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, 2002
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
550 Montgomery Street, San Francisco, California 94111
(Address of principal executive offices) (Zip code)
(415) 781-7810
(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, 2002
----- -----------------
Common Stock, $0.15 par value 10,356,060
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....................................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................... 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 24
SIGNATURES.......................................................................................... 25
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2002 2001
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................... $ 81,149 103,421
Interest-bearing deposits with other financial institutions
with maturities of three months or less........................................ 2,395 4,376
Federal funds sold................................................................ 69,300 11,300
----------- -----------
Total cash and cash equivalents.............................................. 152,844 119,097
----------- -----------
Investment securities:
Available for sale, at fair value................................................. 294,656 364,518
Held to maturity, at amortized cost (fair value of $3,407 and $3,745
at March 31, 2002 and December 31, 2001, respectively)......................... 3,372 3,689
----------- -----------
Total investment securities.................................................. 298,028 368,207
----------- -----------
Loans:
Commercial, financial and agricultural............................................ 748,601 770,992
Real estate construction and development.......................................... 508,958 518,325
Real estate mortgage.............................................................. 1,011,795 1,001,663
Consumer and installment.......................................................... 27,329 33,578
----------- -----------
Total loans.................................................................. 2,296,683 2,324,558
Unearned discount................................................................. (3,206) (1,295)
Allowance for loan losses......................................................... (38,318) (42,721)
----------- -----------
Net loans.................................................................... 2,255,159 2,280,542
----------- -----------
Derivative instruments................................................................ 21,454 28,909
Bank premises and equipment, net of accumulated depreciation and amortization......... 46,407 46,746
Intangibles associated with the purchase of subsidiaries, net of amortization......... 102,986 103,153
Bank-owned life insurance............................................................. 28,500 28,119
Accrued interest receivable........................................................... 14,142 15,233
Deferred income taxes................................................................. 53,130 57,746
Other assets.......................................................................... 14,874 13,236
----------- -----------
Total assets................................................................. $ 2,987,524 3,060,988
=========== ===========
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 share and per share data)
March 31, December 31,
2002 2001
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing............................................................ $ 479,646 529,924
Interest-bearing................................................................ 310,204 297,033
Savings........................................................................... 934,924 920,737
Time deposits:
Time deposits of $100 or more................................................... 289,092 314,287
Other time deposits............................................................. 463,318 493,280
----------- -----------
Total deposits............................................................... 2,477,184 2,555,261
Short-term borrowings................................................................. 84,819 59,780
Note payable.......................................................................... 56,500 71,000
Guaranteed preferred beneficial interest in First Banks
America, Inc. subordinated debentures............................................. 44,460 44,342
Accrued interest payable.............................................................. 6,278 6,277
Deferred income taxes................................................................. 14,666 19,054
Accrued expenses and other liabilities................................................ 18,093 19,957
----------- -----------
Total liabilities............................................................ 2,702,000 2,775,671
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Common stock:
Common stock, $0.15 par value; 15,000,000 shares authorized;
10,416,460 shares issued at March 31, 2002 and
December 31, 2001, respectively................................................. 1,562 1,562
Class B common stock, $0.15 par value; 4,000,000 shares
authorized; 2,500,000 shares issued and outstanding at
March 31, 2002 and December 31, 2001............................................ 375 375
Capital surplus....................................................................... 184,979 184,979
Retained earnings since elimination of accumulated deficit
effective December 31, 1994....................................................... 85,711 80,509
Treasury stock, at cost; 60,400 shares of common stock
at March 31, 2002 and December 31, 2001........................................... (1,332) (1,332)
Accumulated other comprehensive income................................................ 14,229 19,224
----------- -----------
Total stockholders' equity................................................... 285,524 285,317
----------- -----------
Total liabilities and stockholders' equity................................... $ 2,987,524 3,060,988
=========== ===========
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended
March 31,
---------------------
2002 2001
---- ----
Interest income:
Interest and fees on loans...................................................... $ 42,872 48,880
Investment securities........................................................... 3,887 5,113
Federal funds sold and other.................................................... 107 830
-------- --------
Total interest income...................................................... 46,866 54,823
-------- --------
Interest expense:
Deposits:
Interest-bearing demand....................................................... 808 925
Savings....................................................................... 4,603 7,815
Time deposits of $100 or more................................................. 3,166 4,458
Other time deposits........................................................... 4,660 8,437
Short-term borrowings........................................................... 434 723
Note payable.................................................................... 682 1,837
Guaranteed preferred debentures................................................. 1,077 975
-------- --------
Total interest expense..................................................... 15,430 25,170
-------- --------
Net interest income........................................................ 31,436 29,653
Provision for loan losses........................................................... 7,700 90
-------- --------
Net interest income after provision for loan losses........................ 23,736 29,563
-------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees................... 2,858 2,160
Net loss on sales of available-for-sale investment securities................... -- (174)
Bank-owned life insurance investment income..................................... 408 334
Net (loss) gain on derivative instruments....................................... (136) 300
Other........................................................................... 2,386 1,759
-------- --------
Total noninterest income................................................... 5,516 4,379
-------- --------
Noninterest expense:
Salaries and employee benefits.................................................. 8,401 8,112
Occupancy, net of rental income................................................. 2,598 2,529
Furniture and equipment......................................................... 1,010 912
Postage, printing and supplies.................................................. 603 419
Information technology fees..................................................... 2,812 2,475
Legal, examination and professional fees........................................ 2,209 2,423
Amortization of intangibles associated with the purchase of subsidiaries........ 266 1,374
Communications.................................................................. 277 275
Advertising and business development............................................ 190 161
Other........................................................................... 2,431 2,314
-------- --------
Total noninterest expense.................................................. 20,797 20,994
-------- --------
Income before provision for income taxes and cumulative effect
of change in accounting principle........................................ 8,455 12,948
Provision for income taxes.......................................................... 3,253 5,222
-------- --------
Income before cumulative effect of change in accounting principle.......... 5,202 7,726
Cumulative effect of change in accounting principle, net of tax..................... -- (459)
-------- --------
Net income................................................................. $ 5,202 7,267
======== ========
Basic earnings per common share:
Income before cumulative effect of change in accounting principle............. $ 0.40 0.64
Cumulative effect of change in accounting principle, net of tax............... -- (0.04)
-------- --------
Basic......................................................................... $ 0.40 0.60
======== ========
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle............. $ 0.40 0.64
Cumulative effect of change in accounting principle, net of tax............... -- (0.04)
-------- --------
Diluted....................................................................... $ 0.40 0.60
======== ========
Weighted average shares of common stock outstanding................................. 12,856 12,097
======== ========
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, 2002 And 2001 And Nine Months Ended December 31, 2001
(dollars expressed in thousands, except per share data)
Accu-
mulated
Other Total
Class B Compre- Common Compre- Stock-
Common Common Capital hensive Retained Treasury hensive holders'
Stock Stock Surplus Income Earnings Stock Income Equity
----- ----- ------- ------ -------- ----- ------ ------
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
-------
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
Nine months ended December 31, 2001:
Comprehensive income:
Net income............................. -- -- -- 32,348 32,348 -- -- 32,348
Other comprehensive income, net
of tax:
Unrealized losses on securities,
net of reclassification
adjustment(1).................... -- -- -- (505) -- -- (505) (505)
Derivative instruments:
Current period transactions........ -- -- -- 10,372 -- -- 10,372 10,372
Reclassification to earnings....... -- -- -- (4,157) -- -- (4,157) (4,157)
-------
Comprehensive income................... 38,058
=======
Reduction of deferred tax asset
valuation allowance.................... -- -- 4,430 -- -- -- 4,430
Compensation paid in stock.............. -- -- 46 -- -- -- 46
Repurchases of common stock............. -- -- -- -- (441) -- (441)
Issuance of common stock................ 120 -- 26,033 -- -- -- 26,153
------ ------ ------- -------- -------- ------ -------
Consolidated balances, December 31, 2001.. 1,562 375 184,979 80,509 (1,332) 19,224 285,317
Three months ended March 31, 2002:
Comprehensive income:
Net income............................. -- -- -- 5,202 5,202 -- -- 5,202
Other comprehensive income, net
of tax:
Unrealized losses on securities,
net of reclassification
adjustment (1).................... -- -- -- (662) -- -- (662) (662)
Derivative instruments:
Current period transactions........ -- -- -- (4,333) -- -- (4,333) (4,333)
-------
Comprehensive income................... 207
------ ------ ------- ======= -------- -------- ------ -------
Consolidated balances, March 31, 2002..... $1,562 375 184,979 85,711 (1,332) 14,229 285,524
====== ====== ======= ======== ======== ====== =======
- ------------------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended
March 31, December 31,
------------------ -----------------
2002 2001 2001
---- ---- ----
Unrealized (losses) gains on investment securities arising during the period...... $ (662) 1,911 (664)
Less reclassification adjustment for losses included in net income................ -- (113) (159)
------- ------- -----
Unrealized (losses) gains on investment securities................................ $ (662) 2,024 (505)
======= ======= =====
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,
------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income............................................................................ $ 5,202 7,267
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..................................... 1,965 1,744
Provision for loan losses......................................................... 7,700 90
Provision for income tax expense.................................................. 3,253 5,222
(Payments) refunds of income taxes................................................ (3,205) 1,519
Net loss on sales of available-for-sale securities................................ -- 174
Net loss (gain) on derivative instruments......................................... 136 (300)
Decrease in accrued interest receivable........................................... 1,091 2,764
Interest accrued on liabilities................................................... 15,430 25,170
Payments of interest on liabilities............................................... (15,429) (22,501)
Other operating activities, net................................................... (510) (9,610)
---------- ---------
Net cash provided by operating activities................................... 15,633 11,998
---------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities.......................................... -- 52,916
Maturities of investment securities available for sale................................ 88,973 77,148
Maturities of investment securities held to maturity.................................. 324 130
Purchases of investment securities available for sale................................. (20,645) (10,159)
Net decrease in loans................................................................. 15,935 34,772
Recoveries of loans previously charged-off............................................ 1,748 826
Purchases of bank premises and equipment.............................................. (972) (544)
Proceeds from sales of other real estate.............................................. 17 9
Other investing activities, net....................................................... (381) (308)
---------- ---------
Net cash provided by investing activities................................... 84,999 154,790
---------- ---------
Cash flows from financing activities:
Other decreases in deposits:
Demand and savings deposits....................................................... (22,920) (55,115)
Time deposits..................................................................... (54,504) (10,437)
Increase in short-term borrowings..................................................... 25,039 1,187
Repayments of note payable............................................................ (14,500) (35,200)
Repurchases of common stock for treasury.............................................. -- (815)
---------- ---------
Net cash used in financing activities....................................... (66,885) (100,380)
---------- ---------
Net increase in cash and cash equivalents................................... 33,747 66,408
Cash and cash equivalents, beginning of period............................................ 119,097 153,210
---------- ---------
Cash and cash equivalents, end of period.................................................. $ 152,844 219,618
========== =========
Noncash investing and financing activities:
Reduction of deferred tax asset valuation reserve..................................... $ -- 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 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 2001
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, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
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 2001 amounts have been made to conform to the 2002
presentation. Specifically, the guaranteed preferred beneficial interest in
First Banks America, Inc. subordinated debentures has been reclassified into the
liabilities section of the consolidated balance sheets rather than presented as
a separate line item excluded from the calculation of total liabilities.
Consequently, the guaranteed preferred debentures expense has been reclassified
to interest expense from noninterest expense in the consolidated statements of
income.
FBA is majority owned by First Banks, Inc., St. Louis, Missouri (First
Banks), headquartered in St. Louis County, Missouri. 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 was 93.69% at March 31,
2002 and December 31, 2001.
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 wholly owned subsidiary bank, First Bank & Trust (FB&T),
which is also headquartered in San Francisco, California.
(2) IMPLEMENTATION OF ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142 -- Goodwill and Other
Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144 --
Accounting for the Impairment or Disposal of Long-Lived Assets as discussed
below. The amortization of goodwill ceased upon adoption of SFAS No. 142, which
for calendaSPr year-end companies was January 1, 2002.
On January 1, 2002, FBA adopted SFAS No. 142. At the date of adoption, FBA
had unamortized goodwill of $96.7 million and core deposit intangibles of $6.5
million, which were subject to the transition provisions of SFAS No. 142. Under
SFAS No. 142, FBA will continue to amortize, on a straight-line basis, its core
deposit intangibles and goodwill associated with purchases of branch offices.
Goodwill associated with the purchase of subsidiaries will no longer be
amortized, but instead, will be tested annually for impairment following FBA's
existing methods of measuring and recording impairment losses. FBA is currently
in the process of completing the transitional goodwill impairment test required
under SFAS No. 142, to determine the potential impact, if any, on the
consolidated financial statements. However, FBA does not believe the results of
the transitional goodwill impairment testing will identify significant
impairment losses or have a material effect on the consolidated financial
statements.
<
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at March 31, 2002 and December 31,
2001:
March 31, 2002 December 31, 2001
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles........... $ 6,458 (230) 6,458 --
Goodwill associated with
purchases of branch offices...... 2,210 (612) 2,210 (576)
---------- ------- -------- -------
Total......................... $ 8,668 (842) 8,668 (576)
========== ======= ======== =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries......... $ 95,160 95,061
========== ========
Amortization of intangibles associated with the purchase of subsidiaries
was $266,000 and $1.4 million for the three months ended March 31, 2002 and
2001, respectively, and $5.5 million for the year ended December 31, 2001.
Amortization of intangibles associated with the purchase of subsidiaries,
including amortization of core deposit intangibles and branch purchases, has
been estimated through 2007 in the following table, and does not take into
consideration any potential future acquisitions or branch purchases.
(dollars expressed in thousands)
Year ending December 31:
2002............................................... $ 1,064
2003............................................... 1,064
2004............................................... 1,064
2005............................................... 1,064
2006............................................... 1,064
2007............................................... 1,064
---------
Total........................................... $ 6,384
=========
Changes in the carrying amount of goodwill, all of which is attributable to
FB&T, for the three months ended March 31, 2002 were as follows:
Three Months Ended
March 31, 2002
--------------
(dollars expressed in thousands)
Balance, beginning of period............................. $96,695
Acquisition-related adjustments.......................... 99
Amortization - purchases of branch offices............... (36)
-------
Balance, end of period................................. $96,758
=======
The following is a reconciliation of reported net income to net income
adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented
on January 1, 2001:
Three Months Ended
March 31,
------------------------------
2002 2001
---- ----
(dollars expressed in thousands)
Net income:
Reported net income................................................. $ 5,202 7,267
Add back - goodwill amortization.................................... -- 1,329
--------- ---------
Adjusted net income............................................... $ 5,202 8,596
========= =========
Basic earnings per share:
Reported net income................................................. $ 0.40 0.60
Add back - goodwill amortization.................................... -- 0.11
--------- ---------
Adjusted net income............................................... $ 0.40 0.71
========= =========
Diluted earnings per share:
Reported net income................................................. $ 0.40 0.60
Add back - goodwill amortization.................................... -- 0.11
--------- ---------
Adjusted net income............................................... $ 0.40 0.71
========= =========
In August 2001, the FASB issued SFAS No. 144 -- Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS No. 144 broadens the
presentation of discontinued operations to include more disposal transactions.
Therefore, the accounting for similar events and circumstances will be the same.
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. The provisions of SFAS No. 144
generally are to be applied prospectively. On January 1, 2002, FBA implemented
SFAS No. 144, which did not have a material effect on the consolidated financial
statements.
(3) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic earnings per share (EPS) computations for the periods indicated. FBA does
not have any dilutive potential shares, therefore, basic EPS is equivalent to
dilutive EPS for the periods indicated.
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(in thousands, except per share data)
Three months ended March 31, 2002:
Basic EPS--income before cumulative effect................... $ 5,202 12,856 $ 0.40
Cumulative effect of change in accounting principle,
net of tax................................................ -- -- --
------- ------ -------
Basic EPS--income available to common stockholders........... $ 5,202 12,856 $ 0.40
======= ====== =======
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
======= ====== =======
(4) TRANSACTIONS WITH RELATED PARTIES
FBA purchases certain services and supplies from or through First Banks and
its affiliates. 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 and its
affiliates 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
$1.8 million and $1.7 million for the three months ended March 31, 2002 and
2001, respectively.
First Services L.P., a limited partnership indirectly owned by First Banks'
Chairman and his adult children, provides information technology and operational
support for FBA and FB&T under the terms of information technology agreements.
Fees paid under these agreements were $2.7 million and $2.0 million for the
three months ended March 31, 2002 and 2001, respectively.
FB&T had $84.2 million and $93.1 million in whole loans and loan
participations outstanding at March 31, 2002 and December 31, 2001,
respectively, that were purchased from First Bank, a wholly owned banking
subsidiary of First Banks. In addition, FB&T had sold $151.9 million and $137.6
million in whole loans and loan participations to First Bank at March 31, 2002
and December 31, 2001, 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 had a $100.0 million revolving note payable from First Banks on which
the outstanding principal and accrued interest under the note payable were due
and payable on June 30, 2005. On August 23, 2001, FBA and First Banks modified
the note payable by making interest payable quarterly, shortening the maturity
date to February 24, 2003, and securing the note by a pledge of FBA's stock in
its subsidiaries. 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,
2002 and December 31, 2001, were $56.5 million and $71.0 million, respectively.
The interest expense under the note payable was $682,000 and $1.8 million for
the three months ended March 31, 2002 and 2001, respectively.
(5) REGULATORY CAPITAL
FBA and FB&T 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 FB&T 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 FB&T 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, 2002, FBA was
adequately capitalized and FB&T was well capitalized.
As of March 31, 2002, the most recent notification from FBA's primary
regulator categorized FBA and FB&T as adequately capitalized and well
capitalized, respectively, under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized and 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, 2002 and December 31, 2001, FBA's and FB&T's required and
actual capital ratios were as follows:
For To Be Well
Actual Capital Capitalized Under
------------------------
March 31, December 31, Adequacy Prompt Corrective
2002 2001 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
FBA.................................. 9.02% 8.82% 8.0% 10.0%
FB&T................................. 11.06 11.27 8.0 10.0
Tier 1 capital (to risk-weighted assets):
FBA.................................. 7.77 7.57 4.0 6.0
FB&T................................. 9.81 10.02 4.0 6.0
Tier 1 capital (to average assets):
FBA.................................. 7.27 7.15 3.0 5.0
FB&T................................. 9.18 9.47 3.0 5.0
(6) BUSINESS SEGMENT RESULTS
FBA's business segment is FB&T. The reportable business segment is
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, debit cards, brokerage
services, credit-related insurance, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services, stock
option services 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 First Bank. See Note 4 to the 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 Corporate and Other (1) Consolidated Totals
----------------------- ------------------------ ----------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities....................... $ 298,028 368,207 -- -- 298,028 368,207
Loans, net of unearned discount............. 2,293,477 2,323,263 -- -- 2,293,477 2,323,263
Total assets................................ 2,983,675 3,057,920 3,849 3,068 2,987,524 3,060,988
Deposits.................................... 2,477,316 2,555,396 (132) (135) 2,477,184 2,555,261
Stockholders' equity........................ 384,170 398,713 (98,646) (113,396) 285,524 285,317
========= ========= ======= ======== ========= =========
FB&T Corporate and Other (1) Consolidated Totals
----------------------- ------------------------ ----------------------
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
----------------------- ------------------------ ----------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income............................. $ 46,866 54,739 -- 84 46,866 54,823
Interest expense............................ 13,671 22,340 1,759 2,830 15,430 25,170
--------- --------- ------- -------- -------- -------
Net interest income................... 33,195 32,399 (1,759) (2,746) 31,436 29,653
Provision for loan losses................... 7,700 90 -- -- 7,700 90
--------- --------- ------- -------- -------- -------
Net interest income after
provision for loan losses........... 25,495 32,309 (1,759) (2,746) 23,736 29,563
Noninterest income.......................... 5,535 4,510 (19) (131) 5,516 4,379
Noninterest expense......................... 20,676 20,792 121 202 20,797 20,994
--------- --------- ------- -------- -------- -------
Income before provision for income
taxes and cummulative effect of
change in accounting principle...... 10,354 16,027 (1,899) (3,079) 8,455 12,948
Provision for income taxes.................. 3,902 6,284 (649) (1,062) 3,253 5,222
--------- --------- ------- -------- -------- -------
Income before cumulative effect
of change in accounting principle... 6,452 9,743 (1,250) (2,017) 5,202 7,726
Cumulative effect of change in accounting
principle, net of tax.................... -- (459) -- -- -- (459)
--------- --------- ------- -------- -------- -------
Net income............................ $ 6,452 9,284 (1,250) (2,017) 5,202 7,267
========= ========= ======= ======== ========= =========
- -----------------
(1) Corporate and other includes $1.1 million and $975,000 of guaranteed
preferred debentures expense for the three months ended March 31, 2002 and
2001, respectively. The applicable income tax benefit associated with the
guaranteed preferred debentures expense was $377,000 and $341,000 for the
three months ended March 31, 2002 and 2001, 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, including the negative impact on the economy resulting
from the events of September 11, 2001 in New York City and Washington D.C. and
the national response to those events; 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, 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 anticipated 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 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 San Francisco, California. 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 one banking subsidiary that has 55 branch offices in northern
and southern California and Houston, Dallas, Irving and McKinney, Texas. At
March 31, 2002, we had total assets of $2.99 billion, loans, net of unearned
discount, of $2.29 billion, total deposits of $2.48 billion and total
stockholders' equity of $285.5 million.
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, debit cards,
brokerage services, credit-related insurance, internet banking, automated teller
machines, telephone banking, safe deposit boxes, escrow and bankruptcy deposit
services, stock option services and trust and private banking services.
We operate through our wholly owned subsidiary bank holding company, The
San Francisco Company, or SFC, headquartered in San Francisco, California, and
its wholly owned bank subsidiary, First Bank & Trust, or FB&T, also
headquartered in San Francisco, California.
Primary responsibility for managing FB&T rests with its officers and
directors. However, in keeping with our policy, we centralize overall corporate
policies, procedures and administrative functions and provide operational
support functions. This practice allows us to achieve various operating
efficiencies while allowing FB&T to focus on customer service.
Financial Condition
Our total assets were $2.99 billion and $3.06 billion at March 31, 2002 and
December 31, 2001, respectively. The decline in total assets was primarily
attributable to decreases in investment securities and loans resulting from the
slowdown in economic conditions, lower loan demand and an anticipated level of
attrition associated with our acquisitions of Charter Pacific Bank and BYL
Bancorp, which were completed during the fourth quarter of 2001. Loans, net of
unearned discount, decreased by $29.8 million, which is further discussed under
"--Loans and Allowance for Loan Losses." Investment securities decreased by
$70.2 million to $298.0 million at March 31, 2002 from $368.2 million at
December 31, 2001. We attribute the decrease in investment securities to a $69.9
million decline in available-for-sale investment securities during the first
quarter of 2002, primarily reflecting maturities of $89.0 million offset by
purchases of $20.6 million. The net proceeds associated with the decline in
investment securities were utilized primarily to fund our reduction in total
deposits. Derivative instruments also decreased $7.4 million from $28.9 at
December 31, 2001 to $21.5 million at March 31, 2002 due to mark-to-market
adjustments required under Statement of Financial Accounting Standards, or SFAS,
No. 133, Accounting for Derivative Instruments and Hedging Activities, which was
implemented in January 2001, offset by the market value of an interest rate swap
agreement purchased in March 2002. See further discussion under "--Interest Rate
Risk Management." The overall decline in total assets was offset by an increase
of $58.0 million in federal funds sold due to the investment of excess funds
resulting from reduced loan demand. Total deposits decreased by $78.1 million to
$2.48 billion at March 31, 2002 from $2.56 billion at December 31, 2001, which
reflects an anticipated level of attrition associated with our acquisitions in
the fourth quarter of 2001, normal cyclical trends typically experienced during
the first quarter of each calendar year and continued aggressive competition
within our market areas. In addition, our note payable decreased by $14.5
million to $56.5 million at March 31, 2002 from $71.0 million at December 31,
2001 due to repayments, which were funded by dividends from FB&T. Short-term
borrowings increased $25.0 million to $84.8 million at March 31, 2002 from $59.8
million at December 31, 2001 due primarily to increases in securities sold under
agreements to repurchase.
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, 2002, we had purchased a total of
863,857 shares of common stock held for treasury. However, in October 2000, we
issued 5,727,340 shares of our common stock and 803,429 shares of our common
stock held for treasury to First Banks in conjunction with our acquisition of
First Bank & Trust. Consequently, at March 31, 2002, we held 60,400 shares of
common stock for treasury at an aggregate cost of $1.3 million. At March 31,
2002, we could purchase approximately 231,000 additional shares under the
existing authorization.
Proposed Common Stock Transaction
Currently, First Banks owns 93.69% of our outstanding voting stock,
including 92.2% of our common stock and all of our Class B common stock. First
Banks recently informed our Board of Directors that it intends to propose a
transaction in which First Banks would acquire all of the outstanding capital
stock of FBA which it does not already own, and all of our other stockholders
would receive cash for their shares. Such a transaction would be in the form of
a merger of FBA with First Banks or a subsidiary of First Banks and would
require prior approval of our Board of Directors and, following the distribution
of a proxy statement discussing the terms of a transaction in detail, by our
stockholders.
Specific terms of the proposed transaction have not been determined. On
April 25, 2002, our Board of Directors discussed the proposal and voted to form
a Special Committee, composed solely of directors who are not affiliated with
First Banks, to analyze the terms on which such a transaction might be
acceptable to FBA. The Board of Directors authorized the Special Committee to
engage outside advisers, including its own independent legal counsel and
financial advisor, to assist the Special Committee in evaluating such a
transaction, including an analysis of the terms on which the transaction would
be considered fair to our stockholders (other than First Banks) from a financial
point of view. The transaction is likely to proceed if First Banks and the
Special Committee are able to agree on terms, including the price at which all
of our shares would be acquired.
The process by which the transaction will be reviewed by the Special
Committee before any proposal is made to stockholders will consist of several
steps, and there is no assurance whether such a transaction will actually be
presented to stockholders, voted upon or completed.
Results of Operations
Net Income
Net income was $5.2 million, or $0.40 per share on a diluted basis, for the
three months ended March 31, 2002, in comparison to $7.3 million, or $0.60 per
share on a diluted basis, for the comparable period in 2001. 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 in 2001. 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, 2002. The accounting for derivatives under the requirements of SFAS No. 133
will continue to have an impact on future financial results as further discussed
under "--Noninterest Income." The decline in earnings for the quarter ended
March 31, 2002, as compared to the quarter ended March 31, 2001, primarily
reflects increased provisions for loan losses associated with the increased
charge-off, delinquency and nonperforming trends we are experiencing as a result
of current economic conditions. The increased provisions for loan losses were
partially offset by slight increases in net interest income and noninterest
income.
Net Interest Income
Net interest income was $31.4 million, or 4.76% of average interest-earning
assets, for the three months ended March 31, 2002, in comparison to $29.7
million, or 5.06% of average interest-earning assets, for the comparable period
in 2001. We credit the increased net interest income primarily to the net
interest-earning assets provided by our acquisitions of Charter Pacific Bank and
BYL Bancorp, completed during the fourth quarter of 2001, and earnings
associated with our interest rate swap agreements that we entered into in
connection with our interest rate risk management program. Our derivative
financial instruments contributed $6.2 million to net interest income for the
three months ended March 31, 2002, compared to $561,000 for the comparable
period in 2001. The improvement in net interest income, however, was partially
mitigated by the significant decline in prevailing interest rates during 2001
and overall economic conditions, resulting in the decline in our net interest
margin. Guaranteed preferred debentures expense was $1.1 million and $975,000
for the three months ended March 31, 2002 and 2001, respectively. The increase
for 2002 reflects a change in estimate regarding the amortization period over
which the deferred issuance costs are being amortized.
Average loans, net of unearned discount, increased by $275.5 million to
$2.33 billion for the three months ended March 31, 2002 from $2.05 billion for
the comparable period in 2001. The yield on our loan portfolio decreased to
7.47% for the three months ended March 31, 2002, in comparison to 9.66% for the
comparable period in 2001. This was a major contributor to the decline in our
net interest margin of 30 basis points for the three months ended March 31,
2002, from the comparable period in 2001. We attribute the decline in yields and
our net interest margin primarily to the decreases in prevailing interest rates
during 2001. During the period from March 31, 2001 through March 31, 2002, the
Board of Governors of the Federal Reserve System decreased the targeted Federal
funds rate eight times, resulting in eight decreases in the prime rate of
interest from 8.0% to 4.75%. 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 interest rates was partially mitigated by the earnings
associated with our interest rate swap agreements.
For the three months ended March 31, 2002, the aggregate weighted average
rate paid on our deposit portfolio was 2.68%, compared to 4.86% for the
comparable period in 2001. We attribute the decline primarily to rates paid on
savings and time deposits, which have continued to decline in conjunction with
the interest rate reductions previously discussed. The decrease in rates paid
for the three months ended March 31, 2002, is a result of generally decreasing
interest rates during 2001. However, the competitive pressures on deposits
within our market areas precluded us from fully reflecting the general interest
rate decreases in our deposit pricing and still providing an adequate funding
source for loans.
The aggregate weighted average rate paid on our note payable and short-term
borrowings decreased to 3.12% from 7.14% for the three months ended March 31,
2002 and 2001, respectively. 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 as increased advances have the effect of increasing the weighted
average rate of non-deposit liabilities. The overall cost of this funding
source, however, has been significantly mitigated by the reductions in the prime
lending rate throughout 2001. During 2001, we utilized the note payable to
partially fund our acquisitions of Charter Pacific Bank and BYL Bancorp, thus
resulting in a higher level of borrowings occurring during the fourth quarter of
2001.
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,
----------------------------------------------------------
2002 2001
----------------------------- --------------------------
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)................................... $2,326,681 42,872 7.47% $2,051,226 48,880 9.66%
Investment securities (3)............................... 325,430 3,887 4.84 270,558 5,113 7.66
Federal funds sold and other............................ 28,741 107 1.51 56,994 830 5.91
---------- ------- ---------- -------
Total interest-earning assets...................... 2,680,852 46,866 7.09 2,378,778 54,823 9.35
------- -------
Nonearning assets........................................... 335,125 269,481
---------- ----------
Total assets....................................... $3,015,977 $2,648,259
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing demand deposits........................ $ 302,766 808 1.08% $ 207,478 925 1.81%
Savings deposits........................................ 922,756 4,603 2.02 734,810 7,815 4.31
Time deposits of $100 or more........................... 300,368 3,166 4.27 297,782 4,458 6.07
Other time deposits (4)................................. 478,342 4,660 3.95 565,795 8,437 6.05
---------- ------- ---------- -------
Total interest-bearing deposits.................... 2,004,232 13,237 2.68 1,805,865 21,635 4.86
Note payable and short-term borrowings.................. 145,129 1,116 3.12 145,411 2,560 7.14
Guaranteed preferred debentures......................... 44,386 1,077 9.84 44,290 975 8.93
---------- ------- ---------- -------
Total interest-bearing liabilities................. 2,193,747 15,430 2.85 1,995,566 25,170 5.12
------- -------
Noninterest-bearing liabilities:
Demand deposits......................................... 485,119 414,922
Other liabilities....................................... 45,781 35,594
---------- ----------
Total liabilities.................................. 2,724,647 2,446,082
Stockholders' equity........................................ 291,330 202,177
---------- ----------
Total liabilities and stockholders' equity......... $3,015,977 $2,648,259
========== ==========
Net interest income......................................... 31,436 29,653
======= =======
Interest rate spread........................................ 4.24% 4.23%
Net interest margin (5)..................................... 4.76 5.06
==== ====
- ------------------------
(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) Interest income and interest expense include the effects of interest rate swap agreements.
(5) Net interest margin is the ratio of net interest income to average interest-earning assets.
Provision for Loan Losses
The provision for loan losses was $7.7 million and $90,000 for the three
months ended March 31, 2002 and 2001, respectively. We attribute the significant
increase in the provision for loan losses to increases in net loan charge-offs
and delinquent loans. Loan charge-offs were $13.9 million for the three months
ended March 31, 2002, in comparison to $2.2 million for the comparable period in
2001. The increase in loan charge-offs reflects the general slowdown in economic
conditions prevalent within our markets as well as an aggregate of $11.0 million
of charge-offs on three large credit relationships. Loan recoveries were $1.7
million for the three months ended March 31, 2002, in comparison to $826,000 for
the comparable period in 2001. Although nonperforming assets and past-due loans
have declined to $43.0 million at March 31, 2002 from $47.5 million at December
31, 2001, our overall nonperforming and past-due trends are at higher than
historical levels and are expected to remain at these levels in the near future.
However, we believe these trends represent normal cyclical trends experienced
within the banking industry during times of economic slowdown. Management
considered these trends in its overall assessment of the adequacy of the
allowance for loan losses.
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 $5.5 million and $4.4 million for the three months
ended March 31, 2002 and 2001, 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
$2.9 million from $2.2 million for the three months ended March 31, 2002 and
2001, respectively. We attribute the increase in service charges and customer
service fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed during 2001;
>> additional products and services available and utilized by our
expanding base of retail and corporate customers;
>> increased fee income resulting from revisions of our customer service
charge rates, effective July 1, 2001, and enhanced control of fee
waivers; and
>> increased income associated with automated teller machine services and
debit 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
resulting from the liquidation of certain equity investment securities held by
FBA that resulted in a loss.
The net loss on derivative instruments of $136,000 for the three months
ended March 31, 2002, in comparison to the net gain of $300,000 for the three
months ended March 31, 2001, reflects changes in the fair value of our interest
rate cap agreements and fair value hedges.
Other income was $2.4 million and $1.8 million for the three months ended
March 31, 2002 and 2001, respectively. We attribute the primary components of
the increase to:
>> our acquisitions completed during 2001;
>> increased earnings associated with our international banking products;
>> 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
>> a gain of approximately $448,000 on the sale of certain operating
lease equipment associated with equipment leasing activities that were
acquired in conjunction with our acquisition of Bank of San Francisco.
Noninterest Expense
Noninterest expense was $20.8 million and $21.0 million for the three
months ended March 31, 2002 and 2001, respectively. Noninterest expense consists
primarily of salaries and employee benefits; occupancy, net of rental income;
information technology fees; legal, examination and professional fees; and other
expense.
Salaries and employee benefits were $8.4 million and $8.1 million for the
three months ended March 31, 2002 and 2001, respectively. We primarily associate
the increase with our 2001 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.
Information technology fees were $2.8 million and $2.5 million for the
three months ended March 31, 2002, and 2001, respectively. As more fully
described in Note 4 to our consolidated financial statements, First Services,
L.P. provides information technology and operational support to FB&T and us. We
attribute the increased fees to growth and technological advancements consistent
with our product and services offerings, and continued upgrades to technological
equipment, networks and communication channels.
Legal, examination and professional fees were $2.2 million and $2.4 million
for the three months ended March 31, 2002 and 2001, respectively. The decrease
in these fees is primarily due to settlement of certain litigation offset by 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 4 to our consolidated financial statements for a further
discussion of transactions with related parties.
Amortization of intangibles associated with the purchase of subsidiaries
was $266,000 and $1.4 million for the three months ended March 31, 2002 and
2001, respectively. The significant decrease for 2002 is primarily attributable
to the implementation of SFAS No. 142 in January 2002. See Note 2 to our
consolidated financial statements.
Other expense was $2.4 million and $2.3 million for the three months ended
March 31, 2002 and 2001, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges,
miscellaneous losses and recoveries, memberships and subscriptions and transfer
agent fees. We attribute the majority of the increase in other expense to our
acquisitions completed during 2001, including certain nonrecurring expenses
associated with those acquisitions, and overall continued growth and expansion
of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $3.3 million and $5.2 million for the
three months ended March 31, 2002 and 2001, representing an effective income tax
rate of 38.5% and 40.3%, respectively. The decrease in the effective income tax
rate for the three months ended March 31, 2002 reflects the significant decline
in amortization of intangibles associated with the purchase of subsidiaries, in
accordance with the requirements of SFAS No. 142, which is not deductible for
tax purposes.
Interest Rate Risk Management
We utilize derivative financial instruments and hedging activities to
assist in our management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics of certain assets and
liabilities. The derivative instruments we hold are summarized as follows:
March 31, 2002 December 31, 2001
--------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $ 605,000 1,117 555,000 1,006
Fair value hedges.................................... 54,900 1,350 54,900 1,881
Interest rate cap agreement.......................... 150,000 414 150,000 688
========== ===== ======== ======
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 the three months ended March 31, 2002 and 2001, the net interest
income realized on our derivative financial instruments was $6.2 million and
$561,000, respectively. In addition, we realized a net loss on derivative
instruments, which is included in noninterest income, of $136,000 for the three
months ended March 31, 2002, in comparison to a net gain of $300,000 for the
comparable period in 2001.
Cash Flow Hedges
We entered into the following interest rate swap agreements, designated as
cash flow hedges, 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:
>> During 1998, we entered into $105.0 million notional amount of
interest rate swap agreements that provided for us to receive a fixed
rate of interest and pay an adjustable rate of interest equivalent to
the daily weighted average prime lending rate minus 2.705%. The terms
of the swap agreements provided or us to pay quarterly and receive
payment semiannually. In June 2001, we terminated these swap
agreements, which would have expired in 2002, in order to
appropriately modify our overall hedge position in accordance with our
risk management program. In conjunction with the termination of these
swap agreements, we recorded a pre-tax gain of $1.4 million.
>> During September 1999, we entered into $130.0 million notional amount
of interest rate swap agreements that 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.
>> During September 2000, March 2001, April 2001, and March 2002 we
entered into $300.0 million, $200.0 million, $130.0 million and $50.0
million notional amount, respectively, of interest rate swap
agreements that 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%, 2.82%, 2.82% and 2.80%, respectively. The
terms of the swap agreements provide for us to pay and receive
interest on a quarterly basis. In November 2001, we terminated $75.0
million notional amount of the swap agreements originally entered into
in April 2001, which would have expired in April 2006, in order to
appropriately modify our overall hedge position in accordance with our
interest rate risk management program. We recorded a pre-tax gain of
$2.6 million in conjunction with the termination of these swap
agreements. The amount receivable by us under the swap agreements was
$1.8 million and $1.7 million at March 31, 2002 and December 31, 2001,
respectively, and the amount payable by us was $634,000 and $647,000
at March 31, 2002 and December 31, 2001, respectively.
The maturity dates, notional amounts, interest rates paid and received and
fair value of our interest rate swap agreements designated as cash flow hedges
as of March 31, 2002 and December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity date Amount Paid Received Value
------------- -------- ----------- ------------- ----------
(dollars expressed in thousands)
March 31, 2002:
March 14, 2004........................... $ 50,000 1.95% 3.93% $ (136)
September 20, 2004....................... 300,000 2.05 6.78 16,498
March 21, 2005........................... 200,000 1.93 5.24 3,007
April 2, 2006............................ 55,000 1.93 5.45 673
--------- --------
$ 605,000 1.99 5.91 $ 20,042
========= ===== ===== ========
December 31, 2001:
September 20, 2004....................... $ 300,000 2.05% 6.78% $ 20,490
March 21, 2005........................... 200,000 1.93 5.24 4,951
April 2, 2006............................ 55,000 1.93 5.45 1,268
--------- --------
$ 555,000 1.99 6.09 $ 26,709
========= ===== ===== ========
Fair Value Hedges
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 interest on a quarterly basis and receive interest on a semiannual basis.
The amount receivable by us under the swap agreements was $686,000 and $1.4
million at March 31, 2002 and December 31, 2001, respectively. The amount
payable by us under the swap agreements was $234,000 and $318,000 at March 31,
2002 and December 31, 2001, respectively.
The maturity dates, notional amounts, interest rates paid and received and
fair value of our interest rate swap agreements designated as fair value hedges
as of March 31, 2002 and December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity date Amount Paid Received Value
------------- -------- ----------- ------------- ----------
(dollars expressed in thousands)
March 31, 2002:
January 9, 2004........................... $10,000 1.87% 5.37% $ 260
January 9, 2006........................... 44,900 1.87 5.51 738
------- -------
$54,900 1.87 5.48 $ 998
======= ===== ===== =======
December 31, 2001:
January 9, 2004........................... $10,000 2.48% 5.37% $ 352
January 9, 2006........................... 44,900 2.48 5.51 1,160
------- -------
$54,900 2.48 5.48 $ 1,512
======= ===== ===== =======
Interest Rate Cap Agreement
In conjunction with the interest rate swap agreements that we entered into
in September 2000, we also entered into a four-year $150.0 million notional
amount interest rate cap agreement to limit the net interest expense associated
with our interest rate swap agreements in the event of a rising rate scenario.
The interest rate cap agreement 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 the strike price. At March
31, 2002 and December 31, 2001, the carrying value of this interest rate cap
agreement, which is included in derivative instruments in the consolidated
balance sheets, was $414,000 and $688,000, respectively.
Pledged Collateral
At March 31, 2002 and December 31, 2001, we had pledged investment
securities available for sale with a carrying value of $833,000 and $894,000,
respectively, in connection with our interest rate swap agreements. In addition,
at March 31, 2002 and December 31, 2001, we had accepted, as collateral in
connection with the interest rate swap agreements, cash of $21.6 million and
$1.5 million, respectively. At December 31, 2001, we had also accepted
investment securities with a fair value of $28.5 million as collateral in
connection with our interest rate swap agreements. We are permitted by contract
to sell or repledge the collateral accepted from our counterparties, however, at
March 31, 2002 and December 31, 2001, we had not done so.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents our principal source of
income. Interest and fees on loans were 91.5% and 89.2% of total interest income
for the three months ended March 31, 2002 and 2001, respectively. Total loans,
net of unearned discount, were $2.29 billion, or 76.8% of total assets, at March
31, 2002, compared to $2.32 billion, or 75.9% of total assets, at December 31,
2001. The decrease in loans, as reflected on our consolidated balance sheets, is
primarily attributable to an anticipated amount of attrition associated with our
acquisitions completed during the fourth quarter of 2001, current economic
conditions prevalent in our markets resulting in lower loan demand, a decreased
level of loans purchased from First Bank and the continued decline in our
existing consumer and installment portfolio. Commensurate with our prescribed
credit exposure guidelines for extending credit to an individual borrower, loan
participations sold to and purchased from First Bank were $151.9 million and
$84.2 million at March 31, 2002, respectively, in comparison to $137.6 million
and $93.1 million at December 31, 2001, respectively. See Note 4 to the
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,
2002 2001
---- ----
(dollars expressed in thousands)
Nonperforming loans........................................................ $ 18,566 19,564
Other real estate.......................................................... 547 547
----------- ---------
Total nonperforming assets........................................ $ 19,113 20,111
=========== =========
Loans, net of unearned discount............................................ $ 2,293,477 2,323,263
=========== =========
Loans past due:
Over 30 days to 90 days................................................ $ 22,089 18,713
Over 90 days and still accruing........................................ 1,796 8,660
----------- ---------
Total past-due loans.............................................. $ 23,885 27,373
=========== =========
Ratio of:
Allowance for loan losses to loans..................................... 1.67% 1.84%
Nonperforming loans to loans........................................... 0.81 0.84
Allowance for loan losses to nonperforming loans....................... 206.39 218.37
Nonperforming assets to loans and other real estate.................... 0.83 0.87
=========== =========
Nonperforming loans, consisting of loans on nonaccrual status and certain
restructured loans, were $18.6 million at March 31, 2002, in comparison to $19.6
million at December 31, 2001. While nonperforming loans have decreased slightly
at March 31, 2002 compared to December 31, 2001, loan charge-offs increased
significantly from $2.2 million for the three months ended March 31, 2001 to
$13.9 million for the three months ended March 31, 2002. We attribute the higher
trends in nonperforming and past-due loans to be reflective of cyclical trends
experienced within the banking industry as a result of economic slowdown.
Consistent with the general economic slowdown experienced within our primary
markets, we anticipate this trend will continue in the upcoming months.
The following table is a summary of our loan loss experience for the
periods indicated:
Three Months Ended
March 31,
------------------
2002 2001
(dollars expressed in thousands)
Allowance for loan losses, beginning of period............ $ 42,721 37,930
Loans charged-off..................................... (13,851) (2,168)
Recoveries of loans previously charged-off............ 1,748 826
--------- ---------
Net loan charge-offs.................................. (12,103) (1,342)
--------- ---------
Provision for loan losses............................. 7,700 90
--------- ---------
Allowance for loan losses, end of period.................. $ 38,318 36,678
========= =========
The allowance for loan losses is monitored on a monthly basis. Each month,
the credit administration department provides 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,
nonperforming loans, 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 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 $430.4 million and $445.1 million at March 31,
2002 and December 31, 2001, 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, our
revolving note payable and other short-term borrowings, at March 31, 2002:
(dollars expressed in thousands)
Three months or less...................... $ 167,781
Over three months through six months...... 97,133
Over six months through twelve months..... 112,454
Over twelve months........................ 53,043
---------
Total................................... $ 430,411
=========
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
under the revolving note payable is due and payable on February 24, 2003 and
interest is payable on a quarterly basis. At March 31, 2002 and December 31,
2001, there were $56.5 million and $71.0 million of advances outstanding under
our revolving note payable. See Note 4 to the consolidated financial statements.
In addition to these sources of funds, FB&T has 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,
2002 and December 31, 2001, FB&T's borrowing capacity under this agreement was
approximately $845.6 million and $774.5 million, respectively. In addition,
FB&T's borrowing capacity through its relationship with the Federal Home Loan
Bank was approximately $2.3 million and $1.0 million at March 31, 2002 and
December 31, 2001, 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2001, 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 5.5% of net interest income,
based on assets and liabilities at December 31, 2001. At March 31, 2002, we
remain in an "asset-sensitive" position and thus, remain subject to a higher
level of risk in a declining interest rate environment. 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 interest rates would have over time. Our asset-sensitive position, coupled
with reductions in prevailing interest rates throughout 2001, is reflected in
our reduced net interest margin for the three months ended March 31, 2002 as
compared to the comparable period in 2001 and further discussed under "--Results
of Operations." During the three months ended March 31, 2002 as compared to the
comparable period in 2001 and 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 18, 2002. Item 5 of
the report references a press release announcing our financial results
for the three months and year ended December 31, 2001.
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 13, 2002 (Principal Executive Officer)
By: /s/ Allen H. Blake
-----------------------------------------
Allen H. Blake
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
May 13, 2002 (Principal Financial
and Accounting Officer)