UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-8937
FIRST BANKS AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1604965
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- ----------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares outstanding
Class at April 30, 2001
----- -----------------
Common Stock, $0.15 par value 9,568,603
Class B Common Stock, $0.15 par value 2,500,000
FIRST BANKS AMERICA, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - (UNAUDITED):
CONSOLIDATED BALANCE SHEETS......................................................... 1
CONSOLIDATED STATEMENTS OF INCOME................................................... 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME........................................................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................... 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 23
SIGNATURES.......................................................................................... 24
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
(dollars expressed in thousands, except per share data)
March 31, December 31,
2001 2000
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................... $ 73,176 96,934
Interest-bearing deposits with other financial institutions
with maturities of three months or less........................................ 1,132 3,101
Federal funds sold................................................................ 145,310 53,175
----------- -----------
Total cash and cash equivalents.............................................. 219,618 153,210
----------- -----------
Investment securities:
Available for sale, at fair value................................................. 214,364 330,557
Held to maturity, at amortized cost (fair value of $4,583 and $4,615
at March 31, 2001 and December 31, 2000, respectively)......................... 4,536 4,662
----------- -----------
Total investment securities.................................................. 218,900 335,219
----------- -----------
Loans:
Commercial and financial.......................................................... 677,195 686,426
Real estate construction and development.......................................... 424,829 444,218
Real estate mortgage.............................................................. 885,591 883,103
Consumer and installment.......................................................... 39,620 50,247
----------- -----------
Total loans.................................................................. 2,027,235 2,063,994
Unearned discount................................................................. (5,498) (5,317)
Allowance for loan losses......................................................... (36,678) (37,930)
----------- -----------
Net loans.................................................................... 1,985,059 2,020,747
----------- -----------
Bank premises and equipment, net of depreciation and amortization..................... 44,939 45,526
Intangibles associated with the purchase of subsidiaries, net of amortization......... 72,998 74,609
Accrued interest receivable........................................................... 17,284 20,048
Deferred tax assets................................................................... 39,772 45,308
Derivative instruments................................................................ 21,109 --
Other assets.......................................................................... 46,726 46,712
----------- -----------
Total assets................................................................. $ 2,666,405 2,741,379
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED - (UNAUDITED)
(dollars expressed in thousands, except per share data)
March 31, December 31,
2001 2000
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing............................................................ $ 461,566 475,785
Interest-bearing................................................................ 206,171 195,585
Savings........................................................................... 715,105 766,587
Time deposits:
Time deposits of $100 or more................................................... 311,651 301,649
Other time deposits............................................................. 546,584 566,750
----------- -----------
Total deposits............................................................... 2,241,077 2,306,356
Note payable.......................................................................... 62,800 98,000
Short-term borrowings................................................................. 58,772 57,585
Accrued interest payable.............................................................. 11,103 8,434
Deferred tax liabilities.............................................................. 9,709 5,525
Accrued expenses and other liabilities................................................ 21,578 24,290
----------- -----------
Total liabilities............................................................ 2,405,039 2,500,190
----------- -----------
Guaranteed preferred beneficial interest in First Banks
America, Inc. subordinated debentures............................................. 44,295 44,280
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Common stock:
Common stock, $0.15 par value; 15,000,000 shares authorized;
9,610,703 shares issued at March 31, 2001
and December 31, 2000........................................................... 1,442 1,442
Class B common stock, $0.15 par value; 4,000,000 shares
authorized; 2,500,000 shares issued and outstanding at
March 31, 2001 and December 31, 2000............................................ 375 375
Capital surplus....................................................................... 154,470 153,929
Retained earnings since elimination of accumulated deficit
effective December 31, 1994....................................................... 48,161 40,894
Common treasury stock, at cost; 42,100 shares and 4,500 shares
at March 31, 2001 and December 31, 2000, respectively............................. (891) (76)
Accumulated other comprehensive income................................................ 13,514 345
----------- -----------
Total stockholders' equity................................................... 217,071 196,909
----------- -----------
Total liabilities and stockholders' equity................................... $ 2,666,405 2,741,379
=========== ===========
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three months ended
March 31,
---------------------
2001 2000
---- ----
Interest income:
Interest and fees on loans...................................................... $ 48,880 34,927
Investment securities........................................................... 5,113 3,126
Federal funds sold and other.................................................... 830 835
-------- --------
Total interest income...................................................... 54,823 38,888
-------- --------
Interest expense:
Deposits:
Interest-bearing demand....................................................... 925 612
Savings....................................................................... 7,815 5,135
Time deposits of $100 or more................................................. 4,458 1,410
Other time deposits........................................................... 8,437 7,577
Note payable.................................................................... 1,837 61
Short-term borrowings........................................................... 723 341
-------- --------
Total interest expense..................................................... 24,195 15,136
-------- --------
Net interest income........................................................ 30,628 23,752
Provision for loan losses........................................................... 90 982
-------- --------
Net interest income after provision for loan losses........................ 30,538 22,770
-------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees................... 2,160 1,699
(Loss) gain on sales of securities, net......................................... (174) 379
Gain on derivative instruments, net............................................. 300 --
Other income.................................................................... 2,093 836
-------- --------
Total noninterest income................................................... 4,379 2,914
-------- --------
Noninterest expense:
Salaries and employee benefits.................................................. 8,112 6,244
Occupancy, net of rental income................................................. 2,529 1,899
Furniture and equipment......................................................... 912 865
Postage, printing and supplies.................................................. 419 366
Data processing fees............................................................ 2,475 1,618
Legal, examination and professional fees........................................ 2,423 1,578
Amortization of intangibles associated with the purchase of subsidiaries........ 1,374 655
Guaranteed preferred debentures................................................. 975 993
Other........................................................................... 2,750 1,393
-------- --------
Total noninterest expense.................................................. 21,969 15,611
-------- --------
Income before provision for income tax expense and cumulative effect
of change in accounting principle........................................ 12,948 10,073
Provision for income tax expense.................................................... 5,222 3,655
-------- --------
Income before cumulative effect of change in accounting principle.......... 7,726 6,418
Cumulative effect of change in accounting principle, net of tax..................... 459 --
-------- --------
Net income................................................................. $ 7,267 6,418
======== ========
Earnings per common share:
Basic:
Income before cumulative effect of change in accounting principle............. $ 0.64 0.53
Cumulative effect of change in accounting principle, net of tax............... (0.04) --
-------- --------
Basic......................................................................... $ 0.60 0.53
======== ========
Diluted:
Income before cumulative effect of change in accounting principle............. $ 0.64 0.53
Cumulative effect of change in accounting principle, net of tax............... (0.04) --
-------- --------
Diluted....................................................................... $ 0.60 0.53
======== ========
Weighted average common stock outstanding (in thousands)............................ 12,097 12,160
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three months ended March 31, 2001 and 2000 and nine months 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,
December 31, 1999.................... $1,441 375 161,613 25,097 (11,369) (2,644) 174,513
Three months ended March 31, 2000:
Comprehensive income:
Net income.......................... -- -- -- 6,418 6,418 -- -- 6,418
Other comprehensive income, net of
tax - unrealized gains on
securities, net of reclassi-
fication adjustment (1)........... -- -- -- 349 -- -- 349 349
------
Comprehensive income................ 6,767
======
Repurchases of common stock.......... -- -- -- -- (880) -- (880)
Pre-merger transactions of FB&T...... -- -- -- (2,000) -- -- (2,000)
------ --- ------- ------- ------- ------ -------
Consolidated balances, March 31, 2000... 1,441 375 161,613 29,515 (12,249) (2,295) 178,400
Nine months ended December 31, 2000:
Comprehensive income:
Net income.......................... -- -- -- 21,379 21,379 -- -- 21,379
Other comprehensive income, net
of tax - unrealized gains on
securities, net of reclassi-
fication adjustment (1)........... -- -- -- 2,640 -- -- 2,640 2,640
------
Comprehensive income................ 24,019
======
Exercise of stock options............ 1 -- 24 -- -- -- 25
Compensation paid in stock........... -- -- 36 -- -- -- 36
Repurchases of common stock.......... -- -- -- -- (574) -- (574)
Retirement and reissuance
of treasury stock................. -- -- (12,747) -- 12,747 -- --
Pre-merger transactions of FB&T...... -- -- 5,003 (10,000) -- -- (4,997)
------ --- ------- ------- ------- ------ -------
Consolidated balances,
December 31, 2000................. 1,442 375 153,929 40,894 (76) 345 196,909
Three months ended March 31, 2001:
Comprehensive income:
Net income.......................... -- -- -- 7,267 7,267 -- -- 7,267
Other comprehensive income, net
of tax:
Unrealized gains on securities,
net of reclassification
adjustment (1).................. -- -- -- 2,024 -- -- 2,024 2,024
Derivative instruments:
Cumulative effect of change
in accounting principle....... -- -- -- 4,950 -- -- 4,950 4,950
Current period transactions..... -- -- -- 6,195 -- -- 6,195 6,195
Reclassification to earnings.... -- -- -- -- -- -- -- --
------
Comprehensive income................ 20,436
======
Reduction of deferred tax asset
valuation reserve................. -- -- 541 -- -- -- 541
Repurchases of common stock.......... -- -- -- -- (815) -- (815)
------ --- ------- ------- ------- ------ -------
Consolidated balances, March 31, 2001... $1,442 375 154,470 48,161 (891) 13,514 217,071
====== === ======= ======= ======= ====== =======
- -------------------------------------
(1) Disclosure of reclassification adjustment:
Three months ended Nine months ended
March 31, December 31,
------------------
2001 2000 2000
---- ---- ----
Unrealized gains on investment securities arising during the period............... $ 1,911 595 2,509
Less reclassification adjustment for (losses) gains included in net income........ (113) 246 (131)
------- ------- -----
Unrealized gains on investment securities......................................... $ 2,024 349 2,640
======= ======= =====
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three months ended
March 31,
-----------------
2001 2000
---- ----
Cash flows from operating activities:
Net income............................................................................ $ 7,267 6,418
Adjustments to reconcile net income to cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax................... 459 --
Depreciation, amortization and accretion, net..................................... 1,744 1,215
Provision for loan losses......................................................... 90 982
Provision for income tax expense.................................................. 5,222 3,655
Refunds (payments) of income taxes................................................ 1,519 (509)
Loss (gain) on sales of securities, net........................................... 174 (379)
Gain on derivative instrument, net................................................ (300) --
Decrease in accrued interest receivable........................................... 2,764 748
Interest accrued on liabilities................................................... 24,195 15,136
Payments of interest on liabilities............................................... (21,526) (14,812)
Other operating activities, net................................................... (9,609) (1,760)
---------- ---------
Net cash provided by operating activities................................... 11,998 10,694
---------- ---------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received............ -- (2,709)
Proceeds from sales of investment securities available for sale....................... 52,916 8,148
Maturities of investment securities available for sale................................ 77,148 35,838
Maturities of investment securities held to maturity.................................. 130 6
Purchases of investment securities available for sale................................. (10,159) (28,234)
Net decrease (increase) in loans...................................................... 34,772 (9,450)
Recoveries of loans previously charged-off............................................ 826 2,292
Purchases of bank premises and equipment.............................................. (544) (1,077)
Proceeds from sales of other real estate.............................................. 9 381
Other investing activities, net....................................................... (308) (307)
---------- ---------
Net cash provided by investing activities................................... 154,790 4,888
---------- ---------
Cash flows from financing activities:
Other (decreases) increases in deposits:
Demand and savings deposits....................................................... (55,115) 57,617
Time deposits..................................................................... (10,437) 25,628
Decrease in federal funds purchased................................................... -- (27,500)
Increase in securities sold under agreements to repurchase............................ 1,187 11,937
Advances drawn on note payable........................................................ -- 9,200
Repayments of note payable............................................................ (35,200) --
Repurchases of common stock for treasury.............................................. (815) (880)
Pre-merger transactions of FB&T....................................................... -- (2,000)
---------- ---------
Net cash (used in) provided by financing activities......................... (100,380) 74,002
---------- ---------
Net increase in cash and cash equivalents................................... 66,408 89,584
Cash and cash equivalents, beginning of period............................................ 153,210 97,296
---------- ---------
Cash and cash equivalents, end of period.................................................. $ 219,618 186,880
========== =========
Noncash investing and financing activities:
Loans transferred to other real estate................................................ $ -- 295
Reduction of deferred tax asset valuation allowance.................................. 541 --
========== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements of First Banks
America, Inc. and subsidiaries (FBA or the Company) are unaudited and should be
read in conjunction with the consolidated financial statements contained in the
2000 Annual Report on Form 10-K. The consolidated financial statements 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 the opinion of management, all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein, have been included.
Operating results for the three months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001.
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 2000 amounts have been made to conform to the 2001
presentation.
FBA is majority owned by First Banks, Inc., St. Louis, Missouri (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 March 31, 2001 and December 31, 2000 was 93.15% and 92.86%,
respectively.
FBA operates through its wholly owned subsidiary bank holding company,
The San Francisco Company (SFC), which is headquartered in San Francisco,
California, and SFC's subsidiary bank, First Bank & Trust (FB&T), which is also
headquartered in San Francisco, California. FBA's subsidiaries are wholly owned
by their respective parent companies.
(2) ACQUISITION OF FIRST BANK & TRUST
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. 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.
The accompanying consolidated financial statements at March 31, 2000
and for the three months then ended give retroactive effect to this transaction
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 subsequent to First Banks' acquisition of First
Bank & Trust on March 15, 1995. The consolidated statements of changes in
stockholders' equity and comprehensive income reflect the accounts of FBA as if
the common stock, excluding the treasury shares, issued to First Banks in
exchange for its interest in First Bank & Trust had been outstanding for all
periods subsequent to March 15, 1995.
(3) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 -- Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). In June 1999 and June
2000, 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, and SFAS No. 138 - Accounting for
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133, respectively. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133,
as amended, requires an entity to 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, as
amended, 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.
FBA utilizes derivative instruments and hedging activities to assist in
the management of interest rate sensitivity and to modify the repricing,
maturity and option characteristics of certain assets and liabilities. FBA uses
such derivative instruments solely to reduce its interest rate exposure. The
following is a summary of FBA's accounting policies for derivative instruments
and hedging activities under SFAS 133, as amended:
Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap
agreements designated as cash flow hedges are accounted for at fair value. The
effective portion of the change in the cash flow hedge's gain or loss is
initially reported as a component of other comprehensive income and subsequently
reclassified into noninterest income when the underlying transaction affects
earnings. The ineffective portion of the change in the cash flow hedge's gain or
loss is recorded in noninterest income on each quarterly measurement date. The
swap 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 being hedged.
Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap
agreements designated as fair value hedges are accounted for at fair value.
Changes in the fair value of the swap agreements are recognized currently in
noninterest income. The change in the fair value on the underlying hedged item
(liabilities) attributable to the hedged risk adjusts the carrying amount of the
underlying hedged item and is also recognized currently in noninterest income.
All changes in fair value are measured on a quarterly basis. The swap 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.
Interest Rate Cap and Floor Agreements. Interest rate cap and floor
agreements are accounted for at fair value. Changes in the fair value of
interest rate cap and floor agreements are recognized in earnings on each
quarterly measurement date.
On January 1, 2001, FBA implemented SFAS 133, as amended. The
implementation of SFAS 133, as amended, resulted in an increase in derivative
instruments of $6.9 million, an increase in deferred tax liabilities of $2.7
million and an increase in other comprehensive income of $5.0 million. In
addition, FBA recorded a cumulative effect of change in accounting principle of
$459,000, net of taxes of $247,000, as a reduction of net income.
(4) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share (EPS) computations for the periods
indicated:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
(in thousands, except per share data)
Three months ended March 31, 2001:
Basic EPS-- income before cumulative effect.................. $7,726 12,097 $ 0.64
Cumulative effect of change in accounting principle,
net of tax................................................ (459) -- (0.04)
------ ------ -------
Basic EPS - income available to common stockholders.......... 7,267 12,097 0.60
-- --
------ ------
Diluted EPS-- income available to common stockholders........ $7,267 12,097 $ 0.60
====== ====== =======
Three months ended March 31, 2000:
Basic EPS-- income available to common stockholders.......... $6,418 12,160 $ 0.53
=======
Effect of dilutive securities-- stock options................ -- 5
------ ------
Diluted EPS-- income available to common stockholders........ $6,418 12,165 $ 0.53
====== ====== =======
(5) TRANSACTIONS WITH RELATED PARTIES
FBA purchases certain services and supplies from or through First
Banks, its affiliates and First Services, L.P. 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. In addition, fees payable
to First Banks, its affiliates and First Services, L.P. generally increase as
FBA expands through acquisitions and internal growth, reflecting the higher
levels of service needed to operate its subsidiaries.
First Banks provides management services to FBA and FB&T. 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
$1.7 million and $1.3 million for the three months ended March 31, 2001 and
2000, 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 services and
various related services to FBA and FB&T under the terms of data processing
agreements. Fees paid under these agreements were $2.0 million and $1.5 million
for the three months ended March 31, 2001 and 2000, 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 $104.6 million and $108.2 million in whole loans and loan
participations outstanding at March 31, 2001 and December 31, 2000,
respectively, that were purchased from First Bank, a wholly owned subsidiary of
First Banks. In addition, FB&T had sold $121.8 million and $146.1 million in
whole loan and loan participations to First Bank at March 31, 2001 and December
31, 2000, 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.
FBA has a $100.0 million revolving note payable from First Banks on
which the outstanding principal and accrued interest under the note payable are
due and payable on June 30, 2005. 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 amounts outstanding under the note
payable at March 31, 2001 and December 31, 2000 were $62.8 million and $98.0
million, respectively. The interest expense under the note payable was $1.8
million and $61,000 for the three months ended March 31, 2001 and 2000,
respectively.
(6) REGULATORY CAPITAL
FBA and its 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 its 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 its 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 March 31, 2001, FB&T was well capitalized under the applicable
regulations. At March 31, 2001 and December 31, 2000, FBA's total capital ratio
fell below the well-capitalized level, however, FBA remained adequately
capitalized. FBA's reduction in the total capital ratio 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 March 31, 2001, the most recent notification from FBA's primary
regulator categorized FBA and FB&T as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
FBA and FB&T must maintain minimum total risk-based, Tier I risk-based and Tier
I leverage ratios as set forth in the following table.
At March 31, 2001 and December 31, 2000, FBA's, FB&T's and Bank of San
Francisco's (BSF) required and actual capital ratios were as follows:
To be well
Actual For capital capitalized under
------------------------
March 31, December 31, adequacy prompt corrective
2001 2000 purposes action provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
FBA................................... 8.18% 8.01% 8.0% 10.0%
FB&T.................................. 10.59 10.58 8.0 10.0
BSF (1)............................... -- 22.38 8.0 10.0
Tier 1 capital (to risk-weighted assets):
FBA................................... 6.92% 6.76 4.0 6.0
FB&T.................................. 9.34 9.32 4.0 6.0
BSF (1)............................... -- 21.42 4.0 6.0
Tier 1 capital (to average assets):
FBA................................... 6.54% 7.34 3.0 5.0
FB&T.................................. 8.89 9.27 3.0 5.0
BSF (1)............................... -- 22.00 3.0 5.0
--------------------------
(1) BSF was acquired by FBA on December 31, 2000. FB&T was merged with
and into BSF on March 29, 2001, and BSF was renamed FB&T.
(7) BUSINESS SEGMENT RESULTS
FBA's business segments are the parent company (which includes
intercompany eliminations) and FB&T. The reportable business segments are
consistent with the management structure of FBA and the internal reporting
system that monitors performance.
Through its branch network, FB&T provides similar products and services
in its 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, FB&T markets
combined basic services for various customer groups, including packaged accounts
for more affluent customers, and sweep accounts, lock-box deposits and cash
management products for commercial customers. FB&T also offers both consumer and
commercial loans. Consumer lending includes residential real estate, home equity
and installment lending. Commercial lending includes commercial, financial and
agricultural loans, real estate construction and development loans, commercial
real estate loans, 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.
The revenues generated by FB&T 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 FB&T and other banks affiliated with First Banks. See note 4 to
the accompanying consolidated financial statements.
The business segment results are consistent with FBA's internal
reporting system and, in all material respects, with accounting principles
generally accepted in the United States of America and practices predominate in
the banking industry.
The business segment results are summarized as follows:
FB&T (1) Corporate and other (2) Consolidated totals
------------------------ ----------------------- -----------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities....................... $ 217,295 330,478 1,605 4,741 218,900 335,219
Loans, net of unearned discount............. 2,021,737 2,058,628 -- 49 2,021,737 2,058,677
Total assets................................ 2,660,924 2,733,545 5,481 7,834 2,666,405 2,741,379
Deposits.................................... 2,241,177 2,306,469 (100) (113) 2,241,077 2,306,356
Stockholders' equity........................ 321,343 333,186 (104,272) (136,277) 217,071 196,909
========== ========= ========= ======== ========== =========
FB&T (1) Corporate and Other (2) Consolidated totals
--------------------- ----------------------- ------------------------
Three months ended Three months ended Three months ended
March 31, March 31, March 31,
--------------------- ---------------------- ----------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income............................. $ 54,739 38,807 84 81 54,823 38,888
Interest expense............................ 22,340 15,098 1,855 38 24,195 15,136
--------- -------- -------- -------- ---------- ---------
Net interest income................... 32,399 23,709 (1,771) 43 30,628 23,752
Provision for loan losses................... 90 982 -- -- 90 982
--------- -------- -------- -------- ---------- ---------
Net interest income after
provision for loan losses........... 32,309 22,727 (1,771) 43 30,538 22,770
Noninterest income.......................... 4,510 3,046 (131) (132) 4,379 2,914
Noninterest expense......................... 20,792 14,682 1,177 929 21,969 15,611
--------- -------- -------- -------- ---------- ---------
Income (loss) before provision
(benefit)for income tax expense
and cumulative effect of change
in accounting principle............. 16,027 11,091 (3,079) (1,018) 12,948 10,073
Provision (benefit) for income tax expense.. 6,284 4,396 (1,062) (741) 5,222 3,655
--------- -------- -------- -------- ---------- ---------
Income (loss) before cumulative effect
of change in accounting principle... 9,743 6,695 (2,017) (277) 7,726 6,418
Cumulative effect of change in
accounting principle, net of tax......... 459 -- -- -- 459 --
--------- -------- -------- -------- ---------- ---------
Net income (loss)..................... $ 9,284 6,695 (2,017) (277) 7,267 6,418
========= ======== ======== ======== ========== =========
- -----------------
(1) Includes BSF, which was acquired by FBA on December 31, 2000. FB&T was
merged with and into BSF on March 29, 2001, and BSF was renamed FB&T.
(2) Corporate and other includes $634,000 of guaranteed preferred debentures
expense, after applicable income tax benefit of $341,000, for the three
months ended March 31, 2001, and $645,000 of guaranteed preferred
debentures expense, after applicable income tax benefit of $348,000, for
the comparable period in 2000, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause 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; the impact of accounting pronouncements applicable to us
and changes therein; competitive conditions in the markets in which we conduct
our operations, including competition from banking and non-banking companies
with substantially greater resources than us, some of which may offer and
develop products and services not offered by us; our ability to control the
composition of our loan portfolio without adversely affecting interest income;
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
than us; 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-Q should therefore not place
undue reliance on forward-looking statements.
General
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. We currently operate one banking subsidiary that has 52
branch offices in California and Texas. At March 31, 2001, we had total assets
of $2.67 billion, loans, net of unearned discount, of $2.02 billion, total
deposits of $2.24 billion and total stockholders' equity of $217.1 million.
We operate through our subsidiary bank holding company, The San
Francisco Company, or SFC, which is headquartered in San Francisco, California,
and our subsidiary bank, First Bank & Trust, or FB&T, which is also
headquartered in San Francisco, California. Our subsidiaries are wholly owned by
their respective parent companies.
We offer a broad range of commercial and personal banking services,
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 FB&T rests with the officers and
directors. However, 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.
Financial Condition
Our total assets were $2.67 billion and $2.74 billion at March 31, 2001
and December 31, 2000, respectively. The decrease in total assets is primarily
attributable to an anticipated level of attrition associated with our
acquisitions of Commercial Bank of San Francisco, Millennium Bank and Bank of
San Francisco, which were completed during the fourth quarter of 2000. Loans,
net of unearned discount, decreased by $36.9 million, which is further discussed
under "--Loans and Allowance for Loan Losses." Investment securities decreased
by $116.3 million to $218.9 million at March 31, 2001 from $335.2 million at
December 31, 2000. We attribute the decrease in investment securities primarily
to the liquidation of certain investment securities acquired through acquisition
that did not meet our investment objectives and a higher than normal level of
investment security calls experienced during the three months ended March 31,
2001. A portion of the funds generated from the reduction of investment
securities were reinvested in investment securities, and the remaining funds
were temporarily invested in cash and cash equivalents, resulting in an increase
of $92.1 million in federal funds sold to $145.3 million at March 31, 2001.
Offsetting these reductions was an increase in derivative instruments of $21.1
million, resulting solely from the implementation of Statement of Financial
Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by 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, and SFAS No. 138 -
Accounting for Derivative Instruments and Hedging Activities, an Amendment of
FASB Statement No. 133. Total deposits decreased by $65.3 million to $2.24
billion at March 31, 2001 from $2.31 billion at December 31, 2000, which
reflects an anticipated level of attrition associated with our fourth quarter
acquisitions as well as normal cyclical trends typically experienced during the
first quarter of each calendar year. In addition, our note payable decreased by
$35.2 million to $62.8 million at March 31, 2001 from $98.0 million at December
31, 2000. The reduction of our note payable was funded with dividends from FB&T
and a capital reduction of $23.0 million that was recorded in conjunction with
the merger of our former subsidiary, First Bank & Trust, with and into Bank of
San Francisco, effective March 29, 2001. In conjunction with this merger, Bank
of San Francisco was renamed FB&T.
During the three months ended March 31, 2001, we purchased $815,000 of
our common stock at an average cost of $21.66 per share. We utilized available
cash and the proceeds from sales of available-for-sale investment securities to
fund our repurchases of common stock. 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 March 31, 2001, we
had purchased a cumulative total 845,529 shares of common stock held for
treasury. However, on October 31, 2000, we issued 803,429 treasury shares to
First Banks in conjunction with our acquisition of First Bank & Trust. At March
31, 2001, we could purchase approximately 249,000 additional shares under the
existing authorization.
Results of Operations
Net Income
Net income was $7.3 million, or $0.60 per share on a diluted basis, for
the three months ended March 31, 2001, in comparison to $6.4 million, or $0.53
per share on a diluted basis, for the comparable period in 2000, representing an
increase of 13.2% on a diluted per share basis. The implementation of SFAS No.
133, as amended, on January 1, 2001, resulted in the recognition of a cumulative
effect of change in accounting principle of $459,000, net of tax, which reduced
net income. Excluding this item, net income was $7.7 million, or $0.64 per share
on a diluted basis, for the three months ended March 31, 2001. The earnings
progress was primarily driven by increased net interest income and noninterest
income, along with a reduction in our provision for loan losses as further
discussed under "--Provision for Loan Losses." The increased net interest income
was generated through internal loan growth and our acquisitions of Lippo Bank,
Bank of Ventura, Commercial Bank of San Francisco, Millennium Bank and Bank of
San Francisco, completed during 2000. However, the improvement in net interest
income was partially mitigated by several reductions in the prime lending rate
that occurred during the first quarter of 2001.
The improvement in net interest income and noninterest income for the
three months ended March 31, 2001 was partially offset by increased operating
expenses of $6.4 million to $22.0 million from $15.6 million for the three
months ended March 31, 2001 and 2000, respectively. The increased operating
expenses are primarily attributable to the operating expenses of the
aforementioned acquisitions 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 the aforementioned
banks.
Net Interest Income
Net interest income was $30.6 million, or 5.22% of average
interest-earning assets, for the three months ended March 31, 2001, in
comparison to $23.8 million, or 5.44% of average interest-earning assets, for
the comparable period in 2000. We credit the improved net interest income
primarily to the net interest-earning assets provided by our acquisitions
completed during 2000, internal loan growth, increased yields on
interest-earning assets and earnings on our interest rate swap agreements that
we entered into in conjunction with our risk management program.
Average loans, net of unearned discount, increased by $553.5 million to
$2.05 billion for the three months ended March 31, 2001 from $1.50 billion for
the comparable period in 2000. The yield on our loan portfolio increased to
9.66% for the three months ended March 31, 2001, in comparison to 9.38% for the
comparable period in 2000. Although yields on our interest-earning assets have
improved for the three months ended March 31, 2001, our net interest rate margin
declined 22 basis points. We attribute the decline in our net interest rate
margin primarily to the recent declines in the prime lending rate, which we
anticipate will continue to occur in the upcoming months. During the period from
January 1, 2001 through March 31, 2001, the Board of Governors of the Federal
Reserve System decreased the targeted federal funds rate three times, resulting
in three decreases in the prime rate of interest from 9.5% to 8.0%. 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.
As further discussed under "--Interest Rate Risk Management," the reduced level
of interest income earned on our loan portfolio as a result of declining rates
was partially mitigated by the earnings associated with our interest rate swap
agreements. For the three months ended March 31, 2001, these agreements provided
income of $561,000, in comparison to expense of $189,000 incurred for the
comparable period in 2000.
The improved yield earned on our interest-earning assets was partially
offset by an increased rate paid on our interest-bearing liabilities. For the
three months ended March 31, 2001, the aggregate weighted average rate paid on
our deposit portfolio increased to 4.86% from 4.41% for the comparable period in
2000, reflecting increased rates paid by us to attract and retain deposits as a
result of the high level of competition within our market areas. In addition,
the aggregate weighted average rate paid on our note payable and short-term
borrowings increased to 7.14% for the three months ended March 31, 2001 from
5.36% for the comparable period in 2000. 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 Commercial
Bank of San Francisco, Millennium Bank and Bank of San Francisco, thus resulting
in a significantly higher level of borrowings occurring during the fourth
quarter of 2000.
The following table sets forth certain information relating to our
average balance sheets, and reflects the average yield earned on
interest-earning assets, the average cost of interest-bearing liabilities and
the resulting net interest income for the periods indicated.
Three months ended March 31,
----------------------------------------------------------
2001 2000
----------------------------- --------------------------
Interest Interest
Average income/ Yield/ Average income/ Yield/
balance expense rate balance expense rate
------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1) (2) (3) (4)................................... $2,051,226 48,880 9.66% $1,497,733 34,927 9.38%
Investment securities (3)............................... 270,558 5,113 7.66 199,238 3,126 6.31
Federal funds sold and other............................ 56,994 830 5.91 59,730 835 5.62
---------- ------- ---------- ------
Total interest-earning assets...................... 2,378,778 54,823 9.35 1,756,701 38,888 8.90
------- ------
Nonearning assets........................................... 271,191 169,349
---------- ----------
Total assets....................................... $2,649,969 $1,926,050
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing demand deposits........................ $ 207,478 925 1.81% $ 161,698 612 1.52%
Savings deposits........................................ 734,810 7,815 4.31 501,234 5,135 4.12
Time deposits of $100 or more........................... 297,782 4,458 6.07 113,492 1,410 5.00
Other time deposits (4)................................. 565,795 8,437 6.05 567,011 7,577 5.37
---------- ------- ---------- ------
Total interest-bearing deposits.................... 1,805,865 21,635 4.86 1,343,435 14,734 4.41
Note payable and short-term borrowings.................. 145,411 2,560 7.14 30,139 402 5.36
---------- ------- --------- ------
Total interest-bearing liabilities................. 1,951,276 24,195 5.03 1,373,574 15,136 4.43
------- ------
Noninterest-bearing liabilities:
Demand deposits......................................... 414,922 302,918
Other liabilities....................................... 81,594 71,796
---------- ----------
Total liabilities.................................. 2,447,792 1,748,288
Stockholders' equity........................................ 202,177 177,762
---------- ----------
Total liabilities and stockholders' equity......... $2,649,969 $1,926,050
========== ==========
Net interest income......................................... 30,628 23,752
======= ======
Interest rate spread........................................ 4.32% 4.47%
Net interest rate margin.................................... 5.22 5.44
==== ====
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) FBA has no tax-exempt income.
(4) Includes the effects of interest rate exchange agreements.
Provision for Loan Losses
The provision for loan losses was $90,000 and $982,000 for the three
months ended March 31, 2001 and 2000, respectively. We attribute the decrease in
the provision for loan losses primarily to management's overall assessment of
the adequacy of the allowance for loan losses especially in light of the
allowances acquired with our acquisitions during 2000 in relation to the risk of
the acquired loan portfolios. Loan charge-offs were $2.2 million for the three
months ended March 31, 2001, in comparison to $1.8 million for the comparable
period in 2000. The increase in loan charge-offs reflects the recent general
slow down in economic conditions prevalent in our markets, which we anticipate
will continue in the upcoming months. Loan recoveries were $826,000 for the
three months ended March 31, 2001, in comparison to $2.3 million for the
comparable period in 2000, reflecting lower charge-off experience in 2000, which
reduced the amount of recovery opportunities. In addition, loan recoveries for
the three months ended March 31, 2000 included a recovery of $1.3 million on a
single credit relationship. Nonperforming assets and past-due loans have
increased during the three months ended March 31, 2001, and we anticipate these
trends will continue in the near future. However, we believe these trends
represent normal cyclical trends experienced within the banking industry during
times of economic slow down. Management considered these trends in its overall
assessment of the adequacy of the allowance for loan losses and concluded that
no additional provision for loan losses was necessary.
Tables summarizing nonperforming assets, past-due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $4.4 million and $2.9 million for the three
months ended March 31, 2001 and 2000, respectively. Noninterest income consists
primarily of service charges on deposit accounts and customer service fees and
other income.
Service charges on deposit accounts and customer service fees increased
to $2.2 million from $1.7 million for the three months ended March 31, 2001 and
2000, respectively. We attribute the increase in service charges and customer
service fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed during 2000;
>> additional products and 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 June 1, 2000, and enhanced control of fee
waivers; and
>> increased income associated with automatic teller machine services
and debit and credit cards.
Noninterest income for the three months ended March 31, 2001 also
included a net loss on the sale of available-for-sale investment securities of
$174,000, in comparison to a net gain on the sale of available-for-sale
investment securities of $379,000 for the comparable period in 2000. The net
loss for 2001 resulted primarily from the liquidation of certain equity
investment securities held by our parent company that resulted in a loss of
$134,000, whereas the net gain in 2000 resulted primarily from sales of certain
investment securities held by acquired institutions that did not meet our
overall investment objectives.
The net gain on derivative instruments is solely attributable to
changes in the fair value of our interest rate cap agreements and interest rate
floor agreements, and results from the implementation of SFAS No. 133, as
amended, on January 1, 2001. See Note 3 to our accompanying consolidated
financial statements.
Other income was $2.1 million and $836,000 for the three months ended
March 31, 2001 and 2000, respectively. We attribute the primary components of
the increase to:
>> our acquisitions completed during 2000;
>> increased earnings associated with our international banking products,
which were initially offered in March 2000;
>> increased brokerage revenue associated with the stock option services
acquired in conjunction with our acquisition of Bank of San Francisco;
>> increased earnings associated with our official check processing
program, in which we earn a fee based upon the amount of official
checks issued and outstanding; and,
>> income of approximately $300,000 associated with equipment leasing
activities that were acquired in conjunction with our acquisition of
Bank of San Francisco in December 2000.
Noninterest Expense
Noninterest expense was $22.0 million and $15.6 million for the three
months ended March 31, 2001 and 2000, respectively. The increase reflects:
>> the noninterest expense of our acquisitions completed during 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 were $8.1 million and $6.2 million for
the three months ended March 31, 2001 and 2000, respectively. We primarily
associate the increase with our 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.
Data processing fees were $2.5 million and $1.6 million for the three
months ended March 31, 2001 and 2000, respectively. As more fully described in
Note 5 to our accompanying consolidated financial statements, First Services,
L.P. provides data processing and various related services to FB&T and us. We
attribute the increased data processing fees to growth and technological
advancements consistent with our product and services offerings, continued
upgrades to technological equipment, networks and communication channels, and
certain nonrecurring expenses associated with the data processing conversions of
Redwood Bank and Commercial Bank of San Francisco, completed in February 2001
and March 2001, respectively.
Legal, examination and professional fees were $2.4 million and $1.6
million for the three months ended March 31, 2001 and 2000, respectively. The
increase in these fees is primarily attributable to our expanded utilization of
legal and professional services in conjunction with general corporate
activities, commercial loan documentation, collection efforts and an increase in
management fees paid to First Banks for various corporate services. See Note 5
to our accompanying consolidated financial statements for a further discussion
of these transactions with related parties.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.4 million and $655,000 for the three months ended March 31,
2001 and 2000, respectively. The increase for 2001 is primarily attributable to
amortization of the cost in excess of the fair value of the net assets acquired
of the five acquisitions that we completed during 2000.
Other expense was $2.8 million and $1.4 million for the three months
ended March 31, 2001 and 2000, 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.
Provision for Income Tax Expense
Provision for income tax expense was $5.2 million and $3.7 million for
the three months ended March 31, 2001 and 2000, representing an effective income
tax rate of 40.3% and 36.3%, respectively. The increase in the effective income
tax rate for the three months ended March 31, 2001 is primarily attributable to:
>> the increase in amortization of intangibles associated with the
purchase of subsidiaries; and
>> a reduction of the deferred tax asset valuation reserve of $404,000
related to the utilization of net operating losses associated with a
previously acquired entity, which was recorded in March 2000.
Interest Rate Risk Management
We utilize derivative financial instruments and hedging activities to
assist in our management of interest rate sensitivity and to modify the
repricing, maturity and option characteristics of certain assets and
liabilities. We limit the use of such derivative financial instruments to reduce
our interest rate exposure. The derivative instruments we hold, for purposes of
managing interest rate risk, are summarized as follows:
March 31, 2001 December 31, 2000
--------------------- ----------------------
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $ 735,000 311 535,000 1,112
Fair value hedges.................................... 54,900 -- -- --
Interest rate floor agreements....................... 175,000 3,240 -- --
Interest rate cap agreement.......................... 150,000 449 150,000 1,251
========== ===== ======== ======
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 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, which have been designated as
cash flow hedges, 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 us to pay quarterly and receive payment semiannually. The
amount receivable by us under the swap agreements was $454,000 and $1.4 million
at March 31, 2001 and December 31, 2000, respectively, and the amount payable by
us under the swap agreements was $230,000 and $281,000 at March 31, 2001 and
December 31, 2000, respectively.
During September 1999, we entered into $130.0 million notional amount
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, which had been
designated as cash flow hedges, provided 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
provided for us to pay and receive interest on a quarterly basis. In April 2001,
we terminated these swap agreements, which would have expired in September 2001,
in order to lengthen the period covered by the swaps. In conjunction with the
termination of these swap agreements, we recorded a pre-tax gain of $731,000.
The amount receivable by us under the swap agreements was $89,000 at December
31, 2000 and the amount payable by us under the swap agreements was $123,000 at
December 31, 2000.
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, which have
been designated as cash flow hedges, provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the weighted
average prime lending rate minus 2.70%. 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 March 31, 2001 and December 31,
2000, and the amount payable by us under the swap agreements was $534,000 and
$623,000 at March 31, 2001 and December 31, 2000, respectively. 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 differential between the three-month London Interbank
Offering Rate and the strike price of 7.50% should the three-month London
Interbank Offering Rate exceed 7.50%. At March 31, 2001 and December 31, 2000,
the carrying value of this interest rate cap agreement, which is included in
derivative instruments in the accompanying consolidated balance sheet, was
$449,000 and $1.3 million, respectively.
During January 2001, we entered into $54.9 million notional amount of
interest rate swap agreements to effectively shorten the repricing
characteristics of certain interest-bearing liabilities with the objective of
stabilizing net interest income over time. The swap agreements, which have been
designated as fair value hedges, provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the three-month
London Interbank Offering Rate. The 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 $686,000 at March 31, 2001, and the amount payable
by us under the swap agreements was $704,000 at March 31, 2001.
During January 2001, we also entered into $100.0 million notional
amount of an interest rate floor agreement to further stabilize net interest
income in the event of a falling rate scenario. The interest rate floor
agreement has a maturity date of January 9, 2004, and provides for us to receive
a quarterly adjustable rate of interest equivalent to the differential between
the three-month London Interbank Offering Rate and the strike price of 5.50%
should the three-month London Interbank Offering Rate fall below 5.50%. At March
31, 2001, the carrying value of this interest rate floor agreement, which is
included in derivative instruments in the accompanying consolidated balance
sheet, was $2.2 million.
During March 2001, we entered into $200.0 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, which have
been designated as cash flow hedges, provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the weighted
average prime lending rate minus 2.82%. 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 $291,000 at March 31, 2001, and the amount
payable by us under the swap agreements was $317,000 at March 31, 2001.
During March 2001, we also entered into $75.0 million notional amount
of an interest rate floor agreement to further stabilize net interest income in
the event of a falling rate scenario. The interest rate floor agreement has a
maturity date of March 21, 2004, and provides for us to receive a quarterly
adjustable rate of interest equivalent to the differential between the
three-month London Interbank Offering Rate and the strike price of 5.00% should
the three-month London Interbank Offering Rate fall below 5.00%. At March 31,
2001, the carrying value of this interest rate floor agreement, which is
included in derivative instruments in the accompanying consolidated balance
sheet, was $1.0 million.
During the three months ended March 31, 2001, the net interest income
realized on our derivative financial instruments was $561,000, in comparison to
net interest expense of $189,000 realized on our derivative financial
instruments for the comparable period in 2000.
At March 31, 2001, we had pledged investment securities available for
sale with a carrying value of $3.3 million in connection with our interest rate
swap agreements. In addition, at March 31, 2001, we had accepted investment
securities with a fair value of $16.2 million as collateral in connection with
the interest rate swap agreements. We are permitted by contract to sell or
repledge the collateral accepted from our counterparties, however, at March 31,
2001, we 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 March 31, 2001
and December 31, 2000 were as follows:
Notional Interest rate Interest rate Fair
Maturity date amount paid received value
------------- -------- ----------- ------------- ----------
(dollars expressed in thousands)
March 31, 2001:
September 27, 2001....................... $ 130,000 5.30% 6.14% $ 865
June 11, 2002............................ 15,000 5.30 6.00 219
September 16, 2002....................... 20,000 5.30 5.36 166
September 18, 2002....................... 70,000 5.30 5.33 549
January 9, 2004.......................... 10,000 5.70 5.37 79
September 20, 2004....................... 300,000 5.30 6.78 15,315
March 21, 2005........................... 200,000 5.18 5.24 33
January 9, 2006.......................... 44,900 5.70 5.51 194
--------- --------
$ 789,900 5.23 6.02 $ 17,420
========= ==== ===== ========
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
========= ==== ===== ========
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents our principal source
of income. Interest and fees on loans were 89.2% and 89.8% of total interest
income for the three months ended March 31, 2001 and 2000, respectively. Total
loans, net of unearned discount, were $2.02 billion, or 75.8% of total assets,
at March 31, 2001, compared to $2.06 billion, or 75.1% of total assets, at
December 31, 2000. The decrease in loans, as summarized on our consolidated
balance sheets, is primarily attributable to an anticipated amount of attrition
associated with our acquisitions completed during the fourth quarter of 2000.
With the exception of our real estate mortgage portfolio, which increased
slightly by $2.5 million during the three months ended March 31, 2001, all other
categories within our loan portfolio have declined during this period. While we
anticipate some additional run-off of the loan portfolio associated with our
recent acquisitions, we do not expect this trend to continue in the upcoming
months. Commensurate with our prescribed credit exposure guidelines for
extending credit to an individual borrower, loan participations sold to and
purchased from First Bank were $121.8 million and $104.6 million at March 31,
2001, respectively, in comparison to $146.1 million and $108.2 million at
December 31, 2000, respectively. See Note 2 to the accompanying consolidated
financial statements for a further discussion of transactions with related
parties.
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:
March 31, December 31,
2001 2000
---- ----
(dollars expressed in thousands)
Nonperforming loans........................................................ $ 16,140 15,005
Other real estate.......................................................... 683 694
----------- ---------
Total nonperforming assets........................................ $ 16,823 15,699
=========== =========
Loans, net of unearned discount............................................ $ 2,021,737 2,058,677
=========== =========
Loans past due:
Over 30 days to 90 days................................................ $ 17,069 12,387
Over 90 days and still accruing........................................ 2,332 985
----------- ---------
Total past-due loans.............................................. $ 19,401 13,372
=========== =========
Allowance for loan losses to loans......................................... 1.81% 1.84%
Nonperforming loans to loans............................................... 0.80 0.73
Allowance for loan losses to nonperforming loans........................... 227.25 252.78
Nonperforming assets to loans and other real estate........................ 0.83 0.76
=========== =========
Nonperforming loans (also considered impaired loans), consisting of
loans on nonaccrual status and certain restructured loans, were $16.1 million at
March 31, 2001, in comparison to $15.0 million at December 31, 2000. We
attribute the increase in nonperforming loans and past-due loans to be
reflective of normal, cyclical trends experienced within the banking industry
during times of economic slow down. Consistent with the recent general economic
slow down experienced within our prevalent markets, we anticipate this trend
will continue in the upcoming months and therefore, we expect our nonperforming
loans and past-due loans to remain at a higher level in the near future. Despite
the increase in nonperforming loans, these loans represent only 0.80% of our
loan portfolio.
The following table is a summary of loan loss experience for the
periods indicated:
Three months ended
March 31,
2001 2000
(dollars expressed in thousands)
Allowance for loan losses, beginning of period............ $ 37,930 30,192
Acquired allowances for loan losses................... -- 799
--------- ---------
37,930 30,991
--------- ---------
Loans charged-off..................................... (2,168) (1,841)
Recoveries of loans previously charged-off............ 826 2,292
--------- ---------
Net loan (charge-offs) recoveries..................... (1,342) 451
--------- ---------
Provision for loan losses............................. 90 982
--------- ---------
Allowance for loan losses, end of period.................. $ 36,678 32,424
========= =========
The allowance for loan losses is monitored on a monthly basis. 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 FB&T by risk rating. These are coupled with analyses of changes in
the risk profile of the portfolio, changes in past due and nonperforming loans
and changes in watch list and classified loans over time. In this manner, we
continually monitor the overall increases or decreases in the level of risk in
the portfolio. Factors are applied to the loan portfolio for each category of
loan risk to determine acceptable levels of allowance for loan losses. We derive
these factors primarily from the actual loss experience of FB&T and from
published national surveys of norms in the industry. The calculated allowance
required for the portfolio is then compared to the actual allowance balance to
determine the provision necessary to maintain the allowance at an appropriate
level. In addition, management exercises a certain degree of judgment in its
analysis of the overall adequacy of the allowance for loan losses. In its
analysis, management considers the change in the portfolio, including growth,
composition 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.
Liquidity
Our liquidity and the liquidity of FB&T 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. FB&T receives funds for liquidity from
customer deposits, loan payments, maturities of loans and investments, sales of
investments and earnings. In addition, we may avail ourselves of other sources
of funds by issuing certificates of deposit in denominations of $100,000 or
more, borrowing federal funds, selling securities sold under agreements to
repurchase and utilizing borrowings from the Federal Home Loan Bank and other
borrowings, including our revolving note payable to First Banks. The aggregate
funds acquired from these sources were $433.2 million and $457.2 million at
March 31, 2001 and December 31, 2000, respectively.
The following table presents the maturity structure of these other
sources of funds, which consists of certificates of deposit of $100,000 or more,
the revolving note payable and other short-term borrowings, at March 31, 2001:
(dollars expressed in thousands)
3 months or less.......................... $ 151,824
Over 3 through 6 months................... 84,052
Over 6 through 12 months.................. 69,621
Over 12 months............................ 127,726
----------
Total................................... $ 433,223
==========
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. 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 March 31, 2001 and December 31, 2000, there were $62.8 million and
$98.0 million in advances 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 March 31, 2001 and December 31, 2000, the borrowing
capacity under this agreement was approximately $496.9 million and $756.4
million, respectively. In addition, FB&T's borrowing capacity through its
relationship with the Federal Home Loan Bank was approximately $19.9 million and
$20.4 million at March 31, 2001 and December 31, 2000, respectively.
Management believes the available liquidity and operating results of
FB&T 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,
First America Capital Trust.
Effect of New Accounting Standards
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 have evaluated
the additional requirements of SFAS 140 to determine their potential impact on
our consolidated financial statements and do not believe they will have a
material effect on our consolidated financial statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. While a decline in interest rates of less than 100 basis points
was projected to have a relatively minimal impact on our net interest income, an
instantaneous, parallel decline in the interest yield curve of 100 basis points
indicated a pre-tax projected loss of approximately 7.5% of net interest income,
and an instantaneous, parallel shift in the yield curve of 200 basis points
indicated a pre-tax projected loss of approximately 10.5% of net interest
income, based on assets and liabilities at December 31, 2000. At March 31, 2001,
we remain in an "asset-sensitive" position and thus, remain subject to a higher
level of risk in a declining interest-rate environment, as experienced during
the first quarter of 2001. Although we do not anticipate that instantaneous
shifts in the yield curve as projected in our simulation model are likely, these
are indications of the effects that changes in rates would have over time. Our
asset-sensitive position, coupled with reductions in the prime lending rate
throughout the last three months, is reflected in the reduced net interest rate
margin for the three months ended March 31, 2001 as further discussed under
"--Results of Operations." During the three months ended March 31, 2001, our
asset-sensitive position and overall susceptibility to market risks have not
changed materially.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
Exhibit Number Description
-------------- -----------
None Not Applicable
(b) We filed a current report on Form 8-K on January 10, 2001. Item 2 of the
Report describes our acquisitions of The San Francisco Company and
Millennium Bank, which we completed on December 29, 2000 and December 31,
2000, respectively. In addition, Item 7 of the Report presents financial
statements of the businesses acquired, pro forma financial information and
exhibits, as applicable.
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
May 14, 2001 (Principal Executive Officer)
By: /s/ Frank H. Sanfilippo
----------------------------------------
Frank H. Sanfilippo
Executive Vice President
and Chief Financial Officer
May 14, 2001 (Principal Financial
and Accounting Officer)