UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File Number - 0-8937 FIRST BANKS AMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1604965 (State or other jurisdiction (I.R.S. Employer Identification Number) of 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) ------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of class on which registered -------------- -------------------- Common Stock, $0.15 Par Value Per Share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: 8.50% Cumulative Trust Preferred Securities (issued by First America Capital Trust and guaranteed by its parent, First Banks America, Inc.) (Title of class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X ] The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of the Common Stock on the New York Stock Exchange on March 20, 2001 was $17,787,376. For purposes of this computation, officers, directors and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers or 5% beneficial owners are, in fact, affiliates of the registrant. As of March 20, 2001, there were 9,578,403 shares of the registrant's Common Stock, $0.15 par value, and 2,500,000 shares of the registrant's Class B Common Stock, $0.15 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 2000, or our 2000 Annual Report, are incorporated by reference into Parts I, II and IV of this report, as follows: The following portions of our 2000 Annual Report to Stockholders, or our 2000 Annual Report, are incorporated by reference in this report: Page(s) in our 2000 Section Annual Report ------- ------------- Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").............................. 3 - 24 Selected Consolidated and Other Financial Data................................. 2 Consolidated Financial Statements.............................................. 26 - 54 Supplementary Financial Data................................................... 25 Range of Prices of Common Stock and Preferred Securities....................... 56 Except for the parts of our 2000 Annual Report expressly incorporated by reference, such report is not deemed filed with the Securities and Exchange Commission. PART I Information appearing in this report, in documents incorporated by reference herein and in documents subsequently filed with the Securities and Exchange Commission which are not statements of historical fact may include forward-looking statements with respect to our financial condition, results of operations and 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; the impact of laws and regulations 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, some of which may offer and develop products and services that we do not offer; our ability to control the composition of our loan portfolio without adversely affecting interest income; 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 potential for higher than acceptable operating costs arising from the geographic dispersion of our offices, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources; fluctuations in the prices at which acquisition targets may be available for sale and in the market for our securities; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of our Form 10-K and our 2000 Annual Report should therefore not place undue reliance on forward-looking statements. Item 1. Business General. First Banks America, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, or the BHC Act. We were incorporated in Delaware in 1978 and our corporate headquarters are located in St. Louis, Missouri. Our principal function is to assist in the management of our banking subsidiaries. At December 31, 2000, we had $2.74 billion in total assets, $2.06 billion in loans, net of unearned discount, $2.31 billion in total deposits and $196.9 million in total stockholders' equity. We operate through two subsidiary banks and one subsidiary bank holding company, as follows: First Bank & Trust, or FB&T, headquartered in San Francisco, California; and, The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned subsidiary: Bank of San Francisco, or BSF, headquartered in San Francisco, California. Our subsidiary banks are wholly owned by their respective parent companies. All of our Class B common stock, or Class B Stock, is owned by First Banks, Inc., or First Banks, a multi-bank holding company headquartered in St. Louis, Missouri. The Class B Stock has the same voting rights per share as the Common Stock, and the two classes of stock are generally equivalent except the Class B Stock is not registered with the Securities and Exchange Commission, not listed on any exchange and, with limited exceptions, is not transferable, other than to an affiliate of First Banks. In the event we were to commence the payment of dividends to our stockholders, the Class B Stock would receive dividends only to the extent that dividends on the Common Stock exceed $0.45 per share annually. The terms of the Class B Stock allow First Banks to purchase additional shares of Class B Stock through August 31, 2001 if a sufficient number of additional shares of Common Stock are issued to cause First Banks' voting power to fall below 55%, at prices to be determined based on a formula related to the book value per share of common stock. The Class B Stock is convertible into shares of Common Stock at the option of First Banks. In February 1998, we completed our acquisition of First Commercial Bancorp, Inc., or FCB, Sacramento, California, a company that was majority-owned by First Banks, as described further in the MD&A section of our 2000 Annual Report and in Note 2 to our Consolidated Financial Statements. In connection with our acquisition of FCB, we issued approximately 1,555,700 shares of Common Stock, of which 1,266,176 shares were issued to First Banks. We also issued to First Banks a convertible debenture in the principal amount of $6.5 million in exchange for outstanding debentures of FCB. In December 1998, First Banks elected to convert the $6.5 million principal and $2.4 million accrued and unpaid interest of the convertible debenture into 629,557 shares of our Common Stock. As a result, at December 31, 1998, First Banks owned 76.84% of our outstanding voting stock. In February 1999, First Banks completed its purchase of 314,848 shares of our Common Stock, pursuant to a tender offer that commenced in January 1999. This tender offer increased First Banks' ownership interest to 82.34% of our outstanding voting stock. At December 31, 1999, First Banks owned 83.37% of our outstanding voting stock. On October 31, 2000, we completed our acquisition of First Bank & Trust, Newport Beach, California, a wholly owned subsidiary of First Banks, as described further in the MD&A section of our 2000 Annual Report and in Note 2 to our Consolidated Financial Statements. In conjunction with this transaction, First Bank & Trust and two of our former wholly owned subsidiary banks, First Bank of California and First Bank Texas N.A., were merged with and into Redwood Bank, our other wholly owned subsidiary bank, which was renamed "First Bank & Trust." In addition, in connection with our acquisition of First Bank & Trust, we issued 5,727,340 shares of our Common Stock and 803,429 shares of our Common Stock held for treasury to First Banks. At December 31, 2000, First Banks owned 92.86% of our outstanding voting stock. As of March 20, 2001, the total Common Stock and Class B Stock owned by First Banks constituted approximately 93.07% of our outstanding voting stock. Accordingly, First Banks exercises control over our management, policies and the election of our officers and directors. For the three years ended December 31, 2000, we completed 11 acquisitions and two branch office purchases. These transactions provided us with total assets of $1.15 billion and 45 banking locations. For a description of these acquisitions and our acquisition policies, see "MD&A - Acquisitions" and Note 2 to our Consolidated Financial Statements of our 2000 Annual Report. Through our subsidiary banks, 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, commercial leasing and trade financing. Other financial services include mortgage banking, credit and debit cards, brokerage services, credit-related insurance, automated teller machines, telephone banking, safe deposit boxes and trust and private banking services. Primary responsibility for managing our subsidiary banking units rests with the officers and directors of each unit. However, in keeping with our policy, we centralize overall corporate policies, procedures and administrative functions and provide operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our subsidiary banking units to focus on customer service. The following summarizes selected data about our subsidiary banks at December 31, 2000: Loans, net of Number of Total unearned Total Name locations assets discount deposits ---- --------- ------ -------- -------- (dollars expressed in thousands) FB&T........................................ 52 $ 2,516,993 1,943,013 2,168,742 SFC: BSF .................................... 1 216,552 115,615 137,727 We purchase certain services and supplies, directly or through our subsidiary banks, including data processing services, internal audit, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services, through our majority stockholder, First Banks. Additional information regarding the nature of our arrangements with First Banks appears in Note 16 to our Consolidated Financial Statements incorporated herein by reference. Further discussion of our business operations and our policies is set forth in the MD&A section of our 2000 Annual Report, which is incorporated herein by reference. Competition and Branch Banking. The activities in which our subsidiary banks are engaged are highly competitive. Those activities and the geographic markets served primarily involve competition with other banks, some of which are affiliated with large regional or national holding companies. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to competing with other banks within their primary service areas, our subsidiary banks also compete with other financial intermediaries, such as credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations and other enterprises. Additional competition for depositors' funds comes from United States Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors. Many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks and state regulations governing state-chartered banks. As a result, such non-bank competitors may have certain advantages over us in providing some services. The trend in Texas and California has been for multi-bank holding companies to acquire independent banks and thrifts in communities throughout these states. We believe we will continue to face competition in the acquisition of such banks and thrifts from bank holding companies based in those states and from bank holding companies based in other states under interstate banking laws. Many of the financial institutions with which we compete are larger than us and have substantially greater resources available for making acquisitions. Subject to regulatory approval, commercial banks situated in Texas and California are permitted to establish branches throughout their respective states, thereby creating the potential for additional competition in our subsidiary banks' service areas. Supervision and Regulation General. We are extensively regulated under federal and state laws designed primarily to protect depositors and customers of our subsidiary banks. To the extent this discussion refers to statutory or regulatory provisions, it is not intended to summarize all of such provisions and is qualified in its entirety by reference to the relevant statutory and regulatory provisions. Changes in applicable laws, regulations or regulatory policies may have a material effect on our business and prospects. We are unable to predict the nature or extent of the effects on our business and earnings that new federal and state legislation or regulation may have. The enactment of the legislation described below has significantly affected the banking industry generally and is likely to have ongoing effects on our subsidiary banks and us in the future. We are a registered bank holding company under the BHC Act and, as such, are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System, or the FRB. We are required to file annual reports with the FRB and to provide to the FRB additional information as it may require. FB&T and BSF are chartered by the State of California and are subject to supervision, regulation and examination by the California Department of Financial Institutions. Our subsidiary banks are also regulated and examined by the Federal Deposit Insurance Corporation, or the FDIC, which provides deposit insurance of up to $100,000 for each insured depositor. Bank Holding Company Regulation. Our activities and those of our subsidiary banks have in the past been limited to the business of banking and activities "closely related" or "incidental" to banking. Under the Gramm-Leach-Bliley Act, which was enacted in November 1999 and is discussed below, bank holding companies now have the opportunity to seek broadened authority, subject to limitations on investment, to engage in activities that are "financial in nature" if its subsidiary depository institutions are well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (discussed briefly below). We are also subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of our subsidiary banks (briefly summarized below). The BHC Act also requires a bank holding company to obtain approval from the FRB before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls a majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantially anti-competitive result, unless the anti-competitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial factors in reviewing acquisitions and mergers. Safety and Soundness and Similar Regulations. We are subject to various regulations and regulatory policies directed at the financial soundness of our subsidiary banks. These include, but are not limited to, the FRB's source of strength policy, which obligates a bank holding company to provide financial and managerial strength to our subsidiary banks; restrictions on the nature and size of certain transactions between a bank holding company and its subsidiary depository institutions; and restrictions on extensions of credit by our subsidiary banks to executive officers, directors, principal stockholders and the related interests of such persons. Regulatory Capital Standards. The federal bank regulatory agencies have adopted substantially similar risk-based and leverage capital guidelines for banking organizations. Risk-based capital ratios are determined by classifying assets and specified off-balance-sheet financial instruments into weighted categories, with higher levels of capital being required for categories deemed to represent greater risk. FRB policy also provides that banking organizations generally, and in particular those that are experiencing internal growth or actively making acquisitions, are expected to maintain capital positions that are substantially above the minimum supervisory levels, without significant reliance on intangible assets. Under the risk-based capital standard, the minimum consolidated ratio of total capital to risk-adjusted assets required for bank holding companies is 8%. At least one-half of the total capital, or Tier 1 capital, must be composed of common equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain items such as goodwill and certain other intangible assets. The remainder, or Tier 2 capital, may consist of qualifying hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock that does not qualify as Tier 1 capital and a limited amount of loan and lease loss reserves. In addition to the risk-based standard, we are subject to minimum requirements with respect to the ratio of our Tier 1 capital to our average assets less goodwill and certain other intangible assets, or the Leverage Ratio. Applicable requirements provide for a minimum Leverage Ratio of 3% for bank holding companies that have the highest supervisory rating, while all other bank holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%. The FDIC has established capital requirements for banks under its jurisdiction that are consistent with those imposed by the FRB on bank holding companies. Information regarding our capital levels and our subsidiary banks' capital levels under the federal capital requirements is contained in Note 19 to our Consolidated Financial Statements incorporated herein by reference. Prompt Corrective Action. The FDIC Improvement Act requires the federal bank regulatory agencies to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. A depository institution's status under the prompt corrective action provisions will depend upon how its capital levels compare to various relevant capital measures and other factors as established by regulation. The federal regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels. Under the regulations, a bank will be: (i) "well capitalized" if it has a total capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater and a Leverage Ratio of 5% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3% in certain circumstances); (iii) "undercapitalized" if it has a total capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a Leverage Ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. A depository institution's primary federal regulatory agency is authorized to lower the institution's capital category under certain circumstances. The banking agencies are permitted to establish individualized minimum capital requirements exceeding the general requirements described above. Generally, a bank which does not maintain the status of "well capitalized" or "adequately capitalized" will be subject to restrictions and limitations on its business that are progressively more severe. A bank is prohibited from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be "undercapitalized." "Undercapitalized" depository institutions are subject to limitations on, among other things, asset growth, acquisitions, branching, new lines of business, acceptance of brokered deposits and borrowings from the Federal Reserve System, and they are required to submit a capital restoration plan that includes a guarantee from the institution's holding company. "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. Dividends. Our primary source of funds in the future is the dividends, if any, paid by our subsidiary banks. The ability of our subsidiary banks to pay dividends is limited by federal laws, by regulations promulgated by the bank regulatory agencies and by principles of prudent bank management. The amount of dividends our subsidiary banks may pay to us is also limited by First Banks' credit agreement with a group of unaffiliated financial institutions. Additional information concerning limitations on the ability of our subsidiary banks to pay dividends appears in Note 15 to our Consolidated Financial Statements incorporated herein by reference. Customer Protection. Our subsidiary banks are also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. These laws and regulations mandate various disclosure requirements and substantively regulate the manner in which financial institutions must deal with their customers. Our subsidiary banks are required to comply with numerous regulations in this regard and are subject to periodic examinations with respect to their compliance with the requirements. Community Reinvestment Act. The Community Reinvestment Act of 1977, or CRA, requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and other applications to expand. The Gramm-Leach-Bliley Act. The activities of bank holding companies have historically been limited to the business of banking and activities "closely related" or "incidental" to banking. The enactment of the Gramm-Leach-Bliley Act in 1999 has relaxed the previous limitations and permits some bank holding companies to engage in a broader range of financial activities. Bank holding companies may elect to become "financial holding companies" that may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. In addition to lending, activities that will be deemed "financial in nature" include securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, merchant banking activities and other activities which the FRB determines to be closely related to banking. A bank holding company may become a financial holding company only if each of its subsidiary banks is well capitalized and well managed and has a rating of satisfactory or higher under CRA. A bank holding company that ceases to be in compliance with those requirements may be required to stop engaging in specified activities. The Gramm-Leach-Bliley Act also permits banks to own subsidiaries that engage in a somewhat broader range of financial activities than was previously permitted, including some insurance activities. In order to take advantage of any new powers, a bank must satisfy standards governing capital adequacy and is also required to have satisfactory examination ratings of its management and CRA compliance, among other factors. The powers available to bank subsidiaries are not as broad as those available to qualifying financial holding companies. Under the Gramm-Leach-Bliley Act, the FRB has supervisory authority over each parent financial holding company and limited authority over its subsidiaries. The determination of which federal regulatory agency is given primary authority over a subsidiary of a financial holding company will depend on the types of activities conducted by the subsidiary. In that regard, broker-dealer subsidiaries will be regulated primarily by securities regulators and insurance subsidiaries will primarily be regulated by insurance authorities. The Gramm-Leach-Bliley Act also will impose significant new regulatory requirements regarding the privacy of customer information when implementing regulations become effective in July, 2001. Each bank and other provider of financial services will be required to protect the security and confidentiality of nonpublic information about its customers, to adopt a privacy policy regarding its practices for sharing information about customers, and, for consumer accounts, to disclose its privacy policy when an account relationship is established and at least annually thereafter. Unless an exemption from the requirements in the Act is available for a particular type of disclosure, a bank or other financial company must provide an opportunity for the consumer to "opt out" of disclosure of information to third parties, and third parties with whom information is shared will be subject to restrictions on their use of shared information. The Act will also prohibit the disclosure to unaffiliated third parties of account numbers and other specified information for use in telemarketing, direct mail and electronic mail marketing. Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System. The FRB requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements. Institutions are authorized to borrow from the Federal Reserve Bank "discount window," but FRB regulations require institutions to exhaust other reasonable alternative sources of funds, including advances from Federal Home Loan Banks, or FHLBs, before borrowing from the Federal Reserve Bank. Certain of our subsidiary banks are members of the Federal Reserve System and the Federal Home Loan Bank System and are required to hold investments in regional banks within those systems. Our subsidiary banks were in compliance with these requirements at December 31, 2000, with investments of $2.0 million and $767,000 in stock of the FHLB of San Francisco held by FB&T and BSF, respectively, $1.5 million in stock of the FHLB of Dallas held by FB&T, and $328,000 in stock of the Federal Reserve Bank of San Francisco held by FB&T. Monetary Policy and Economic Control. The commercial banking business is affected not only by legislation, regulatory policies and general economic conditions, but also by the monetary policies of the FRB. Changes in the discount rate on member bank borrowings, the availability of credit at the "discount window," open market operations, the imposition of changes in reserve requirements against deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the FRB. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on liabilities. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and are expected to do so in the future. Such policies are influenced by various factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on our future business and earnings and on the future business and earnings of our subsidiary banks cannot be predicted. Employment As of March 20, 2001, we employed approximately 645 employees. None of our employees are subject to a collective bargaining agreement. We consider our relationships with our employees to be good. Executive Officers of the Registrant Information regarding executive officers is contained in Item 10 of Part III hereof (pursuant to General Instruction G) and is incorporated herein by this reference. Item 2. Properties Our executive office is located at the executive office owned by First Banks at 135 North Meramec, Clayton, Missouri 63105. The headquarters of our subsidiary banks are (i) in the case of FB&T, in a building leased by FB&T located at 735 Montgomery Street, San Francisco, California; and (ii) in the case of BSF, in a building leased by BSF located at 550 Montgomery Street, San Francisco, California. In addition to those offices, as of March 20, 2001, our subsidiary banks do business at 51 branch offices in Texas and California, of which 14 are located in buildings that we own and 37 are located in buildings that we lease. We consider the properties at which we do business to be in good condition, suitable for our business conducted at each location. To the extent our properties or those acquired in connection with the acquisition of other entities provide space in excess of that effectively utilized in the operations of our subsidiary banks, we seek to lease or sublease any excess space to third parties. Additional information regarding the premises and equipment utilized by our subsidiary banks appears in Note 5 to our Consolidated Financial Statements incorporated herein by reference. Item 3. Legal Proceedings There are various claims and pending actions against our subsidiary banks and us in the ordinary course of business. It is our opinion, in consultation with legal counsel, the ultimate liability, if any, resulting from such claims and pending actions will not have a material adverse effect on our financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Stockholders was held on October 11, 2000. Our seven directors were reelected, with the vote totals indicated in the following table: Name of Director For Against ---------------- --- ------- Allen H. Blake 5,430,571 39,366 Charles A. Crocco, Jr. 5,431,672 38,265 James F. Dierberg 5,431,707 38,230 Albert M. Lavezzo 5,431,780 38,157 Ellen D. Schepman 5,430,665 39,272 Edward T. Story, Jr. 5,431,618 38,319 Donald W. Williams 5,430,799 39,138 Stockholders also approved the acquisition of First Bank & Trust and the related issuance of 6,530,769 shares of Common Stock to First Banks, with the following vote totals: Broker For Against Abstain Non-Votes --- ------- ------- --------- 5,026,491 41,597 7,084 394,765 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters Market Information. We have two classes of common stock. Our Common Stock is listed on the New York Stock Exchange, or the NYSE, under the symbol "FBA." All of our Class B Stock is held by First Banks and is not listed or traded. See "Item 1, Business - General." Continued listing of our Common Stock on the NYSE is subject to various requirements, including the financial eligibility and distribution requirements of the NYSE. Information regarding the number of stockholders and the market prices for Common Stock since January 1, 2001 is set forth under the caption "Investor Information" of our 2000 Annual Report and is incorporated herein by reference. Dividends. In recent years, we have not paid any dividends on our Common Stock. Our ability to pay dividends is limited by regulatory requirements and by the receipt of dividend payments from our subsidiary banks, which are also subject to regulatory requirements. See Note 15 to our Consolidated Financial Statements incorporated herein by reference. Item 6. Selected Financial Data The information required by this item is incorporated herein by reference from page 2 of our 2000 Annual Report under the caption "Selected Consolidated and Other Financial Data." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated herein by reference from pages 3 through 24 of our 2000 Annual Report under the caption "MD&A." Item 7a. Quantitative and Qualitative Disclosure About Market Risk The information required by this item is incorporated herein by reference from pages 10 through 11 of our 2000 Annual Report under the caption "MD&A - Interest Rate Risk Management." Item 8. Financial Statements and Supplementary Data Our consolidated financial statements are incorporated herein by reference from pages 26 through 54 of our 2000 Annual Report under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report." Our Supplementary Financial Information is incorporated herein by reference from page 25 of our 2000 Annual Report under the caption "Quarterly Condensed Financial Data - Unaudited." Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Board of Directors Our Board of Directors, consisting of seven members, is identified in the following table. Each of our directors was elected or appointed to serve a one-year term and until his/her successor has been duly qualified for office. Director Principal Occupation(s) During Last Five Years Name Age Since and Directorships of Public Companies ---- --- ----- ------------------------------------- James F. Dierberg (1) 63 1994 Chairman of the Board of Directors, President and Chief Executive Officer of FBA since 1994; Chairman of the Board and Chief Executive Officer of First Banks since 1988; Director of First Banks since 1979; President of First Banks from 1979 to 1992 and from 1994 to October 1999; Trustee of First Preferred Capital Trust and First America Capital Trust since 1997 and 1998, respectively. Allen H. Blake 58 1994 Executive Vice President, Chief Operating Officer and Secretary of FBA since 1998; Vice President, Chief Operating Officer and Secretary of FBA from 1994 to 1998; Chief Financial Officer of FBA from 1994 to September 1999; President of First Banks since October 1999; Executive Vice President and Chief Financial Officer of First Banks from 1996 to September 1999; Chief Operating Officer of First Banks since 1998; Secretary of First Banks since 1988; Trustee of First Preferred Capital Trust, First America Capital Trust and First Preferred Capital Trust II since 1997, 1998 and September 2000, respectively. Charles A. Crocco, Jr. (2) 62 1988 Counsel to the law firm of Crocco & De Maio, P.C., Mount Kisco, New York since April 2000; Counsel to the law firm of Jackson & Nash, LLP., New York, New York from January 1999 to April 2000; Counsel to Crocco & De Maio, P.C. in 1998; Partner in Crocco & De Maio, P.C., New York, New York prior to 1998; Director of The Hallwood Group Incorporated, a merchant banking firm. Albert M. Lavezzo (2) 64 1998 President and Chief Operating Officer of the law firm of Favaro, Lavezzo, Gill, Caretti & Heppell, Vallejo, California, a professional legal corporation, since 1974; Former Chairman of the Board of Directors of Surety Bank (15 years); Director of FB&T; President of North Bay Exchange Co., Inc. Ellen D. Schepman (1) 26 1999 Retail Marketing Officer of First Banks since May 1999; Retail Marketing Specialist of FB&T from 1997 to May 1999; prior to 1996, Mrs. Schepman was a full-time student. Edward T. Story, Jr. (2) 57 1987 President, Chief Executive Officer and Director of SOCO International, plc, Comfort, Texas, a corporation listed on the London Stock Exchange and engaged in international oil and gas operations, since 1991; Director of Cairn Energy plc and Hallwood Realty Corporation. Donald W. Williams 53 1995 Senior Executive Vice President and Chief Credit Officer of First Banks since September 2000; Executive Vice President and Chief Credit Officer of First Banks since 1996; Chairman of the Board of Directors, President and Chief Executive Officer of First Bank, a wholly owned subsidiary of First Banks; Chairman of the Board of Directors of First Capital Group, Inc., a wholly owned subsidiary of First Banks. - ---------------------------------- (1) Mrs. Schepman is the daughter of Mr. James F. Dierberg. See Item 12. Security Ownership of Certain Beneficial Owners and Management. (2) Member of the Audit Committee. Executive Officers Our executive officers, each of whom was elected to the office(s) indicated by our Board of Directors, as of March 20, 2001, were as follows: Principal Occupation(s) Name Age Current FBA Office(s) Held During Last Five Years ---- --- -------------------------- ---------------------- James F. Dierberg 63 Chairman of the Board, President See Item 10 - "Directors and Executive and Chief Executive Officer. Officers of the Registrant - Board of Directors." Allen H. Blake 58 Executive Vice President, Chief See Item 10 - "Directors and Executive Operating Officer and Secretary. Officers of the Registrant - Board of Directors." Frank H. Sanfilippo 38 Executive Vice President and Chief Executive Vice President and Chief Financial Officer. Financial Officer of First Banks since September 1999; Executive Vice President and Chief Financial Officer of FBA since September 1999; Director, Executive Vice Chief Financial Officer, Secretary and Treasurer of First Bank since September 1999; Trustee of First Preferred Capital Trust II since September 2000; Senior Vice President and Director of Management Accounting of Mercantile Bancorporation, Inc., St. Louis, Missouri, from 1998 to September 1999; Vice President and Chief Financial Officer - Mercantile Bank Opera- tions Division, from 1996 to 1997; Vice President and Assistant Controller of Mercantile Bank N.A. from 1994 to 1996. Terrance M. McCarthy 46 Executive Vice President; Chairman Mr. McCarthy has been employed in various of the Board of Directors, executive capacities with First Banks and President and Chief Executive FBA since 1995 and 1998, respectively. Officer of FB&T and BSF. David F. Weaver 53 Executive Vice President; President Mr. Weaver has been employed in various - Texas Region. executive capacities with FBA since 1994. Except for the relationship of Mrs. Schepman and Mr. Dierberg described above, there are no family relationships between any of our nominees for director, our directors or executive officers or our subsidiary banks' directors or executive officers. Section 16(a) Beneficial Ownership Reporting Compliance To our knowledge, none of our directors, executive officers or shareholders, subject, in their capacity as such, to the reporting obligations set forth in Section 16 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, has failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2000. Item 11. Executive Compensation The following table sets forth certain information regarding compensation earned during the year ended December 31, 2000, and specified information with respect to the two preceding years, by Mr. McCarthy and Mr. Weaver, who are our only executive officers whose annual compensation in 2000 from our subsidiary banks or us exceeded $100,000. Neither Mr. Dierberg, Mr. Blake nor Mr. Sanfilippo receives any compensation directly from our subsidiary banks or us. Our subsidiary banks and we have entered into various contracts with First Banks, of which Messrs. Dierberg, Blake and Sanfilippo are directors and/or executive officers, pursuant to which services are provided to our subsidiary banks and us (see "Compensation Committee Interlocks and Insider Participation" for additional information regarding contracts with First Banks). SUMMARY COMPENSATION TABLE -------------------------- All Other Name and Principal Position(s) Year Salary (1) Bonus Compensation (2) ------------------------------ ---- --------- ----- ---------------- Terrance M. McCarthy 2000 $ 180,000 25,000 6,650 Executive Vice President; 1999 147,500 20,000 4,950 Chairman of the Board of Directors, 1998 121,600 27,000 4,460 President and Chief Executive Officer of FB&T and BSF David F. Weaver 2000 137,500 18,000 5,150 Executive Vice President; 1999 127,000 20,450 3,700 President - Texas Region 1998 116,200 20,000 3,400 - --------------------- (1) The total of all other annual compensation for the named officer is less than the amount required to be reported which is the lesser of (a) $50,000 or (b) ten percent (10%) of the total of the annual salary and bonus paid to that person. (2) All other compensation reported represents matching contributions to our 401(k) Plan for the year indicated and ownership interests granted in units of Star Lane Trust, First Bank's unit investment trust that was created on January 21, 2000. Compensation of Directors. Directors who are not our officers or affiliated with First Banks (Messrs. Crocco, Story and Lavezzo) were paid a fee of $2,000 for each meeting of our Board of Directors attended, and a fee of $500 for each committee meeting attended. In addition, each of these individuals was paid a fee of $10,000 for their participation on a special committee of our Board of Directors created during 2000 for the purpose of conducting an independent evaluation of our acquisition of FB&T. For their service as directors in 2000, Messrs. Crocco, Story and Lavezzo each received aggregate fees of $20,000. Mrs. Schepman, who serves as a Retail Marketing Officer of First Banks, but who is not an officer of FBA, also received $8,000 for her service as a director in 2000. Furthermore, Mr. Lavezzo received $6,000 as a member of the Board of Directors of FB&T. Messrs. Crocco, Story and Lavezzo and Mrs. Schepman also participate in our 1993 Directors' Stock Bonus Plan, or our Stock Bonus Plan, which provides for an annual grant of 500 shares of our Common Stock to each such director. Future grants would apply equally to current directors and to any individual who becomes our director in the future. The maximum number of shares that may be issued may not exceed 16,667 shares, and the plan will expire on July 1, 2001. Directors' compensation expense of $36,000 was incurred in 2000 in connection with our Stock Bonus Plan. None of our three directors who are also executive officers of First Banks (Messrs. Dierberg, Blake and Williams) receive any compensation from our subsidiary banks or us for service as a director, nor do they participate in our Stock Bonus Plan or any of our other compensation plans. First Banks, of which Messrs. Dierberg, Blake, McCarthy, Sanfilippo and Williams are executive officers and Messrs. Dierberg and Blake are directors, provides various services to our subsidiary banks and us for which it is compensated (see "Compensation Committee Interlocks and Insider Participation"). Compensation Committee Interlocks and Insider Participation. Messrs. Dierberg, Blake and Sanfilippo, who are our executive officers but do not receive any compensation for their services as such, are also executive officers and/or members of the Board of Directors of First Banks. First Banks does not have a separate compensation committee, but its Board of Directors performs the functions of such a committee. Except for the foregoing, none of our executive officers served during 2000 as a member of our compensation committee, or any other committee performing similar functions, or as a director of another entity, any of whose executive officers or directors served on our Board of Directors. We purchase certain services and supplies from or through First Banks. Our financial position and operating results could significantly differ from those that would be obtained if our relationship with First Banks did not exist. First Banks provides management services to our subsidiary banks and us. Management services are provided under management fee agreements whereby we compensate First Banks for our use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services. Fees paid under these agreements were $5.2 million, $4.4 million and $3.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. The fees paid for management services are at least as favorable as we could have obtained from unaffiliated third parties. First Services, L.P., a limited partnership indirectly owned by First Banks' Chairman and his adult children, provides data processing and various related services to FB&T and us under the terms of data processing agreements. Fees paid under these agreements were $6.8 million, $5.3 million and $3.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. The fees paid for data processing services are at least as favorable as we could have obtained from unaffiliated third parties. Our subsidiary banks had $108.2 million and $31.9 million in whole loans and loan participations outstanding at December 31, 2000 and 1999, respectively, that were purchased from First Bank, a wholly owned subsidiary of First Banks. In addition, our subsidiary banks had sold $146.1 million and $167.5 million in whole loans and loan participations to First Bank at December 31, 2000 and 1999, respectively. These loans and loan participations were acquired and sold at interest rates and terms prevailing at the dates of their purchase or sale and under standards and policies followed by our subsidiary banks. As more fully discussed in Note 7 to our Consolidated Financial Statements of our 2000 Annual Report, we have a $100.0 million revolving note payable to First Banks. At December 31, 2000, the amount outstanding under our note payable was $98.0 million. There were no amounts outstanding under our note payable at December 31, 1999. Employee Benefit Plans. We maintain various employee benefit plans. Our directors are not eligible to participate in such plans except our Stock Bonus Plan unless they are also our employees or employees of our subsidiary banks. Although Messrs. Dierberg, Blake and Sanfilippo are executive officers, they are not participants in any of our employee benefit plans. Prior to 1996, we maintained a noncontributory, defined benefit plan, or our Pension Plan, for eligible officers and employees. During 1994, we discontinued the accumulation of benefits under our Pension Plan. While our Pension Plan continues in existence and provides benefits that had then accumulated, no additional benefits have accrued to participants since 1994, and no new participants will become eligible for benefits thereafter. In addition, we intend to dissolve this plan in 2001. Benefits under our Pension Plan are based upon annual base salaries and years of service as of 1994 and are payable only upon retirement or disability and, in some instances, at death. A participant who fulfilled the eligibility and tenure requirements prior to the discontinuation of accumulation of benefits will receive, upon reaching the normal retirement age of 65, monthly benefits based upon average monthly compensation during the five consecutive calendar years out of his or her last ten calendar years prior to 1994 that provided the highest average compensation. As of December 31, 2000, Mr. Weaver would be eligible to receive annual benefits of approximately $11,000 upon retirement at age 65. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 20, 2001, certain information with respect to the beneficial ownership of our Common Stock and Class B Stock by each person known to us to be the beneficial owner of more than five percent of the outstanding shares of either class of our stock, by each of our directors and executive officers and by all of our executive officers and directors as a group: Title of Name of Number of Shares and Nature Percent of Class Beneficial Owner of Beneficial Ownership Class - ------------------------------------------------------------------------------------------------------------ Class B Stock First Banks, Inc. 2,500,000 (1)(2)(3) 100.0% 135 North Meramec Clayton, Missouri 63105 Class B Stock James F. Dierberg 2,500,000 (1)(2)(3) 100.0 Common Stock First Banks, Inc. 8,741,350 (1)(2)(3) 91.3 Common Stock James F. Dierberg 8,741,350 (1)(2)(3) 91.3 Common Stock Allen H. Blake 1,000 (4) (*) Common Stock Charles A. Crocco, Jr. 7,772 (4) (*) Common Stock Albert M. Lavezzo 10,210 (4) (*) Common Stock Terrance M. McCarthy 2,000 (4) (*) Common Stock Frank H. Sanfilippo 0 -- Common Stock Ellen D. Schepman 1,000 (2)(3)(4) (*) Common Stock Edward T. Story, Jr. 10,682 (4) (*) Common Stock David F. Weaver 2,974 (4) (*) Common Stock Donald W. Williams 100 (4) (*) All executive officers 8,777,088 shares 91.6% of and directors as a Common Stock Common Stock group (10 persons) 2,500,000 shares 100% of Class B Stock Class B Stock - ------------------------ (*) Less than one percent (1) The shares shown as beneficially owned by First Banks and James F. Dierberg comprise 100% of the outstanding shares of Class B Stock and 91.3% of the outstanding shares of Common Stock. Each share of Common Stock and Class B Stock is entitled to one vote on matters subject to stockholder vote. All of the shares of Class B Stock and Common Stock owned by First Banks are pledged to secure a loan to First Banks from a group of unaffiliated lenders. The related credit agreement contains customary provisions which could ultimately result in the transfer of such shares if First Banks were to default in the repayment of the loan and such default were not cured, or other arrangements satisfactory to the lenders were not made, by First Banks. (2) The controlling stockholders of First Banks are (i) the James F. Dierberg, II Family Trust, dated December 30, 1992; (ii) Irrevocable Trust of Michael J. Dierberg, dated May 1, 1998; (iii) the Ellen C. Dierberg Family Trust, dated December 30, 1992; (iv) James F. Dierberg, trustee of the James F. Dierberg living trust, dated October 8, 1985; (v) the Michael J. Dierberg Family Trust, dated December 30, 1992; and (vi) First Trust (Mary W. Dierberg and First Bank, Trustees) established U/I James F. Dierberg, dated December 30, 1992. Mr. James F. Dierberg and Mrs. Mary W. Dierberg are husband and wife, and Messrs. James F. Dierberg, II, Michael James Dierberg and Mrs. Ellen D. Schepman are their adult children. (3) Due to the relationships among James F. Dierberg, Mary W. Dierberg, First Bank and the three adult children of James F. and Mary W. Dierberg, Mr. Dierberg is deemed to share voting and investment power over all of the outstanding voting stock of First Banks which in turn exercises voting and investment power over the shares of Common Stock and Class B Stock attributed to it in the table. (4) All of the shares attributed in the table to Messrs. Blake, Crocco, Lavezzo, McCarthy, Story, Weaver and Williams and Mrs. Schepman are owned by them directly. Item 13. Certain Relationships and Related Transactions Outside of normal customer relationships, no directors, executive officers or stockholders holding over 5% of our voting stock, and no corporations or firms with which such persons or entities are associated, currently maintain or have maintained since the beginning of the last full fiscal year, any significant business or personal relationships with our subsidiaries or us, other than that which arises by virtue of such position or ownership interest in our subsidiaries or us, except as set forth in Item 11 - "Executive Compensation - Compensation of Directors," or as described in the following paragraphs. Our subsidiary banks have had in the past, and may have in the future, loan transactions in the ordinary course of business with our directors or their affiliates. These loan transactions have been and will be on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not and will not involve more than the normal risk of collectibility or present other unfavorable features. Our subsidiary banks do not extend credit to our officers or to officers of our subsidiary banks, except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles and personal credit card accounts. Certain of our directors and officers and their respective affiliates have deposit accounts with our subsidiary banks. It is the policy of our subsidiary banks not to permit any of their officers or directors or their affiliates to overdraw their respective deposit accounts unless that person has been previously approved for overdraft protection under a plan whereby a credit limit has been established in accordance with the standard credit criteria of our subsidiary banks. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements and Supplementary Data - The financial statements and supplementary data filed as part of this Report are listed under Item 8. 2. Financial Statement Schedules - These schedules are omitted for the reason they are not required or are not applicable. 3. Exhibits - The exhibits are listed in the index of exhibits required by Item 601 of Regulation S-K at Item (c) below and are incorporated herein by reference. (b) Reports on Form 8-K. A current report on Form 8-K was filed on November 8, 2000. Item 2 of the Report describes our acquisitions of FB&T and Commercial Bank of San Francisco, which we completed on October 31, 2000. In addition, Item 7 of the Report presents financial statements of the businesses acquired, pro forma financial information and exhibits, as applicable. (c) The index of required exhibits is included beginning on page 20 of this Report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST BANKS AMERICA, INC. By: /s/ James F. Dierberg ------------------------------------------------ James F. Dierberg Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Frank H. Sanfilippo ----------------------------------------------- Frank H. Sanfilippo Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) March 28, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signatures Title Date - ------------------------------------------------------------------------------------------------------------------- /s/James F. Dierberg Director March 28, 2001 ------------------------------------------ James F. Dierberg /s/Allen H. Blake Director March 28, 2001 ------------------------------------------ Allen H. Blake /s/Charles A. Crocco, Jr. Director March 28, 2001 ------------------------------------------ Charles A. Crocco, Jr. /s/Albert M. Lavezzo Director March 28, 2001 ------------------------------------------ Albert M. Lavezzo /s/Ellen D. Schepman Director March 28, 2001 ------------------------------------------ Ellen D. Schepman /s/Edward T. Story, Jr. Director March 28, 2001 ------------------------------------------ Edward T. Story, Jr. /s/Donald W. Williams Director March 28, 2001 ------------------------------------------ Donald W. Williams INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------------------------------------------------------------------------------- 3(a) Restated Certificate of Incorporation of the Company effective August 31, 1995 (filed as Exhibit 3(a) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). 3(b) Amended and Restated Bylaws of the Company (as amended April 21, 1995) (filed as Exhibit 3(b) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference). 3(c) Certificate of Amendment of the Restated Certificate of Incorporation of the Company effective June 16, 1999 (filed as Exhibit 3(c) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference). 3(d) Certificate of Amendment of the Restated Certificate of Incorporation of the Company effective December 26, 2000 - filed herewith. 4(a) Specimen Stock Certificate for Common Stock (filed as Exhibit 1.01 to the Company's Amendment No. I to Form 8-A on Form 8, dated September 4, 1987, and incorporated herein by reference). 4(b) The Company agrees to furnish to the Securities and Exchange Commission upon request pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. 4(c) Agreement as to Expenses and Liabilities (incorporated herein by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-2, file number 333-58355, dated July 1, 1998). 4(d) Preferred Securities Guarantee Agreement (incorporated herein by reference to Exhibit 4(b) to the Company's Registration Statement on Form S-2, file number 333-58355, dated July 1, 1998). 4(e) Indenture (incorporated herein by reference to Exhibit 4(c) to the Company's Registration Statement on Form S-2, file number 333-58355, dated July 1, 1998). 4(f) Amended and Restated Trust Agreement (incorporated herein by reference to Exhibit 4(d) to the Company's Registration Statement on Form S-2, file number 333-58355, dated July 1, 1998). 10(a)* BancTEXAS Group Inc. 1990 Stock Option Plan (as amended July 22, 1993) (filed as Exhibit 10(c) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference). 10(b)* 1993 Directors' Stock Bonus Plan (filed as Exhibit 10(k) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 10(c) Stock Purchase and Operating Agreement by and between First Banks, Inc., a Missouri Corporation and the Company, dated May 19, 1994 (filed as Exhibit 10(d) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). 10(d)* Financial Management Policy by and between First Banks, Inc. and the Company, dated September 15, 1994 (filed as Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(e)* Federal Funds Agency Agreement by and between First Banks, Inc. and the Company, dated September 15, 1994 (filed as Exhibit 10(k) to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10(f) Promissory note payable to First Banks, Inc. dated November 30, 2000 - filed herewith. 10(g)* Management Services Agreement by and between First Banks, Inc. and Redwood Bank, dated June 1, 1999 (filed as Exhibit 10(x) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). 10(h) Brokerage Service Agreement by and between First Bank of California and First Brokerage America, L.L.C., dated July 1, 1999 (filed as Exhibit 10(y) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). 10(i)* Service Agreement by and between First Bank of California, First Brokerage America, L.L.C. and BTI Insurance Agency, Inc. d/b/a BTI Coastal Insurance Agency, Inc., dated July 1, 1999 filed as Exhibit 10(z) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). 10(j) Brokerage Service Agreement by and between First Bank Texas N.A. and First Brokerage America, L.L.C., dated July 1, 1999 (filed as Exhibit 10(aa) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). 10(k)* Service Agreement by and between First Bank Texas N.A., First Brokerage America, L.L.C. and BTI Insurance Agency, Inc., dated July 1, 1999 (filed as Exhibit 10(bb) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). 10(l)* Federal Funds Agency Agreement by and between First Banks, Inc. and Redwood Bank, dated May 26, 1999 (filed as Exhibit 10(cc) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). 10(m)* Resignation and General Release Agreement among Anthony S. Dee, Redwood Bank, First Banks America, Inc. and its affiliates, dated March 12, 2000 (filed as Exhibit 10(bb) to the Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). 10(n) Agreement and Plan of Reorganization by and between First Banks America, Inc. and Commercial Bank of San Francisco, dated June 27, 2000 (filed as Exhibit 10(dd) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference). 10(o) Agreement and Plan of Reorganization by and among First Banks America, Inc., Redwood Bank, First Banks, Inc. and First Bank & Trust, dated June 29, 2000 (filed as Exhibit 10(ee) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference). 10(p) Agreement and Plan of Reorganization by and between First Banks America, Inc. and Millennium Bank, dated August 23, 2000 (filed as Exhibit 10(ff) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). 10(q) Agreement and Plan of Merger by and among First Banks America, Inc., Redwood Bank, The San Francisco Company and Bank of San Francisco, dated September 22, 2000 (filed as Exhibit 10(gg) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). 13 2000 Annual Report to Stockholders filed herewith. Portions not specifically incorporated by reference in this Report are not deemed "filed" for purposes of the Securities Exchange Act of 1934 - filed herewith. 21 Subsidiaries of the Company - filed herewith. 23 Consent of KPMG LLP - filed herewith. * Exhibits designated by an asterisk in this Index to Exhibits relate to management contracts and/or compensatory plans or arrangements. EXHIBIT 3(d) CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION FIRST BANKS AMERICA, INC. First Banks America, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: FIRST: That the Board of Directors of the Corporation, at a meeting duly held, adopted a resolution proposing and declaring advisable the following amendment to the Restated Certificate of Incorporation of the Corporation: RESOLVED: That Article FOURTH of the Restated Certificate of Incorporation of First Banks America, Inc., is amended to read in its entirety as follows: FOURTH: (A) The total number of shares of all classes of ------ capital stock which the Corporation shall have authority to issue is nineteen million (19,000,000) shares consisting of (a) fifteen million (15,000,000) shares of a class designated Common Stock, par value $0.15 per share ("Common Stock"), and (b) four million (4,000,000) shares of a class designated Class B Common Stock, par value $0.15 per share ("Class B Common Stock"). (B) The designations and the powers, preferences, rights, qualifications, limitations, and restrictions of the Common Stock and the Class B Common Stock are as follows: 1. Provisions Relating to the Common Stock and the Class B Common Stock. (a) General. Except as otherwise provided herein, or as otherwise provided by applicable law, all shares of Common Stock and Class B Common Stock shall have identical rights and privileges in every respect. (b) Voting. The Common Stock and the Class B Common Stock shall each be fully voting stock entitled to one vote per share with respect to the election of directors and for all other purposes. The holders of Common Stock and Class B Common Stock shall, unless otherwise required by law or by another provision of this Certificate of Incorporation, vote as a single class on all matters. In all elections for directors of the Corporation, each stockholder shall have the right to cast as many votes in the aggregate as shall equal the number of voting shares held by such stockholder in the Corporation, multiplied by the number of directors to be elected by the class to which such stockholder belongs at such election, and each stockholder may cast the whole number of votes, either in person or by proxy, for one candidate or distribute them among two or more candidates. (c) Dividends. Subject to the limitations prescribed herein, holders of Common Stock and Class B Common Stock shall participate equally in any dividends (whether payable in cash, stock or property) when and as declared by the Board of Directors of the Corporation out of the assets of the Corporation legally available therefor and the Corporation shall treat the Common Stock and Class B Common Stock identically in respect of any subdivisions or combinations (for example, if the Corporation effects a two-for-one stock split with respect to the Common Stock, it shall at the same time effect a two-for-one stock split with respect to the Class B Common Stock); provided, however, that (i) with respect to dividends payable in cash by the Corporation, the holders of Class B Common Stock shall participate equally per share only if and to the extent such cash dividends exceed $0.45 per share on the Common Stock per calendar year (for example, if the Board of Directors declares and the Corporation pays a dividend of $0.75 per share of Common Stock for a given calendar year, holders of Class B Common Stock shall be entitled to a dividend of $0.30 per share); and (ii) dividends payable in shares of Common Stock (or rights to subscribe for or purchase shares of Common Stock or securities or indebtedness convertible into shares of Common Stock) shall be paid only on shares of Common Stock and dividends payable in shares of Class B Common Stock (or rights to subscribe for or purchase shares of Class B Common Stock or securities or indebtedness convertible into shares of Class B Common Stock) shall be paid only on shares of Class B Common Stock (for example, if the Board of Directors declares and the Corporation pays a five percent (5%) stock dividend on the Common Stock, payable in shares of Common Stock, at the same time the Board of Directors shall declare and the Corporation shall pay a five percent (5%) stock dividend on the Class B Common Stock payable in shares of Class B Common Stock). (d) Liquidation. In the event the Corporation is liquidated, dissolved or wound up, whether voluntarily or involuntarily, the holders of the Common Stock and the Class B Common Stock shall participate equally in any distribution. (e) Voluntary Conversion of Class B Common Stock. (i) Conversion Rights. Each share of Class B Common Stock may be converted into one (1) share of Common Stock at the option of any holder thereof at any time after the fifth (5th) anniversary of the date of its issuance by the Corporation. For the foregoing purpose, a share of Class B Common Stock issued as a stock dividend or pursuant to a stock split, reclassification or other combination, shall be deemed to have been issued on the date of the share of Class B Common Stock with respect to which it is so issued. (ii) Conversion Procedures. Any holder of Class B Common Stock desiring to exercise such holder's option to convert such Class B Common Stock in accordance with the foregoing shall surrender the certificate or certificates representing the Class B Common Stock to be converted, duly endorsed to the Corporation or in blank, at the principal executive office of the Corporation, and shall give written notice to the Corporation at such office that such holder elects to convert the number of shares represented by such certificate or certificates, or a specified number thereof. As promptly as practicable after the surrender for conversion of any Class B Common Stock, the Corporation shall execute and deliver or cause to be executed and delivered to the holder of such Class B Common Stock certificates representing the shares of Common Stock issuable upon such conversion. In case any certificate or certificates representing shares of Class B Common Stock shall be surrendered for conversion for only a part of the shares represented thereby, the Corporation shall execute and deliver to the holders of the certificate or certificates for shares of Class B Common Stock so surrendered a new certificate or certificates representing the shares of Class B Common Stock not converted, dated the same date as the certificate or certificates representing the Common Stock. Shares of the Class B Common Stock converted as aforesaid shall be deemed to have been converted immediately prior to the close of business on the date such shares are duly surrendered for conversion, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. (iii) Recapitalization, Consolidation, or Merger of the Corporation. In the event that the Corporation shall be recapitalized, consolidated with, or merged with or into any other corporation (a "Reorganization") and the terms thereof shall provide (i) that the Class B Common Stock shall remain outstanding after such Reorganization and (ii) for any change in or conversion of the Common Stock, then the terms of such Reorganization shall include a provision to the effect that each share of Class B Common Stock after such Reorganization shall thereafter be entitled to receive upon conversion the same kind and amount of securities or assets as shall be distributable upon such Reorganization with respect to one share of Common Stock. (iv) Reservation of Shares. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of Class B Common Stock as herein provided, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Class B Common Stock and shall take all such corporate action as may be necessary to assure that such shares of Common Stock may be validly and legally issued upon conversion of all of the outstanding shares of Class B Common Stock; and if, at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Class B Common Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (v) Retirement of Shares. Shares of Class B Common Stock which have been issued and have been converted into Common Stock, repurchased, or reacquired in any other manner by the Corporation shall not be reissued. (f) Mandatory Conversion of Class B Common Stock. If, at any time while there are shares of Class B Common Stock issued and outstanding, it shall be determined by the Board of Directors, in its sole discretion, that legislation or regulations are enacted or any judicial or administrative determination is made which would prohibit the listing, quotation or trading of the Common Stock on the New York Stock Exchange or the National Association of Securities Dealers Automated Quotation System, or would otherwise have a material adverse effect on the Corporation, in any such case due to the Corporation having more than one class of common shares outstanding, then the Board of Directors may by resolution convert all outstanding shares of Class B Common Stock into shares of Common Stock on a share-for-share basis. To the extent practicable, notice of such conversion of Class B Common Stock specifying the date fixed for said conversion shall be mailed, postage pre-paid, at least ten (10) days but not more than thirty (30) days prior to said conversion date to the holders of record of Common Stock and Class B Common Stock at their respective addresses as the same shall appear on the books of the Corporation; provided, however, that no failure or inability to provide such notice shall limit the authority or ability of the Board of Directors to convert all outstanding shares of Class B Common Stock into shares of Common Stock. Immediately prior to the close of business on said conversion date (or, if said conversion date is not a business day, on the next succeeding business day) each outstanding share of Class B Common Stock shall thereupon automatically be converted into a share of Common Stock and each certificate theretofore representing shares of Class B Common Stock shall thereupon and thereafter represent a like number of shares of Common Stock. (g) Class Voting Under Certain Circumstances. None of the provisions hereof affecting the powers, preferences, rights, qualifications, limitations or restrictions of the Class B Common Stock may be amended or repealed unless, in addition to any other vote required by law or this Certificate of Incorporation, such amendment shall be approved by the affirmative vote of the holders of a majority of the shares of the Common Stock then outstanding, voting as a separate class. 2. General. Subject to the foregoing provisions of this Certificate of Incorporation, the Corporation may issue shares of its Common Stock and Class B Common Stock from time to time for such consideration (not less than the par value thereof) as may be fixed by the Board of Directors of the Corporation, which is expressly authorized to fix the same in its absolute and uncontrolled discretion, subject to the foregoing conditions. Shares so issued for which the consideration shall have been paid or delivered to the Corporation shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares. SECOND: That in lieu of a meeting and vote of stockholders, the stockholders of the Corporation have given written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware, and written notice of the adoption of the amendment has been given as provided in Section 228 of the General Corporation Law of the State of Delaware. THIRD: That said amendment was duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, First Banks America, Inc. has caused this Certificate to be signed by James F. Dierberg, Chairman of the Board of Directors, Chief Executive Officer and President and Allen H. Blake, Secretary, this 26th day of December, 2000. FIRST BANKS AMERICA, INC. By: /s/ James F. Dierberg ----------------------------------------- James F. Dierberg Chairman of the Board of Directors, Chief Executive Officer and President Attest: /s/ Allen H. Blake - --------------------- Allen H. Blake Secretary EXHIBIT 10(f) PROMISSORY NOTE $100,000,000.00 CLAYTON, MISSOURI November 30, 2000 On or before June 30, 2005, First Banks America, Inc., a Delaware corporation (hereinafter called "Borrower"), promises to pay to the order of First Banks, Inc., a Missouri corporation (hereinafter called "Lender") at its offices at 135 North Meramec, Clayton, Missouri, in lawful money of the United States of America, the sum of One Hundred Million Dollars ($100,000,000.00), or so much thereof as is advanced from time to time and remains outstanding, together with interest thereon from the date hereof until maturity at a varying rate per annum which is one-quarter percent per annum less than the "Prime Rate" as hereinafter defined (but in no event to exceed the maximum rate of non-usurious interest allowed from time to time by law, hereinafter called the "Highest Lawful Rate"), with adjustments in such varying rate to be made on the first day of each month beginning on December 1, 2000, and adjustments due to changes in the Highest Lawful Rate to be made on the effective date of any change in the Highest Lawful Rate. All past due principal and interest shall, at the option of Lender, bear interest at the Highest Lawful Rate from maturity until paid. Interest shall be computed on a per annum basis of a year of 365 days and for the actual number of days (including the first but excluding the last day) elapsed. Principal and accrued interest owing on this Promissory Note (the "Note") shall be due and payable on June 30, 2005. If any default shall occur in the payment of any amount due pursuant to this Note, then, at the option of Lender, the unpaid principal balance and accrued, unpaid interest shall become due and payable forthwith without any further demand, notice of default, notice of acceleration, notice of intent to accelerate the maturity hereof, notice of nonpayment, presentment, protest or notice of dishonor, all of which are hereby expressly waived by Borrower. Lender may waive any default without waiving any prior or subsequent default. If this Note is not paid at maturity and is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in probate, bankruptcy, receivership, reorganization, arrangement or other legal proceedings for collection hereof, Borrower agrees to pay Lender its collection costs, including a reasonable amount for attorneys' fees. Borrower hereby expressly waives bringing of suit and diligence in taking any action to collect any sums owing hereon. Borrower reserves the option of prepaying the principal of this note, in whole or in part, at any time after the date hereof without penalty. Unless otherwise agreed at the time of payment, the amount of any partial payment shall be applied first to accrued unpaid interest, then to any amount due as collection costs, and then to the unpaid principal of the Note. This Note is given by Borrower in replacement of that certain Note dated June 30, 2000 in the principal amount of ninety million dollars ($90,000,000.00) (the "2000 Note"), and the accrued interest on the 2000 Note as of the date of this Note shall become accrued interest on this Note from and after the date hereof. This Note shall be construed under and governed by the laws of the State of Missouri. "Prime Rate" shall mean at any time that variable rate of interest per annum published under "Money Rates" in the Wall Street Journal and defined therein as "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks," or any successor to such rate announced as such by the Wall Street Journal. If the foregoing rate ceases to be published, Lender will choose a new basis for the prime rate, based upon comparable information, and Lender will give Borrower notice of such change. EXECUTED effective as of the 30th day of November, 2000. BORROWER: FIRST BANKS AMERICA, INC. By: /s/ Allen H. Blake ---------------------------------------- Allen H. Blake Executive Vice President ADDRESS: 135 North Meramec Clayton, Missouri 63105 EXHIBIT 13 FIRST BANKS AMERICA, INC. 2000 ANNUAL REPORT TABLE OF CONTENTS PAGE ---- LETTER TO SHAREHOLDERS.............................................................................. 1 SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA...................................................... 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................... 3 QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED...................................................... 25 FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS.................................................................... 26 CONSOLIDATED STATEMENTS OF INCOME.............................................................. 28 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME................................................................... 29 CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................................... 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................... 31 INDEPENDENT AUDITORS' REPORT........................................................................ 54 DIRECTORS AND SENIOR MANAGEMENT..................................................................... 55 INVESTOR INFORMATION................................................................................ 56 To Our Valued Shareholders, Customers and Friends: First Banks America continued its solid performance in 2000! The Company reported record earnings of $27.8 million compared to $17.6 million in 1999. Earnings per share improved from $1.44 in 1999 to $2.29 in 2000, a 59% increase. On October 31, 2000, we acquired First Bank & Trust from First Banks, Inc. and added $1.10 billion in assets and 27 locations to our franchise. This acquisition allowed us to combine our California and Texas banks into one charter, resulting in more convenience for our customers in California and a more efficient operating model. Please note our financial information and commentary have been restated to include First Bank & Trust in all periods presented, in accordance with the accounting treatment applicable to combinations of entities under common control. During the fourth quarter of 2000, the Company significantly increased its presence in the San Francisco Bay area. The acquisitions of Commercial Bank of San Francisco, Millennium Bank and Bank of San Francisco added approximately $456.4 million in assets. Earlier in the year, we also acquired Lippo Bank, based in San Francisco, and Bank of Ventura in Ventura, California. These two banks added another $149.1 million in assets. Our acquisition activities enhanced our existing commercial and commercial real estate lending portfolios and expertise, and also gave us additional opportunities for retail banking, given the favorable locations. The San Francisco Company and its subsidiary, Bank of San Francisco, also brought additional niche businesses including Stock Option Lending, Escrow Services and Private Banking, along with a historic and famous location in downtown San Francisco. Our primary objective of achieving progressive and profitable growth still remains, and the key driver of this growth is net interest income. Continued emphasis on our commercial and commercial real estate lending strengths increased average loans over $317.7 million or 24.4%. This volume increase combined with a rising interest rate environment drove our net interest income up $24.1 million or 29.6%. The net interest rate margin increased 24 basis points from 1999 to 5.51% of our interest-earning assets for 2000. While the revenue growth was strong, increased expenditures for employees, facilities and technology were also required. Non-interest expenses increased $11.6 million or 19.8% in 2000; however, our efficiency ratio improved from 64.0% to 59.5%. We are committed to improving the efficiency of our organization, while increasing the convenience for our customer base, by investing in technology, additional market presence through acquisition and internal growth, and seeking diversified revenue sources that are less dependent on market interest rates. Credit quality is still strong. Non-performing loans represented 0.73% of our loan portfolio at the end of 2000 and net charge-offs were only $201,000 or 0.01% of average loans for the year. These results are consistent with our conservative underwriting practices and sound monitoring procedures over our loan portfolio. BANK FIRST. BE FIRST. These simple sentences reflect our dedication to serving our customers and our communities. With the continued rapid consolidation in the banking industry, consistent, high-quality service is getting more difficult to find. I assure you our Company will strive to continuously improve its service levels, and this should be a competitive advantage for us in the marketplace. In closing, I would like to extend our sincere appreciation for the dedication of our employees, the loyalty of our customers and the continued support of our shareholders. Sincerely, /s/ James F. Dierberg - --------------------- Chairman of the Board, President and Chief Executive Officer SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA (1) The selected consolidated financial data set forth below are derived from our consolidated financial statements, which have been audited by KPMG LLP. This information is qualified by reference to our consolidated financial statements included herein. This information should be read in conjunction with such consolidated financial statements, the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." As of or for the year ended December 31, (1) ---------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars expressed in thousands, except per share data) Income Statement Data: Interest income.................................. $ 177,248 132,720 108,833 85,163 67,844 Interest expense................................. 71,625 51,239 49,295 39,560 29,220 ---------- --------- --------- --------- --------- Net interest income.............................. 105,623 81,481 59,538 45,603 38,624 Provision for loan losses........................ 1,877 4,183 1,750 4,000 6,879 ---------- --------- --------- --------- --------- Net interest income after provision for loan losses................................ 103,746 77,298 57,788 41,603 31,745 Noninterest income............................... 12,077 9,880 7,856 5,469 6,329 Noninterest expense.............................. 70,019 58,463 48,965 32,312 34,388 ---------- --------- --------- --------- --------- Income before provision (benefit) for income tax expense and minority interest in income of subsidiary............... 45,804 28,715 16,679 14,760 3,686 Provision (benefit) for income tax expense....... 18,007 11,116 6,605 4,018 (2,400) ---------- -------- --------- --------- --------- Income before minority interest in income of subsidiary........................ 27,797 17,599 10,074 10,742 6,086 Minority interest in income of subsidiary........ -- -- -- (294) (131) ---------- --------- --------- --------- --------- Net income....................................... $ 27,797 17,599 10,074 10,448 5,955 ========== ========= ========= ========= ========= Per Share Data: Earnings per common share: Basic.......................................... $ 2.29 1.44 0.86 0.99 0.55 Diluted........................................ 2.29 1.44 0.86 0.99 0.55 Weighted average common stock outstanding........ 12,129 12,235 11,671 10,600 10,756 Balance Sheet Data: Investment securities............................ $ 335,219 196,174 251,166 372,799 205,815 Loans, net of unearned discount.................. 2,058,677 1,469,091 1,089,965 816,707 647,300 Total assets..................................... 2,741,379 1,861,862 1,513,276 1,317,490 1,003,261 Total deposits................................... 2,306,356 1,584,999 1,297,859 1,154,796 856,284 Note payable .................................... 98,000 -- -- 14,900 14,000 Guaranteed preferred beneficial interest in First Banks America, Inc. subordinated debentures....................... 44,280 44,218 44,155 -- -- Stockholders' equity............................. 196,909 174,513 143,194 101,190 87,869 Earnings Ratios: Return on average total assets................... 1.32% 1.04% 0.72% 0.97% 0.68% Return on average total stockholders' equity..... 15.86 11.36 8.43 11.31 6.85 Efficiency ratio (2)............................. 59.49 63.99 72.65 63.27 76.50 Net interest margin.............................. 5.51 5.27 4.66 4.52 4.72 Asset Quality Ratios: Allowance for loan losses to loans............... 1.84 2.06 2.29 2.52 2.96 Nonperforming loans to loans (3)................. 0.73 1.11 2.30 1.37 3.73 Allowance for loan losses to nonperforming loans (3)........................ 252.78 185.87 99.61 184.03 79.36 Nonperforming assets to loans and other real estate (4)...................... 0.76 1.13 2.38 1.64 4.37 Net loan charge-offs to average loans............ 0.01 0.15 0.06 0.39 2.33 Capital Ratios: Average total stockholders' equity to average total assets........................ 8.34 9.12 8.54 8.57 9.98 Total risk-based capital ratio................... 8.01 12.04 13.51 9.70 10.46 Leverage ratio................................... 7.34 9.91 10.66 6.62 7.49 - -------------------------- (1) The comparability of the selected data presented is affected by the acquisitions of 11 banks and two branch offices during the five-year period ended December 31, 2000. These acquisitions were accounted for as purchases and, accordingly, the selected data includes the financial position and results of operations of each acquired entity only for the periods subsequent to its respective date of acquisition. In addition on October 31, 2000, we completed our acquisition of First Bank & Trust, and on February 2, 1998, we completed our acquisition of First Commercial Bancorp, Inc. and its wholly owned subsidiary, First Commercial Bank. As discussed in Note 2 to our consolidated financial statements, the selected data has been restated to reflect First Banks, Inc.'s interest in First Bank & Trust and First Commercial Bancorp, Inc. for the periods subsequent to the respective date on which First Banks, Inc. acquired its initial interest in these entities. (2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income. (3) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms. (4) Nonperforming assets consist of nonperforming loans and other real estate. FIRST BANKS AMERICA, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion set forth in the Letter to Shareholders and 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. 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; the impact of laws and regulations 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, some of which may offer and develop products and services that we do not offer; our ability to control the composition of our loan portfolio without adversely affecting interest income; 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 potential for higher than acceptable operating costs arising from the geographic dispersion of our offices, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources; fluctuations in the prices at which acquisition targets may be available for sale and in the market for our securities; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of our Annual Report should therefore not place undue reliance on forward-looking statements. Company Profile We are a registered bank holding company incorporated in Delaware and headquartered in St. Louis County, Missouri. Through the operation of our subsidiaries, we offer a broad array of financial services to consumer and commercial customers. Over the years, our organization has grown significantly, primarily as a result of acquisitions, as well as through internal growth. We currently operate banking subsidiaries that have branch offices in California and Texas. At December 31, 2000, we had total assets of $2.74 billion, loans, net of unearned discount, of $2.06 billion, total deposits of $2.31 billion and total stockholders' equity of $196.9 million. We operate through one subsidiary bank holding company and two subsidiary banks, which are wholly owned by their respective parent companies, as follows: First Bank & Trust, or FB&T, headquartered in San Francisco, California; and, The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned subsidiary: Bank of San Francisco, or BSF, headquartered in San Francisco, California. 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, commercial leasing and trade financing. Other financial services include mortgage banking, credit and debit cards, brokerage services, credit-related insurance, automated teller machines, telephone banking, safe deposit boxes and trust and private banking services. Primary responsibility for managing our subsidiary banking units rests with the officers and directors of each unit. However, in keeping with our policy, we centralize overall corporate policies, procedures and administrative functions and provide operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our subsidiary banking units to focus on customer service. The following table summarizes selected data about our subsidiary banks at December 31, 2000: Loans, net of Number of Total unearned Total locations assets discount deposits --------- ------ -------- -------- (dollars expressed in thousands) FB&T............................. 52 $2,516,993 1,943,013 2,168,742 SFC: BSF............................ 1 216,552 115,615 137,727 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) We are majority owned by First Banks, Inc., or First Banks, headquartered in St. Louis, Missouri. As discussed in Note 15 to our accompanying consolidated financial statements, at December 31, 2000, First Banks owned 2,500,000 shares of our Class B common stock and 8,741,350 shares of our common stock, which represented 92.86% of our total outstanding voting stock. Accordingly, First Banks has effective control over our management and policies, and the election of our directors. In July 1998, our financing subsidiary, First America Capital Trust, a Delaware statutory business trust, issued $46.0 million of 8.50% trust preferred securities. The preferred securities are publicly held and traded on the New York Stock Exchange and have no voting rights except in certain limited circumstances. We pay distributions on these preferred securities quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. General In the development of our banking franchise, we emphasize acquiring other financial institutions as one means of achieving our growth objectives. Acquisitions may serve to enhance our presence in a given market, to expand the extent of our market area or to enable us to enter into new or noncontiguous markets. We believe we must achieve a size sufficient to enable us to take advantage of many of the efficiencies available to our much larger competitors. We also view a combination of internal growth and acquisitions as the means by which we will achieve our overall growth objectives. Although we originally viewed Texas, particularly the Dallas and Houston areas, as our primary acquisition area, during 1995 and 1996 prices for acquisitions escalated sharply in those areas. The prices required to successfully consummate these transactions would have caused substantial diminution in the economic benefits that we envisioned would be available in our acquisition program. This diminution in benefits resulted in our evaluation of California for acquisition candidates, where acquisition pricing was considerably more favorable. During the five years ended December 31, 2000, we have concentrated our acquisitions in California, completing 12 acquisitions of banks and five purchases of branch offices. In addition, our acquisition of First Bank & Trust from our parent company, First Banks, Inc., and the associated internal reorganizations, is expected to significantly expand our presence throughout the state of California, improve operational efficiencies, convey a more consistent image and quality of service and more cohesively market and deliver our products and services. In conjunction with our acquisition strategy, we were also building the infrastructure necessary to accomplish our objectives for internal growth. This process included significantly expanding our commercial and financial, commercial real estate and real estate construction business development staff, enhancing our retail service delivery organization and systems, improving overall asset quality and changing the composition of our loan portfolio. Previously, our lending strategy had been focused on consumer lending, particularly indirect automobile lending. However, in conjunction with that type of lending, we began experiencing substantial asset quality problems resulting in high provisions for loan losses. With the expansion of our business development staff, we began building our portfolio of commercial and financial, commercial real estate and real estate construction loans while substantially reducing our indirect automobile loan portfolio. Reflective of our revised lending strategy, at December 31, 2000, consumer and installment loans, net of unearned discount, represented only 2.2% of our loan portfolio compared to 17.1% at December 31, 1996, while commercial and financial, real estate mortgage and real estate construction and development loans constituted 97.8% of our portfolio, compared to 82.9% at December 31, 1996. Our acquisitions have provided us with access into several new major market areas and, accordingly, an opportunity for future growth and profitability. We continue to meld the acquired entities into our operations, systems and culture. Some of the acquired institutions exhibited elements of financial distress prior to their acquisitions which, generally resulted from asset quality problems and/or high noninterest expenses. Although we have incurred significant expenses in the amalgamation of newly acquired entities into our corporate culture and systems, and in the expansion of our organizational capabilities, the earnings of the acquired entities and the improved net interest income resulting from the transition in the composition of our loan portfolio have contributed to improving net income during 2000 and 1999. For the years ended December 31, 2000 and 1999, net income was $27.8 million and $17.6 million, respectively, compared with $10.1 million in 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Acquisitions To enhance our banking franchise, we emphasize acquiring other financial institutions as a means of accelerating our growth, in order to significantly expand our presence in a given market, to increase the extent of our market area or to enter new or noncontiguous market areas. After we consummate an acquisition, we expect to enhance the franchise of the acquired entity by supplementing the marketing and business development efforts to broaden the customer bases, strengthening particular segments of the business or filling voids in the overall market coverage. In addition, our acquisition program enables us to further leverage the operational support services available through First Banks and its affiliates and to provide the products and services typically available only through such a larger organization. We have utilized cash, voting stock, borrowings and the issuance of additional securities to meet our growth objectives under our acquisition program. Although in the past we have issued voting stock as consideration in some acquisitions, the majority of our recent acquisitions have been for cash, and our present policy is to seek cash transactions. Our ability to consummate additional acquisitions will be dependent, in part, on our access to cash resources with which to fund such transactions, and the maintenance of capital levels which are adequate to satisfy regulatory requirements and internal policies. During the three years ended December 31, 2000, we completed 11 bank acquisitions and two branch office purchases. As demonstrated below, our acquisitions during the three years ended December 31, 2000 have primarily served to increase our presence in markets that we originally entered during 1996 and that First Bank & Trust originally entered during 1995. These transactions, as more fully described in Note 2 to our accompanying consolidated financial statements, are summarized as follows: Number Loans, net of of Total unearned Investment banking Entity Date assets discount securities Deposits locations ------ ---- ------ -------- ---------- -------- --------- (dollars expressed in thousands) 2000 ---- The San Francisco Company San Francisco, California December 31, 2000 $ 183,800 115,700 38,300 137,700 1 Millennium Bank San Francisco, California (1) December 29, 2000 117,000 81,700 21,100 104,200 2 Commercial Bank of San Francisco San Francisco, California (1) October 31, 2000 155,600 97,700 45,500 109,400 1 First Bank & Trust Newport Beach, California (2) October 31, 2000 1,104,000 894,200 91,100 959,400 27 Bank of Ventura Ventura, California (3) August 31, 2000 63,800 39,400 15,500 57,300 1 Lippo Bank San Francisco, California (4) February 29, 2000 85,300 40,900 37,400 76,400 3 ---------- --------- -------- --------- ---- $1,709,500 1,269,600 248,900 1,444,400 35 ========== ========= ======== ========= ==== 1999 ---- Brentwood Bank of California Malibu, California branch office (5) September 17, 1999 $ 23,600 6,300 -- 17,300 1 Century Bank Beverly Hills, California (3) August 31, 1999 156,000 94,800 26,100 132,000 6 Redwood Bancorp San Francisco, California (6) March 4, 1999 183,900 134,400 34,400 162,900 4 ---------- --------- -------- --------- ---- $ 363,500 235,500 60,500 312,200 11 ========== ========= ======== ========= ==== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Number Loans, net of of Total unearned Investment banking Entity Date assets discount securities Deposits locations ------ ---- ------ -------- ---------- -------- --------- (dollars expressed in thousands) 1998 ---- Republic Bank Torrance, California (3) September 15, 1998 $124,100 97,900 7,500 117,200 3 Bank of America Solvang, California branch office (5) March 19, 1998 15,500 -- -- 15,500 1 First Commercial Bancorp, Inc. Sacramento, California) (7) February 2, 1998 192,500 118,900 64,400 173,100 6 Pacific Bay Bank San Pablo, California (4) February 2, 1998 38,300 29,700 232 35,200 1 -------- --------- -------- --------- ---- $370,400 246,500 72,132 341,000 11 ======== ========= ======== ========= ==== - ------------------------- (1) Millennium Bank and Commercial Bank of San Francisco were merged with and into our existing subsidiary bank, FB&T. (2) First Bank & Trust was acquired from First Banks. In conjunction with this transaction, First Bank & Trust and two of our former wholly owned subsidiary banks, First Bank of California and First Bank Texas N.A., were merged with and into Redwood Bank, our other wholly owned subsidiary bank. Redwood Bank was renamed FB&T. (3) Bank of Ventura, Century Bank and Republic Bank were merged with and into a predecessor of FB&T. (4) Lippo Bank, First Commercial Bancorp, Inc.'s wholly owned banking subsidiary, First Commercial Bank, and Pacific Bay Bank were merged with and into a predecessor of FB&T. (5) The Malibu branch office of Brentwood Bank of California and the Solvang branch office of Bank of America were acquired by a predecessor of FB&T through a purchase of certain assets and assumption of deposit liabilities of the branch offices. Total assets reflected in the table above consist primarily of cash received upon assumption of the deposit liabilities and selected loans. (6) Redwood Bancorp was merged with and into its wholly owned subsidiary, now FB&T. (7) First Commercial Bancorp, Inc. was merged with and into a predecessor of FB&T. Except for the acquisitions of First Bank & Trust and First Commercial Bancorp, Inc., or FCB, and its wholly owned subsidiary, First Commercial Bank, these acquisitions were funded from available cash reserves, proceeds from sales and maturities of available-for-sale investment securities, borrowings under our revolving note payable to First Banks and the proceeds from First America Capital Trust's issuance of preferred securities. As more fully discussed in Note 2 to our accompanying consolidated financial statements, we acquired First Bank & Trust and FCB through an exchange of shares of our common stock for all of the issued and outstanding shares of their common stock. Restatements to Reflect Reorganizations In connection with our acquisitions of First Bank & Trust on October 31, 2000 and FCB on February 2, 1998, our financial information has been restated to include First Banks' respective ownership interest, reflected at historical cost, in these entities for all periods subsequent to First Banks' acquisitions of First Bank & Trust and FCB, consistent with the accounting treatment applicable to combinations of entities under common control. Accordingly, Management's Discussion and Analysis of Financial Condition and Results of Operations and our accompanying consolidated financial statements are presented as if First Bank & Trust and FCB had been consolidated into our operations for all periods subsequent to March 15, 1995 and August 23, 1995, respectively. Financial Condition and Average Balances Our average total assets were $2.10 billion for the year ended December 31, 2000, compared to $1.70 billion and $1.40 billion for the years ended December 31, 1999 and 1998, respectively. We attribute the increase of $404.6 million in total average assets for 2000 primarily to: the acquisitions of Commercial Bank of San Francisco, Bank of Ventura and Lippo Bank, which provided total assets of $155.6 million, $63.8 million and $85.3 million, respectively; and, internal loan growth resulting from the continued expansion and development of our MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) business development staff. Similarly, we attribute the increase of $297.9 million in total average assets for 1999 primarily to: > the acquisitions of Century Bank and Redwood Bancorp, which provided total assets of $156.0 million and $183.9 million, respectively; > the purchase of the deposit accounts of the Malibu, California banking location of Brentwood Bank of California; > internal loan growth; and > the issuance of by our financing subsidiary of trust preferred securities during 1998. The increase in assets for 2000 was primarily funded by an increase in total average deposits of $357.3 million to $1.80 billion for the year ended December 31, 2000 and a decrease in average investment securities of $2.7 million to $205.7 million for the year ended December 31, 2000. We utilized the majority of the funds generated from our deposit growth to fund a portion of our loan growth, and the remaining funds were temporarily invested in federal funds sold, resulting in an increase in average federal funds sold of $55.5 million to $86.7 million for the year ended December 31, 2000. Similarly, we funded the increase in assets for 1999 by an increase in total average deposits of $229.1 million to $1.44 billion for the year ended December 31, 1999, from $1.21 billion for the year ended December 31, 1998, and a decrease in average investment securities of $95.8 million during 1999. We attribute the increase in deposits for 1999 of $287.1 million to our acquisitions and internal deposit growth. Loans, net of unearned discount, averaged $1.62 billion, $1.30 billion and $935.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. As summarized under "--Acquisitions," the acquisitions we completed during 1999 and 2000 provided loans, net of unearned discount, of $235.5 million and $375.4 million, respectively. In addition to the growth provided by these acquisitions, for 2000, $273.1 million of net loan growth was provided by corporate banking business development, consisting of an increase of $106.5 million of commercial, financial and agricultural loans, $44.0 million of real estate construction and land development loans and $122.6 million of commercial real estate loans. These increases were partially offset by continuing reductions in residential real estate loans of $33.5 million and consumer and installment loans, net of unearned discount, which consist primarily of indirect automobile loans, of $25.4 million. These changes result from the focus we have placed on our business development efforts and the portfolio repositioning which we began in 1995. This repositioning provided for the origination of indirect automobile loans to be substantially reduced. Investment securities averaged $205.7 million, $208.5 million and $304.3 million for the years ended December 31, 2000, 1999 and 1998, respectively, reflecting decreases of $2.7 million and $95.8 million for the years ended December 31, 2000 and 1999, respectively. We attribute these decreases primarily to the liquidation of certain acquired investment securities and to sales of investment securities available for sale necessary to provide an additional source of funds for our loan growth. The investment securities that we obtained in conjunction with our acquisitions during 1999 and 2000 and we retained in our portfolio partially offset the decreases. We use deposits as our primary funding source and acquire them from a broad base of local markets, including both individual and corporate customers. Deposits averaged $1.80 billion, $1.44 billion and $1.21 billion for the years ended December 31, 2000, 1999 and 1998, respectively. We credit the increases primarily to our acquisitions completed during the respective periods and the expansion of the deposit product and service offerings available to our customer base. During July 1998, First America Capital Trust issued $46.0 million of 8.50% trust preferred securities. Proceeds from this offering, net of underwriting fees and offering expenses, were approximately $44.0 million and were used to reduce borrowings, to support possible repurchases of our common stock from time to time and for general corporate purposes. We temporarily invested the remaining proceeds in interest-bearing deposits and subsequently used them to fund our acquisition of Redwood Bancorp, completed in March 1999. Distributions payable on the trust preferred securities were $3.9 million, $4.0 million and $1.8 million for the years ended December 31, 2000, 1999 and 1998, respectively, and are recorded as noninterest expense in our accompanying consolidated financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Stockholders' equity averaged $175.3 million, $154.9 million and $119.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. We associate the increase for 2000 primarily with net income of $27.8 million and a $3.0 million increase in accumulated other comprehensive income, resulting from the change in unrealized gains and losses on available-for-sale investment securities. The increase was partially offset by repurchases of $1.5 million of common stock for treasury and a reduction of $7.0 million associated with pre-merger transactions of FB&T, which represent transactions that occurred prior to our acquisition of FB&T. We attribute the increase for 1999 to net income of $17.6 million, pre-merger transactions of $18.2 million and a reduction of the deferred tax valuation reserve of $981,000 relating to the utilization of tax net operating losses incurred by certain subsidiary banks prior to completing quasi-reorganizations. The increase was partially offset by repurchase of $1.3 million of common stock for treasury and a $4.3 million reduction in accumulated other comprehensive income resulting from the change in unrealized gains and losses on available-for-sale investment securities. The following table sets forth certain information relating to our average balance sheets, and reflects the average yield earned on interest-bearing assets, the average cost of interest-bearing liabilities and the resulting net interest income for the periods indicated. Years ended December 31, ------------------------------------------------------------------------------------------ 2000 1999 1998 ---------------------------- ----------------------------- -------------------------- Interest Interest Interest Average income/ Yield/ Average income/ Yield/ Average income/ Yield/ balance expense rate balance expense rate balance expense rate ------- ------- ---- ------- ------- ---- ------- ------- ---- (dollars expressed in thousands) ASSETS ------ Interest-earning assets: Loans (1) (2) (3) (4).... $1,621,432 158,020 9.75% $1,303,742 118,279 9.07% $ 935,284 88,351 9.45% Investment securities (3) 205,746 13,652 6.64 208,481 12,753 6.12 304,294 18,494 6.08 Federal funds sold....... 86,700 5,416 6.25 31,176 1,582 5.07 33,563 1,791 5.34 Other.................... 2,082 160 7.68 1,865 106 5.68 3,875 197 5.08 ---------- -------- ---------- ------- ---------- ------- Total interest-earning assets............... 1,915,960 177,248 9.25 1,545,264 132,720 8.59 1,277,016 108,833 8.52 ---------- -------- ---------- ------- ---------- ------- Nonearning assets........... 186,709 152,827 123,155 ---------- ---------- ---------- Total assets .......... $2,102,669 $1,698,091 $1,400,171 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY -------------------- Interest-bearing liabilities: Interest-bearing demand deposits .............. $ 152,487 2,415 1.58% $ 133,976 2,053 1.53% $ 107,070 1,721 1.61% Savings deposits......... 575,227 25,398 4.42 454,022 17,146 3.78 358,371 15,114 4.22 Time deposits............ 727,695 41,561 5.71 586,970 30,009 5.11 541,274 30,058 5.55 ---------- -------- ---------- ------- ---------- ------- Total interest-bearing deposits ............ 1,455,409 69,374 4.77 1,174,968 49,208 4.19 1,006,715 46,893 4.66 Note payable and short-term borrowings.. 38,696 2,251 5.82 39,677 2,031 5.12 36,298 2,402 6.62 ---------- -------- ---------- ------- ---------- ------- Total interest-bearing liabilities ......... 1,494,105 71,625 4.79 1,214,645 51,239 4.22 1,043,013 49,295 4.73 -------- ------- ------- Noninterest-bearing liabilities: Demand deposits........ 340,278 263,427 202,628 Other liabilities...... 92,967 65,092 35,001 ---------- ---------- ---------- Total liabilities...... 1,927,350 1,543,164 1,280,642 Stockholders' equity........ 175,319 154,927 119,529 ---------- ---------- ---------- Total liabilities and stockholders' equity. $2,102,669 $1,698,091 $1,400,171 ========== ========== ========== Net interest income......... 105,623 81,481 59,538 ======== ======= ======= Interest rate spread........ 4.46% 4.37% 3.79% Net interest margin......... 5.51 5.27 4.66 ==== ==== ==== - ----------------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) We have no tax-exempt income. (4) Includes the effects of interest rate exchange agreements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table indicates the changes in interest income and interest expense which are attributable to changes in average volume and changes in average rates, in comparison with the preceding year. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each. Increase (decrease) attributable to change in: ------------------------------------------------------------------ December 31, 2000 compared December 31, 1999 compared to December 31, 1999 to December 31, 1998 ----------------------------- ---------------------------- Net Net Volume Rate Change Volume Rate Change ------ ---- ------ ------ ---- ------ (dollars expressed in thousands) Interest-earning assets: Loans (1) (2) (3) (4).................. $ 30,391 9,350 39,741 33,606 (3,678) 29,928 Investment securities (3).............. (170) 1,069 899 (5,862) 121 (5,741) Federal funds sold..................... 3,391 443 3,834 (122) (87) (209) Other.................................. 13 41 54 (112) 21 (91) -------- ------- ------- ------ ------ ------ Total interest income............ 33,625 10,903 44,528 27,510 (3,623) 23,887 -------- ------- ------- ------ ------ ------ Interest-bearing liabilities: Interest-bearing demand deposits....... 293 69 362 420 (88) 332 Savings deposits....................... 5,049 3,203 8,252 3,729 (1,697) 2,032 Time deposits.......................... 7,648 3,904 11,552 2,429 (2,478) (49) Note payable and short-term borrowings................ (51) 271 220 209 (580) (371) -------- ------- ------- ------ ------ ------ Total interest expense........... 12,939 7,447 20,386 6,787 (4,843) 1,944 -------- ------- ------- ------ ------ ------ Net interest income.............. $ 20,686 3,456 24,142 20,723 1,220 21,943 ======== ======= ======= ====== ====== ====== - ------------------------ (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) We have no tax-exempt income. (4) Includes the effect of interest rate exchange agreements. Net Interest Income The primary source of our income is net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on our interest-bearing liabilities. Net interest income improved to $105.6 million, or 5.51% of average interest-earning assets, for the year ended December 31, 2000, from $81.5 million, or 5.27% of average interest-earning assets, and $59.5 million, or 4.66% of average interest-earning assets, for the years ended December 31, 1999 and 1998, respectively. We credit the improved net interest income primarily to the net interest-earning assets provided by our acquisitions, internal loan growth and increases in the prime lending rate which resulted in increased yields on interest-earning assets. During 2000, the cost of interest-bearing liabilities increased with prevailing interest rates. However, since this increase was less dramatic than the increase in earnings on interest-earning assets, it did not undermine the improvement in net interest margins. Average total loans, net of unearned discount, increased by $317.7 million to $1.62 billion for the year ended December 31, 2000, from $1.30 billion and $935.3 million for the years ended December 31, 1999 and 1998, respectively. During the period from June 30, 1999 through December 31, 2000, the Board of Governors of the Federal Reserve System increased the discount rate several times, resulting in six increases in the prime rate of interest from 7.75% to 9.50%. This is reflected not only in the rate of interest earned on loans that are indexed to the prime rate, but also in other assets and liabilities which either have variable or adjustable rates, or which matured or repriced during this period. The yield on our loan portfolio increased to 9.75% for the year ended December 31, 2000, from 9.07% for the year ended December 31, 1999, principally as the result of an increase in prevailing interest rates. However, the improved yield on our loan portfolio was partially offset by the expense associated with our interest rate swap agreements that we entered into in conjunction with our risk management program. Although our net interest margin has continued to improve over the last three years, the yield on our loan portfolio declined to 9.07% for the year ended December 31, 1999 in comparison to 9.45% for the year ended December 31, 1998. This reduction primarily resulted from the overall decline in prevailing interest rates that occurred during the fourth quarter of 1998. In addition, increased competition within the market areas we serve led to reduced lending rates. The effect of the reduced yield on our loan portfolio was partially mitigated in 1999 by the earnings impact of the interest rate swap agreements that we entered into and a reduced rate paid on average interest-bearing liabilities. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the years ended December 31, 2000, 1999 and 1998, the aggregate weighted average rate paid on our interest-bearing deposit portfolio was 4.77%, 4.19% and 4.66%, respectively. This increase for 2000 reflected increased rates we paid to provide a funding source for continued loan growth, whereas the decrease for 1999 reflected the ongoing realignment of our deposit portfolio. In addition, the aggregate weighted average rate paid on our note payable and short-term borrowings increased to 5.82% for the year ended December 31, 2000 from 5.12% for the year ended December 31, 1999, reflecting an increase in market interest rates. Amounts outstanding under our $100.0 million revolving note payable to First Banks bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. Thus, our revolving note payable represents a relatively high-cost funding source, so that increased advances under the revolving note payable have the effect of increasing the weighted average rate of non-deposit liabilities. During 2000, we utilized the note payable to fund our acquisitions of Lippo Bank, Commercial Bank of San Francisco, Millennium Bank and The San Francisco Company, whereas in 1999 we did not utilize the revolving note payable. Interest Rate Risk Management For financial institutions, the maintenance of a satisfactory level of net interest income is a primary factor in achieving acceptable income levels. However, the maturity and repricing characteristics of the institution's loan and investment portfolios, relative to those within its deposit structure, may differ significantly. The nature of the loan and deposit markets within which such institution operates, and its objective for business development within those markets at any point in time, influence these characteristics. In addition, the ability of borrowers to repay loans and depositors to withdraw funds prior to stated maturity dates introduces divergent option characteristics which operate primarily as interest rates change. These factors cause various elements of the institution's balance sheet to react in different manners and at different times relative to changes in interest rates, thereby leading to increases or decreases in net interest income over time. Depending upon the direction and velocity of interest rate movements and their effect on the specific components of the institution's balance sheet, the effects on net interest income can be substantial. Consequently, managing a financial institution requires establishing effective control over the exposure of the institution to changes in interest rates. We manage our interest rate risk by: > maintaining an Asset Liability Committee, or ALCO, responsible to our Board of Directors to review the overall interest rate risk management activity and approve actions taken to reduce risk; > maintaining an effective simulation model to determine our exposure to changes in interest rates; > coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and > employing various off-balance-sheet financial instruments, including derivatives, to offset inherent interest rate risk when it becomes excessive. The objective of these procedures is to limit the adverse impact which changes in interest rates may have on our net interest income. The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes our Chairman, Chief Executive Officer and President, as well as the senior executives of investments, credit, banking support and finance, and certain other officers. The Asset Liability Management Group, which monitors interest rate risk, supports the ALCO, prepares analyses for review by the ALCO and implements actions which are either specifically directed by the ALCO or established by policy guidelines. In interest rate sensitivity management, we strive to optimize earnings results, while managing interest rate risk within internal policy constraints. Regarding rate sensitivity, our policy is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near-term changes in interest rates. To measure the effect of interest rate changes, we calculate our net income over two one-year horizons on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, and parallel and non-parallel shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, we include scenarios based on actual changes in interest rates, which have occurred over a two-year period, simulating both a declining and rising interest rate scenario. We are "asset-sensitive," and our simulation model indicates a loss of projected net interest income should interest rates decline. While a decline in interest rates of less than 100 basis points has a relatively minimal impact on our net interest income, a decline in interest rates of 100 basis points indicates a pre-tax projected loss of approximately 7.5% of net interest income, and a decline in interest rates of 200 basis points indicates a pre-tax projected loss MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of approximately 10.5% of net interest income, based on assets and liabilities at December 31, 2000. We utilize off-balance-sheet derivative financial instruments to assist in our management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of on-balance-sheet assets and liabilities. We limit the use of such derivative financial instruments to reduce our interest rate exposure. As more fully described in Note 17 to our accompanying consolidated financial statements, the derivative financial instruments we hold, for purposes of managing interest rate risk, are summarized as follows: December 31, 2000 December 31, 1999 -------------------- -------------------- Notional Credit Notional Credit amount exposure amount exposure ------ -------- ------ -------- (dollars expressed in thousands) Interest rate swap agreements - pay adjustable rate, receive fixed rate......... $535,000 1,112 235,000 1,094 Interest rate swap agreements - pay adjustable rate, receive adjustable rate.... -- -- 150,000 -- Interest rate cap agreements.................. 150,000 1,251 10,000 26 ======== ====== ======== ====== The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the accounting loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. During 1998, we entered into $105.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements initially provided for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the 90-day London Interbank Offering Rate. In March 2000, the terms of the swap agreements were modified such that we currently pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.705%. The terms of the swap agreements provide for FBA to pay quarterly and receive payment semiannually. The amount receivable by us under the swap agreements was $1.4 million at December 31, 2000 and 1999, and the amount payable by us under the swap agreements was $281,000 and $294,000 at December 31, 2000 and 1999, respectively. During May 1999, we entered into $150.0 million notional amount of interest rate swap agreements with the objective of stabilizing the net interest margin during the six-month period surrounding the Year 2000 century date change. The swap agreements provided for us to receive an adjustable rate of interest equivalent to the daily weighted average 30-day London Interbank Offering Rate and pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.665%. The terms of the swap agreements, which had an effective date of October 1, 1999 and a maturity date of March 31, 2000, provided for us to pay and receive interest on a monthly basis. In January 2000, we determined these swap agreements were no longer necessary based upon the results of the Year 2000 transition and terminated these agreements resulting in a cost of $45,000. During September 1999, we entered into $130.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. The amount receivable by us under the swap agreements was $89,000 at December 31, 2000 and 1999, and the amount payable by us under the swap agreements was $123,000 and $105,000 at December 31, 2000 and 1999, respectively. During September 2000, we entered into $300.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for us to receive a fixed rate of interest and pay an adjustable rate equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. The amount receivable by us under the swap agreements was $621,000 at December 31, 2000 and the amount payable by us under the swap agreements was $623,000 at December 31, 2000. In conjunction with these interest rate swap agreements, we also entered into $150.0 million notional amount of an interest rate cap agreement to limit the net interest expense associated with the interest rate swap agreements in the event of a rising rate scenario. The interest rate cap agreement has a maturity date of September 20, 2004, and provides for us to receive a quarterly adjustable rate of interest equivalent to the three-month London Interbank Offering Rate should such rate exceed the predetermined interest rate of 7.50%. At December 31, 2000, the unamortized costs associated with this interest rate cap agreement were $1.3 million, and were included in other assets. During 2000 and 1998, we realized net interest expense on our derivative financial instruments of $2.1 million and $55,000, respectively, in comparison to net interest income of $226,000 that we realized on our derivative financial instruments in 1999. As more fully described in Note 1 to our accompanying consolidated financial statements, in the event of early termination of the interest rate swap agreements, the net proceeds received or paid are deferred and amortized over the shorter of the remaining contract life or the maturity of the related asset. If, however, the amount of the underlying asset is repaid, then the fair value gains or losses on the interest rate swap agreements are recognized immediately in our consolidated statements of income. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In addition to our simulation model, we also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of the simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of December 31, 2000, adjusted to account for anticipated prepayments: Over Over three six Over Three through through one Over months six twelve through five or less months months five years years Total ------- ------ ------ ---------- ----- ----- (dollars expressed in thousands) Interest-earning assets: Loans (1)...................................... $1,523,039 165,291 192,658 169,230 8,459 2,058,677 Investment securities.......................... 103,822 15,018 21,201 156,926 38,252 335,219 Federal funds sold and other................... 56,276 -- -- -- -- 56,276 ---------- --------- --------- --------- -------- --------- Total interest-earning assets................ 1,683,137 180,309 213,859 326,156 46,711 2,450,172 Effect of interest rate swap agreements........ (535,000) -- 130,000 405,000 -- -- ---------- --------- --------- --------- -------- --------- Total interest-earning assets after the effect of interest rate swap agreements..................... $1,148,137 180,309 343,859 731,156 46,711 2,450,172 ========== ========= ========= ========= ======== ========= Interest-bearing liabilities: Interest-bearing demand accounts............... $ 72,366 44,985 29,338 21,514 27,382 195,585 Money market demand accounts................... 527,583 -- -- -- -- 527,583 Savings accounts............................... 40,630 33,461 28,680 40,631 95,602 239,004 Time deposits.................................. 226,966 220,408 246,811 174,206 8 868,399 Note payable................................... -- -- -- 98,000 -- 98,000 Other borrowed funds........................... 47,041 -- -- 10,544 -- 57,585 ---------- --------- --------- --------- -------- --------- Total interest-bearing liabilities........... $ 914,586 298,854 304,829 344,895 122,992 1,986,156 ========== ========= ========= ========= ======== ========= Interest-sensitivity gap: Periodic....................................... $ 233,551 (118,545) 39,030 386,261 (76,281) 464,016 ========= Cumulative..................................... 233,551 115,006 154,036 540,297 464,016 ========== ========= ========= ========= ======== Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic................................. 1.26 0.60 1.13 2.12 0.38 1.23 ========= Cumulative............................... 1.26 1.09 1.10 1.29 1.23 ========== ========= ========= ========= ======== - ---------------------- (1) Loans are presented net of unearned discount. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Management made certain assumptions in preparing the table above. These assumptions included: > loans will repay at projected repayment speeds; > mortgage-backed securities, included in investment securities, will repay at projected repayment speeds; > interest-bearing demand accounts and savings accounts are interest- sensitive at rates ranging from 11% to 37% and 12% to 40%, respectively, of the remaining balance for each period presented; and > fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table. At December 31, 2000 and 1999, our asset-sensitive position on a cumulative basis through the twelve-month time horizon was $154.0 million, or 5.62% of total assets, and $166.5 million, or 8.9% of total assets, respectively. The asset-sensitive position is attributable to the composition of our loan and investment security portfolios as compared to our deposit base. We attribute the decrease for 2000 to the interest rate swap agreements entered into in June 1998, September 1998, September 1999 and September 2000. The interest-sensitivity position is one of several measurements of the impact of interest rate changes on net interest income. Its usefulness in assessing the effect of potential changes in net interest income varies with the constant change in the composition of our assets and liabilities and changes in interest rates. For this reason, we place greater emphasis on a simulation model for monitoring our interest rate risk exposure. Comparison of Results of Operations for the Years Ended December 31, 2000 and 1999 Net Income. Net income was $27.8 million, or $2.29 per share on a diluted basis, for the year ended December 31, 2000, compared to $17.6 million, or $1.44 per share on a diluted basis, for 1999. The earnings progress was primarily driven by increased net interest income generated from our acquisitions completed during 1999 and 2000; the continued change in the composition of our loan portfolio; increased yields on earning assets; internal loan growth; a reduced provision for loan losses; and, increased noninterest income. We funded the overall loan growth primarily through internal deposit growth. As previously discussed under "--Financial Condition and Average Balances" and "--Net Interest Income," net interest income increased by $24.1 million to $105.6 million, or 5.51% of average interest-earning assets, from $81.5 million, or 5.27% of average interest-earnings assets, for the years ended December 31, 2000 and 1999, respectively. The improvement in net income was partially offset by increased operating expenses. The increased operating expenses reflect the operating expenses of our 1999 and 2000 acquisitions, exclusive of First Bank & Trust, subsequent to their respective acquisition dates; increased salaries and employee benefit expenses; increased data processing fees, increased legal, examination and professional fees; and increased amortization of intangibles associated with the purchase of subsidiaries. Provision for Loan Losses. The provision for loan losses was $1.9 million and $4.2 million for the years ended December 31, 2000 and 1999, respectively. We attribute the decrease in the provision for loan losses primarily to improved asset quality, as determined by management's review and evaluation of the credit quality of the loans in our portfolio, reduced charge-offs, and management's assessment of the adequacy of our allowance for loan losses. Nonperforming assets decreased by $934,000 to $15.7 million from $16.6 million at December 31, 2000 and 1999, respectively, resulting in a reduced ratio of nonperforming loans to loans from 1.11% at December 31, 1999 to 0.73% at December 31, 2000. Our loan loss experience further supported the decrease in the provision for loan losses. For the year ended December 31, 2000, loan charge-offs were $5.4 million, in comparison to $7.1 million for the year ended December 31, 1999. The decrease in loan charge-offs shows the generally strong economic conditions prevalent in our markets, as well as a decline in nonperforming assets and management's continued efforts to effectively monitor and manage our loan portfolio. In addition, loan charge-offs for the year ended December 31, 2000 included a charge-off of $1.6 million on a single loan. Loan recoveries were $5.2 million for the years ended December 31, 2000 and 1999, in comparison to $4.3 million for the year ended December 31, 1998, reflecting continued aggressive collection efforts. Our acquisitions during 1999 and 2000 provided $3.0 million and $6.1 million, respectively, in additional allowance for loan losses at the respective acquisition dates. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Tables summarizing nonperforming assets, past-due loans and charge-off and recovery experience are presented under "--Loans and Allowance for Loan Losses." Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 2000 and 1999: Increase (Decrease) ------------------- 2000 1999 Amount Percent ---- ---- ------ ------- (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees........................ $ 7,626 6,210 1,416 22.80% Other income....................................... 4,274 3,185 1,089 34.19 Gains on sales of securities, net.................. 177 485 (308) (63.51) -------- ------- -------- Total noninterest income....................... $ 12,077 9,880 2,197 22.24 ======== ======= ======== ======== Noninterest expense: Salaries and employee benefits..................... $ 25,917 21,889 4,028 18.40% Occupancy, net of rental income.................... 8,496 6,980 1,516 21.72 Furniture and equipment............................ 3,588 3,232 356 11.01 Advertising and business development............... 969 819 150 18.32 Postage, printing and supplies..................... 1,459 1,362 97 7.12 Data processing fees............................... 7,406 5,570 1,836 32.96 Legal, examination and professional fees........... 6,995 5,753 1,242 21.59 Communications..................................... 943 1,098 (155) (14.12) Gain on sales of other real estate, net of expenses.................................. (215) (720) 505 (70.14) Amortization of intangibles associated with the purchase of subsidiaries......................... 3,234 2,296 938 40.85 Guaranteed preferred debentures.................... 3,908 3,966 (58) (1.46) Other.............................................. 7,319 6,218 1,101 17.71 -------- ------- -------- Total noninterest expense...................... $ 70,019 58,463 11,556 19.77 ======== ======= ======== ======== Noninterest Income. Noninterest income was $12.1 million for the year ended December 31, 2000, compared to $9.9 million for 1999. Noninterest income consists primarily of service charges on deposit accounts, customer service fees and other income. Service charges on deposit accounts and customer service fees increased to $7.6 million for 2000, from $6.2 million for 1999. We attribute the increase in service charges and customer service fees to: > increased deposit balances provided by internal growth; > our acquisitions completed throughout 1999 and 2000; > additional services available and utilized by our expanding base of retail and corporate customers; > increased fee income resulting from revisions of customer service charge rates, effective April 1, 1999 and June 30, 2000, and enhanced control of fee waivers; and > increased income associated with automated teller machine services and debit cards. Other income was $4.3 million and $3.2 million for the years ended December 31, 2000 and 1999, respectively. The primary components of the increase are increased income earned on our investment in bank-owned life insurance; earnings associated with our International Banking Division, which was initially acquired in conjunction with our Lippo Bank acquisition and has subsequently been expanded to offer these services to our entire customer base; and approximately $620,000 relating to the repayment of an acquired loan in excess of our historical cost basis. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Noninterest income for 2000 and 1999 also includes $177,000 and $485,000, respectively, of net gains on sales of available-for-sale investment securities. The net gain in 2000 resulted from sales of certain investment securities held by acquired institutions that did not meet our overall investment objectives, whereas the net gain in 1999 resulted from sales of certain investment securities to facilitate the funding of loan growth. Noninterest Expense. Noninterest expense was $70.0 million for the year ended December 31, 2000, compared to $58.5 million for 1999. The increase reflects: > the noninterest expense of our acquisitions completed throughout 1999 and 2000 subsequent to the respective acquisition dates, including certain nonrecurring expenses associated with those acquisitions; > increased salaries and employee benefit expenses; > increased data processing fees; > increased legal, examination and professional fees; and > increased amortization of intangibles associated with the purchase of subsidiaries. Salaries and employee benefits increased by $4.0 million to $25.9 million from $21.9 million for the years ended December 31, 2000 and 1999, respectively. We primarily associate the increase with our 1999 and 2000 acquisitions. However, the increase also reflects the competitive environment in the employment market that has resulted in a higher demand for limited resources, thus escalating industry salary and employee benefit costs associated with employing and retaining qualified personnel. In addition, the increase includes various additions to our staff to enhance management expertise. Occupancy, net of rental income, and furniture and equipment expense totaled $12.1 million in 2000, in comparison to $10.2 million in 1999. The increase is primarily attributable to acquisitions, the relocation of certain California and Texas branches and increased depreciation expense associated with numerous capital expenditures made throughout 1999, including the implementation of our new teller system. Data processing fees were $7.4 million and $5.6 million for the years ended December 31, 2000 and 1999, respectively, of which $6.8 million and $5.3 million were paid to First Services, L.P., an affiliate of First Banks. As more fully described in Note 16 to our accompanying consolidated financial statements, First Services, L.P. provides data processing and various related services to our subsidiary banks and us. We attribute the increased data processing fees to growth and technological advancements consistent with our product and service offerings and upgrades to technological equipment, networks and communication channels. Legal, examination and professional fees were $7.0 million and $5.8 million for the years ended December 31, 2000 and 1999, respectively. We attribute the increase in these fees to our expanded utilization of legal and professional services in conjunction with general corporate activities. Intangibles associated with the purchase of subsidiaries are amortized on a straight-line basis generally over 15 years. Amortization of these intangibles was $3.2 million and $2.3 million in 2000 and 1999, respectively. The increase for 2000 is primarily attributable to amortization of the cost in excess of the fair value of the net assets acquired of Commercial Bank of San Francisco, Bank of Ventura, Lippo Bank, Century Bank and Redwood Bancorp. Other expense was $7.3 million and $6.2 million for the years ended December 31, 2000 and 1999, respectively. Other expense encompasses numerous general and administrative expenses including but not limited to travel, meals and entertainment, insurance, freight and courier services, correspondent bank charges, miscellaneous losses and recoveries, memberships and subscriptions, transfer agent fees and sales taxes. We attribute the overall increase in these expenses to the continued growth and expansion of our banking franchise. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Results of Operations for the Years Ended December 31, 1999 and 1998 Net Income. Net income was $17.6 million, or $1.44 per share on a diluted basis, for the year ended December 31, 1999, compared to $10.1 million or $0.86 per share on a diluted basis, for 1998. We associate our improved operating results with increased net interest income generated from our acquisitions completed throughout 1998 and 1999; our continuing efforts to realign the composition of our loan portfolio through further diversification and growth; and increased noninterest income. Net interest income increased by $21.9 million to $81.5 million, or 5.27% of average interest-earning assets, from $59.5 million, or 4.66% of average interest-earning assets, for the years ended December 31, 1999 and 1998, respectively. An increase in the provision for loan losses and an increase in operating expenses partially offset the improvement in net income. The increased operating expenses are primarily reflective of the operating expenses of our 1998 and 1999 acquisitions; increased salaries and employee benefits; increased data processing fees primarily associated with Year 2000 activities; increased amortization of intangibles associated with the purchase of subsidiaries; and increased guaranteed preferred debentures expense, reflecting the additional cost of the trust preferred securities issued in July 1998. Provision for Loan Losses. The provision for loan losses was $4.2 million and $1.8 million for the years ended December 31, 1999 and 1998, respectively. We attribute the increase in the provision for loan losses for 1999 to continued growth in our loan portfolio, both internal and through acquisitions; increased risk associated with the continued changing composition of our loan portfolio; increased loans charged-off; and a relatively high level of nonperforming assets that existed at December 31, 1998. For the year ended December 31, 1999, loan charge-offs were $7.1 million, in comparison to $4.9 million for the year ended December 31, 1998. The increase in loan charge-offs reflects overall growth in our loan portfolio, the changing composition of our loan portfolio and the further degradation and charge-off of certain nonperforming loans that existed at December 31, 1998. Loan recoveries were $5.2 million for the year ended December 31, 1999, in comparison to $4.3 million for the year ended December 31, 1998, reflecting continued aggressive collection efforts. Our acquisitions during 1999 and 1998 provided $3.2 million and $3.0 million, respectively, in additional allowance for loan losses at the respective acquisition dates. Tables summarizing nonperforming assets, past-due loans and charge-off and recovery experience are presented under "--Loans and Allowance for Loan Losses." Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 1999 and 1998: Increase (Decrease) ------------------- 1999 1998 Amount Percent ---- ---- ------ ------- (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees........................ $ 6,210 5,166 1,044 20.21% Other income ...................................... 3,185 1,991 1,194 59.97 Gains on sales of securities, net.................. 485 699 (214) (30.62) -------- ------- ------- Total noninterest income....................... $ 9,880 7,856 2,024 25.76 ======== ======= ======= ======= Noninterest expense: Salaries and employee benefits .................... $ 21,889 17,465 4,424 25.33% Occupancy, net of rental income ................... 6,980 5,655 1,325 23.43 Furniture and equipment ........................... 3,232 3,149 83 2.64 Advertising and business development............... 819 1,178 (359) (30.48) Postage, printing and supplies..................... 1,362 1,395 (33) (2.37) Data processing fees............................... 5,570 3,738 1,832 49.01 Legal, examination and professional fees........... 5,753 5,627 126 2.24 Communications..................................... 1,098 1,315 (217) (16.50) Gain on sales of other real estate, net of expenses.................................. (720) (93) (627) 674.19 Amortization of intangibles associated with the purchase of subsidiaries......................... 2,296 1,046 1,250 119.50 Guaranteed preferred debentures.................... 3,966 1,758 2,208 125.60 Other.............................................. 6,218 6,732 (514) (7.64) -------- ------- ------- Total noninterest expense...................... $ 58,463 48,965 9,498 19.40 ======== ======= ======= ======= MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Noninterest Income. Noninterest income was $9.9 million for the year ended December 31, 1999, compared to $7.9 million for 1998. Noninterest income consists primarily of service charges on deposit accounts, customer service fees and other income. Service charges on deposit accounts and customer service fees increased to $6.2 million for 1999, from $5.2 million for 1998. We attribute the increase in service charges and customer service fees to: > increased deposit balances provided by internal growth; > our acquisitions completed during 1998 and 1999; > additional products and services available and utilized by our expanding base of retail and corporate customers; and > increased fee income resulting from revisions of customer service charge rates, effective April 1, 1999, and enhanced control of fee waivers. Other income was $3.2 million and $2.0 million for the years ended December 31, 1999 and 1998, respectively. The primary components of the increase consist of $795,000 relating to the repayment of an acquired loan in excess of our historical cost basis and increased income earned on our investment in bank-owned life insurance. The bank-owned life insurance income increased to $1.2 million for 1999, in comparison to $848,000 for 1998 and primarily results from twelve months of earnings in 1999, in comparison to nine months of earnings in 1998. Noninterest income for 1999 and 1998 also includes $485,000 and $699,000, respectively, of net gains on sales of available-for-sale investment securities. The net gains resulted from sales of certain investment securities to facilitate the funding of loan growth. Noninterest Expense. Noninterest expense increased to $58.5 million for the year ended December 31, 1999 from $49.0 million for 1998. The increase reflects: > the noninterest expense of our acquisitions completed throughout 1998 and 1999, exclusive of FCB and First Bank & Trust, subsequent to the respective acquisition dates, including certain nonrecurring expenses; > increased salaries and employee benefit expenses; > increased data processing fees; > increased amortization of intangibles associated with the purchase of subsidiaries; and > increased guaranteed preferred debentures expense. The overall increase in noninterest expense was partially offset by a reduction in advertising and business development expenses and communications expenses, and is consistent with management's efforts to more effectively manage these expenditures. Specifically, salaries and employee benefits increased by $4.4 million to $21.9 million from $17.5 million for the years ended December 31, 1999 and 1998, respectively. We associate the increase with our 1999 and 1998 acquisitions and our continued commitment to expanding our commercial and retail business development capabilities. Occupancy, net of rental income, and furniture and equipment expense totaled $10.2 million in 1999, in comparison to $8.8 million in 1998. The increase is primarily attributable to our acquisitions and the relocation of certain California branches. Data processing fees were $5.6 million and $3.7 million for the years ended December 31, 1999 and 1998, respectively, of which $5.3 million and $3.5 million were paid to First Services, L.P. As more fully described in Note 16 to our accompanying consolidated financial statements, First Services, L.P. provides data processing and various related services to our subsidiary banks and us. We attribute the increased data processing fees to growth and technological advancements consistent with our product and service offerings, increased expenses attributable to communication data lines related to the expansion of our branch network infrastructure and expenses associated with our Year 2000 program. We incurred direct expenses related to our Year 2000 program of approximately $900,000 and $310,000 for the years ended December 31, 1999 and 1998, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Intangibles associated with the purchase of subsidiaries are amortized on a straight-line basis generally over 15 years. Amortization of such intangibles was $2.3 million and $1.0 million in 1999 and 1998, respectively. The increase for 1999 is primarily attributable to amortization of the cost in excess of the fair value of the net assets acquired of Century Bank, Redwood Bancorp, Republic Bank, the Solvang branch office of Bank of America, FCB and Pacific Bay Bank. Guaranteed preferred debentures expense was $4.0 million and $1.8 million for the years ended December 31, 1999 and 1998, respectively. As more fully discussed under "--Financial Condition and Average Balances" and Note 9 to our accompanying consolidated financial statements, First America Capital Trust issued $46.0 million of trust preferred securities in July 1998. Thus, the increase is reflective of twelve months of expense incurred on the trust preferred securities in 1999, in comparison to approximately six months of expense incurred in 1998. Other expense was $6.2 million and $6.7 million for the years ended December 31, 1999 and 1998, respectively. Other expense encompasses numerous general and administrative expenses including but not limited to travel, meals and entertainment, insurance, freight and courier services, correspondent bank charges, miscellaneous losses and recoveries memberships and subscriptions, transfer agent fees and sales taxes. We attribute the overall decrease in these expenses primarily to a $350,000 charge in settlement of certain litigation that occurred in 1998. Investment Securities We classify the securities within our investment portfolio as held to maturity or available for sale. We do not engage in the trading of investment securities. As more fully described in Notes 1 and 3 to our accompanying consolidated financial statements, our investment security portfolio consists primarily of securities designated as available for sale. The investment security portfolio was $335.2 million at December 31, 2000 compared to $196.2 million and $251.2 million at December 31, 1999 and 1998, respectively. Loans and Allowance for Loan Losses Interest earned on our loan portfolio represents the principal source of income for our subsidiary banks. Interest and fees on loans were 89.2%, 89.1% and 81.2% of total interest income for the years ended December 31, 2000, 1999 and 1998, respectively. Loans, net of unearned discount, represented 75.1% of total assets as of December 31, 2000, compared to 78.9% and 72.0% as of December 31, 1999 and 1998, respectively. Total loans, net of unearned discount, increased $589.6 million to $2.06 billion for the year ended December 31, 2000, and $379.1 million to $1.47 billion for the year ended December 31, 1999. We view the quality, yield and growth of our loan portfolio to be instrumental elements in determining our profitability. As summarized in the composition of loan portfolio table, during the five years ended December 31, 2000, total loans, net of unearned discount, increased substantially from $647.3 million at December 31, 1996 to $2.06 billion at December 31, 2000. Prior to 1995, our lending strategy had been focused on consumer lending, particularly indirect automobile lending. However, in conjunction with that type of lending, we began experiencing substantial asset quality problems resulting in high provisions for loan losses in 1995 and 1996. As a result, we initiated a process of repositioning our loan portfolio through acquisitions and the expansion of our corporate business development staff, which is responsible for the internal development of both loan and deposit relationships with commercial customers. As the corporate business development effort continued to originate a substantial volume of new commercial and financial, real estate construction and development and real estate mortgage loans, we substantially reduced our origination of indirect automobile loans. This allowed us to fund a part of the growth in corporate lending through the reduction in indirect automobile lending. Reflective of our revised lending strategy, at December 31, 2000, consumer and installment loans, net of unearned discount, represented only 2.2% of our loan portfolio, whereas at December 31, 1996, such loans constituted 17.1%. In addition, our acquisitions added substantial portfolios of new loans. However, some of these portfolios, particularly those related to First Bank & Trust's acquisitions completed in 1995, contained significant loan problems. As we resolved the asset quality issues, the portfolios of the acquired entities tended to decline because many of the resources which would otherwise be directed toward generating new loans were concentrated on improving or eliminating existing relationships. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table summarizes the changes in the loan portfolio for the periods indicated: Increase (decrease) -------------------------------------- For the Years Ended December 31, -------------------------------------- 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Internal loan volume increase (decrease): Commercial lending............................................ $ 273,099 191,223 235,202 Indirect automobile lending................................... (13,865) (21,841) (14,343) Other......................................................... (45,048) (25,756) (75,201) Loans provided by acquisition..................................... 375,400 235,500 127,600 --------- --------- --------- Total increase in loans, net of unearned discount........ $ 589,586 379,126 273,258 ========= ========= ========= (Decrease) increase in potential problem loans (1)................ $ (6,300) (100) 7,000 ========= ========= ========= - ------------------------- (1) Potential problem loans include loans on nonaccrual status and other loans identified by management as having potential credit problems. Our lending strategy stresses quality, growth and diversification. Throughout our organization, we employ a common credit underwriting policy. Our commercial lenders focus principally on small to middle-market companies. Consumer lenders focus principally on residential loans, including home equity loans, automobile financing and other consumer financing opportunities arising out of our branch banking network. Commercial and financial loans include loans that are made primarily based on the borrowers' general credit strength and ability to generate cash flows for repayment from income sources even though such loans may also be secured by real estate or other assets. Real estate construction and development loans, primarily relating to residential properties and commercial properties, represent financing secured by real estate under construction. Real estate mortgage loans consist primarily of loans secured by single-family, owner-occupied properties and various types of commercial properties on which the income from the property is the intended source of repayment. Consumer and installment loans consist primarily of loans to individuals secured by automobiles. The following table shows the composition of our loan portfolio by major category and the percent of each category to the total portfolio as of the dates presented: December 31, ------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------ ---------------- ---------------- ---------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (dollars expressed in thousands) Commercial and financial............... $ 686,426 33.3% $ 427,974 29.1% $ 337,084 30.9% $217,214 26.6% $141,518 21.9% Real estate construction and development............. 444,218 21.6 377,254 25.7 293,665 26.9 146,147 17.9 78,878 12.2 Real estate mortgage..... 883,103 42.9 607,171 41.3 394,255 36.2 370,790 45.4 316,305 48.8 Consumer and installment,net of unearned discount....... 44,930 2.2 56,692 3.9 64,961 6.0 82,556 10.1 110,599 17.1 ---------- ----- ---------- ----- ---------- ----- -------- ----- -------- ----- Total loans, excluding loans held for sale.... $2,058,677 100.0% $1,469,091 100.0% $1,089,965 100.0% $816,707 100.0% $647,300 100.0% ========== ===== ========== ===== ========== ===== ======== ===== ======== ===== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Loans at December 31, 2000 mature as follows: Over one year through five years Over five years ------------------ --------------- One year Fixed Floating Fixed Floating or less rate rate rate rate Total ------- ---- ---- ---- ---- ----- (dollars expressed in thousands) Commercial and financial.................. $ 574,979 56,101 29,762 15,178 10,406 686,426 Real estate construction and development........................ 433,497 4,538 3,867 -- 2,316 444,218 Real estate mortgage...................... 574,219 86,884 68,436 42,871 110,693 883,103 Consumer and installment, net of unearned discount............... 18,887 22,398 1,022 916 1,707 44,930 ---------- --------- -------- ------- -------- --------- Total loans.......................... $1,601,582 169,921 103,087 58,965 125,122 2,058,677 ========== ========= ======== ======= ======== ========= The following table is a summary of loan loss experience for the five years ended December 31, 2000: December 31, ------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars expressed in thousands) Balance at beginning of year............... $ 30,192 24,947 20,586 19,156 24,156 Acquired allowances for loan losses........ 6,062 3,008 3,200 30 2,338 ---------- --------- --------- ------- ------- 36,254 27,955 23,786 19,186 26,494 ---------- --------- --------- ------- ------- Loans charged off: Commercial and financial................. (4,893) (5,458) (2,347) (1,158) (5,009) Real estate construction and development......................... -- (228) -- (15) (427) Real estate mortgage..................... (113) (586) (1,416) (4,528) (8,237) Consumer and installment................. (384) (835) (1,099) (2,524) (4,338) ---------- --------- --------- ------- ------- Total loans charged-off............... (5,390) (7,107) (4,862) (8,225) (18,011) ---------- --------- --------- ------- ------- Recoveries of loans previously charged off: Commercial and financial............... 3,575 2,201 2,357 1,188 1,395 Real estate construction and development....................... 75 400 219 183 15 Real estate mortgage................... 1,066 1,745 912 3,075 1,249 Consumer and installment............... 473 815 785 1,179 1,135 ---------- --------- --------- ------- ------- Total recoveries of loans previously charged off............. 5,189 5,161 4,273 5,625 3,794 ---------- --------- --------- ------- ------- Net loan charge-offs................ (201) (1,946) (589) (2,600) (14,217) ----------- --------- --------- ------- ------- Provision for loan losses.................. 1,877 4,183 1,750 4,000 6,879 ---------- --------- --------- ------- ------- Balance at end of year..................... $ 37,930 30,192 24,947 20,586 19,156 ========== ========= ========= ======= ======= Loans outstanding, net of unearned discount: Average................................ 1,621,432 1,303,742 935,284 669,902 610,835 End of period.......................... 2,058,677 1,469,091 1,089,965 816,707 647,300 Ratio of allowance for loan losses to loans outstanding: Average............................ 2.34% 2.32% 2.67% 3.07% 3.14% End of period...................... 1.84 2.06 2.29 2.52 2.96 Ratio of net loan charge-offs to average loans outstanding............. 0.01 0.15 0.06 0.39 2.33 ========== ========= ========= ======== ======= Allocation of allowance for loan losses at end of period: Commercial and financial............... $ 13,626 10,051 7,413 5,256 5,859 Real estate construction and development....................... 8,038 6,582 6,982 2,979 2,144 Real estate mortgage................... 11,665 8,405 5,987 6,865 6,177 Consumer and installment............... 929 1,933 2,166 2,464 4,213 Unallocated............................ 3,672 3,221 2,399 3,022 763 ----------- --------- --------- ------- ------- Total .............................. $ 37,930 30,192 24,947 20,586 19,156 =========== ========= ========= ======= ======= Percent of categories to loans, net of unearned discount: Commercial and financial.............. 33.3% 29.1% 30.9% 26.6% 21.9% Real estate construction and development...................... 21.6 25.7 26.9 17.9 12.2 Real estate mortgage................... 42.9 41.3 36.2 45.4 48.8 Consumer and installment............... 2.2 3.9 6.0 10.1 17.1 ------------ --------- ---------- ------- -------- Total............................... 100.0% 100.0% 100.0% 100.0% 100.0% ============ ========= ========== ======= ======== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Nonperforming assets include nonaccrual loans, restructured loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated: December 31, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars expressed in thousands) Nonperforming loans......................... $ 15,005 16,244 25,044 11,186 24,139 Other real estate, net...................... 694 389 935 2,254 4,347 ---------- --------- --------- --------- -------- Total nonperforming assets............ $ 15,699 16,633 25,979 13,440 28,486 ========== ========= ========= ========= ======== Loans, net of unearned discount............. $2,058,677 1,469,091 1,089,965 816,707 647,300 ========== ========= ========= ========= ======== Loans past due: Over 30 days to 90 days.................. $ 12,387 6,284 17,497 9,673 11,470 Over 90 days and still accruing.......... 985 4,626 816 1,314 879 ---------- --------- --------- --------- -------- Total past-due loans.................. $ 13,372 10,910 18,313 10,987 12,349 ========== ========= ========= ========= ======== Allowance for loan losses to loans................................. 1.84% 2.06% 2.29% 2.52% 2.96% Nonperforming loans to loans................ 0.73 1.11 2.30 1.37 3.73 Allowance for loan losses to nonperforming loans................... 252.78 185.87 99.61 184.03 79.36 Nonperforming assets to loans and other real estate.................... 0.76 1.13 2.38 1.64 4.37 ========== ========= ========= ========= ======== Nonperforming loans, consisting of loans on nonaccrual status and certain restructured loans, were $15.0 million at December 31, 2000 in comparison to $16.2 million at December 31, 1999. The decrease in nonperforming loans in 2000 and 1999 primarily results from continued aggressive collection efforts and management's continued efforts to effectively monitor and manage the loan portfolios of acquired entities. As previously discussed, certain acquired loan portfolios, particularly those acquired during 1995, exhibited varying degrees of distress prior to their acquisition. While these problems had been identified and considered in the acquisition pricing, our acquisitions led to an increase in nonperforming assets and problem loans (as defined below) to $55.0 million at December 31, 1995. Problem loans were reduced to $22.5 million at December 31, 1997. At December 31, 1998, nonperforming assets and problem loans increased to $29.5 million. We associate the increase for 1998 primarily with our acquisitions of Republic Bank and Pacific Bay Bank and the overall growth of our loan portfolio, principally in commercial and financial, real estate construction and development and real estate mortgage loans. As of December 31, 2000, 1999 and 1998, $8.1 million, $13.2 million and $4.5 million, respectively, of loans not included in the table above were identified by management as having potential credit problems (problem loans). Problem loans totaled $11.3 million and $9.9 million at December 31, 1997 and 1996, respectively. Our credit management policy and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews, external audits and regulatory bank examinations. The system requires rating all loans at the time they are originated, except for homogeneous categories of loans, such as residential real estate mortgage loans and indirect automobile loans. These homogeneous loans are assigned an initial rating based on our experience with each type of loan. We adjust these ratings based on payment experience subsequent to their origination. We include adversely rated credits, including loans requiring close monitoring which would not normally be considered criticized credits by regulators, on a monthly loan watch list. Loans may be added to our watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Other loans are added whenever any adverse circumstance is detected which might affect the borrower's ability to meet the terms of the loan. The delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the list. Loans on the watch list require periodic detailed loan status reports prepared by the responsible officer, which are discussed in formal meetings with loan review and credit administration staff members. Downgrades of loan risk ratings may be initiated by the responsible loan officer at any time. However, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) upgrades of risk ratings may only be made with the concurrence of selected loan review and credit administration staff members generally at the time of the formal watch list review meetings. Each month, the credit administration department provides our management with detailed lists of loans on the watch list and summaries of the entire loan portfolio of each subsidiary bank by risk rating. These are coupled with analyses of changes in the risk profiles of the portfolios, changes in past-due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the levels of risk in the portfolios. Factors are applied to the loan portfolios for each category of loan risk to determine acceptable levels of allowance for loan losses. We derive these factors primarily from the actual loss experience of our subsidiary banks and from published national surveys of norms in the industry. The calculated allowances required for the portfolios are then compared to the actual allowance balances to determine the provisions necessary to maintain the allowances at appropriate levels. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for losses. In its analysis, management considers the change in the portfolio, including growth, composition and the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, provisions are made to our allowance for loan losses. Such provisions are reflected in our consolidated statements of income. We do not engage in lending in foreign countries or based on activities in foreign countries. Additionally, we do not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table and Note 4 to our accompany consolidated financial statements. We do not have a material amount of interest-earning assets that would have been included in nonaccrual, past due or restructured loans if such assets were loans. Deposits Deposits are the primary source of funds for our subsidiary banks. Our deposits consist principally of core deposits from each bank's local market areas, including both individual and corporate customers. The following table sets forth the distribution of our average deposit accounts at the dates indicated and the weighted average interest rates on each category of deposits: December 31, ------------------------------------------------------------------------------ 2000 1999 1998 ---------------------- ------------------------- ------------------------ Percent Percent Percent of of of Amount deposits Rate Amount deposits Rate Amount deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (dollars expressed in thousands) Noninterest-bearing demand..... $ 340,278 18.95% --% $ 263,427 18.31% --% $ 202,628 16.76% --% Interest-bearing demand........ 152,487 8.49 1.58 133,976 9.31 1.53 107,070 8.85 1.61 Savings........................ 575,227 32.04 4.42 454,022 31.56 3.78 358,371 29.63 4.22 Time deposits.................. 727,695 40.52 5.71 586,970 40.82 5.11 541,274 44.76 5.55 ---------- ------ ==== ---------- ------ ==== ---------- ------ ==== Total average deposits...... $1,795,687 100.00% $1,438,395 100.00% $1,209,343 100.00% ========== ====== ========== ====== ========== ====== Noninterest-bearing demand, interest-bearing demand and savings have no stated maturity. The maturity distribution of time deposits of $100,000 or more and other time deposits is presented in the interest rate sensitivity table under "--Interest Rate Risk Management." Capital In February 1998, we completed our acquisition of FCB. In connection with this acquisition, we issued 1,555,728 shares of our common stock, of which 1,266,176 shares were issued to First Banks, resulting in an increase to stockholders' equity of $13.0 million. The consolidated statements of changes in stockholders' equity and comprehensive income reflect our accounts as if the common stock issued to acquire First Banks' interest in FCB had been outstanding since August 23, 1995. In December 1998, First Banks exercised its right to acquire 629,557 shares of our common stock by converting an outstanding convertible debenture and the related accrued but unpaid interest of $6.5 million and $2.3 million, respectively. In connection with our acquisition of FCB, we issued to First Banks a convertible debenture totaling $6.5 million and assumed the related accrued but unpaid interest of $2.4 million associated with similar outstanding debentures of FCB owned by First Banks. This transaction resulted in an increase to stockholders' equity of $8.7 million. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On October 31, 2000, we completed our acquisition of First Bank & Trust. In connection with this acquisition, we issued 5,727,340 shares of our common stock and 803,429 shares of our common stock held for treasury to First Banks. The consolidated statements of changes in stockholders' equity and comprehensive income reflect our accounts as if the common stock, excluding the treasury shares, issued to acquire First Banks' interest in First Bank & Trust had been outstanding since March 15, 1995. In addition, for the years ended December 31, 2000, 1999 and 1998, the statements of changes in stockholders' equity and other comprehensive income includes $7.0 million, $18.2 million and $15.3 million, respectively, of pre-merger transactions of FB&T. Our Board of Directors, through various resolutions passed from 1995 to 2000, has authorized the purchase of up to a cumulative total of 1,094,797 shares of common stock. As of December 31, 2000, we had purchased a cumulative total of 807,929 shares of common stock held for treasury. However, as previously discussed, we issued 803,429 treasury shares to First Banks in conjunction with our acquisition of First Bank & Trust. As a result, at December 31, 2000, we had purchased 4,500 shares of common stock held for treasury at an aggregate cost of $76,000. At December 31, 2000, we could purchase approximately 287,000 additional shares under the existing authorization. Management believes as of December 31, 2000 and 1999, our subsidiary banks each were "well capitalized" as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. At December 31, 2000, our consolidated total capital ratio fell below the well capitalized level, however we remained adequately capitalized. The reduction in our total capital is primarily attributable to our acquisitions of Millennium Bank and SFC in December 2000, which added assets of approximately $300.8 million. As more fully discussed under "--Financial Condition and Average Balances" and Note 9 to the accompanying consolidated financial statements, in July 1998, we formed First America Capital Trust for the purpose of issuing $46.0 million of trust preferred securities. We received the proceeds, issued a subordinated debenture to First America Capital Trust and made certain guarantees and commitments relating to the trust preferred securities. For regulatory reporting purposes, the trust preferred securities are eligible for inclusion, subject to certain limitations, in our Tier 1 capital. Liquidity Our liquidity and the liquidity of our subsidiary banks is the ability to maintain a cash flow which is adequate to fund operations, service debt obligations and meet other commitments on a timely basis. Our subsidiary banks receive funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings. In addition, we may avail ourselves of more volatile sources of funds by issuing certificates of deposit in denominations of $100,000 or more, borrowing federal funds, selling securities sold under agreements to repurchase and utilizing borrowings from the Federal Home Loan Banks and other borrowings, including our note payable to First Banks. The aggregate funds acquired from these more volatile sources were $457.2 million and $231.2 million at December 31, 2000 and 1999, respectively. The following table presents the maturity structure of volatile funds, which consists of certificates of deposit of $100,000 or more, the revolving note payable and other short-term borrowings, at December 31, 2000: (dollars expressed in thousands) 3 months or less.................. $ 137,549 Over 3 through 6 months........... 76,814 Over 6 through 12 months.......... 78,250 Over 12 months.................... 164,621 ---------- Total........................... $ 457,234 ========== We have periodically borrowed from First Banks under our revolving note payable. Borrowings under the revolving note payable have been utilized to facilitate the funding of our acquisitions, support repurchases of common stock from time to time and for other corporate purposes. The increase to $100.0 million of the maximum amount available under the revolving note payable, as further discussed in Note 7 to our accompanying consolidated financial statements, is intended to provide us with sufficient additional liquidity to pursue acquisition opportunities. Borrowings under the revolving note payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The principal and accrued interest under the revolving note payable is due and payable on June 30, 2005. At December 31, 2000, there was $98.0 million in advances outstanding under the revolving note payable. At December 31, 1999, there were no amounts outstanding under the revolving note payable. In 1999, FB&T established a borrowing relationship with the Federal Reserve Bank of San Francisco. This borrowing relationship, which is secured by commercial loans, provides an additional liquidity facility that may be utilized for contingency purposes. At December 31, 2000 and 1999, FB&T's borrowing capacity under this agreement was approximately $756.4 million and $603.0 million, respectively. In addition, our subsidiary banks' borrowing capacity through their relationships with the Federal Home Loan Banks was approximately MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) $20.4 million and $70.4 million at December 31, 2000 and 1999, respectively. Management believes the available liquidity and operating results of our subsidiary banks will be sufficient to provide funds for growth and to permit the distribution of dividends to us sufficient to meet our operating and debt service requirements, both on a short-term and long-term basis, and to pay the dividends on the trust preferred securities issued by our financing subsidiary. Effect of New Accounting Standards In June 1998, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133 -- Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge in one of three categories. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish, at the inception of the hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. SFAS 133 applies to all entities. In June 1999, the FASB issued SFAS No. 137 - Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133, which defers the effective date of SFAS 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Initial application should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated and documented pursuant to the provisions of SFAS 133, as amended. Earlier application of all of the provisions is encouraged but is permitted only as of the beginning of any fiscal quarter that begins after the issuance date of SFAS 133, as amended. Additionally, SFAS 133, as amended, should not be applied retroactively to financial statements of prior periods. In June 2000, the FASB issued SFAS No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, which addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133, as amended. SFAS 138 amends the accounting and reporting standards of SFAS 133, as amended, for certain derivative instruments, certain hedging activities and for decisions made by the FASB relating to the Derivatives Implementation Group, or the DIG, process. The DIG presently has additional issues and questions pending and continues to release guidance and interpretations as such issues are resolved. We continue to consider the actions and conclusions of the DIG as they are released in order to determine their potential impact on our consolidated financial statements. On January 1, 2001, we implemented SFAS 133, as amended. The implementation of SFAS 133, as amended, did not have a material impact on our consolidated financial statements as it relates to the derivative financial instruments that existed at December 31, 2000. However, the effect of future derivative transactions as well as further guidance from the DIG may result in modifications of our current assessment of SFAS 133, as amended, and its overall impact on our consolidated financial statements. In September 2000, the FASB issued SFAS No. 140 -- Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities which are based on the consistent application of a financial-components approach. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2001. On December 31, 2000, we implemented the disclosure requirements of SFAS 140, which did not have a material effect on our consolidated financial statements. We are currently evaluating the additional requirements of SFAS 140 to determine their potential impact on our consolidated financial statements. Effects of Inflation Inflation affects financial institutions less than other types of companies. Financial institutions make relatively few significant asset acquisitions that are directly affected by changing prices. Instead, the assets and liabilities are primarily monetary in nature. Consequently, interest rates are more significant to the performance of financial institutions than the effect of general inflation levels. While a relationship exists between the inflation rate and interest rates, we believe this is generally manageable through our asset-liability management program. QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED 2000 Quarter Ended ----------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (dollars in thousands, except per share data) Interest income .............................................. $ 38,888 42,752 45,015 50,593 Interest expense.............................................. 15,137 17,094 18,386 21,008 ---------- ------- ------- ------- Net interest income.................................... 23,751 25,658 26,629 29,585 Provision for loan losses..................................... 982 470 365 60 ---------- ------- ------- ------- Net interest income after provision for loan losses.... 22,769 25,188 26,264 29,525 Noninterest income ........................................... 2,914 2,752 3,285 3,126 Noninterest expense .......................................... 15,610 17,418 17,472 19,519 ---------- ------- ------- ------- Income before provision for income tax expense......... 10,073 10,522 12,077 13,132 Provision for income tax expense.............................. 3,655 4,249 4,872 5,231 ---------- ------- ------- ------- Net income ........................................... $ 6,418 6,273 7,205 7,901 ========== ======= ======= ======= Earnings per common share: Basic.................................................... $ 0.53 0.52 0.59 0.65 Diluted.................................................. 0.53 0.52 0.59 0.65 ========== ======= ======= ======= 1999 Quarter Ended ----------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (dollars in thousands, except per share data) Interest income .............................................. $ 29,109 31,482 33,795 38,334 Interest expense.............................................. 11,674 12,323 12,872 14,370 ---------- ------- ------- ------- Net interest income ................................... 17,435 19,159 20,923 23,964 Provision for loan losses..................................... 390 773 930 2,090 ---------- ------- ------- ------- Net interest income after provision for loan losses.... 17,045 18,386 19,993 21,874 Noninterest income ........................................... 2,323 2,604 2,109 2,844 Noninterest expense .......................................... 13,983 15,336 15,327 13,817 ---------- ------- ------- ------- Income before provision for income tax expense......... 5,385 5,654 6,775 10,901 Provision for income tax expense.............................. 2,155 2,329 2,718 3,914 ---------- ------- ------- ------- Net income .......................................... $ 3,230 3,325 4,057 6,987 ========== ======= ======= ======= Earnings per common share: Basic.................................................... $ 0.26 0.27 0.33 0.57 Diluted.................................................. 0.26 0.27 0.33 0.57 ========== ======= ======= ======= CONSOLIDATED BALANCE SHEETS (dollars expressed in thousands, except per share data) December 31, ---------------------- 2000 1999 ---- ---- ASSETS ------ Cash and cash equivalents: Cash and due from banks........................................................... $ 96,934 62,631 Interest-bearing deposits with other financial institutions with maturities of three months or less........................................ 3,101 1,165 Federal funds sold................................................................ 53,175 33,500 ------------ --------- Total cash and cash equivalents.............................................. 153,210 97,296 ------------ --------- Investment securities: Available for sale, at fair value................................................. 330,557 194,294 Held to maturity, at amortized cost (fair value of $4,615 and $1,757 at December 31, 2000 and 1999, respectively)............................ 4,662 1,880 ------------ --------- Total investment securities.................................................. 335,219 196,174 ------------ --------- Loans: Commercial and financial.......................................................... 686,426 427,974 Real estate construction and development.......................................... 444,218 377,254 Real estate mortgage.............................................................. 883,103 607,171 Consumer and installment.......................................................... 50,247 60,884 ------------ --------- Total loans.................................................................. 2,063,994 1,473,283 Unearned discount................................................................. (5,317) (4,192) Allowance for loan losses......................................................... (37,930) (30,192) ------------ --------- Net loans.................................................................... 2,020,747 1,438,899 ------------ --------- Bank premises and equipment, net of accumulated depreciation.......................... 45,526 26,545 Intangibles associated with the purchase of subsidiaries.............................. 74,609 32,343 Accrued interest receivable........................................................... 20,048 12,513 Deferred tax assets................................................................... 45,308 27,219 Other assets.......................................................................... 46,712 30,873 ------------ --------- Total assets................................................................. $ 2,741,379 1,861,862 ============ ========= The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED BALANCE SHEETS, CONTINUED (dollars expressed in thousands, except per share data) December 31, ------------------ 2000 1999 ---- ---- LIABILITIES ----------- Deposits: Demand: Non-interest-bearing............................................................ $ 475,785 301,134 Interest-bearing................................................................ 195,585 147,043 Savings........................................................................... 766,587 472,399 Time deposits: Time deposits of $100 or more................................................... 301,649 189,493 Other time deposits............................................................. 566,750 474,930 ------------ --------- Total deposits............................................................... 2,306,356 1,584,999 Note payable.......................................................................... 98,000 -- Short-term borrowings................................................................. 57,585 41,756 Accrued interest payable.............................................................. 8,434 3,710 Deferred tax liabilities.............................................................. 5,525 3,619 Accrued expenses and other liabilities................................................ 24,290 9,047 ------------ --------- Total liabilities............................................................ 2,500,190 1,643,131 ------------ --------- Guaranteed preferred beneficial interest in First Banks America, Inc. subordinated debentures............................................. 44,280 44,218 ------------ --------- STOCKHOLDERS' EQUITY -------------------- Common stock: Common stock, $0.15 par value; 15,000,000 shares and 6,666,666 shares authorized at December 31, 2000 and 1999, respectively; 9,610,703 shares and 9,602,037 shares issued at December 31, 2000 and 1999, respectively......... 1,442 1,441 Class B common stock, $0.15 par value; 4,000,000 shares authorized; 2,500,000 shares issued and outstanding at December 31, 2000 and 1999....................................... 375 375 Capital surplus....................................................................... 153,929 161,613 Retained earnings since elimination of accumulated deficit effective December 31, 1994............................................... 40,894 25,097 Common treasury stock, at cost; 4,500 shares and 724,396 shares at December 31, 2000 and 1999, respectively...................................... (76) (11,369) Accumulated other comprehensive income (loss)......................................... 345 (2,644) ------------ --------- Total stockholders' equity................................................... 196,909 174,513 ------------ --------- Total liabilities and stockholders' equity................................... $ 2,741,379 1,861,862 ============ ========= CONSOLIDATED STATEMENTS OF INCOME (dollars expressed in thousands, except per share data) Years Ended December 31, ----------------------------- 2000 1999 1998 ---- ---- ---- Interest income: Interest and fees on loans.................................................. $158,020 118,279 88,351 Investment securities....................................................... 13,652 12,753 18,494 Federal funds sold and other................................................ 5,576 1,688 1,988 -------- --------- --------- Total interest income.................................................. 177,248 132,720 108,833 -------- --------- --------- Interest expense: Deposits: Interest-bearing demand................................................... 2,415 2,053 1,721 Savings................................................................... 25,398 17,146 15,114 Time deposits of $100 or more............................................. 11,288 6,283 6,728 Other time deposits....................................................... 30,273 23,726 23,330 Note payable and short-term borrowings...................................... 2,251 2,031 2,402 -------- --------- --------- Total interest expense................................................. 71,625 51,239 49,295 -------- --------- --------- Net interest income.................................................... 105,623 81,481 59,538 Provision for loan losses....................................................... 1,877 4,183 1,750 -------- --------- --------- Net interest income after provision for loan losses.................... 103,746 77,298 57,788 -------- --------- --------- Noninterest income: Service charges on deposit accounts and customer service fees............... 7,626 6,210 5,166 Gain on sales of securities, net............................................ 177 485 699 Other income................................................................ 4,274 3,185 1,991 -------- --------- --------- Total noninterest income............................................... 12,077 9,880 7,856 -------- --------- --------- Noninterest expense: Salaries and employee benefits.............................................. 25,917 21,889 17,465 Occupancy, net of rental income............................................. 8,496 6,980 5,655 Furniture and equipment..................................................... 3,588 3,232 3,149 Advertising and business development........................................ 969 819 1,178 Postage, printing and supplies.............................................. 1,459 1,362 1,395 Data processing fees........................................................ 7,406 5,570 3,738 Legal, examination and professional fees.................................... 6,995 5,753 5,627 Communications.............................................................. 943 1,098 1,315 Gain on sales of other real estate, net of expenses......................... (215) (720) (93) Amortization of intangibles associated with the purchase of subsidiaries.... 3,234 2,296 1,046 Guaranteed preferred debentures............................................. 3,908 3,966 1,758 Other....................................................................... 7,319 6,218 6,732 -------- --------- --------- Total noninterest expense.............................................. 70,019 58,463 48,965 -------- --------- --------- Income before provision for income tax expense......................... 45,804 28,715 16,679 Provision for income tax expense................................................ 18,007 11,116 6,605 -------- --------- --------- Net income............................................................. $ 27,797 17,599 10,074 ======== ========= ========= Earnings per common share: Basic....................................................................... $ 2.29 1.44 0.86 Diluted..................................................................... 2.29 1.44 0.86 ======== ========= ========= Weighted average common stock outstanding (in thousands)........................ 12,129 12,235 11,671 ======== ========= ========= The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income Three Years ended December 31, 2000 (dollars expressed in thousands, except per share data) Accu- mulated Other Compre- Total Class B Compre- Common hensive Stock- Common Common Capital hensive Retained Treasury Income holders' Stock Stock Surplus Income Earnings Stock (Loss) Equity ----- ----- ------- ------ -------- ----- ------ ------ Consolidated balances, January 1, 1998.. $1,182 375 88,314 14,786 (4,350) 883 101,190 Year ended December 31, 1998: Comprehensive income: Net income.......................... -- -- -- 10,074 10,074 -- -- 10,074 Other comprehensive income, net of tax - unrealized gains on securities, net of reclassification adjustment (1)... -- -- -- 738 -- -- 738 738 ------ Comprehensive income................ 10,812 ====== Issuance of common stock for purchase accounting acquisition of FCB..... 43 -- 2,965 -- -- -- 3,008 Exercise of stock options............ -- -- 13 -- -- -- 13 Redemption of stock options.......... -- -- (48) -- -- -- (48) Compensation paid in stock........... -- -- 27 -- -- -- 27 Conversion of note payable........... 121 -- 9,879 -- -- -- 10,000 Conversion of 12% convertible debentures........................ 95 -- 8,578 -- -- -- 8,673 Repurchases of common stock.......... -- -- -- -- (5,738) -- (5,738) Pre-merger transactions of FB&T...... -- -- 19,257 (4,000) -- -- 15,257 ------ ---- ------- ------- ------- ------- ------- Consolidated balances, December 31, 1998.................... 1,441 375 128,985 20,860 (10,088) 1,621 143,194 Year ended December 31, 1999: Comprehensive income: Net income.......................... -- -- -- 17,599 17,599 -- -- 17,599 Other comprehensive income, net of tax - unrealized losses on securities, net of reclassification adjustment (1).. -- -- -- (4,265) -- -- (4,265) (4,265) ------ Comprehensive income................ 13,334 ====== Reduction of deferred tax asset valuation allowance............... -- -- 981 -- -- -- 981 Compensation paid in stock........... -- -- 36 -- -- -- 36 Repurchases of common stock.......... -- -- -- -- (1,281) -- (1,281) Pre-merger transactions of FB&T...... -- -- 31,611 (13,362) -- -- 18,249 ------ ---- ------- ------- ------- ------- ------- Consolidated balances, December 31, 1999................... 1,441 375 161,613 25,097 (11,369) (2,644) 174,513 Year ended December 31, 2000: Comprehensive income: Net income.......................... -- -- -- 27,797 27,797 -- -- 27,797 Other comprehensive income, net of tax - unrealized gains on securities, net of reclassification adjustment (1)... -- -- -- 2,989 -- -- 2,989 2,989 ------ Comprehensive income................ 30,786 ====== Exercise of stock options............ 1 -- 24 -- -- -- 25 Compensation paid in stock........... -- -- 36 -- -- -- 36 Repurchases of common stock.......... -- -- -- -- (1,454) -- (1,454) Retirement and reissuance of treasury stock................. -- -- (12,747) -- 12,747 -- -- Pre-merger transactions of FB&T...... -- -- 5,003 (12,000) -- -- (6,997) ------ ---- ------- ------- ------- ------- ------- Consolidated balances, December 31, 2000.................... $1,442 375 153,929 40,894 (76) 345 196,909 ====== ==== ======= ======= ======= ======= ======= (1) Disclosure of reclassification adjustment: Years Ended December 31, 2000 1999 1998 ---- ---- ---- Unrealized gains (losses) arising during the year................................... $3,104 (3,950) 1,192 Less reclassification adjustment for gains included in net income................... 115 315 454 ------ ------ ----- Unrealized gains (losses) on investment securities.................................. $2,989 (4,265) 738 ====== ====== ===== The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars expressed in thousands) Years Ended December 31, -------------------------------- 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income............................................................... $ 27,797 17,599 10,074 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, amortization and accretion, net.......................... 5,695 5,070 3,480 Provision for loan losses.............................................. 1,877 4,183 1,750 Provision for income tax expense....................................... 18,007 11,116 6,605 Payments of income taxes............................................... (15,162) (5,912) (4,731) Gains on sales of securities, net...................................... (177) (485) (699) (Increase) decrease in accrued interest receivable..................... (3,017) (713) 745 Interest accrued on liabilities........................................ 71,625 51,239 49,295 Payments of interest on liabilities.................................... (68,630) (50,185) (51,598) Other operating activities, net........................................ 7,173 (5,536) 2,986 -------- --------- --------- Net cash provided by operating activities...................... 45,188 26,376 17,907 -------- --------- --------- Cash flows from investing activities: Cash (paid) received for acquired entities, net of cash and cash equivalents received (paid).............................. (86,106) 15,538 32,594 Proceeds from sales of investment securities............................. 25,062 60,891 79,784 Maturities of investment securities available for sale................... 165,897 134,404 165,341 Maturities of investment securities held to maturity..................... 46 143 7 Purchases of investment securities available for sale.................... (155,680) (88,708) (112,457) Purchases of investment securities held to maturity...................... (2,828) -- (2,033) Net increase in loans.................................................... (236,158) (152,689) (149,992) Recoveries of loans previously charged-off............................... 5,189 5,161 4,273 Purchases of bank premises and equipment................................. (3,738) (5,719) (6,027) Proceeds from sales of other real estate................................. 899 2,868 2,863 Other investing activities, net.......................................... (1,239) (1,524) (14,689) -------- --------- --------- Net cash used in investing activities.......................... (288,656) (29,635) (336) -------- --------- --------- Cash flows from financing activities: Other increases (decreases) in deposits: Demand and savings deposits............................................ 183,774 (20,017) 53,801 Time deposits.......................................................... 52,305 12,180 (78,579) (Decrease) increase in federal funds purchased and short-term borrowings. (54,600) 27,500 -- Decrease in Federal Home Loan Bank advances.............................. -- -- (1,515) Increase (decrease) in securities sold under agreements to repurchase.... 28,329 200 (2,620) Increase (decrease) in note payable...................................... 98,000 -- (4,900) Decrease in payable to former shareholders of Surety Bank................ -- -- (3,829) Proceeds from issuance of guaranteed preferred subordinated debenture.... -- -- 44,124 Redemption of stock options.............................................. -- -- (48) Exercise of stock options................................................ 25 -- 13 Repurchases of common stock.............................................. (1,454) (1,281) (5,738) Pre-merger transactions of FB&T.......................................... (6,997) (13,250) (4,000) -------- --------- --------- Net cash provided by (used in) financing activities............ 299,382 5,332 (3,291) -------- --------- --------- Net increase in cash and cash equivalents...................... 55,914 2,073 14,280 Cash and cash equivalents, beginning of year................................. 97,296 95,223 80,943 -------- --------- --------- Cash and cash equivalents, end of year....................................... $153,210 97,296 95,223 ======== ========= ========= Noncash investing and financing activities: Loans transferred to other real estate................................... $ 295 1,443 761 Loans exchanged for and transferred to available-for-sale investment securities............................... 17,207 -- -- Compensation paid in stock............................................... 36 36 27 Reduction of deferred tax valuation reserve.............................. -- 981 -- Issuance of common stock in purchase accounting acquisition.............. -- -- 3,008 Conversion of note payable to common stock............................... -- -- 10,000 Conversion of 12% convertible debentures and accrued interest payable to common stock, net of unamortized deferred acquisition costs......... -- -- 8,673 ======== ========= ========= The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the more significant accounting policies followed by First Banks America, Inc. and subsidiaries (FBA or the Company): Basis of Presentation. The accompanying consolidated financial statements of FBA have been prepared in accordance with accounting principles generally accepted in the United States of America and conform to predominant practices within the banking industry. Management of FBA 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 accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Restatements. Effective October 31, 2000, FBA completed its acquisition of First Bank & Trust in a transaction accounted for as a combination of entities under common control. FBA acquired First Bank & Trust from First Banks, Inc., St. Louis, Missouri (First Banks). Prior to the acquisition, First Banks owned 84.42% of the outstanding common stock of FBA and all of the outstanding common stock of First Bank & Trust. Effective February 2, 1998, FBA completed its acquisition of First Commercial Bancorp, Inc. (FCB) and FCB's wholly owned subsidiary, First Commercial Bank (First Commercial), in a transaction accounted for as a combination of entities under common control. Prior to the acquisition, First Banks owned a majority interest in both FBA and FCB. The accompanying consolidated financial statements give retroactive effect to these transactions and, as a result, the consolidated balance sheets, statements of income and statements of cash flows are presented as if the combining entities had been consolidated for all periods presented that are subsequent to First Banks' acquisitions of First Bank & Trust and FCB on March 15, 1995 and August 23, 1995, respectively. The consolidated statements of changes in stockholders' equity and comprehensive income reflect the accounts of FBA as if the common stock, excluding treasury shares, issued to First Banks in exchange for its interests in First Bank & Trust and FCB had been outstanding for all periods subsequent to March 15, 1995 and August 23, 1995, respectively. Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications of 1999 and 1998 amounts have been made to conform with the 2000 presentation. FBA is majority owned by First Banks. Accordingly, First Banks has effective control over the management and policies of FBA and the election of its directors. First Banks' ownership interest in FBA at December 31, 2000 and 1999 was 92.86% and 83.37%, respectively. FBA operates through its wholly owned subsidiary bank holding company and subsidiary financial institutions (collectively referred to as the Subsidiary Banks) as follows: First Bank & Trust, headquartered in San Francisco, California (FB&T); The San Francisco Company, headquartered in San Francisco, California (SFC), and its wholly owned subsidiary: Bank of San Francisco, headquartered in San Francisco, California (BSF). Cash and Cash Equivalents. Cash, due from banks, federal funds sold, and interest-bearing deposits with maturities of three months or less are considered to be cash and cash equivalents for purposes of the consolidated statements of cash flows. The Subsidiary Banks are required to maintain certain daily reserve balances in accordance with regulatory requirements. These reserve balances maintained in accordance with such requirements were $15.4 million and $5.7 million at December 31, 2000 and 1999, respectively. Investment Securities. The classification of investment securities as available for sale or held to maturity is determined at the date of purchase. FBA does not engage in the trading of investment securities. Investment securities designated as available for sale, which include any security that FBA has no immediate plan to sell but which may be sold in the future under different circumstances, are stated at fair value. Realized gains and losses are included in noninterest income upon commitment to sell, based on the amortized cost of the individual security sold. Unrealized gains and losses are recorded, net of related income tax effects, in accumulated other comprehensive income. All previous fair value adjustments included in the separate component of accumulated other comprehensive income are reversed upon sale. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Investment securities designated as held to maturity, which include any security that FBA has the positive intent and ability to hold until maturity, are stated at cost, net of amortization of premiums and accretion of discounts computed on the level-yield method taking into consideration the level of current and anticipated prepayments. Loans. Loans are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Interest and fees on loans are recognized as income using the interest method. Loan origination fees are deferred and accreted over the estimated life of the loans using the interest method. Loans are stated at cost as FBA has the ability and it is management's intention to hold them to maturity. The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business. Generally, payments received on nonaccrual and impaired loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred which would warrant resumption of interest accruals. A loan is considered impaired when it is probable FBA will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, FBA measures impairment based on the fair value of the collateral when foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. FBA uses its existing nonaccrual methods for recognizing interest income on impaired loans. Allowance for Loan Losses. The allowance for loan losses is maintained at a level considered adequate to provide for probable losses. The provision for loan losses is based on a periodic analysis of the loans by management, considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, loan collateral, payment experience and selected key financial ratios. As adjustments become necessary, they are reflected in the results of operations in the periods in which they become known. Bank Premises and Equipment. Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the useful life of the improvement or term of the lease. Bank premises and improvements are depreciated over five to 40 years and equipment over three to seven years. Intangibles Associated With the Purchase of Subsidiaries. Intangibles associated with the purchase of subsidiaries include excess of cost over net assets acquired. The excess of cost over net assets acquired of purchased subsidiaries is amortized using the straight-line method over the estimated periods to be benefited, which generally has been estimated at 15 years. FBA reviews intangibles for impairment whenever events or changes in circumstances indicate the carrying value of an underlying asset associated with the intangibles may not be recoverable. FBA measures recoverability based upon the future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, FBA recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset. As such adjustments become necessary, they are reflected in the results of operations in the periods in which they become known. Other Real Estate. Other real estate, consisting of real estate acquired through foreclosure or deed in lieu of foreclosure, is stated at the lower of cost or fair value less applicable selling costs. The excess of cost over fair value of the property at the date of acquisition is charged to the allowance for loan losses. Subsequent reductions in carrying value, to reflect current fair value or costs incurred in maintaining the properties, are charged to expense as incurred. Income Taxes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FBA and its subsidiaries filed a consolidated federal income tax return through February 19, 1999. Each subsidiary paid its allocation of federal income taxes to FBA, or received payment from FBA to the extent tax benefits were realized. Subsequent to February 19, 1999, FBA and its subsidiaries join in filing a consolidated federal and Missouri income tax return with First Banks, as First Banks' ownership of FBA is greater than 80%. FBA and its subsidiaries pay their allocation of federal income taxes to First Banks, or receive payment from First Banks to the extent tax benefits are realized. FBA and its subsidiaries join in filing Illinois and California unitary income tax returns with First Banks, as First Banks' ownership of FBA is greater than 50%. Separate state franchise tax returns are filed in Texas and Delaware for the appropriate entities. Financial Instruments. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. Financial Instruments With Off-Balance-Sheet Risk. FBA uses financial instruments to reduce the interest rate risk arising from its financial assets and liabilities. These instruments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. "Interest rate risk" is defined as the possibility that interest rates may move unfavorably from the perspective of FBA. The risk that a counterparty to an agreement entered into by FBA may default is defined as "credit risk." FBA is party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. Interest Rate Swap and Cap Agreements. Interest rate swap and cap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability. Premiums and fees paid upon the purchase of interest rate swap and cap agreements are amortized over the life of the agreements using the straight-line method. In the event of early termination of these derivative financial instruments, the net proceeds received or paid are deferred and amortized over the shorter of the remaining contract life of the derivative financial instrument or the maturity of the related asset or liability. If, however, the amount of the underlying asset or liability is repaid, then the gains or losses on the agreements are recognized immediately in the consolidated statements of income. The unamortized premiums and fees paid are included in other assets in the accompanying consolidated balance sheets. Earnings Per Common Share. Basic earnings per common share (EPS) are computed by dividing the income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the year. The computation of diluted EPS is similar except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) ACQUISITIONS During the three years ended December 31, 2000, FBA completed 11 acquisitions as follows: Total Purchase Excess Entity Date assets price cost ------ ---- ------ ----- ---- (dollars expressed in thousands) 2000 ---- The San Francisco Company San Francisco, California December 31, 2000 $ 183,800 62,200 16,300 Millennium Bank San Francisco, California December 29, 2000 117,000 20,700 8,700 Commercial Bank of San Francisco San Francisco, California October 31, 2000 155,600 26,400 9,300 First Bank & Trust Newport Beach, California October 31, 2000 1,104,000 120,800 -- Bank of Ventura Ventura, California August 31, 2000 63,800 14,200 7,200 Lippo Bank San Francisco, California February 29, 2000 85,300 17,200 4,800 ---------- -------- -------- $1,709,500 261,500 46,300 ========== ======== ======== 1999 ---- Century Bank Beverly Hills, California August 31, 1999 $ 156,000 31,500 4,500 Redwood Bancorp San Francisco, California March 4, 1999 183,900 26,000 9,500 ---------- -------- -------- $ 339,900 57,500 14,000 ========== ======== ======== 1998 ---- Republic Bank Torrance, California September 15, 1998 $ 124,100 19,300 10,200 First Commercial Bancorp, Inc. Sacramento, California February 2, 1998 192,500 23,700 1,500 Pacific Bay Bank San Pablo, California February 2, 1998 38,300 4,200 1,500 ---------- -------- -------- $ 354,900 47,200 13,200 ========== ======== ======== In addition to the acquisitions included in the table above, during the three years ended December 31, 2000, FBA also completed two branch office purchases. On September 17, 1999, First Bank & Trust completed its assumption of the deposits and certain liabilities and the purchase of selected assets of the Malibu, California branch office of Brentwood Bank of California. The transaction resulted in the acquisition of approximately $6.3 million in loans, $17.3 million in deposits and one branch office. The excess of the cost over the fair value of the net assets acquired was $325,000 and is being amortized over 15 years. On March 19, 1998, FBA completed its assumption of the deposits and purchase of selected assets of the Solvang, California branch office of Bank of America. The transaction resulted in the acquisition of approximately $15.5 million of deposits and one branch office. The excess of the cost over the fair value of the net assets acquired was $1.8 million and is being amortized over 15 years. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) With the exception of First Bank & Trust and First Commercial Bancorp, Inc. (FCB), the aforementioned acquisition transactions were accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include the financial position and results of operations for the periods subsequent to the respective acquisition dates, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition dates. These acquisitions, exclusive of First Bank & Trust and FCB, were funded from available cash reserves, proceeds from sales and maturities of available-for-sale investment securities, borrowing under FBA's $100.0 million revolving note payable to First Banks and the proceeds from First America Capital Trust's issuance of trust preferred securities. As further described below, First Bank & Trust and FCB were acquired through an exchange of shares of FBA common stock for all of the issued and outstanding shares of common stock of First Bank & Trust and FCB, respectively. On October 31, 2000, FBA acquired First Bank & Trust. In conjunction with this transaction, First Bank & Trust and two of FBA's former wholly owned subsidiary banks, First Bank of California and First Bank Texas N.A., were merged with and into Redwood Bank, FBA's other wholly owned subsidiary bank, and Redwood Bank was renamed FB&T. In accordance with the terms of the Agreement and Plan of Reorganization, FBA issued 5,727,340 shares of its common stock and 803,429 shares of its common shares held for treasury to First Banks in exchange for First Banks' 100% interest in First Bank & Trust. First Bank & Trust had 27 banking offices in the counties of Los Angeles, Orange, Ventura and Santa Barbara, California as well as branches in San Jose and Walnut Creek, in Northern California. At the time of the transaction, First Bank & Trust had total assets of $1.10 billion, $91.1 million in investment securities, $894.2 million in total loans, net of unearned discount, and $959.4 million in total deposits. In February 1998, FBA and FCB were merged. Under the terms of the Agreement and Plan of Merger, FCB was merged into FBA, and FCB's wholly owned subsidiary, First Commercial, was merged into FBA's former wholly owned subsidiary, First Bank of California. The FCB shareholders received 0.8888 shares of FBA common stock for each share of FCB common stock they held. In total, FCB shareholders received approximately 751,728 shares of FBA common stock. The transaction also provided for First Banks to receive 804,000 shares of FBA common stock in exchange for $10.0 million of the revolving note payable. In addition, FCB's 12% convertible debentures of $6.5 million, which were owned by First Banks, were exchanged for a similar convertible debenture of FBA. FCB had six banking offices located in Sacramento, Roseville (2), San Francisco, Concord and Campbell, California. At the time of the transaction, FCB had total assets of $192.5 million, $64.4 million in investment securities, $118.9 million in total loans, net of unearned discount, and $173.1 million in total deposits. Prior to these transactions, First Banks owned majority interests in FBA, First Bank & Trust and FCB. Consistent with the accounting treatment for a combination of entities under common control, FBA accounted for these acquisitions as follows: > First Banks' interests in First Bank & Trust and FCB were accounted for at First Banks' historical cost. First Banks' historical cost bases in First Bank & Trust and FCB were determined utilizing the purchase method of accounting, effective upon First Banks' acquisitions of First Bank & Trust on March 15, 1995 and of First Commercial on August 23, 1995. Accordingly, First Banks' historical cost bases includes the financial positions and results of operations of these entities for the periods subsequent to their respective acquisition dates, and the assets acquired and liabilities assumed were recorded at fair value at the acquisition dates. > FBA's consolidated financial statements were restated to reflect First Banks' interests in the financial conditions and results of operations of First Bank & Trust and FCB for the periods subsequent to March 15, 1995 and August 23, 1995, respectively. > The amount attributable to the interest of the minority shareholders in the fair value of the net assets of FCB was accounted for by FBA utilizing the purchase method of accounting. Accordingly, FBA reflected this amount at fair value, as determined by the market value of FBA's common stock exchanged for the minority interest. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following information presents unaudited pro forma combined condensed results of operations of FBA, combined with the acquisitions of Commercial Bank of San Francisco, Bank of Ventura, Millennium Bank and The San Francisco Company, as if the combining entities had been consolidated for all periods presented. Year Ended December 31, 2000 1999 ---- ---- (dollars expressed in thousands, except per share data) Net interest income........................................... $120,252 94,593 ======== ====== Net income.................................................... $ 28,168 15,100 ======== ====== Earnings per share: Basic....................................................... $ 2.32 1.23 Diluted..................................................... 2.32 1.23 ======== ====== The unaudited pro forma condensed results of operations reflect the application of the purchase method of accounting and certain other assumptions. Purchase accounting adjustments have been applied to investment securities, loans, net of unearned discount, bank premises and equipment, deferred tax assets, deferred tax liabilities, other liabilities and excess cost to reflect the assets and liabilities assumed at fair value. The resulting premiums and discounts are amortized or accreted to income consistent with the accounting policies of FBA. The unaudited pro forma condensed results of operations do not reflect the acquisition of Lippo Bank, as this acquisition did not have a material impact on FBA's results of operations for the periods presented. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) INVESTMENTS IN DEBT AND EQUITY SECURITIES Securities Available for Sale. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities available for sale at December 31, 2000 and 1999 were as follows: Maturity Total ---------------------------------------- ----- After Amor- Gross Weighted 1 Year 1-5 5-10 10 tized Unrealized Fair Average -------------- or Less Years Years Years Cost Gains Losses Value Yield ------- ----- ----- ----- ---- ----- ------ ----- ----- (dollars expressed in thousands) December 31, 2000: Carrying value: U.S. Treasury.................. $ 65,193 801 -- -- 65,994 23 (23) 65,994 5.88% U.S. Government agencies and corporations: Mortgage-backed......... 576 19,248 6,568 73,600 99,992 418 (132) 100,278 6.87 Other................... 17,065 104,005 10,131 20,256 151,457 1,664 (1,483) 151,638 6.68 Corporate debt securities...... 912 1,961 -- 500 3,373 -- (20) 3,353 7.65 Equity investments in other financial institutions...... 5,082 -- -- -- 5,082 28 (369) 4,741 7.77 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)........ 4,553 -- -- -- 4,553 -- -- 4,553 6.45 -------- ------- ------- ------ ------- ----- ------ ------- Total................. $ 93,381 126,015 16,699 94,356 330,451 2,133 (2,027) 330,557 6.61 ======== ======= ======= ====== ======= ===== ====== ======= ==== Fair value: Debt securities................ $ 83,767 126,957 16,896 93,643 Equity securities.............. 9,294 -- -- -- -------- ------- ------- ------- Total................. $ 93,061 126,957 16,896 93,643 ======== ======= ======= ======= Weighted average yield............ 6.10% 6.76% 7.06% 6.92% ======== ======= ======= ======= December 31, 1999: Carrying value: U.S. Treasury.................. $ 6,009 20,136 -- -- 26,145 49 (19) 26,175 6.17% U.S. Government agencies and corporations: Mortgage-backed......... 5,204 -- 6,784 33,947 45,935 3 (878) 45,060 6.38 Other................... 76,772 4,968 6,585 24,256 112,581 4 (3,050) 109,535 6.02 Foreign debt securities........ 2,995 -- -- -- 2,995 286 -- 3,281 9.42 Equity investments in other financial institutions...... 4,249 -- -- -- 4,249 -- (434) 3,815 7.57 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)........ 6,428 -- -- -- 6,428 -- -- 6,428 5.60 -------- ------- ------- ------ ------- ----- ------ ------- Total................. $101,657 25,104 13,369 58,203 198,333 342 (4,381) 194,294 6.15 ======== ======= ======= ====== ======= ===== ====== ======= ==== Fair value: Debt securities................ $ 87,832 25,100 12,862 54,975 Equity securities.............. 13,525 -- -- -- -------- ------- ------- ------ Total................. $101,357 25,100 12,862 54,975 ======== ======= ======= ====== Weighted average yield............ 5.98% 6.20% 6.32% 6.54% ======== ======= ======= ====== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at December 31, 2000 and 1999 were as follows: Maturity Total ------------------------------- After Amor- Gross Weighted 1 Year 1-5 5-10 10 tized Unrealized Fair Average ---------------- or Less Years Years Years Cost Gains Losses Value Yield ------- ----- ----- ----- ---- ----- ------ ----- ----- (dollars expressed in thousands) December 31, 2000: Carrying value: U.S. Government agencies and corporations: Mortgage-backed......... $ -- -- -- 4,662 4,662 3 (50) 4,615 6.75% ===== ==== ==== ===== ===== ==== ==== ===== ===== Fair value: Debt securities................ $ -- -- -- 4,615 ===== ==== ==== ===== Weighted average yield............ --% --% --% 6.75% ===== ==== ==== ===== December 31, 1999: Carrying value: U.S. Government agencies and corporations: Mortgage-backed......... $ -- -- -- 1,880 1,880 -- (123) 1,757 6.26% ===== ==== ==== ====== ===== ==== ==== ===== ===== Fair value: Debt securities................ $ -- -- -- 1,757 ===== ==== ==== ====== Weighted average yield............ --% --% --% 6.26% ===== ==== ==== ====== Proceeds from sales of available-for-sale investment securities were $25.1 million, $60.9 million and $79.8 million for the years ended December 31, 2000, 1999 and 1998, respectively. Gross gains of $565,000, $485,000 and $699,000 were realized on these sales during the years ended December 31, 2000, 1999 and 1998, respectively. Gross losses of $388,000 were realized on these sales during the year ended December 31, 2000. There were no losses realized on these sales in 1999 and 1998. Certain of the Subsidiary Banks maintain investments in the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB). These investments are recorded at cost, which represents redemption value. The investment in FHLB stock is maintained at a minimum amount equal to the greater of 1% of the aggregate outstanding balance of the applicable Subsidiary Bank's loans secured by residential real estate, or 5% of advances from the FHLB to each Subsidiary Bank. FB&T and BSF are members of the FHLB system. The investment in FRB stock is maintained at a minimum of 6% of the applicable Subsidiary Bank's capital stock and capital surplus. FB&T is a member of the FRB system. Investment securities with a carrying value of approximately $28.1 million and $63.3 million at December 31, 2000 and 1999, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase, interest rate swap agreements and for other purposes as required by law. (4) LOANS AND ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31 were as follows: 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Balance at beginning of year................................. $30,192 24,947 20,586 Acquired allowances for loan losses.......................... 6,062 3,008 3,200 ------- ------- -------- 36,254 27,955 23,786 ------- ------- -------- Loans charged-off............................................ (5,390) (7,107) (4,862) Recoveries of loans previously charged-off................... 5,189 5,161 4,273 ------- ------- -------- Net loan charge-offs..................................... (201) (1,946) (589) ------- ------- -------- Provision for loan losses.................................... 1,877 4,183 1,750 ------- ------- -------- Balance at end of year....................................... $37,930 30,192 24,947 ======= ======= ======== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2000 and 1999, FBA had $12.1 million and $13.3 million, respectively, of loans on nonaccrual status. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was $1.5 million, $2.4 million and $1.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Of these amounts, $630,000, $1.3 million and $874,000 was actually recorded as interest income on such loans in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, FBA had $15.0 million and $16.2 million of impaired loans, respectively, including $12.1 million and $13.3 million of loans on nonaccrual status. At December 31, 2000 and 1999, impaired loans also included $2.9 million of restructured loans. The allowance for loan losses includes an allocation for each impaired loan. The aggregate allocation of the allowance for loan losses related to impaired loans was approximately $3.2 million and $3.8 million at December 31, 2000 and 1999, respectively. The average recorded investment in impaired loans was $13.9 million, $20.4 million and $17.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. The amount of interest income recognized using a cash basis method of accounting during the time those loans were impaired was $895,000, $1.5 million and $1.3 million in 2000, 1999 and 1998, respectively. FBA's primary market areas are California and Houston, Dallas, Irving and McKinney, Texas. At December 31, 2000 and 1999, approximately 88.5% and 70.4% of the total loan portfolio, respectively, and 89.8% and 75.8% of the commercial and financial loan portfolio, respectively, were made to borrowers within these regions. Real estate lending constituted the only significant concentration of credit risk. Real estate loans comprised approximately 64.5% and 67.0% of the loan portfolio at December 31, 2000 and 1999, respectively. FBA is, in general, a secured lender. At December 31, 2000 and 1999, approximately 93.9% and 97.2%, respectively, of the loan portfolio was secured. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. (5) BANK PREMISES AND EQUIPMENT Bank premises and equipment were comprised of the following at December 31: 2000 1999 ---- ---- (dollars expressed in thousands) Land............................................................. $ 7,512 6,993 Buildings and improvements....................................... 48,315 22,699 Furniture, fixtures and equipment................................ 22,470 14,872 Construction in progress......................................... 2,084 482 -------- --------- Total........................................................ 80,381 45,046 Less accumulated depreciation ................................... 34,855 18,501 -------- --------- Bank premises and equipment, net............................. $ 45,526 26,545 ======== ========= Depreciation expense for the years ended December 31, 2000, 1999 and 1998 totaled $2.8 million, $3.2 million and $1.9 million, respectively. FBA leases land, office properties and some items of equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $6.5 million, $4.3 million and $3.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum lease payments under noncancellable operating leases extend through 2020 as follows: (dollars expressed in thousands) Year ending December 31: 2001.................................................... $ 6,464 2002.................................................... 5,492 2003.................................................... 5,020 2004.................................................... 3,780 2005.................................................... 3,077 Thereafter.............................................. 8,536 ------- Total future minimum lease payments................. $32,369 ======= FBA leases to unrelated parties a portion of its banking facilities. Total rental income was $1.3 million, $1.6 million and $1.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) SHORT-TERM BORROWINGS Short-term borrowings were comprised of the following at December 31: 2000 1999 ---- ---- (dollars expressed in thousands) Federal funds purchased.................................. $ -- 27,500 Securities sold under agreements to repurchase........... 42,041 13,712 FHLB borrowings ......................................... 15,544 544 --------- ------- Short-term borrowings................................ $ 57,585 41,756 ========= ======= The average balance of short-term borrowings was $32.6 million and $39.7 million, respectively, and the maximum month-end balance of short-term borrowings was $60.0 million and $61.2 million, respectively, for the years ended December 31, 2000 and 1999. The average rates paid on short-term borrowings during the years ended December 31, 2000, 1999 and 1998 were 5.43%, 5.12% and 6.32%, respectively. The assets underlying the short-term borrowings are under FBA's control. (7) NOTE PAYABLE FBA had a $20.0 million revolving note payable to First Banks on which the outstanding principal and accrued interest under the note payable were due and payable on October 31, 2001. On June 30, 2000, FBA and First Banks renewed this note payable, increasing the commitment to $90.0 million and extending the maturity date to June 30, 2005. On November 30, 2000, FBA and First Banks further modified the note payable by increasing the commitment to $100.0 million. The borrowings under the note payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The interest expense under the note payable was $482,000 for the year ended December 31, 2000 and $599,000 for the year ended December 31, 1998. There were no amounts outstanding under the note payable during 1999. The average balance and maximum balance outstanding during the years ended December 31 were as follows: 2000 1999 ---- ---- (dollars expressed in thousands) Average balance.......................................... $ 6,114 -- Maximum month-end balance ............................... 98,000 -- ======== ====== The average rates paid on notes payable outstanding during the years ended December 31, 2000 and 1998 were 7.9% and 7.7%, respectively. (8) 12% CONVERTIBLE DEBENTURE As more fully described in Note 2 to the consolidated financial statements, FBA issued to First Banks a $6.5 million 12% convertible debenture in exchange for similar convertible debentures of FCB. The principal and any accrued but unpaid interest thereon was convertible at any time prior to maturity, at the option of First Banks, into FBA common stock at $14.06 per share. In December 1998, First Banks elected to convert the $6.5 million principal and $2.4 million accrued and unpaid interest into 629,557 shares of FBA common stock. The interest expense under the convertible debenture was $724,000 for the year ended December 31, 1998. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBENTURES In July 1998, First America Capital Trust (FACT), a newly-formed Delaware business trust subsidiary of FBA, issued 1.84 million shares of 8.50% cumulative trust preferred securities at $25 per share in an underwritten public offering, and issued 56,908 shares of common securities to FBA at $25 per share. FBA owns all of FACT's common securities. The gross proceeds of the offering were used by FACT to purchase $47.4 million of 8.50% subordinated debentures from FBA, maturing on June 30, 2028. The maturity date may be shortened to a date not earlier than June 30, 2003 or extended to a date not later than June 30, 2037 if certain conditions are met. The subordinated debentures are the sole asset of FACT. In connection with the issuance of the FACT preferred securities, FBA made certain guarantees and commitments that, in the aggregate, constitute a full and unconditional guarantee by FBA of the obligations of FACT under the FACT preferred securities. FBA's proceeds from the issuance of the subordinated debentures to FACT, net of underwriting fees and offering expenses, were $44.0 million. Distributions payable on the FACT preferred securities were $3.9 million, $4.0 million and $1.8 million for the years ended December 31, 2000, 1999 and 1998, respectively, and are included in noninterest expense in the consolidated financial statements. (10) INCOME TAXES Income tax expense attributable to income from continuing operations for the years ended December 31 consists of: 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Current income tax expense: Federal................................................ $ 12,083 3,734 3,124 State.................................................. 2,344 2,172 1,357 -------- ------- ------- 14,427 5,906 4,481 -------- ------- ------- Deferred income tax expense: Federal................................................ 4,026 5,808 2,524 State.................................................. (41) 137 168 -------- ------- ------- 3,985 5,945 2,692 -------- ------- ------- Reduction in deferred valuation allowance................... (405) (735) (568) -------- ------- ------- Total............................................... $ 18,007 11,116 6,605 ======== ======= ======= The effective rates of federal income taxes for the years ended December 31 differ from statutory rates of taxation as follows: 2000 1999 1998 ------------------- -------------------- ----------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (dollars expressed in thousands) Income before provision for income tax expense.......... $ 45,804 $ 28,715 $16,679 ======== ======== ======= Tax expense at federal income tax rates............ $ 16,031 35.0% 10,050 35.0% 5,838 35.0% Effects of differences in tax reporting: Change in the deferred tax valuation allowance......... (405) (0.9) (735) (2.6) (568) (3.4) State income taxes............. 1,497 3.3 1,501 5.2 991 5.9 Amortization of intangibles associated with the purchase of subsidiaries............. 901 2.0 584 2.0 182 1.1 Other.......................... (17) (0.1) (284) (0.9) 162 1.0 -------- ----- -------- ----- ------- ----- Income tax expense at effective rate......... $ 18,007 39.3% $ 11,116 38.7% $ 6,605 39.6% ======== ===== ======== ===== ======= ===== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: December 31, ------------------- 2000 1999 ---- ---- (dollars expressed in thousands) Deferred tax assets: Net operating loss carryforwards............................................. $ 38,993 23,168 Allowance for loan losses.................................................... 12,815 11,688 Quasi-reorganization adjustment of bank premises............................. 1,226 1,276 Alternative minimum tax credits.............................................. 2,509 2,016 Net fair value adjustment for securities available for sale.................. -- 1,414 Other real estate............................................................ 42 -- Other........................................................................ 2,798 1,137 -------- ------- Gross deferred tax assets.............................................. 58,383 40,699 Valuation allowance.......................................................... (13,075) (13,480) -------- ------- Deferred tax assets, net of valuation allowance........................ 45,308 27,219 -------- ------- Deferred tax liabilities: Net fair value adjustment for securities available for sale.................. 181 -- Depreciation on bank premises and equipment.................................. 4,387 2,224 FHLB stock dividends......................................................... 528 732 Other ....................................................................... 429 663 -------- ------- Deferred tax liabilities............................................... 5,525 3,619 -------- ------- Net deferred tax assets................................................ $ 39,783 23,600 ======== ======= The realization of FBA's net deferred tax assets is based on the expectation of future taxable income and the utilization of tax planning strategies. Based on these factors, management believes it is more likely than not that FBA will realize the recognized net deferred tax asset of $39.8 million. The net change in the valuation allowance, related to deferred tax assets, was a decrease of $405,000 for the year ended December 31, 2000. The decrease was comprised of the reversal of valuation reserves resulting from the utilization of net operating losses. Changes to the deferred tax asset valuation allowance for the years ended December 31 were as follows: 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Balance, January 1........................................ $13,480 15,912 16,480 Current year deferred provision, change in deferred tax valuation allowance....................... (405) (735) (568) Reduction attributable to utilization of deferred tax assets: Adjustment to capital surplus....................... -- (981) -- Adjustment to intangibles associated with the purchase of subsidiaries......................... -- (716) -- Purchase acquisitions..................................... -- -- -- ------- ------ ------ Balance, December 31...................................... $13,075 13,480 15,912 ======= ====== ====== The valuation allowance for deferred tax assets at December 31, 1998 included $716,000 that was recognized in 1999 and credited to intangibles associated with the purchase of subsidiaries. The valuation allowance for deferred tax assets at December 31, 2000 and 1999 includes $5.0 million which when recognized, will be credited to capital surplus under the terms of the quasi-reorganizations implemented for FBA and FCB as of December 31, 1994 and 1996, respectively. At December 31, 2000, FBA has separate return limitation year net operating loss carryforwards of $111.4 million and alternative minimum tax credits of $2.5 million. Their utilization is subject to annual limitations. Additionally, FBA had alternative minimum tax credits of $185,000, which are not subject to annual limitations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The net operating loss carryforwards for FBA at December 31, 2000 expire as follows: (dollars expressed in thousands) Year ending December 31: 2001.................................... $ 561 2002.................................... 4,562 2003.................................... 1,563 2004.................................... 4,120 2005.................................... 21,019 2006 through 2020....................... 79,583 --------- Total............................... $ 111,408 ========= (11) EARNINGS PER COMMON SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated: Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ (dollars expressed in thousands, except per share data) Year ended December 31, 2000: Basic EPS - income available to common stockholders.......... $ 27,797 12,129 $ 2.29 ====== Effect of dilutive securities - stock options................ -- 1 --------- ------ Diluted EPS - income available to common stockholders........ $ 27,797 12,130 $ 2.29 ========= ====== ====== Year ended December 31, 1999: Basic EPS - income available to common stockholders.......... $ 17,599 12,235 $ 1.44 ====== Effect of dilutive securities - stock options................ -- 5 --------- ------ Diluted EPS - income available to common stockholders........ $ 17,599 12,240 $ 1.44 ========= ====== ====== Year ended December 31, 1998: Basic EPS - income available to common stockholders.......... $ 10,074 11,671 $ 0.86 ====== Effect of dilutive securities - stock options................ -- 8 --------- ------ Diluted EPS - income available to common stockholders........ $ 10,074 11,679 $ 0.86 ========= ====== ====== (12) EMPLOYEE BENEFIT PLANS 401(K) Plan. FBA's 401(k) plan is a self-administered savings and incentive plan covering substantially all employees. Under the plan, employer matching contributions are determined annually by FBA's Board of Directors. Employee contributions are limited to 15% of the employee's annual compensation not to exceed $10,500 for 2000. Total employer contributions under the plan were $441,000, $318,000 and $202,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The plan assets are held and managed under a trust agreement with the trust department of an affiliated bank. Pension Plan. Previously, FBA had a noncontributory defined benefit pension plan covering substantially all officers and employees. In conjunction with the acquisition of FBA by First Banks, the accumulation of benefits under the plan were discontinued during 1994. While the plan continues in existence and provides benefits which had then accumulated, no additional benefits have accrued to participants since 1994, and no new participants will become eligible for benefits thereafter. During 2000, 1999 and 1998, no contributions were made to the pension plan. In addition, FBA is proceeding with the dissolution of this plan in 2001. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (13) DIRECTORS' STOCK BONUS PLAN The 1993 Directors' Stock Bonus Plan provides for annual grants of FBA common stock to the nonemployee directors of FBA. Directors' compensation of $36,000, $36,000 and $27,000 was recorded relating to this plan for the years ended December 31, 2000, 1999 and 1998, respectively. These amounts represented the market values of the 2,000, 2,000 and 1,500 shares granted for the years ended December 31, 2000, 1999 and 1998, respectively. The plan is self-operative, and the timing, amounts, recipients and terms of individual grants are determined automatically. On July 1 of each year, each nonemployee director automatically receives a grant of 500 shares of common stock. The maximum number of plan shares that may be issued shall not exceed 16,667 shares, and 4,167 shares were available to be issued at December 31, 2000. The plan will expire on July 1, 2001. (14) CREDIT COMMITMENTS FBA is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate fixed-rate loans. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and the collateral or other security is of no value. FBA uses the same credit policies in granting commitments and conditional obligations as it does for on-balance-sheet items. Commitments to extend credit at December 31 were as follows: 2000 1999 ---- ---- (dollars expressed in thousands) Commitments to extend credit............................................ $ 719,039 538,178 Commercial and standby letters of credit................................ 37,077 15,422 --------- ------- $ 756,116 553,600 ========= ======= 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. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, income-producing commercial properties or single family residential properties. Collateral is generally required except for consumer credit card commitments. Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The letters of credit are primarily issued to support private borrowing arrangements and commercial transactions. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Upon issuance of the commitments, FBA holds marketable securities, certificates of deposit, inventory, real property or other assets as collateral supporting those commitments for which collateral is deemed necessary. (15) STOCKHOLDERS' EQUITY Classes of Common Stock. FBA is majority owned by First Banks. At December 31, 2000, First Banks owned 2,500,000 shares of Class B common stock and 8,741,350 shares of common stock, which represented 92.86% of FBA's outstanding voting stock. Accordingly, First Banks has effective control over the management and policies of FBA and the election of its directors. As of December 31, 2000, FBA had issued and outstanding 9,606,203 shares and 2,500,000 shares of common stock and Class B common stock, respectively. The rights of Class B common stock are in most respects equivalent to the rights associated with common stock, except the common stock has a dividend preference over the Class B common stock, and the Class B common stock is unregistered and transferable only in certain limited circumstances. The outstanding shares of Class B common stock became convertible on August 31, 1999, at the option of the holder, into an equal number of shares of common stock. Each share of common stock and Class B common stock is entitled to one vote in the election of FBA's directors and in other matters on which a vote of stockholders is taken. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Options. On April 19, 1990, FBA's Board of Directors adopted the 1990 Stock Option Plan (1990 Plan). The 1990 Plan provided that no more than 200,000 shares of common stock would be available for stock options. One-fourth of each stock option became exercisable at the date of the grant and at each anniversary date of the grant. The options expired ten years from the date of the grant. There were no options granted under this plan during the three years ended December 31, 2000. At December 31, 2000, there were no shares available for future stock options and no shares of common stock reserved for the exercise of outstanding options. Transactions relating to the 1990 Plan for the years ended December 31 are as follows: 2000 1999 1998 ----------------- ------------------- ----------------- Average Average Average option option option Amount price Amount price Amount price ------ ----- ------ ----- ------ ----- Outstanding options, January 1....... 6,667 $ 3.75 6,667 $ 3.75 13,334 $ 3.75 Options exercised and redeemed....... (6,667) 3.75 -- 3.75 (6,667) 3.75 ------ ------ ------- Outstanding options, December 31..... -- 3.75 6,667 3.75 6,667 3.75 ====== ====== ====== ======= ======= ====== Options exercisable, December 31..... -- 6,667 6,667 ====== ====== ======= Distribution of Earnings of the Subsidiary Banks. The Subsidiary Banks are restricted by various state and federal regulations as to the amount of dividends which are available for payment to FBA. Under the most restrictive of these requirements, the Subsidiary Banks would be required to obtain permission from the regulatory authorities prior to making future payments of dividends to FBA at December 31, 2000. (16) TRANSACTIONS WITH RELATED PARTIES FBA purchases certain services and supplies from or through First Banks. FBA's financial position and operating results could significantly differ from those that would be obtained if FBA's relationship with First Banks did not exist. First Banks provides management services to FBA and its subsidiaries. Management services are provided under management fee agreements whereby FBA compensates First Banks for its use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services. Fees paid under these agreements were $5.2 million, $4.4 million and $3.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. The fees paid for management services are at least as favorable as could have been obtained from unaffiliated third parties. First Services, L.P., a limited partnership indirectly owned by First Banks' Chairman and his adult children, provides data processing and various related services to FBA and FB&T under the terms of data processing agreements. Fees paid under these agreements were $6.8 million, $5.3 million and $3.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. The fees paid for data processing services are at least as favorable as could have been obtained from unaffiliated third parties. FB&T had $108.2 million and $31.9 million in whole loans and loan participations outstanding at December 31, 2000 and 1999, respectively, that were purchased from First Bank, a wholly owned subsidiary of First Banks. In addition, FB&T had sold $146.1 million and $167.5 million in whole loans and loan participations to First Bank at December 31, 2000 and 1999, respectively. These loans and loan participations were acquired and sold at interest rates and terms prevailing at the dates of their purchase or sale and under standards and policies followed by FB&T. As more fully discussed in Note 7 to the consolidated financial statements, FBA has a revolving note payable from First Banks. At December 31, 2000, the amount outstanding under the note payable was $98.0 million. There were no amounts outstanding under the note payable at December 31, 1999. Outside of normal customer relationships, no directors, executive officers or stockholders holding over 5% of FBA's voting stock, and no corporations or firms with which such persons or entities are associated, currently maintain or have maintained, any significant business or personal relationships with FBA or its subsidiaries, other than that which arises by virtue of such position or ownership interest in FBA, except as described above. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (17) DERIVATIVE FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK FBA utilizes off-balance-sheet derivative financial instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of on-balance-sheet assets and liabilities. The use of such derivative financial instruments is strictly limited to reducing FBA's interest rate risk exposure. Derivative financial instruments held by FBA for purposes of managing interest rate risk are summarized as follows: December 31, 2000 December 31, 1999 ------------------- -------------------- Notional Credit Notional Credit amount exposure amount exposure ------ -------- ------ -------- (dollars expressed in thousands) Interest rate swap agreements - pay adjustable rate, receive fixed rate.................... $535,000 1,112 235,000 1,094 Interest rate swap agreements - pay adjustable rate, receive adjustable rate............... -- -- 150,000 -- Interest rate cap agreements............................. 150,000 1,251 10,000 26 ======== ===== ========= ===== The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of FBA's credit exposure through its use of derivative financial instruments. The credit exposure represents the accounting loss FBA would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral was of no value. During 1998, FBA entered into $105.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements initially provided for FBA to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the 90-day London Interbank Offering Rate. In March 2000, the terms of the swap agreements were modified such that FBA currently pays an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.705%. The terms of the swap agreements provide for FBA to pay quarterly and receive payment semiannually. The amount receivable by FBA under the swap agreements was $1.4 million at December 31, 2000 and 1999, and the amount payable by FBA under the swap agreements was $281,000 and $294,000 at December 31, 2000 and 1999, respectively. During May 1999, FBA entered into $150.0 million notional amount of interest rate swap agreements with the objective of stabilizing the net interest margin during the six-month period surrounding the Year 2000 century date change. The swap agreements provided for FBA to receive an adjustable rate of interest equivalent to the daily weighted average 30-day LIBOR and pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.665%. The terms of the swap agreements, which had an effective date of October 1, 1999 and a maturity date of March 31, 2000, provided for FBA to pay and receive interest on a monthly basis. In January 2000, FBA determined these swap agreements were no longer necessary based upon the results of the Year 2000 transition and terminated these agreements resulting in a cost of $45,000. During September 1999, FBA entered into $130.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for FBA to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for FBA to pay and receive interest on a quarterly basis. The amount receivable by FBA under the swap agreements was $89,000 at December 31, 2000 and 1999, and the amount payable by FBA under the swap agreements was $123,000 and $105,000 at December 31, 2000 and 1999, respectively. During September 2000, FBA entered into $300.0 million notional amount of four-year interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements provide for FBA to receive a fixed rate of interest and pay an adjustable rate equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provide for FBA to pay and receive interest on a quarterly basis. The amount receivable by FBA under the swap agreements was $621,000 at December 31, 2000 and the amount payable by FBA under the swap agreements was $623,000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In conjunction with these interest rate swap agreements, FBA also entered into $150.0 million notional amount of an interest rate cap agreement to limit the net interest expense associated with the interest rate swap agreements in the event of a rising rate scenario. The interest rate cap agreement has a maturity date of September 20, 2004, and provides for FBA to receive a quarterly adjustable rate of interest equivalent to the three-month London Interbank Offering Rate should such rate exceed the predetermined interest rate of 7.50%. At December 31, 2000, the unamortized costs associated with this interest rate cap agreement were $1.3 million, and were included in other assets, and the fair value of the interest rate cap agreement was $546,000. During 2000 and 1998, the net interest expense realized on the derivative financial instruments was $2.1 million and $55,000, respectively, in comparison to net interest income of $226,000 realized on the derivative financial instruments in 1999. At December 31, 2000, FBA had pledged investment securities available for sale with a carrying value of $2.6 million in connection with the interest rate swap agreements. In addition, at December 31, 2000, FBA had accepted investment securities with a fair value of $8.5 million as collateral in connection with the interest rate swap agreements. FBA is permitted by contract to sell or repledge the collateral accepted from its counterparties, however, at December 31, 2000, FBA had not sold or repledged any of this collateral. The maturity dates, notional amounts, interest rates paid and received and fair value of interest rate swap agreements outstanding as of December 31, 2000 and 1999 were as follows: Notional Interest rate Interest rate Fair Maturity date amount paid received Value ------------- -------- ----------- ------------- ----------- (dollars expressed in thousands) December 31, 2000: September 27, 2001...................... $ 130,000 6.80% 6.14% $ 49 June 11, 2002........................... 15,000 6.80 6.00 7 September 16, 2002...................... 20,000 6.80 5.36 (184) September 18, 2002...................... 70,000 6.80 5.33 (690) September 20, 2004...................... 300,000 6.80 6.78 8,434 --------- ------- $ 535,000 6.80 6.35 $ 7,616 ========= ====== ===== ======= December 31, 1999: March 31, 2000 ......................... $ 150,000 5.84% 6.45% $ 37 September 27, 2001...................... 130,000 5.80 6.14 (1,187) June 11, 2002........................... 15,000 6.12 6.00 (291) September 16, 2002...................... 20,000 6.12 5.36 (751) September 18, 2002...................... 70,000 6.14 5.33 (2,700) --------- ------- $ 385,000 5.90 6.06 $(4,892) ========= ====== ====== ======= NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (18) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, bank premises and equipment and intangibles associated with the purchase of subsidiaries. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates. The estimated fair value of FBA's financial instruments at December 31 were as follows: December 31, 2000 December 31, 1999 ----------------------------- --------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- (dollars expressed in thousands) Financial assets: Cash and cash equivalents............... $ 153,210 153,210 97,296 97,296 Investment securities: Available for sale................... 330,557 330,557 194,294 194,294 Held to maturity..................... 4,662 4,615 1,880 1,757 Net loans............................... 2,020,747 2,027,284 1,438,899 1,433,572 Accrued interest receivable............. 20,048 20,048 12,513 12,513 ========== ========= ========= ========== Financial liabilities: Demand and savings deposits............. $1,437,957 1,437,957 920,576 920,576 Time deposits........................... 868,399 880,807 664,423 664,423 Note payable............................ 98,000 98,000 -- -- Accrued interest payable................ 8,434 8,434 3,710 3,710 FACT preferred securities............... 44,280 40,259 44,218 40,710 Short-term borrowings................... 57,585 57,585 41,756 41,756 ========== ========= ========= ========== Off-balance-sheet: Interest rate swap and cap agreements... $ 2,363 8,162 1,120 (4,844) Credit commitments...................... -- -- -- -- ========== ========= ========= ========== The following methods and assumptions were used in estimating the fair value of financial instruments: Financial Assets: Cash and cash equivalents and accrued interest receivable: The carrying values reported in the consolidated balance sheets approximate fair value. Investment securities: The fair value of investment securities available for sale is the amount reported in the consolidated balance sheets. The fair value of investment securities held to maturity is based on quoted market prices where available. If quoted market prices were not available, the fair value was based upon quoted market prices of comparable instruments. Net loans: The fair value of most loans was estimated utilizing discounted cash flow calculations that applied interest rates currently being offered for similar loans to borrowers with similar risk profiles. The carrying value of loans is net of the allowance for loan losses and unearned discount. Financial Liabilities: Deposits: The fair value disclosed for deposits generally payable on demand (i.e., non-interest-bearing and interest-bearing demand, savings and money market accounts) is considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value disclosed for demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value disclosed for certificates of deposit was estimated utilizing a discounted cash flow calculation that applied interest rates currently being offered on similar certificates to a schedule of aggregated monthly maturities of time deposits. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FACT preferred securities: The fair value is based on quoted market prices. Short-term borrowings, note payable and accrued interest payable: The carrying values reported in the consolidated balance sheets approximate fair value. Off-Balance-Sheet: Interest rate swap and cap agreements: The fair value of the interest rate swap and cap agreements is estimated by comparison to market rates quoted on new agreements with similar terms and creditworthiness. Credit commitments: The majority of the commitments to extend credit and commercial and standby letters of credit contain variable interest rates and credit deterioration clauses and, therefore, the carrying value of these credit commitments reported in the consolidated balance sheets approximates fair value. (19) REGULATORY CAPITAL FBA and the Subsidiary Banks 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 FBA's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FBA and the Subsidiary Banks 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 FBA and the Subsidiary Banks 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 December 31, 2000, the Subsidiary Banks were each well capitalized. At December 31, 2000, FBA's total capital ratio fell below the well-capitalized level, however, FBA remained adequately capitalized. FBA's reduction in total capital for 2000 is primarily attributable to the acquisitions of Millennium Bank and SFC in December 2000, which added total assets of approximately $300.8 million. As of December 31, 2000, the most recent notification from FBA's primary regulator categorized FBA and the Subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, FBA and the Subsidiary Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. At December 31, 2000 and 1999, FBA's and the Subsidiary Banks' required and actual capital ratios were as follows: To be well capitalized under Actual For capital prompt corrective ------------------ 2000 1999 adequacy purposes action provisions ---- ---- ----------------- ----------------- Total capital (to risk-weighted assets): FBA.................................. 8.01% 12.04% 8.0% 10.0% FB&T................................. 10.58 11.17 8.0 10.0 BSF (1).............................. 22.38 -- 8.0 10.0 Tier 1 capital (to risk-weighted assets): FBA.................................. 6.76 10.78 4.0 6.0% FB&T................................. 9.32 9.94 4.0 6.0 BSF (1).............................. 21.42 -- 4.0 6.0 Tier 1 capital (to average assets): FBA.................................. 7.34 9.91 3.0 5.0% FB&T................................. 9.27 9.15 3.0 5.0 BSF (1).............................. 22.00 -- 3.0 5.0 ------------------------- (1) BSF was acquired by FBA on December 31, 2000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (20) BUSINESS SEGMENT RESULTS FBA's business segments are its Subsidiary Banks. The reportable business segments are consistent with the management structure of FBA, the Subsidiary Banks and the internal reporting system that monitors performance. Through the respective branch networks, the Subsidiary Banks provide similar products and services in their defined geographic areas. The products and services offered include a broad range of commercial and personal banking products, including demand, savings, money market and time deposit accounts. In addition, the Subsidiary Banks 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. The Subsidiary Banks 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, commercial leasing and trade financing. FB&T (1) ---------------------------------------- 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Balance sheet information: Investment securities.................................................... $ 330,478 192,357 247,566 Loans, net of unearned discount.......................................... 2,058,628 1,469,093 1,089,965 Total assets............................................................. 2,733,545 1,854,827 1,504,311 Deposits................................................................. 2,306,469 1,590,490 1,329,253 Stockholders' equity..................................................... 333,186 204,617 148,239 ========== ========= ========= Income statement information: Interest income.......................................................... $ 176,902 132,407 108,662 Interest expense......................................................... 71,167 51,544 48,320 ---------- --------- --------- Net interest income............................................... 105,735 80,863 60,342 Provision for loan losses............................................... 1,877 4,183 1,750 ---------- --------- --------- Net interest income after provision for loan losses................................................. 103,858 76,680 58,592 Noninterest income....................................................... 12,343 10,774 8,322 Noninterest expense...................................................... 65,567 54,992 47,105 ---------- --------- --------- Income before provision (benefit) for income tax expense and minority interest in income of subsidiary................................ 50,634 32,462 19,809 Provision (benefit) for income tax expense............................... 20,064 12,353 8,163 ---------- --------- --------- Income (loss) before minority interest in income of subsidiary................................ 30,570 20,109 11,646 Minority interest in income of subsidiary................................ -- -- -- ---------- --------- --------- Net income........................................................ $ 30,570 20,109 11,646 ========== ========= ========= - ----------------- (1) Includes BSF, which was acquired by FBA on December 31, 2000. (2) Corporate and other includes $2.5 million, $2.6 million and $1.3 million of guaranteed preferred debenture expense, after applicable income tax benefit of $1.4 million, $1.4 million and $700,000 for the years ended December 31, 2000, 1999 and 1998, respectively. See Note 9 to the consolidated financial statements. Notes to Consolidated Financial Statements (Continued) Other financial services include mortgage banking, credit and debit cards, brokerage services, credit-related insurance, automated teller machines, telephone banking, safe deposit boxes and trust and private banking services. The revenues generated by each business segment 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 Houston, Dallas, Irving and McKinney, Texas and southern and northern California. The products and services are offered to customers primarily within their respective geographic areas, with the exception of loan participations executed between the Subsidiary Banks and other banks affiliated with First Banks. See Note 16 to the consolidated financial statements. The business segment results are consistent with FBA's internal reporting system and, in all material respects, with generally accepted accounting principles and practices predominant in the banking industry. Such principles and practices are summarized in Note 1 to the consolidated financial statements. Corporate and other (2) Consolidated totals ------------------------------------------ -------------------------------------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) 4,741 3,817 3,600 335,219 196,174 251,166 49 (2) -- 2,058,677 1,469,091 1,089,965 7,834 7,035 8,965 2,741,379 1,861,862 1,513,276 (113) (5,491) (31,394) 2,306,356 1,584,999 1,297,859 (136,277) (30,104) (5,045) 196,909 174,513 143,194 ========= ======= ======= ========= ========= ========== 346 313 171 177,248 132,720 108,833 458 (305) 975 71,625 51,239 49,295 --------- ------- ------- --------- --------- ---------- (112) 618 (804) 105,623 81,481 59,538 -- -- -- 1,877 4,183 1,750 --------- ------- ------- --------- --------- ---------- (112) 618 (804) 103,746 77,298 57,788 (266) (894) (466) 12,077 9,880 7,856 4,452 3,471 1,860 70,019 58,463 48,965 --------- ------- ------- --------- --------- ---------- (4,830) (3,747) (3,130) 45,804 28,715 16,679 (2,057) (1,237) (1,558) 18,007 11,116 6,605 --------- ------- ------- --------- --------- ---------- (2,773) (2,510) (1,572) 27,797 17,599 10,074 -- -- -- -- -- -- --------- ------- ------- --------- --------- ---------- (2,773) (2,510) (1,572) 27,797 17,599 10,074 ========= ======= ======= ========= ========= ========== Notes to Consolidated Financial Statements (Continued) (21) PARENT COMPANY ONLY FINANCIAL INFORMATION Following are condensed balances sheets of First Banks America, Inc. as of December 31, 2000 and 1999, and condensed statements of income and cash flows for the years ended December 31, 2000, 1999 and 1998: CONDENSED BALANCE SHEETS December 31, ------------------------ 2000 1999 ---- ---- (dollars expressed in thousands) Assets ------ Cash deposited in subsidiary banks.................................... $ 1,650 8,079 Investment securities................................................. 4,741 3,816 Investment in subsidiaries............................................ 334,711 206,201 Deferred tax assets................................................... 144 1,885 Other assets.......................................................... 3,068 3,225 ---------- --------- Total assets.................................................. $ 344,314 223,206 ========== ========= Liabilities and Stockholders' Equity ------------------------------------ Note payable.......................................................... $ 98,000 -- Subordinated debentures............................................... 47,423 47,423 Accrued expenses and other liabilities................................ 1,982 1,270 ---------- --------- Total liabilities............................................. 147,405 48,693 Stockholders' equity.................................................. 196,909 174,513 ---------- --------- Total liabilities and stockholders' equity.................... $ 344,314 223,206 ========== ========= CONDENSED STATEMENTS OF INCOME ------------------------------ Years ended December 31, --------------------------------- 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Income: Dividends from subsidiaries.................................... $ 14,509 5,000 4,750 Other.......................................................... 523 744 711 -------- ------ -------- Total income............................................ 15,032 5,744 5,461 -------- ------ -------- Expense: Interest....................................................... 482 -- 1,363 Other.......................................................... 4,870 4,492 2,475 -------- ------ -------- Total expense........................................... 5,352 4,492 3,838 -------- ------ -------- Income before income tax benefit and equity in undistributed income of subsidiaries .............. 9,680 1,252 1,623 Income tax benefit............................................... (2,057) (1,238) (1,032) -------- ------ -------- Income before equity in undistributed income of subsidiaries................................ 11,737 2,490 2,655 Equity in undistributed income of subsidiaries................... 16,060 15,109 7,419 -------- ------ -------- Net income.............................................. $ 27,797 17,599 10,074 ======== ====== ======== Notes to Consolidated Financial Statements (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, --------------------------------- 2000 1999 1998 ---- ---- ---- (dollars expressed in thousands) Cash flows from operating activities: Net income.................................................... $ 27,797 17,599 10,074 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries............. (16,060) (15,109) (7,419) Dividends from subsidiaries................................ 14,509 5,000 4,750 Other, net................................................. 2,726 (4,787) 956 ---------- ------- ------- Net cash provided by operating activities............ 28,972 2,703 8,361 ---------- ------- ------- Cash flows from investing activities: Acquisition of subsidiaries................................... (131,984) (26,000) (4,200) Purchase of investment securities............................. (1,687) (649) (3,600) Proceeds from sales of investment securities.................. 268 -- -- Investment in common securities of FACT....................... -- -- (1,423) Return of subsidiary capital.................................. 17,000 2,000 -- Decrease in payable to former shareholders of Surety Bank..... -- -- (3,829) Pre-merger transactions....................................... (15,569) -- -- ---------- ------- ------- Net cash used in investing activities................ (131,972) (24,649) (13,052) ---------- ------- ------- Cash flows from financing activities: Increase (decrease) in note payable........................... 98,000 -- (4,900) Proceeds from issuance of subordinated debentures............. -- -- 45,547 Exercise of stock options..................................... 25 -- 13 Repurchases of common stock................................... (1,454) (1,281) (5,738) ---------- ------- ------- Net cash provided by (used in) financing activities.. 96,571 (1,281) 34,922 ---------- ------- ------- Net (decrease) increase in cash and cash equivalents. (6,429) (23,227) 30,231 Cash and cash equivalents, beginning of year.................... 8,079 31,306 1,075 ---------- ------- ------- Cash and cash equivalents, end of year.......................... $ 1,650 8,079 31,306 ========== ======= ======= Noncash investing and financing activities: Reduction of deferred tax valuation reserve................... $ -- 981 -- Issuance of common stock in purchase accounting acquisition... -- -- 3,008 Conversion of note payable to common stock.................... -- -- 10,000 Conversion of 12% convertible debentures and accrued interest payable to common stock.................................... -- -- 8,673 Compensation paid in common stock............................. 36 36 27 Cash paid for interest........................................ 245 -- 1,867 ========== ======= ======= (21) CONTINGENT LIABILITIES In the ordinary course of business, there are various legal proceedings pending against FBA and/or its subsidiaries. Management, in consultation with legal counsel, is of the opinion the ultimate resolution of these proceedings will have no material effect on the financial condition or results of operations of FBA or its subsidiaries. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders First Banks America, Inc.: We have audited the accompanying consolidated balance sheets of First Banks America, Inc. and subsidiaries (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. 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 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 Banks America, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP ------------ St. Louis, Missouri March 16, 2001 DIRECTORS AND SENIOR MANAGEMENT Directors of First Banks America, Inc. James F. Dierberg Chairman of the Board, President and Chief Executive Officer, First Banks America, Inc., St. Louis, Missouri; Chairman of the Board and Chief Executive Officer, First Banks, Inc., St. Louis, Missouri. Allen H. Blake Executive Vice President, Chief Operating Officer and Secretary, First Banks America, Inc., St. Louis, Missouri; Director, President, Chief Operating Officer and Secretary, First Banks, Inc., St. Louis, Missouri. Charles A. Crocco, Jr. Counsel to the law firm of Crocco & De Maio, P.C., Mount Kisco, New York. Albert M. Lavezzo President and Chief Operating Officer of the law firm of Favaro, Lavezzo, Gill, Caretti & Heppell, Vallejo, California. Ellen D. Schepman Retail Marketing Officer, First Banks, Inc., St. Louis, Missouri. Edward T. Story, Jr. President and Chief Executive Officer of SOCO International, plc, Comfort, Texas. Donald W. Williams Senior Executive Vice President and Chief Credit Officer, First Banks, Inc., St. Louis, Missouri. Executive Officers of First Banks America, Inc. James F. Dierberg Chairman of the Board, President and Chief Executive Officer Allen H. Blake Executive Vice President, Chief Operating Officer and Secretary Terrance M. McCarthy Executive Vice President Frank H. Sanfilippo Executive Vice President and Chief Financial Officer David F. Weaver Executive Vice President Directors and Senior Officers of First Bank & Trust Terrance M. McCarthy Chairman of the Board, President and Chief Executive Officer Norman O. Broyer Director, Senior Vice President and Senior Credit Officer - Southern California Patrick S. Day Director, Senior Vice President and Senior Credit Officer - Northern California Fred D. Jensen Vice Chairman of the Board Albert M. Lavezzo Director Kathryn L. Perrine Director, Senior Vice President and Chief Financial Officer David F. Weaver Director and President - Texas Region Directors and Senior Officers of Bank of San Francisco Terrance M. McCarthy Chairman of the Board, President and Chief Executive Officer Keary L. Colwell Executive Vice President and Chief Financial Officer Patrick S. Day Director, Senior Vice President and Senior Credit Officer Peter A. Goetze Director Joanne J. Haakinson Executive Vice President and Chief Administrative Officer William G. Nelle, Jr. Director, Senior Vice President - Commercial / Private Banking Kathryn L. Perrine Director INVESTOR INFORMATION FBA's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available without charge to any stockholder upon request. Requests should be directed, in writing, to Frank H. Sanfilippo, First Banks America, Inc., 11901 Olive Boulevard, Creve Coeur, Missouri 63141. Common Stock The common stock of FBA is traded on the New York Stock Exchange with the ticker symbol "FBA" and is frequently reported in newspapers of general circulation with the symbol "FBKSAM" and in the Wall Street Journal with the symbol "FBA." As of March 20, 2001, there were approximately 1,287 registered common stockholders of record. This number does not include any persons or entities that hold their stock in nominee or "street" name through various brokerage firms. The high and low common stock prices for 2000 and 1999 are summarized as follows: 2000 1999 ------------------ ------------------ High Low High Low ---- --- ---- --- First quarter........................................ $ 18.13 16.88 20.63 18.75 Second quarter....................................... 18.63 16.88 18.63 17.50 Third quarter........................................ 19.06 17.63 18.19 16.88 Fourth quarter....................................... 17.63 14.00 18.25 16.63 Preferred Securities The preferred securities of FBA are traded on the New York Stock Exchange with the ticker symbol "FBAPrt." As of March 20, 2001, there were approximately 235 record holders of preferred securities. This number does not include any persons or entities that hold their preferred securities in nominee or "street" name through various brokerage firms. The high and low preferred securities prices and the dividends declared for 2000 and 1999 are summarized as follows: 2000 Dividend --------------- High Low declared ---- --- -------- First quarter............................................... $ 23.00 19.50 $ 0.53125 Second quarter.............................................. 23.88 20.69 0.53125 Third quarter............................................... 23.75 21.13 0.53125 Fourth quarter.............................................. 22.63 20.75 0.53125 ---------- $ 2.12500 ========== 1999 Dividend ---------------- High Low declared ---- --- -------- First quarter............................................... $ 26.25 24.75 $ 0.53125 Second quarter.............................................. 26.25 24.31 0.53125 Third quarter............................................... 25.25 22.50 0.53125 Fourth quarter.............................................. 24.50 21.94 0.53125 ---------- $ 2.12500 ========== INVESTOR INFORMATION (CONTINUED) For information concerning FBA, please contact: Frank H. Sanfilippo Terrance M. McCarthy David F. Weaver Executive Vice President and Executive Vice President Executive Vice President Chief Financial Officer 550 Montgomery Street P.O Box 630369 11901 Olive Boulevard San Francisco, California 94111 Houston, Texas 77263-0369 Creve Coeur, Missouri 63141 Telephone - (415) 273-2000 Telephone - (713) 954-2400 Telephone - (314) 995-8700 Transfer Agents: Common Stock: Preferred Securities: Mellon Investor Services, L.L.C. State Street Bank and Trust Company 85 Challenger Road Corporate Trust Department Overpect Centre P. O. Box 778 Ridgefield Park, New Jersey 07666 Boston, Massachusetts 02102-0778 Telephone - (888) 213-0965 Telephone - (800) 531-0368 www.chasemellon.com www.statestreet.com EXHIBIT 21 FIRST BANKS AMERICA, INC. Subsidiaries The following is a list of our subsidiaries and the jurisdiction of incorporation or organization. Jurisdiction of Incorporation Name of Subsidiary of Organization ------------------ --------------- First Bank & Trust California Eucaluptus Financial Corp. California The San Francisco Company Delaware Bank of San Francisco California Bank of San Francisco Investors, Inc. California EXHIBIT 23 The Board of Directors First Banks America, Inc.: We consent to incorporation by reference in the registration statement (No. 33-42607) on Form S-8 of First Banks America, Inc. and subsidiaries of our report dated March 16, 2001, relating to the consolidated balance sheets of First Banks America, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of First Banks America, Inc. /s/ KPMG LLP ------------ St. Louis, Missouri March 26, 2001