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 June 30, 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 July 31, 2002
----- ----------------
Common Stock, $0.15 par value 10,346,760
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.......................... 24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 25
SIGNATURES.......................................................................................... 26
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)
June 30, December 31,
2002 2001
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................... $ 81,132 103,421
Interest-bearing deposits with other financial institutions
with maturities of three months or less........................................ 609 4,376
Federal funds sold................................................................ 83,100 11,300
----------- -----------
Total cash and cash equivalents.............................................. 164,841 119,097
----------- -----------
Investment securities:
Available for sale, at fair value................................................. 357,420 364,518
Held to maturity, at amortized cost (fair value of $2,877 and $3,745
at June 30, 2002 and December 31, 2001, respectively).......................... 2,798 3,689
----------- -----------
Total investment securities.................................................. 360,218 368,207
----------- -----------
Loans:
Commercial, financial and agricultural............................................ 725,780 770,992
Real estate construction and development.......................................... 506,179 518,325
Real estate mortgage.............................................................. 1,027,657 1,001,663
Consumer and installment.......................................................... 23,867 33,578
----------- -----------
Total loans.................................................................. 2,283,483 2,324,558
Unearned discount................................................................. (5,085) (1,295)
Allowance for loan losses......................................................... (42,459) (42,721)
----------- -----------
Net loans.................................................................... 2,235,939 2,280,542
----------- -----------
Derivative instruments................................................................ 36,039 28,909
Bank premises and equipment, net of accumulated depreciation and amortization......... 47,569 46,746
Intangibles associated with the purchase of subsidiaries, net of amortization......... 103,986 103,153
Bank-owned life insurance............................................................. 28,940 28,119
Accrued interest receivable........................................................... 14,147 15,233
Deferred income taxes................................................................. 54,602 57,746
Other assets.......................................................................... 16,197 13,236
----------- -----------
Total assets................................................................. $ 3,062,478 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)
June 30, December 31,
2002 2001
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing............................................................ $ 499,733 529,924
Interest-bearing................................................................ 302,923 297,033
Savings........................................................................... 929,810 920,737
Time deposits:
Time deposits of $100 or more................................................... 307,177 314,287
Other time deposits............................................................. 487,472 493,280
----------- -----------
Total deposits............................................................... 2,527,115 2,555,261
Short-term borrowings................................................................. 86,423 59,780
Note payable.......................................................................... 50,000 71,000
Guaranteed preferred beneficial interest in First Banks
America, Inc. subordinated debentures............................................. 44,988 44,342
Accrued interest payable.............................................................. 5,848 6,277
Deferred income taxes................................................................. 21,917 19,054
Accrued expenses and other liabilities................................................ 24,300 19,957
----------- -----------
Total liabilities............................................................ 2,760,591 2,775,671
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Common stock:
Common stock, $0.15 par value; 15,000,000 shares authorized;
10,416,460 shares issued at June 30, 2002 and
December 31, 2001............................................................... 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
June 30, 2002 and December 31, 2001............................................. 375 375
Capital surplus....................................................................... 184,979 184,979
Retained earnings since elimination of accumulated deficit
effective December 31, 1994....................................................... 90,511 80,509
Treasury stock, at cost; 69,300 shares and 60,400 shares
at June 30, 2002 and December 31, 2001, respectively.............................. (1,659) (1,332)
Accumulated other comprehensive income................................................ 26,119 19,224
----------- -----------
Total stockholders' equity................................................... 301,887 285,317
----------- -----------
Total liabilities and stockholders' equity................................... $ 3,062,478 3,060,988
=========== ===========
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans.............................................. $43,167 47,437 86,039 96,317
Investment securities................................................... 3,854 3,626 7,741 8,739
Federal funds sold and other............................................ 247 1,234 354 2,064
------- ------- ------- -------
Total interest income.............................................. 47,268 52,297 94,134 107,120
------- ------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................... 783 916 1,591 1,841
Savings............................................................... 4,620 7,289 9,223 15,104
Time deposits of $100 or more......................................... 2,791 4,328 5,957 8,786
Other time deposits................................................... 4,078 7,676 8,738 16,113
Short-term borrowings................................................... 485 485 919 1,208
Note payable............................................................ 580 1,030 1,262 2,867
Guaranteed preferred debentures......................................... 1,248 975 2,325 1,950
------- ------- ------- -------
Total interest expense............................................. 14,585 22,699 30,015 47,869
------- ------- ------- -------
Net interest income................................................ 32,683 29,598 64,119 59,251
Provision for loan losses................................................... 7,800 820 15,500 910
------- ------- ------- -------
Net interest income after provision for loan losses................ 24,883 28,778 48,619 58,341
------- ------- ------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees........... 3,083 2,097 5,941 4,257
Net loss on sales of available-for-sale investment securities........... -- (13) -- (187)
Bank-owned life insurance investment income............................. 516 332 924 666
Net (loss) gain on derivative instruments............................... (3) 2,587 (139) 2,887
Other................................................................... 1,600 1,340 3,986 3,099
------- ------- ------- -------
Total noninterest income........................................... 5,196 6,343 10,712 10,722
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits.......................................... 9,412 8,266 17,813 16,378
Occupancy, net of rental income......................................... 2,938 2,458 5,536 4,987
Furniture and equipment................................................. 983 940 1,993 1,852
Postage, printing and supplies.......................................... 405 382 1,008 801
Information technology fees............................................. 2,405 2,330 5,217 4,805
Legal, examination and professional fees................................ 3,107 2,318 5,316 4,741
Amortization of intangibles associated with the
purchase of subsidiaries.............................................. 266 1,387 532 2,761
Communications.......................................................... 317 303 594 578
Advertising and business development.................................... 188 219 378 380
Other................................................................... 2,214 3,682 4,645 5,996
------- ------- ------- -------
Total noninterest expense.......................................... 22,235 22,285 43,032 43,279
------- ------- ------- -------
Income before provision for income taxes and cumulative
effect of change in accounting principle......................... 7,844 12,836 16,299 25,784
Provision for income taxes.................................................. 3,044 5,037 6,297 10,259
------- ------- ------- -------
Income before cumulative effect of change in accounting principle.. 4,800 7,799 10,002 15,525
Cumulative effect of change in accounting principle, net of tax............. -- -- -- (459)
------- ------- ------- -------
Net income......................................................... $ 4,800 7,799 10,002 15,066
======= ======= ======= =======
Basic earnings per common share:
Income before cumulative effect of change in accounting principle....... $ 0.37 0.65 0.78 1.29
Cumulative effect of change in accounting principle, net of tax......... -- -- -- (0.04)
------- ------- ------- -------
Basic................................................................... $ 0.37 0.65 0.78 1.25
======= ======= ======= =======
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle....... $ 0.37 0.65 0.78 1.29
Cumulative effect of change in accounting principle, net of tax......... -- -- -- (0.04)
------- ------- ------- -------
Diluted................................................................. $ 0.37 0.65 0.78 1.25
======= ======= ======= =======
Weighted average common stock outstanding................................... 12,854 12,067 12,855 12,082
======= ======= ======= =======
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)
Six Months Ended June 30, 2002 and 2001 and Six 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
Six months ended June 30, 2001:
Comprehensive income:
Net income.......................... -- -- -- 15,066 15,066 -- -- 15,066
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification
adjustment(1)................... -- -- -- 2,085 -- -- 2,085 2,085
Derivative instruments:
Cumulative effect of change
in accounting principle....... -- -- -- 4,950 -- -- 4,950 4,950
Current period transactions..... -- -- -- 2,745 -- -- 2,745 2,745
Reclassification to earnings.... -- -- -- (1,798) -- -- (1,798) (1,798)
------
Comprehensive income................ 23,048
======
Reduction of deferred tax asset
valuation reserve................... -- -- 565 -- -- -- 565
Repurchases of common stock.......... -- -- -- -- (864) -- (864)
------ --- ------- ------ ------ ------ -------
Consolidated balances, June 30, 2001.... 1,442 375 154,494 55,960 (940) 8,327 219,658
Six months ended December 31, 2001:
Comprehensive income:
Net income.......................... -- -- -- 24,549 24,549 -- -- 24,549
Other comprehensive income,
net of tax:
Unrealized losses on securities,
net of reclassification
adjustment(1).................. -- -- -- (566) -- -- (566) (566)
Derivative instruments:
Current period transactions..... -- -- -- 13,822 -- -- 13,822 13,822
Reclassification to earnings.... -- -- -- (2,359) -- -- (2,359) (2,359)
------
Comprehensive income................ 35,446
======
Reduction of deferred tax asset
valuation allowance................. -- -- 4,406 -- -- -- 4,406
Compensation paid in stock........... -- -- 46 -- -- -- 46
Repurchases of common stock.......... -- -- -- -- (392) -- (392)
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
Six months ended June 30, 2002:
Comprehensive income:
Net income.......................... -- -- -- 10,002 10,002 -- -- 10,002
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification
adjustment(1).................. -- -- -- 2,738 -- -- 2,738 2,738
Derivative instruments:
Current period transactions..... -- -- -- 4,157 -- -- 4,157 4,157
------
Comprehensive income................ 16,897
======
Repurchases of common stock......... -- -- -- -- (327) -- (327)
------ --- ------- ------ ------ ------ -------
Consolidated balances, June 30, 2002.... $1,562 375 184,979 90,511 (1,659) 26,119 301,887
====== === ======= ====== ====== ====== =======
- ----------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, December 31,
------------------ ----------------
2002 2001 2002 2001 2001
---- ---- ---- ---- ----
Unrealized gains (losses) on investment securities arising
during the period............................................ $3,400 53 2,738 1,964 (717)
Less reclassification adjustment for losses included
in net income................................................ -- (8) -- (121) (151)
------ --- ----- ----- ----
Unrealized gains (losses) on investment securities............. $3,400 61 2,738 2,085 (566)
====== === ===== ===== ====
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)
Six Months Ended
June 30,
---------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income............................................................................ $ 10,002 15,066
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....................................... 4,610 3,758
Provision for loan losses........................................................... 15,500 910
Provision for income taxes.......................................................... 6,297 10,259
Payments of income taxes............................................................ (2,601) (3,571)
Net loss on sales of available-for-sale investment securities....................... -- 187
Net loss (gain) on derivative instruments........................................... 139 (2,887)
Decrease in accrued interest receivable............................................. 1,093 2,598
Interest accrued on liabilities..................................................... 30,015 47,869
Payments of interest on liabilities................................................. (30,750) (44,003)
Other operating activities, net..................................................... (260) (12,859)
---------- ---------
Net cash provided by operating activities................................... 34,045 17,786
---------- ---------
Cash flows from investing activities:
Cash received from acquired entities, net of cash and cash equivalents paid........... 62,400 --
Proceeds from sales of investment securities.......................................... -- 55,903
Maturities of investment securities available for sale................................ 157,521 126,318
Maturities of investment securities held to maturity.................................. 897 370
Purchases of investment securities available for sale................................. (147,211) (48,589)
Proceeds from termination of swap agreements.......................................... -- 2,659
Net decrease (increase) in loans...................................................... 26,158 (415)
Recoveries of loans previously charged-off............................................ 3,567 1,543
Purchases of bank premises and equipment.............................................. (2,596) (731)
Proceeds from sales of other real estate.............................................. 76 11
Other investing activities, net....................................................... (820) (614)
---------- ---------
Net cash provided by investing activities................................... 99,992 136,455
---------- ---------
Cash flows from financing activities:
Decreases in deposits:
Demand and savings deposits......................................................... (32,997) (42,983)
Time deposits....................................................................... (60,612) (38,652)
Increase in short-term borrowings..................................................... 26,643 3,955
Repayments of note payable............................................................ (21,000) (44,700)
Repurchases of common stock for treasury.............................................. (327) (864)
---------- ---------
Net cash used in financing activities....................................... (88,293) (123,244)
---------- ---------
Net increase in cash and cash equivalents................................... 45,744 30,997
Cash and cash equivalents, beginning of period............................................ 119,097 153,210
---------- ---------
Cash and cash equivalents, end of period.................................................. $ 164,841 184,207
========== =========
Noncash investing and financing activities:
Reduction of deferred tax asset valuation reserve..................................... $ -- 565
========== =========
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 and six months ended June 30, 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. In particular, 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 93.76% and 93.69%
at June 30, 2002 and December 31, 2001, 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 wholly owned subsidiary bank, First Bank & Trust (FB&T),
which is also headquartered in San Francisco, California.
(2) ACQUISITIONS
On June 22, 2002, FB&T completed its assumption of the deposits and
certain liabilities and the purchase of certain assets of the Garland and
Denton, Texas branch offices of Union Planters Bank, National Association. The
transaction resulted in the acquisition of $15.3 million in deposits and one
branch office in Garland and $49.6 million in deposits and one branch office,
including a detached drive-thru facility, in Denton. The core deposit
intangibles associated with the branch purchases were $1.4 million and are being
amortized over seven years.
(3) 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 calendar 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 completed the transitional goodwill impairment test required under
SFAS No. 142, to determine the potential impact, if any, on the consolidated
financial statements. The results of the transitional goodwill impairment
testing did not identify any goodwill impairment losses.
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at June 30, 2002 and December 31,
2001:
June 30, 2002 December 31, 2001
--------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles........... $ 7,824 (461) 6,458 --
Goodwill associated with
purchases of branch offices...... 2,210 (648) 2,210 (576)
------- ------ ------ ----
Total......................... $10,034 (1,109) 8,668 (576)
======= ====== ====== ====
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries......... $95,061 95,061
======= ======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $266,000 and $532,000 for the three and six
months ended June 30, 2002, respectively, and $1.4 million and $2.8 million for
the comparable periods in 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............................................... $ 1,162
2003............................................... 1,260
2004............................................... 1,260
2005............................................... 1,260
2006............................................... 1,260
2007............................................... 1,260
-------
Total........................................... $ 7,462
=======
Changes in the carrying amount of goodwill, all of which is
attributable to FB&T, for the three and six months ended June 30, 2002 were as
follows:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------- -------------
(dollars expressed in thousands)
Balance, beginning of period.................................. $ 96,758 96,695
Acquisition-related adjustments............................... (99) --
Amortization - purchases of branch offices.................... (36) (72)
--------- --------
Balance, end of period...................................... $ 96,623 96,623
========= ========
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 Six Months Ended
June 30, June 30,
--------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Net income:
Reported net income........................... $ 4,800 7,799 10,002 15,066
Add back - goodwill amortization.............. -- 1,342 -- 2,671
------- ------- ------- ------
Adjusted net income......................... $ 4,800 9,141 10,002 17,737
======= ======= ======= ======
Basic earnings per share:
Reported net income........................... $ 0.37 0.65 0.78 1.25
Add back - goodwill amortization.............. -- 0.11 -- 0.22
------- ------- ------- ------
Adjusted net income......................... $ 0.37 0.76 0.78 1.47
======= ======= ======= ======
Diluted earnings per share:
Reported net income........................... $ 0.37 0.65 0.78 1.25
Add back - goodwill amortization.............. -- 0.11 -- 0.22
------- ------- ------- ------
Adjusted net income......................... $ 0.37 0.76 0.78 1.47
======= ======= ======= ======
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.
(4) 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 June 30, 2002:
Basic EPS-- income before cumulative effect.................. $ 4,800 12,854 $ 0.37
Cumulative effect of change in accounting principle,
net of tax................................................. -- -- --
------- ------ -------
Basic EPS-- income available to common stockholders.......... $ 4,800 12,854 $ 0.37
======= ====== =======
Three months ended June 30, 2001:
Basic EPS-- income before cumulative effect.................. $ 7,799 12,067 $ 0.65
Cumulative effect of change in accounting principle,
net of tax................................................. -- -- --
------- ------ -------
Basic EPS-- income available to common stockholders.......... $ 7,799 12,067 $ 0.65
======= ====== =======
Six months ended June 30, 2002:
Basic EPS-- income before cumulative effect.................. $10,002 12,855 $ 0.78
Cumulative effect of change in accounting principle,
net of tax................................................. -- -- --
------- ------ -------
Basic EPS-- income available to common stockholders.......... $10,002 12,855 $ 0.78
======= ====== =======
Six months ended June 30, 2001:
Basic EPS-- income available to common stockholders.......... $15,525 12,082 $ 1.29
Cumulative effect of change in accounting principle,
net of tax................................................. (459) -- (0.04)
------- ------ -------
Basic EPS-- income available to common stockholders.......... $15,066 12,082 $ 1.25
======= ====== =======
(5) 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
$2.1 million and $3.9 million for the three and six months ended June 30, 2002,
and $1.9 million and $3.6 million for the comparable periods in 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 $2.3 million and $5.0 million
for the three and six months ended June 30, 2002, and $2.8 million and $4.8
million for the comparable periods in 2001, respectively.
FB&T had $77.7 million and $93.1 million in whole loans and loan
participations outstanding at June 30, 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 $197.4 million and $137.6 million in whole
loans and loan participations to First Bank at June 30, 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
June 30, 2002 and December 31, 2001, were $50.0 million and $71.0 million,
respectively. The interest expense under the note payable was $580,000 and $1.3
million for the three and six months ended June 30, 2002, and $1.0 million and
$2.9 million for the comparable periods in 2001, respectively.
(6) 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 June 30, 2002,
FBA was adequately capitalized and FB&T was well capitalized.
As of June 30, 2002, the most recent notification from FBA's primary
regulator categorized FBA as adequately capitalized and FB&T as well
capitalized, 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 June 30, 2002 and December 31, 2001, FBA's and FB&T's required and
actual capital ratios were as follows:
Actual For To Be Well
------------------------ Capital Capitalized Under
June 30, December 31, Adequacy Prompt Corrective
2002 2001 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
FBA................................ 9.14% 8.82% 8.0% 10.0%
FB&T............................... 10.88 11.27 8.0 10.0
Tier 1 capital (to risk-weighted assets):
FBA................................ 7.89 7.57 4.0 6.0
FB&T............................... 9.63 10.02 4.0 6.0
Tier 1 capital (to average assets):
FBA................................ 7.52 7.15 3.0 5.0
FB&T............................... 9.17 9.47 3.0 5.0
(7) 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, internet banking, 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, McKinney and Denton, 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 5 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
------------------------ ----------------------- -----------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities....................... $ 360,218 368,207 -- -- 360,218 368,207
Loans, net of unearned discount............. 2,278,398 2,323,263 -- -- 2,278,398 2,323,263
Intangibles associated with the purchase
of subsidiaries, net of amortization..... 103,986 103,153 -- -- 103,986 103,153
Total assets................................ 3,058,123 3,057,920 4,355 3,068 3,062,478 3,060,988
Deposits.................................... 2,527,248 2,555,396 (133) (135) 2,527,115 2,555,261
Note payable................................ -- -- 50,000 71,000 50,000 71,000
Stockholders' equity........................ 394,158 398,713 (92,271) (113,396) 301,887 285,317
========== ========= ======= ======== ========= =========
FB&T Corporate and Other (1) Consolidated Totals
------------------------- ----------------------- ----------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
------------------------- ----------------------- ----------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income............................. $ 47,268 52,339 -- (42) 47,268 52,297
Interest expense............................ 12,757 20,712 1,828 1,987 14,585 22,699
---------- -------- ------- -------- -------- -------
Net interest income................... 34,511 31,627 (1,828) (2,029) 32,683 29,598
Provision for loan losses................... 7,800 820 -- -- 7,800 820
---------- -------- ------- -------- -------- -------
Net interest income after
provision for loan losses........... 26,711 30,807 (1,828) (2,029) 24,883 28,778
---------- -------- ------- -------- -------- -------
Noninterest income.......................... 5,264 6,343 (68) -- 5,196 6,343
Noninterest expense......................... 22,157 22,171 78 114 22,235 22,285
---------- -------- ------- -------- -------- -------
Income before provision for
income taxes........................ 9,818 14,979 (1,974) (2,143) 7,844 12,836
Provision for income taxes.................. 3,720 5,772 (676) (735) 3,044 5,037
---------- -------- ------- -------- -------- -------
Net income............................ $ 6,098 9,207 (1,298) (1,408) 4,800 7,799
========== ======== ======= ======== ======== =======
FB&T Corporate and Other (1) Consolidated Totals
------------------------- ----------------------- -------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
------------------------- ----------------------- -------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income............................. $ 94,134 107,078 -- 42 94,134 107,120
Interest expense............................ 26,428 43,052 3,587 4,817 30,015 47,869
---------- -------- ------- -------- -------- -------
Net interest income................... 67,706 64,026 (3,587) (4,775) 64,119 59,251
Provision for loan losses................... 15,500 910 -- -- 15,500 910
---------- -------- ------- -------- -------- -------
Net interest income after
provision for loan losses........... 52,206 63,116 (3,587) (4,775) 48,619 58,341
---------- -------- ------- -------- -------- -------
Noninterest income.......................... 10,799 10,853 (87) (131) 10,712 10,722
Noninterest expense......................... 42,833 42,963 199 316 43,032 43,279
---------- -------- ------- -------- -------- -------
Income before provision for income
taxes and cumulative effect of
change in accounting principle..... 20,172 31,006 (3,873) (5,222) 16,299 25,784
Provision for income taxes.................. 7,622 12,056 (1,325) (1,797) 6,297 10,259
---------- -------- ------- -------- -------- -------
Income before cumulative effect
of change in accounting principle... 12,550 18,950 (2,548) (3,425) 10,002 15,525
Cumulative effect of change in accounting
principle, net of tax.................... -- (459) -- -- -- (459)
---------- -------- ------- -------- -------- -------
Net income............................ $ 12,550 18,491 (2,548) (3,425) 10,002 15,066
========== ======== ======= ======== ======== =======
- -----------------
(1) Corporate and other includes $1.2 million and $975,000 of guaranteed preferred debentures expense for the three months
ended June 30, 2002 and 2001, respectively. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $437,000 and $341,000 for the three months ended June 30, 2002 and 2001, respectively. For the
six months ended June 30, 2002 and 2001, corporate and other includes $2.3 million and $2.0 million of guaranteed
preferred debentures expense, respectively. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $814,000 and $683,000 for the six months ended June 30, 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 49 branch offices in northern
and southern California and eight branch offices in Houston, Dallas, Irving,
McKinney and Denton, Texas. At June 30, 2002, we had total assets of $3.06
billion, loans, net of unearned discount, of $2.28 billion, total deposits of
$2.53 billion and total stockholders' equity of $301.9 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 $3.06 billion at June 30, 2002 and December 31,
2001. The slight increase in total assets of $1.5 million was primarily
attributable to our acquisition of the Denton and Garland, Texas branch offices
of Union Planters Bank, National Association, completed on June 22, 2002, which
provided assets of approximately $67.3 million. Consequently, federal funds sold
increased $71.8 million from $11.3 million at December 31, 2001 to $83.1 million
at June 30, 2002 due to the investment of excess funds. Derivative instruments
also increased $7.1 million from $28.9 million at December 31, 2001 to $36.0
million at June 30, 2002 due to the purchase of an additional interest rate swap
agreement in June 2002 and 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. See
further discussion under "--Interest Rate Risk Management." The increase in
total assets was partially offset by decreases in investment securities and
loans resulting primarily 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 $44.9 million, as
further discussed under "--Loans and Allowance for Loan Losses." Investment
securities decreased by $8.0 million to $360.2 million at June 30, 2002 from
$368.2 million at December 31, 2001. The $7.1 million decline in
available-for-sale investment securities, primarily reflects the excess
maturities of $157.5 million over purchases of $147.2 million. The net proceeds
associated with the decline in investment securities were utilized primarily to
fund our reduction in total deposits. The increase in total deposits of $64.9
million resulting from our branch office purchases was offset by other decreases
in deposits of $93.0 million during the six months ended June 30, 2002. The
result was a net decrease in total deposits to $2.53 billion at June 30, 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 and
continued aggressive competition within our market areas. In addition, certain
large commercial accounts, particularly related to real estate title and escrow
business, sharply reduced their deposit levels, reflecting reduced business
activity as a result of general economic conditions. Short-term borrowings
increased $26.6 million to $86.4 million at June 30, 2002 from $59.8 million at
December 31, 2001 due primarily to increases in securities sold under agreements
to repurchase. In addition, our note payable decreased by $21.0 million to $50.0
million at June 30, 2002 from $71.0 million at December 31, 2001 due to
repayments, which were funded by dividends from FB&T.
During the six months ended June 30, 2002, we utilized available cash
to repurchase $327,000 of our common stock at an average cost of $36.59 per
share. 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 June 30, 2002, we had purchased a total of 872,757
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 June 30, 2002, we held 69,300 shares of common stock for
treasury at an aggregate cost of $1.7 million. At June 30, 2002, we could
purchase approximately 222,000 additional shares under the existing
authorization.
Buyout of Minority Stockholders
Currently, First Banks owns 93.76% of our outstanding voting stock,
including 92.25% of our common stock and all of our Class B common stock. First
Banks recently proposed to our Board of Directors that it 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 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 Special Committee has engaged 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. Discussions
between First Banks and the Special Committee and its advisors regarding terms
of a transaction have commenced but have not been completed.
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 $4.8 million, or $0.37 per share on a diluted basis, for
the three months ended June 30, 2002, compared to $7.8 million, or $0.65 per
share on a diluted basis, for the comparable period in 2001. Net income for the
six months ended June 30, 2002 and 2001 was $10.0 million and $15.1 million, or
$0.78 and $1.25 per share on a diluted basis, respectively. The implementation
of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
resulted in the discontinuation of the amortization of certain intangibles
associated with the purchase of subsidiaries. If we had implemented SFAS No. 142
at the beginning of 2001, net income for the quarter ended June 30, 2001 would
have increased $1.3 million to $9.1 million, or $0.76 per share on a fully
diluted basis, and net income for the six months ended June 30, 2001 would have
increased $2.7 million to $17.7 million, or $1.47 per share on a fully diluted
basis. In addition, the implementation of SFAS No. 133, 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 would have been $15.5 million, or $1.29 per share on a
diluted basis, for the six months ended June 30, 2001. 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 three and six months ended June 30,
2002 primarily reflects significantly increased provisions for loan losses
associated with the increased charge-off, delinquency and higher-than-normal
nonperforming trends we are experiencing as a result of current economic
conditions. The effects of our asset quality problems were partially offset by
the net interest income generated by our acquisitions of Charter Pacific Bank
and BYL Bancorp in October 2001.
Net Interest Income
Net interest income was $32.7 million, or 4.94% of average
interest-earning assets, for the three months ended June 30, 2002, in comparison
to $29.6 million, or 5.01% of average interest-earning assets, for the
comparable period in 2001, respectively. For the six months ended June 30, 2002
and 2001, net interest income was $64.1 million, or 4.85% of interest-earning
assets, and $59.3 million, or 5.03% of interest-earning assets, respectively. We
credit the increased net interest income primarily to the net interest-earning
assets provided by our acquisitions completed during the fourth quarter of 2001,
internal loan growth and earnings associated with our interest rate swap
agreements that we entered into in connection with our interest rate risk
management program. As further discussed under "--Interest Rate Risk
Management," for the three and six months ended June 30, 2002, these agreements
provided net interest income of $6.3 million and $12.5 million, respectively, in
comparison to $2.4 million and $3.0 million for the comparable periods in 2001.
The increase in net interest income, however, was partially offset by reductions
in prevailing interest rates during 2001, generally weaker loan demand and
overall economic conditions, resulting in the decline in our net interest
margin. Guaranteed preferred debentures expense was $1.2 million and $2.3
million for the three and six months ended June 30, 2002, compared to $975,000
and $2.0 million for the comparable periods in 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, were $2.28 billion and $2.30
billion for the three and six months ended June 30, 2002, respectively, in
comparison to $2.07 billion and $2.06 billion for the comparable periods in
2001. The yield on our loan portfolio, however, decreased to 7.60% and 7.54% for
the three and six months ended June 30, 2002, respectively, from 9.21% and 9.44%
for the comparable periods in 2001. This was a major contributor to the decline
in our net interest margin of seven basis points and 18 basis points for the
three and six months ended June 30, 2002, respectively, from the comparable
periods 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 January 1, 2001 through December 31, 2001, the Board of Governors of
the Federal Reserve System decreased the targeted Federal funds rate 11 times,
resulting in 11 decreases in the prime rate of interest from 9.50% 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 discussed above, the reduced level of interest income earned on our
loan portfolio as a result of declining interest rates and increased competition
within our market areas was partially mitigated by the earnings associated with
our interest rate swap agreements.
For the three and six months ended June 30, 2002, the aggregate
weighted average rate paid on our deposit portfolio decreased to 2.48% and
2.58%, respectively, from 4.48% and 4.67% for the comparable periods 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 and six months
ended June 30, 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% for the three and six months ended June
30, 2002, from 5.52% and 6.43% for the comparable periods in 2001, respectively,
which is reflective of the current rate environment for these instruments.
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 during 2001
and in the outstanding balance of the note payable in 2002.
The aggregate weighted average rate paid on our guaranteed preferred
debentures increased to 11.22% and 10.53% for the three and six months ended
June 30, 2002, respectively, from 8.83% and 8.88% for the comparable periods in
2001. The increase is due to the change in estimate regarding the amortization
period over which the deferred issuance costs associated with these obligations
are being amortized.
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 June 30, Six Months Ended June 30,
-------------------------------------------------- -----------------------------------------------
2002 2001 2002 2001
------------------------- ----------------------- --------------------- -------------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ----- ------- ------- ----- ------- ------- ----- ------- ------- ------
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4).......... $2,277,848 43,167 7.60% $2,065,353 47,437 9.21% $2,302,264 86,039 7.54% $2,058,289 96,317 9.44%
Investment securities (3)... 315,410 3,854 4.90 203,921 3,626 7.13 320,420 7,741 4.87 237,239 8,739 7.43
Federal funds sold
and other................. 62,147 247 1.59 98,591 1,234 5.02 45,445 354 1.57 77,793 2,064 5.35
---------- ------ ---------- ------ ---------- ------ ---------- -------
Total interest-
earning assets.......... 2,655,405 47,268 7.14 2,367,865 52,297 8.86 2,668,129 94,134 7.11 2,373,321 107,120 9.10
------ ------ ------ -------
Nonearning assets.............. 330,253 271,381 332,689 270,432
---------- ---------- ---------- ----------
Total assets.............. $2,985,658 $2,639,246 $3,000,818 $2,643,753
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
- -----------------------
Interest-bearing liabilities:
Interest-bearing demand
deposits.................. $ 310,400 783 1.01% $ 218,770 916 1.68% $ 306,583 1,591 1.05% $ 213,124 1,841 1.74%
Savings deposits............ 920,821 4,620 2.01 749,565 7,289 3.90 921,788 9,223 2.02 742,188 15,104 4.10
Time deposits of $100
or more................... 290,786 2,791 3.85 306,976 4,328 5.66 295,577 5,957 4.06 302,379 8,786 5.86
Other time deposits (4)..... 461,050 4,078 3.55 535,825 7,676 5.75 469,697 8,738 3.75 550,809 16,113 5.90
---------- ------ ---------- ------ ---------- ------ ---------- ------- 4.67
Total interest-bearing
deposits................ 1,983,057 12,272 2.48 1,811,136 20,209 4.48 1,993,645 25,509 2.58 1,808,500 41,844
Note payable and
short-term borrowings...... 136,766 1,065 3.12 110,100 1,515 5.52 140,948 2,181 3.12 127,756 4,075 6.43
Guaranteed preferred
debentures................. 44,628 1,248 11.22 44,306 975 8.83 44,507 2,325 10.53 44,298 1,950 8.88
---------- ------ ---------- ------ ---------- ------ ---------- -------
Total interest-bearing
liabilities............ 2,164,451 14,585 2.70 1,965,542 22,699 4.63 2,179,100 30,015 2.78 1,980,554 47,869 4.87
------ ------ ------ -------
Noninterest-bearing
liabilities:
Demand deposits............. 486,251 408,763 485,685 411,843
Other liabilities........... 42,446 43,212 44,113 39,403
---------- ---------- ---------- ----------
Total liabilities......... 2,693,148 2,417,517 2,708,898 2,431,800
Stockholders' equity........... 292,510 221,729 291,920 211,953
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity... $2,985,658 $2,639,246 $3,000,818 $2,643,753
========== ========== ========== ==========
Net interest income............ 32,683 29,598 64,119 59,251
====== ====== ====== =======
Interest rate spread........... 4.44 4.23 4.33 4.23
Net interest margin (5)........ 4.94% 5.01% 4.85% 5.03%
===== ==== ===== ====
- -------------------------
(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 $7.8 million and $15.5 million for
the three and six months ended June 30, 2002, compared to $820,000 and $910,000
for the comparable periods in 2001, respectively. The provision for loan losses
reflects the level of loan charge-offs and recoveries, the adequacy of the
allowance for loan losses and the effect of economic conditions within our
markets. We attribute the increase in the provision for loan losses primarily to
the significant increase in net loan charge-offs and past due loans. Net loan
charge-offs were $3.7 million and $15.8 million for the three and six months
ended June 30, 2002, respectively, in comparison to $2.9 million and $4.3
million for the comparable periods in 2001. The increase in net charge-offs for
the three and six months ended June 30, 2002 primarily reflects the general
slowdown in economic conditions prevalent within our markets as well as an
aggregate of $12.9 million of loan charge-offs on four large credit
relationships. Loan recoveries were $1.8 million and $3.6 million for the three
and six months ended June 30, 2002, respectively, in comparison to $717,000 and
$1.5 million for the comparable periods in 2001. Although nonperforming assets
and past due loans have declined to $37.3 million at June 30, 2002 from $47.5
million at December 31, 2001, our overall nonperforming and past due trends
remain 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 $5.2 million and $10.7 million for the three and
six months ended June 30, 2002, respectively, in comparison to $6.3 million and
$10.7 million for the comparable periods in 2001. Noninterest income primarily
consists of service charges on deposit accounts and customer service fees,
bank-owned life insurance investment income, net gains or losses on derivative
instruments and other income.
Service charges on deposit accounts and customer service fees increased
to $3.1 million and $5.9 million for the three and six months ended June 30,
2002, respectively, from $2.1 million and $4.3 million for the comparable
periods in 2001. 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 consumer 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.
Bank-owned life insurance investment income was $516,000 and $924,000
for the three and six months ended June 30, 2002, respectively, in comparison to
$332,000 and $666,000 for the comparable periods in 2001. The increase for 2002
reflects changes in the portfolio mix of the underlying investments made by
management to improve our return on this product as well as the reinvestment of
earnings.
The net loss on derivative instruments was $3,000 and $139,000 for the
three and six months ended June 30, 2002, respectively, in comparison to the net
gain of $2.6 million and $2.9 million for the comparable periods in 2001. The
decrease in income from derivative instruments reflects $2.1 million of gains
resulting from the termination of certain interest rate swap agreements during
the second quarter of 2001, the sale of the interest rate floor agreements in
November 2001 and changes in the fair value of our interest rate cap agreement
and fair value hedges.
Other income was $1.6 million and $4.0 million for the three and six
months ended June 30, 2002, respectively, in comparison to $1.3 million and $3.1
million for the comparable periods in 2001. We attribute the primary components
of the increase to:
>> our acquisitions completed during 2001;
>> increased earnings associated with our international banking
products;
>> increased loan servicing fees;
>> 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 $22.2 million and $43.0 million for the three
and six months ended June 30, 2002, respectively, compared to $22.3 million and
$43.3 million for the comparable periods in 2001. 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 $9.4 million and $17.8 million for
the three and six months ended June 30, 2002, respectively, in comparison to
$8.3 million and $16.4 million for the comparable periods in 2001. We primarily
associate the increase with our 2001 acquisitions. However, the increase also
reflects the higher salary and employee benefit costs associated with employing
and retaining qualified personnel. In addition, the increase includes various
additions to staff throughout 2001 to enhance senior management expertise and
expand our product lines.
Occupancy, net of rental income, and furniture and equipment expense
was $3.9 million and $7.5 million for the three and six months ended June 30,
2002, respectively, in comparison to $3.4 million and $6.8 million for the
comparable periods in 2001. We primarily attribute the increase to our 2001
acquisitions, the relocation of certain branches and operational areas,
increased depreciation expense associated with numerous capital expenditures and
the continued expansion and renovation of various corporate and branch offices.
Information technology fees were $2.4 million and $5.2 million for the
three months and six months ended June 30, 2002, respectively, in comparison to
$2.3 million and $4.8 million for the comparable periods in 2001. As more fully
described in Note 5 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 $3.1 million and $5.3
million for the three and six months ended June 30, 2002, respectively, in
comparison to $2.3 million and $4.7 million for comparable periods in 2001. The
increase in these fees is primarily due 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
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 $532,000 for the three and six months ended June
30, 2002, respectively, in comparison to $1.4 million and $2.8 million for the
comparable periods in 2001. As more fully discussed in Note 3 to our
consolidated financial statements, the significant decrease for 2002 is
primarily attributable to the implementation of SFAS No. 142 in January 2002.
Other expense was $2.2 million and $4.6 million for the three and six
months ended June 30, 2002, respectively, in comparison to $3.7 million and $6.0
million for the comparable periods in 2001. 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 decrease in other expense in 2002
to a $1.2 million charge that occurred in June 2001 associated with the
establishment of a specific reserve on an unfunded letter of credit. The overall
decrease was partially offset by expenses relating 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 $3.0 million and $6.3 million for
the three and six months ended June 30, 2002, representing an effective income
tax rate of 38.8% and 38.6%, respectively, in comparison to $5.0 million and
$10.3 million, representing an effective income tax rate of 39.2% and 39.8%, for
the comparable periods in 2001, respectively. The decrease in the effective
income tax rate for 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 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:
June 30, 2002 December 31, 2001
--------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $ 605,000 1,083 555,000 1,006
Fair value hedges.................................... 100,900 2,307 54,900 1,881
Interest rate cap agreement.......................... 150,000 186 150,000 688
========== ===== ======= ======
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 and six months ended June 30, 2002, the net interest
income realized on our derivative financial instruments was $6.3 million and
$12.5 million, respectively, in comparison to $2.4 million and $3.0 million for
the comparable periods in 2001. In addition, we realized a net loss on
derivative instruments, which is included in noninterest income, of $3,000 and
$139,000 for the three and six months ended June 30, 2002, respectively, in
comparison to a net gain of $2.6 million and $2.9 million for the comparable
periods in 2001. The net decrease in income from 2001 reflects $2.1 million of
gains resulting from the termination of certain interest rate swap agreements
during the second quarter of 2001, the sale of the interest rate floor
agreements in November 2001 and changes in the fair value of our interest cap
agreement and fair value hedges.
Cash Flow Hedges
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 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%, 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 $1.7 million at June 30, 2002 and December 31, 2001, and the
amount payable by us was $607,000 and $647,000 at June 30, 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 June 30, 2002 and December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ----------- ------------- ----------
(dollars expressed in thousands)
June 30, 2002:
March 14, 2004........................... $ 50,000 1.95% 3.93% $ 803
September 20, 2004....................... 300,000 2.05 6.78 21,750
March 21, 2005........................... 200,000 1.93 5.24 8,086
April 2, 2006............................ 55,000 1.93 5.45 2,465
--------- --------
$ 605,000 1.99 5.91 $ 33,104
========= ===== ===== ========
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
We entered into the following interest rate swap agreements, designated
as fair value hedges, to effectively shorten the repricing characteristics of
certain interest-bearing liabilities to correspond more closely with their
funding source with the objective of stabilizing net interest income over time:
>> During January 2001, we entered into $54.9 million notional
amount of interest rate swap agreements that 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 $1.4 million at June 30, 2002 and December 31,
2001, and the amount payable by us under the swap agreements was
$254,000 and $318,000 at June 30, 2002 and December 31, 2001,
respectively.
>> During June 2002, we entered into $46.0 million notional amount
of interest rate swap agreements that 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 plus
1.97%. The underlying hedged liabilities are our guaranteed
preferred beneficial interests in First Banks America, Inc.
subordinated debentures. The terms of the swap agreements provide
for us to pay and receive interest on a quarterly basis beginning
in September 2002.
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 June 30, 2002 and December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ----------- ------------- ----------
(dollars expressed in thousands)
June 30, 2002:
January 9, 2004........................... $ 10,000 2.01% 5.37% $ 388
January 9, 2006........................... 44,900 2.01 5.51 2,122
June 30, 2028............................. 46,000 3.83 8.50 239
--------- -------
$ 100,900 2.84 6.86 $ 2,749
========= ===== ===== =======
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 June
30, 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 $186,000 and $688,000, respectively.
Pledged Collateral
At June 30, 2002 and December 31, 2001, we had pledged investment
securities available for sale with a carrying value of $771,000 and $894,000,
respectively, in connection with our interest rate swap agreements. In addition,
at June 30, 2002 and December 31, 2001, we had accepted, as collateral in
connection with the interest rate swap agreements, cash of $37.2 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
June 30, 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 91.3% and 91.4% of total interest
income for the three and six months ended June 30, 2002, respectively, in
comparison to 90.7% and 89.9% for the comparable periods in 2001. Total loans,
net of unearned discount, were $2.28 billion, or 74.4% of total assets, at June
30, 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 within 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, loan participations
sold to and purchased from First Bank were $197.4 million and $77.7 million at
June 30, 2002, respectively, in comparison to $137.6 million and $93.1 million
at December 31, 2001. See Note 5 to the consolidated financial statements for
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:
June 30, December 31,
2002 2001
---- ----
(dollars expressed in thousands)
Nonperforming loans........................................................ $ 18,488 19,564
Other real estate.......................................................... 547 547
----------- ---------
Total nonperforming assets........................................ $ 19,035 20,111
=========== =========
Loans, net of unearned discount............................................ $ 2,278,398 2,323,263
=========== =========
Loans past due:
Over 30 days to 90 days................................................ $ 16,624 18,713
Over 90 days and still accruing........................................ 1,638 8,660
----------- ---------
Total past due loans.............................................. $ 18,262 27,373
=========== =========
Ratio of:
Allowance for loan losses to loans..................................... 1.86% 1.84%
Nonperforming loans to loans........................................... 0.81 0.84
Allowance for loan losses to nonperforming loans....................... 229.66 218.37
Nonperforming assets to loans and other real estate.................... 0.84 0.87
=========== =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $18.5 million at June 30, 2002, in comparison
to $19.6 million at December 31, 2001. Nonperforming and past due loans have
decreased 5.5% and 33.3%, respectively, at June 30, 2002 compared to December
31, 2001, however, they remain at higher-than-normal levels. Nonperforming loans
at June 30, 2002 increased 25.9% from $14.7 million at June 30, 2001, further
contributing to the increased provisions for loan losses in 2002. In addition,
net loan charge-offs increased significantly to $3.7 million and $15.8 million
for the three and six months ended June 30, 2002, respectively, from $2.9
million and $4.3 million for the comparable periods in 2001, primarily due to
the general slowdown in economic conditions as well as charge-offs aggregating
$12.9 million on four large credit relationships. We attribute the higher trends
in nonperforming and past due loans and charge-offs to cyclical trends
experienced within the banking industry, as a result of economic slowdown and we
anticipate these trends will continue in the near future.
The following table is a summary of our loan loss experience for the
periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period............ $ 38,318 36,678 42,721 37,930
--------- -------- --------- --------
Loans charged-off......................................... (5,478) (3,629) (19,329) (5,797)
Recoveries of loans previously charged-off................ 1,819 717 3,567 1,543
--------- -------- --------- --------
Net loan charge-offs...................................... (3,659) (2,912) (15,762) (4,254)
--------- -------- --------- --------
Provision for loan losses................................. 7,800 820 15,500 910
--------- -------- --------- --------
Allowance for loan losses, end of period.................. $ 42,459 34,586 42,459 34,586
========= ======== ========= ========
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 $443.6 million and $445.1 million at June 30,
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,
short-term borrowings and our revolving note payable, at June 30, 2002:
(dollars expressed in thousands)
Three months or less................................................... $ 195,967
Over three months through six months................................... 71,539
Over six months through twelve months.................................. 115,062
Over twelve months..................................................... 61,032
---------
Total......................................................... $ 443,600
=========
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 June 30, 2002 and December 31,
2001, there were $50.0 million and $71.0 million of advances outstanding under
our revolving note payable. See Note 5 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 June 30,
2002 and December 31, 2001, FB&T's borrowing capacity under this agreement was
approximately $776.7 million and $774.5 million, respectively. In addition,
FB&T's borrowing capacity through its relationship with the Federal Home Loan
Bank was approximately $1.1 million and $1.0 million at June 30, 2002 and
December 31, 2001, respectively. At June 30, 2002 and December 31, 2001, FB&T
had no amounts outstanding under either of these agreements.
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 June 30, 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 and six months ended June 30, 2002
as compared to the comparable periods in 2001 and further discussed under
"--Results of Operations." During the three and six months ended June 30, 2002,
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
-------------- -----------
99.1 Certification of Periodic Report -
Chief Executive Officer
99.2 Certification of Periodic Report -
Chief Financial Officer
(b) We filed no reports on Form 8-K for the three months ended June 30, 2002.
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
August 12, 2002 (Principal Executive Officer)
By: /s/ Allen H. Blake
-----------------------------------------
Allen H. Blake
Executive Vice President, and
Chief Financial Officer
August 12, 2002 (Principal Financial and
Accounting Officer)
Exhibit 99.1
CERTIFICATION OF PERIODIC REPORT
I, James F. Dierberg, Chairman of the Board of Directors, President and
Chief Executive Officer of First Banks America, Inc. (the Company), certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2002 (the Report) fully complies with the requirements of
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 12, 2002 /s/ James F. Dierberg
------------------------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive Officer
Exhibit 99.2
CERTIFICATION OF PERIODIC REPORT
I, Allen H. Blake, Executive Vice President and Chief Financial Officer
of First Banks America, Inc. (the Company), certify, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2002 (the Report) fully complies with the requirements of
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 12, 2002 /s/ Allen H. Blake
------------------------------------------
Allen H. Blake
Executive Vice President and
Chief Financial Officer