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 September 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 October 31, 2002
----- -------------------
Common Stock, $0.15 par value 10,343,860
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....................................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................... 25
ITEM 4. CONTROLS AND PROCEDURES............................................................. 26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 27
SIGNATURES.......................................................................................... 28
CERTIFICATIONS...................................................................................... 29 - 32
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................... $ 88,849 103,421
Interest-bearing deposits with other financial institutions
with maturities of three months or less........................................ 1,491 4,376
Federal funds sold................................................................ 72,600 11,300
----------- -----------
Total cash and cash equivalents.............................................. 162,940 119,097
----------- -----------
Investment securities:
Available for sale, at fair value................................................. 391,080 364,518
Held to maturity, at amortized cost (fair value of $2,529 and $3,745
at September 30, 2002 and December 31, 2001, respectively)..................... 2,463 3,689
----------- -----------
Total investment securities.................................................. 393,543 368,207
----------- -----------
Loans:
Commercial, financial and agricultural............................................ 744,384 770,992
Real estate construction and development.......................................... 540,748 518,325
Real estate mortgage.............................................................. 1,011,700 1,001,663
Consumer and installment.......................................................... 20,215 33,578
----------- -----------
Total loans.................................................................. 2,317,047 2,324,558
Unearned discount................................................................. (6,459) (1,295)
Allowance for loan losses......................................................... (46,633) (42,721)
----------- -----------
Net loans.................................................................... 2,263,955 2,280,542
----------- -----------
Derivative instruments................................................................ 52,374 28,909
Bank premises and equipment, net of accumulated depreciation and amortization......... 46,799 46,746
Intangibles associated with the purchase of subsidiaries, net of amortization......... 103,687 103,153
Bank-owned life insurance............................................................. 29,387 28,119
Accrued interest receivable........................................................... 13,291 15,233
Deferred income taxes................................................................. 55,299 57,746
Other assets.......................................................................... 17,895 13,236
----------- -----------
Total assets................................................................. $ 3,139,170 3,060,988
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2002 2001
---- ----
(unaudited)
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing............................................................ $ 526,424 529,924
Interest-bearing................................................................ 306,005 297,033
Savings........................................................................... 980,861 920,737
Time deposits:
Time deposits of $100 or more................................................... 296,275 314,287
Other time deposits............................................................. 472,913 493,280
----------- -----------
Total deposits............................................................... 2,582,478 2,555,261
Short-term borrowings................................................................. 100,672 59,780
Note payable.......................................................................... 37,000 71,000
Guaranteed preferred beneficial interest in First Banks
America, Inc. subordinated debentures............................................. 45,373 44,342
Accrued interest payable.............................................................. 4,520 6,277
Deferred income taxes................................................................. 26,173 19,054
Accrued expenses and other liabilities................................................ 25,831 19,957
----------- -----------
Total liabilities............................................................ 2,822,047 2,775,671
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Common stock:
Common stock, $0.15 par value; 15,000,000 shares authorized;
10,416,460 shares issued at September 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
September 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....................................................... 97,505 80,509
Treasury stock, at cost; 69,900 shares and 60,400 shares
at September 30, 2002 and December 31, 2001, respectively......................... (1,682) (1,332)
Accumulated other comprehensive income................................................ 34,384 19,224
----------- -----------
Total stockholders' equity................................................... 317,123 285,317
----------- -----------
Total liabilities and stockholders' equity................................... $ 3,139,170 3,060,988
=========== ===========
FIRST BANKS AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans.............................................. $43,102 45,467 129,141 141,784
Investment securities................................................... 4,222 3,700 11,963 12,439
Federal funds sold and other............................................ 329 1,618 683 3,682
------- ------- ------- -------
Total interest income.............................................. 47,653 50,785 141,787 157,905
------- ------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................... 727 939 2,318 2,780
Savings............................................................... 4,482 6,644 13,705 21,748
Time deposits of $100 or more......................................... 2,684 3,987 8,641 12,773
Other time deposits................................................... 4,032 6,652 12,770 22,765
Short-term borrowings................................................... 350 596 1,269 1,804
Note payable............................................................ 541 792 1,803 3,659
Guaranteed preferred debentures......................................... 721 975 3,046 2,925
------- ------- ------- -------
Total interest expense............................................. 13,537 20,585 43,552 68,454
------- ------- ------- -------
Net interest income................................................ 34,116 30,200 98,235 89,451
Provision for loan losses................................................... 7,200 2,000 22,700 2,910
------- ------- ------- -------
Net interest income after provision for loan losses................ 26,916 28,200 75,535 86,541
------- ------- ------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees........... 3,555 2,354 9,496 6,611
Net loss on sales of available-for-sale investment securities........... -- (32) -- (219)
Bank-owned life insurance investment income............................. 475 320 1,399 986
Net gain on derivative instruments...................................... 582 5,108 443 7,995
Other................................................................... 2,151 1,273 6,137 4,372
------- ------- ------- -------
Total noninterest income........................................... 6,763 9,023 17,475 19,745
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits.......................................... 9,016 7,962 26,829 24,340
Occupancy, net of rental income......................................... 4,196 2,353 9,732 7,340
Furniture and equipment................................................. 899 1,048 2,892 2,900
Postage, printing and supplies.......................................... 470 489 1,478 1,290
Information technology fees............................................. 2,443 2,615 7,660 7,420
Legal, examination and professional fees................................ 2,102 3,061 7,418 7,802
Amortization of intangibles associated with the purchase
of subsidiaries...................................................... 300 1,385 832 4,146
Communications.......................................................... 216 243 810 821
Advertising and business development.................................... 206 129 584 509
Other................................................................... 2,584 3,259 7,229 9,255
------- ------- ------- -------
Total noninterest expense.......................................... 22,432 22,544 65,464 65,823
------- ------- ------- -------
Income before provision for income taxes and cumulative
effect of change in accounting principle......................... 11,247 14,679 27,546 40,463
Provision for income taxes.................................................. 4,253 6,095 10,550 16,354
------- ------- ------- -------
Income before cumulative effect of change in accounting principle.. 6,994 8,584 16,996 24,109
Cumulative effect of change in accounting principle, net of tax............. -- -- -- (459)
------- ------- ------- -------
Net income......................................................... $ 6,994 8,584 16,996 23,650
======= ======= ======= =======
Basic earnings per common share:
Income before cumulative effect of change in accounting principle....... $ 0.54 0.71 1.32 2.00
Cumulative effect of change in accounting principle, net of tax......... -- -- -- (0.04)
------- ------- ------- -------
Basic................................................................... $ 0.54 0.71 1.32 1.96
======= ======= ======= =======
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle....... $ 0.54 0.71 1.32 2.00
Cumulative effect of change in accounting principle, net of tax......... -- -- -- (0.04)
------- ------- ------- -------
Diluted................................................................. $ 0.54 0.71 1.32 1.96
======= ======= ======= =======
Weighted average common stock outstanding................................... 12,847 12,053 12,852 12,072
======= ======= ======= =======
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)
Nine Months Ended September 30, 2002 and 2001 and Three 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
Nine months ended September 30, 2001:
Comprehensive income:
Net income.......................... -- -- -- 23,650 23,650 -- -- 23,650
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification
adjustment (1).................. -- -- -- 2,764 -- -- 2,764 2,764
Derivative instruments:
Cumulative effect of change
in accounting principle....... -- -- -- 4,950 -- -- 4,950 4,950
Current period transactions..... -- -- -- 21,305 -- -- 21,305 21,305
Reclassification to earnings.... -- -- -- (1,798) -- -- (1,798) (1,798)
------
Comprehensive income................ 50,871
======
Reduction of deferred tax asset
valuation reserve................... -- -- 565 -- -- -- 565
Compensation paid in stock........... -- -- 46 -- -- -- 46
Repurchases of common stock.......... -- -- -- -- (1,256) -- (1,256)
------ --- ------- ------ ------ ------ -------
Consolidated balances,
September 30, 2001................... 1,442 375 154,540 64,544 (1,332) 27,566 247,135
Three months ended December 31, 2001:
Comprehensive income:
Net income.......................... -- -- -- 15,965 15,965 -- -- 15,965
Other comprehensive income,
net of tax:
Unrealized losses on securities,
net of reclassification
adjustment (1).................. -- -- -- (1,245) -- -- (1,245) (1,245)
Derivative instruments:
Current period transactions..... -- -- -- (4,738) -- -- (4,738) (4,738)
Reclassification to earnings.... -- -- -- (2,359) -- -- (2,359) (2,359)
------
Comprehensive income................ 7,623
======
Reduction of deferred tax asset
valuation allowance................. -- -- 4,406 -- -- -- 4,406
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
Nine months ended September 30, 2002:
Comprehensive income:
Net income.......................... -- -- -- 16,996 16,996 -- -- 16,996
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification
adjustment (1).................. -- -- -- 1,685 -- -- 1,685 1,685
Derivative instruments:
Current period transactions..... -- -- -- 13,475 -- -- 13,475 13,475
------
Comprehensive income................ 32,156
======
Repurchases of common stock......... -- -- -- -- (350) -- (350)
------ --- ------ ------ ------ ------ -------
Consolidated balances,
September 30, 2002................... $1,562 375 184,979 97,505 (1,682) 34,384 317,123
====== === ======= ====== ====== ====== =======
- -----------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended Three Months Ended
September 30, September 30, December 31,
------------------ ----------------- ------------------
2002 2001 2002 2001 2001
---- ---- ---- ---- ----
Unrealized (losses) gains on investment securities arising
during the period............................................ $(1,053) 658 1,685 2,622 (1,375)
Less reclassification adjustment for losses included in
net income................................................... -- (21) -- (142) (130)
------- ----- ------ ----- ------
Unrealized (losses) gains on investment securities............. $(1,053) 679 1,685 2,764 (1,245)
======= ===== ====== ===== ======
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)
Nine Months Ended
September 30,
--------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income............................................................................ $ 16,996 23,650
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax..................... -- 459
Depreciation, amortization and accretion, net....................................... 7,173 5,995
Provision for loan losses........................................................... 22,700 2,910
Provision for income taxes.......................................................... 10,550 16,354
Payments of income taxes............................................................ (6,701) (3,571)
Net loss on sales of available-for-sale investment securities....................... -- 219
Net gain on derivative instruments.................................................. (443) (7,995)
Decrease in accrued interest receivable............................................. 1,949 1,305
Interest accrued on liabilities..................................................... 43,552 68,454
Payments of interest on liabilities................................................. (45,615) (64,580)
Other operating activities, net..................................................... (1,620) (11,373)
---------- ---------
Net cash provided by operating activities................................... 48,541 31,827
---------- ---------
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.......................................... 7,492 59,871
Maturities of investment securities available for sale................................ 273,073 305,330
Maturities of investment securities held to maturity.................................. 1,233 693
Purchases of investment securities available for sale................................. (306,311) (369,006)
Proceeds from termination of swap agreements.......................................... -- 2,659
Net (increase) decrease in loans...................................................... (12,231) 15,052
Recoveries of loans previously charged-off............................................ 5,626 3,062
Purchases of bank premises and equipment.............................................. (3,030) (917)
Proceeds from sales of other real estate.............................................. 1,344 11
Other investing activities, net....................................................... (1,269) (907)
---------- ---------
Net cash provided by investing activities................................... 28,327 15,848
---------- ---------
Cash flows from financing activities:
Increase in demand and savings deposits............................................... 47,827 44,284
Decrease in time deposits............................................................. (87,394) (62,375)
Increase in short-term borrowings..................................................... 40,892 5,956
Repayments of note payable............................................................ (34,000) (51,900)
Repurchases of common stock for treasury.............................................. (350) (1,256)
---------- ---------
Net cash used in financing activities....................................... (33,025) (65,291)
---------- ---------
Net increase (decrease) in cash and cash equivalents........................ 43,843 (17,616)
Cash and cash equivalents, beginning of period............................................ 119,097 153,210
---------- ---------
Cash and cash equivalents, end of period.................................................. $ 162,940 135,594
========== =========
Noncash investing and financing activities:
Loans transferred to other real estate................................................ 1,114 --
Reduction of deferred tax asset valuation reserve..................................... -- 565
Compensation paid in stock............................................................ $ -- 46
========== =========
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 nine months ended September 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 September 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 AND OTHER CORPORATE TRANSACTIONS
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 utilizing the straight-line method.
On September 23, 2002, First Banks and FBA signed an agreement and plan
of merger pursuant to which First Banks will acquire all of FBA's outstanding
capital stock that is not already owned by First Banks for a price of $40.54 per
share. At September 30, 2002, FBA had 801,453 shares, or approximately 6.24% of
its outstanding stock, held publicly. First Banks owned the other 93.76%. The
merger agreement provides for the merger of FBA Acquisition Corporation with and
into FBA. Upon consummation of the merger, the legal existence of FBA
Acquisition Corporation and FBA will be combined and FBA will become a wholly
owned subsidiary of First Banks. At that time, FBA will then be merged with and
into First Banks. The transaction, which is subject to stockholder approval, is
expected to be completed in December 2002.
(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 continues 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 September 30, 2002 and December
31, 2001:
September 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 (724) 6,458 --
Goodwill associated with
purchases of branch offices...... 2,210 (684) 2,210 (576)
---------- ------- -------- -------
Total......................... $ 10,034 (1,408) 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 $300,000 and $832,000 for the three and nine
months ended September 30, 2002, respectively, and $1.4 million and $4.1 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)...................................... $ 1,149
2003.......................................... 1,268
2004.......................................... 1,268
2005.......................................... 1,268
2006.......................................... 1,268
2007.......................................... 1,268
-------
Total...................................... $ 7,489
=======
-----------------------------
(1) Includes $832,000 of amortization for the nine months ended
September 30, 2002.
Changes in the carrying amount of goodwill, all of which is
attributable to FB&T, for the three and nine months ended September 30, 2002
were as follows:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
(dollars expressed in thousands)
Balance, beginning of period.................................. $ 96,623 96,695
Amortization - purchases of branch offices.................... (36) (108)
--------- --------
Balance, end of period...................................... $ 96,587 96,587
========= ========
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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Net income:
Reported net income........................... $ 6,994 8,584 16,996 23,650
Add back - goodwill amortization.............. -- 1,340 -- 4,011
------- ------- ------- ------
Adjusted net income......................... $ 6,994 9,924 16,996 27,661
======= ======= ======= ======
Basic earnings per share:
Reported net income........................... $ 0.54 0.71 1.32 1.96
Add back - goodwill amortization.............. -- 0.11 -- 0.33
------- ------- ------- ------
Adjusted net income......................... $ 0.54 0.82 1.32 2.29
======= ======= ======= ======
Diluted earnings per share:
Reported net income........................... $ 0.54 0.71 1.32 1.96
Add back - goodwill amortization.............. -- 0.11 -- 0.33
------- ------- ------- ------
Adjusted net income......................... $ 0.54 0.82 1.32 2.29
======= ======= ======= ======
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.
On October 1, 2002, the FASB issued SFAS No. 147 -- Acquisitions of
Certain Financial Institutions, an amendment of SFAS No. 72 -- Accounting for
Certain Acquisitions of Banking or Thrift Institutions and SFAS No. 144 --
Accounting for the Impairment or Disposal of Long-Lived Assets and FASB
Interpretation No. 9 -- Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method. SFAS No. 147 addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for transactions between two or more mutual enterprises.
SFAS No. 147 removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of SFAS No.
72. SFAS No. 147 also provides guidance on the accounting for impairment or
disposal of acquired long-term customer-relationship intangible assets,
including those acquired in transactions between two or more mutual enterprises.
The provisions of SFAS No. 147 are effective for acquisitions on or after
October 1, 2002. On October 1, 2002, FBA implemented SFAS No. 147, 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
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 September 30, 2002:
Basic EPS-- income before cumulative effect.................. $ 6,994 12,847 $ 0.54
Cumulative effect of change in accounting principle,
net of tax................................................ -- -- --
------- ------ -------
Basic EPS-- income available to common stockholders.......... $ 6,994 12,847 $ 0.54
======= ====== =======
Three months ended September 30, 2001:
Basic EPS-- income before cumulative effect.................. $ 8,584 12,053 $ 0.71
Cumulative effect of change in accounting principle,
net of tax................................................ -- -- --
------- ------ -------
Basic EPS-- income available to common stockholders.......... $ 8,584 12,053 $ 0.71
======= ====== =======
Nine months ended September 30, 2002:
Basic EPS-- income before cumulative effect.................. $16,996 12,852 $ 1.32
Cumulative effect of change in accounting principle,
net of tax................................................ -- -- --
------- ------ -------
Basic EPS-- income available to common stockholders.......... $16,996 12,852 $ 1.32
======= ====== =======
Nine months ended September 30, 2001:
Basic EPS-- income available to common stockholders.......... $24,109 12,072 $ 2.00
Cumulative effect of change in accounting principle,
net of tax................................................ (459) -- (0.04)
------- ------ -------
Basic EPS-- income available to common stockholders.......... $23,650 12,072 $ 1.96
======= ====== =======
(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
$1.5 million and $5.4 million for the three and nine months ended September 30,
2002, and $2.2 million and $5.8 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 $2.4 million and $7.4 million
for the three and nine months ended September 30, 2002, and $2.6 million and
$7.4 million for the comparable periods in 2001, respectively.
FB&T had $64.3 million and $93.1 million in whole loans and loan
participations outstanding at September 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 $184.6 million and $137.6
million in whole loans and loan participations to First Bank at September 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
September 30, 2002 and December 31, 2001, were $37.0 million and $71.0 million,
respectively. The interest expense under the note payable was $541,000 and $1.8
million for the three and nine months ended September 30, 2002, and $792,000 and
$3.7 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 September 30,
2002, FBA was adequately capitalized and FB&T was well capitalized.
As of September 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 September 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
September 30, December 31, Adequacy Prompt Corrective
2002 2001 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
FBA................................ 9.34% 8.82% 8.0% 10.0%
FB&T............................... 10.43 11.27 8.0 10.0
Tier 1 capital (to risk-weighted assets):
FBA................................ 8.08 7.57 4.0 6.0
FB&T............................... 9.17 10.02 4.0 6.0
Tier 1 capital (to average assets):
FBA................................ 7.48 7.15 3.0 5.0
FB&T............................... 8.59 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
-------------------------- -------------------------- --------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities....................... $ 393,543 368,207 -- -- 393,543 368,207
Loans, net of unearned discount............. 2,310,588 2,323,263 -- -- 2,310,588 2,323,263
Intangibles associated with the purchase
of subsidiaries, net of amortization..... 103,687 103,153 -- -- 103,687 103,153
Total assets................................ 3,135,105 3,057,920 4,065 3,068 3,139,170 3,060,988
Deposits.................................... 2,582,612 2,555,396 (134) (135) 2,582,478 2,555,261
Note payable................................ -- -- 37,000 71,000 37,000 71,000
Stockholders' equity........................ 396,298 398,713 (79,175) (113,396) 317,123 285,317
========== ========= ======= ======== ========= =========
FB&T Corporate and Other (1) Consolidated Totals
-------------------- ----------------------- -------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
-------------------- ---------------------- -------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income............................. $ 47,653 50,773 -- 12 47,653 50,785
Interest expense............................ 12,276 18,818 1,261 1,767 13,537 20,585
---------- --------- ------- -------- --------- ---------
Net interest income................... 35,377 31,955 (1,261) (1,755) 34,116 30,200
Provision for loan losses................... 7,200 2,000 -- -- 7,200 2,000
---------- --------- ------- -------- --------- ---------
Net interest income after
provision for loan losses........... 28,177 29,955 (1,261) (1,755) 26,916 28,200
---------- --------- ------- -------- --------- ---------
Noninterest income.......................... 6,617 9,023 146 -- 6,763 9,023
Noninterest expense......................... 22,223 22,383 209 161 22,432 22,544
---------- --------- ------- -------- --------- ---------
Income before provision for
income taxes........................ 12,571 16,595 (1,324) (1,916) 11,247 14,679
Provision for income taxes.................. 4,695 6,751 (442) (656) 4,253 6,095
---------- --------- ------- -------- --------- ---------
Net income............................ $ 7,876 9,844 (882) (1,260) 6,994 8,584
========== ========= ======= ======== ========= =========
FB&T Corporate and Other (1) Consolidated Totals
----------------------- ----------------------- -------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income............................. $ 141,787 157,851 -- 54 141,787 157,905
Interest expense............................ 38,704 61,870 4,848 6,584 43,552 68,454
---------- --------- ------- -------- --------- ---------
Net interest income................... 103,083 95,981 (4,848) (6,530) 98,235 89,451
Provision for loan losses................... 22,700 2,910 -- -- 22,700 2,910
---------- --------- ------- -------- --------- ---------
Net interest income after
provision for loan losses........... 80,383 93,071 (4,848) (6,530) 75,535 86,541
---------- --------- ------- -------- --------- ---------
Noninterest income.......................... 17,416 19,876 59 (131) 17,475 19,745
Noninterest expense......................... 65,056 65,346 408 477 65,464 65,823
---------- --------- ------- -------- --------- ---------
Income before provision for income
taxes and cumulative effect of
change in accounting principle...... 32,743 47,601 (5,197) (7,138) 27,546 40,463
Provision for income taxes.................. 12,317 18,807 (1,767) (2,453) 10,550 16,354
---------- --------- ------- -------- --------- ---------
Income before cumulative effect
of change in accounting principle... 20,426 28,794 (3,430) (4,685) 16,996 24,109
Cumulative effect of change in accounting
principle, net of tax.................... -- (459) -- -- -- (459)
---------- --------- ------- -------- --------- ---------
Net income............................ $ 20,426 28,335 (3,430) (4,685) 16,996 23,650
========== ========= ======= ======== ========= =========
- -----------------
(1) Corporate and other includes $721,000 and $1.0 million of guaranteed
preferred debentures expense for the three months ended September 30, 2002
and 2001, respectively. The applicable income tax benefit associated with
the guaranteed preferred debentures expense was $252,000 and $342,000 for
the three months ended September 30, 2002 and 2001, respectively. For the
nine months ended September 30, 2002 and 2001, corporate and other includes
$3.0 million and $2.9 million of guaranteed preferred debentures expense,
respectively. The applicable income tax benefit associated with the
guaranteed preferred debentures expense was $1.1 million and $1.0 million
for the nine months ended September 30, 2002 and 2001, respectively. In
addition, corporate and other includes holding company expenses.
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 as well as the threat of future terrorist
activities, potential wars and/or military actions related thereto, and domestic
responses to terrorism or threats of terrorism; 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 September 30, 2002, we had total assets of $3.14
billion, loans, net of unearned discount, of $2.31 billion, total deposits of
$2.58 billion and total stockholders' equity of $317.1 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 $3.14 billion at September 30, 2002 and $3.06
billion at December 31, 2001. The increase in total assets 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 $63.7 million. Consequently, federal funds sold
increased $61.3 million from $11.3 million at December 31, 2001 to $72.6 million
at September 30, 2002 due to the investment of excess funds. In addition,
investment securities increased by $25.3 million to $393.5 million at September
30, 2002 from $368.2 million at December 31, 2001. The $26.6 million increase in
available-for-sale investment securities, primarily reflects purchases of $306.3
million compared to sales and maturities of $280.6 million. Derivative
instruments also increased $23.5 million from $28.9 million at December 31, 2001
to $52.4 million at September 30, 2002. The increase was the result of 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 offset by
reduced loan demand resulting from the slowdown in economic conditions 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 $12.7 million, as further
discussed under "--Loans and Allowance for Loan Losses." The $64.9 million of
deposits received in our branch office purchases was offset by other decreases
in deposits of $37.7 million during the nine months ended September 30, 2002.
The result was a net increase in total deposits to $2.58 billion at September
30, 2002 from $2.56 billion at December 31, 2001, which reflects the branch
purchases, 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 their reduced business activity as a result of general
economic conditions. Short-term borrowings increased $40.9 million to $100.7
million at September 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 $34.0 million to $37.0 million at
September 30, 2002 from $71.0 million at December 31, 2001 due to repayments,
which were funded by capital distributions from FB&T.
During the nine months ended September 30, 2002, we utilized available
cash to repurchase $350,000 of our common stock at an average cost of $36.85 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 September 30, 2002, we had purchased a total of
873,357 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 September 30, 2002, we held 69,900 shares
of common stock for treasury at an aggregate cost of $1.7 million. At September
30, 2002, we could purchase approximately 221,000 additional shares under the
existing authorization.
Buyout of Minority Stockholders
In April 2002, First Banks 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. 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 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.
On September 23, 2002, we signed an agreement and plan of merger
pursuant to which First Banks will acquire all of our outstanding capital stock
that is not already owned by First Banks for a price of $40.54 per share. At
September 30, 2002, we had 801,453 shares, or approximately 6.24% of our
outstanding stock, held publicly. First Banks owned the other 93.76%. The merger
agreement provides for the merger of FBA Acquisition Corporation with and into
FBA. Upon consummation of the merger, the legal existence of FBA Acquisition
Corporation and FBA will be combined and FBA will become a wholly owned
subsidiary of First Banks. At that time, FBA will then be merged with and into
First Banks. The transaction, which is subject to stockholder approval, is
expected to be completed in December 2002.
Results of Operations
Net Income
Net income was $7.0 million, or $0.54 per share on a diluted basis, for
the three months ended September 30, 2002, compared to $8.6 million, or $0.71
per share on a diluted basis, for the comparable period in 2001. Net income for
the nine months ended September 30, 2002 and 2001 was $17.0 million and $23.7
million, or $1.32 and $1.96 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
September 30, 2001 would have increased $1.3 million to $9.9 million, or $0.82
per share on a fully diluted basis, and net income for the nine months ended
September 30, 2001 would have increased $4.0 million to $27.7 million, or $2.29
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 was $24.1 million, or $2.00 per share
on a diluted basis, for the nine months ended September 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 nine months ended September 30, 2002
primarily reflects significantly increased provisions for loan losses associated
with increased loan charge-off, delinquency and nonperforming trends we are
experiencing as a result of current economic conditions. See further discussion
under "--Provision for Loan Losses." 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 (expressed on a tax-equivalent basis) was $34.1
million, or 4.88% of average interest-earning assets, for the three months ended
September 30, 2002, in comparison to $30.2 million, or 4.97% of average
interest-earning assets, for the comparable period in 2001, respectively. For
the nine months ended September 30, 2002 and 2001, net interest income
(expressed on a tax-equivalent basis) was $98.2 million, or 4.86% of average
interest-earning assets, and $89.5 million, or 5.01% of average 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 and the second quarter of 2002 as well as 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 nine months ended
September 30, 2002, these agreements provided net interest income of $6.9
million and $19.4 million, respectively, in comparison to $3.5 million and $6.5
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 $721,000 and $3.0 million for the three and nine months ended September 30,
2002, compared to $1.0 and $2.9 million for the comparable periods in 2001,
respectively. The decrease for the three months ended September 30, 2002
reflects the earnings associated with our interest rate swap agreement entered
into on June 30, 2002 (see "--Interest Rate Risk Management"). Partially
offsetting the decrease in guaranteed preferred debentures expense for the three
months ended September 30, 2002, and contributing to the increase for the nine
months ended September 30, 2002 is a change in estimate regarding the
amortization period over which the deferred issuance costs are being amortized.
Average loans, net of unearned discount, were $2.30 billion for the
three and nine months ended September 30, 2002, in comparison to $2.07 billion
and $2.06 billion for the comparable periods in 2001, respectively. The yield on
our loan portfolio, however, decreased to 7.45% and 7.51% for the three and nine
months ended September 30, 2002, respectively, from 8.72% and 9.19% for the
comparable periods in 2001. This was a major contributor to the decline in our
net interest margin of nine basis points and 15 basis points for the three and
nine months ended September 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 nine months ended September 30, 2002, the aggregate
weighted average rate paid on our deposit portfolio declined to 2.29% and 2.48%,
respectively, from 3.93% and 4.42% for the comparable periods in 2001. We
attribute the decline primarily to rates paid on our 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 nine months
ended September 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 2.77% and 3.01% for the three and nine months
ended September 30, 2002, respectively, from 4.89% and 5.95% for the comparable
periods in 2001, 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 average outstanding balance of the note payable in 2002, which was
$47.6 million and $53.5 million for the three and nine months ended September
30, 2002, compared to $48.5 million and $65.1 million for the comparable periods
in 2001.
The aggregate weighted average rate paid on our guaranteed preferred
debentures was 6.26% and 9.07% for the three and nine months ended September 30,
2002, respectively, in comparison to 8.73% and 8.83% for the comparable periods
in 2001. The decreased rate for the three months ended September 30, 2002
primarily reflects the earnings impact of our interest rate swap agreement
entered into on June 30, 2002. The overall rate increase for 2002 is due to the
change in estimate regarding the period over which the deferred issuance costs
associated with these obligations are being amortized.
The following table sets forth, on a tax-equivalent basis, 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 September 30, Nine Months Ended September 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)........... $2,296,305 43,103 7.45% $2,068,463 45,467 8.72% $2,300,278 129,142 7.51% $2,061,680 141,784 9.19%
Investment securities (4).... 396,928 4,222 4.22 233,752 3,700 6.28 345,923 11,963 4.62 236,077 12,439 7.04
Federal funds sold and other. 78,960 329 1.65 108,056 1,618 5.94 56,616 683 1.61 87,880 3,682 5.60
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-
earning assets.......... 2,772,193 47,654 6.82 2,410,271 50,785 8.36 2,702,817 141,788 7.01 2,385,637 157,905 8.85
------ ------ ------- -------
Nonearning assets............... 341,644 265,746 335,674 268,870
---------- ---------- ---------- ----------
Total assets............... $3,113,837 $2,676,017 $3,038,491 $2,654,507
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing
demand deposits........... $ 314,273 727 0.92% $ 239,249 939 1.56% $ 309,146 2,318 1.00% $ 221,832 2,780 1.68%
Savings deposits............. 969,416 4,482 1.83 786,044 6,644 3.35 937,664 13,705 1.95 756,806 21,748 3.84
Time deposits of $100
or more.................... 301,910 2,684 3.53 303,962 3,987 5.20 297,688 8,641 3.88 302,907 12,773 5.64
Other time deposits (3)...... 483,853 4,032 3.31 507,957 6,652 5.20 474,416 12,770 3.60 536,525 22,765 5.67
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-
bearing deposits......... 2,069,452 11,925 2.29 1,837,212 18,222 3.93 2,018,914 37,434 2.48 1,818,070 60,066 4.42
Note payable and
short-term borrowings....... 127,797 891 2.77 112,512 1,388 4.89 136,564 3,072 3.01 122,675 5,463 5.95
Guaranteed preferred
debentures (3)........... 45,701 721 6.26 44,321 975 8.73 44,905 3,046 9.07 44,306 2,925 8.83
---------- ------ --------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities............. 2,242,950 13,537 2.39 1,994,045 20,585 4.10 2,200,383 43,552 2.65 1,985,051 68,454 4.61
------ ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits.............. 504,035 412,366 491,802 412,017
Other liabilities............ 55,319 39,176 47,848 39,327
---------- ---------- ---------- ---------
Total liabilities.......... 2,802,304 2,445,587 2,740,033 2,436,395
Stockholders' equity............ 311,533 230,430 298,458 218,112
---------- ---------- ---------- ---------
Total liabilities and
stockholders' equity.... $3,113,837 $2,676,017 $3,038,491 $2,654,507
========== ========== ========== ==========
Net interest income............. 34,117 30,200 98,236 89,451
====== ====== ====== =======
Interest rate spread............ 4.43 4.26 4.36 4.24
Net interest margin (5)......... 4.88% 4.97% 4.86% 5.01%
==== ==== ==== ====
- -------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $1,000 for the three and nine months ended September 30, 2002.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
Provision for Loan Losses
The provision for loan losses was $7.2 million and $22.7 million for
the three and nine months ended September 30, 2002, compared to $2.0 million and
$2.9 million for the comparable periods in 2001, respectively. The increase in
the provision for loan losses reflects a higher level of problem loans and
related loan charge-offs and past due loans resulting from the economic
conditions within our markets. Loan charge-offs were $5.1 million and $24.4
million for the three and nine months ended September 30, 2002, respectively, in
comparison to $1.9 million and $7.7 million for the comparable periods in 2001.
The increase in loan charge-offs for the three and nine months ended September
30, 2002 primarily reflects the 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, representing over 52% of loan charge-offs in 2002.
Loan recoveries were $2.1 million and $5.6 million for the three and nine months
ended September 30, 2002, respectively, in comparison to $1.5 million and $3.1
million for the comparable periods in 2001. Additionally, nonperforming assets
and past due loans have increased $4.1 million to $51.6 million at September 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. Management considered these trends in it
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 $6.8 million and $17.5 million for the three and
nine months ended September 30, 2002, respectively, in comparison to $9.0
million and $19.7 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 on derivative
instruments and other income.
Service charges on deposit accounts and customer service fees increased
to $3.6 million and $9.5 million for the three and nine months ended September
30, 2002, respectively, from $2.4 million and $6.6 million for the comparable
periods in 2001. We attribute the increase in service charges and customer
service fees to:
>> our acquisitions completed during 2001 and 2002;
>> 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, 2002, 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 $475,000 and $1.4
million for the three and nine months ended September 30, 2002, respectively, in
comparison to $320,000 and $986,000 for the comparable periods in 2001. The
increase for 2002 reflects changes in the portfolio mix of the underlying
investments which improved our return on this product as well as the
reinvestment of earnings.
The net gain on derivative instruments was $582,000 and $443,000 for
the three and nine months ended September 30, 2002, respectively, in comparison
to $5.1 million and $8.0 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 $2.2 million and $6.1 million for the three and nine
months ended September 30, 2002, respectively, in comparison to $1.3 million and
$4.4 million for the comparable periods in 2001. We attribute the primary
components of the increase to:
>> our acquisitions completed during 2001 and 2002;
>> 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 $22.4 million and $65.5 million for the three
and nine months ended September 30, 2002, respectively, compared to $22.5
million and $65.8 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 $9.0 million and $26.8 million for
the three and nine months ended September 30, 2002, respectively, in comparison
to $8.0 million and $24.3 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 $5.1 million and $12.6 million for the three and nine months ended September
30, 2002, respectively, in comparison to $3.4 million and $10.2 million for the
comparable periods in 2001. We primarily attribute the increase to our 2001
acquisitions, including certain nonrecurring expenses associated with lease
obligation terminations, 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 $7.7 million for the
three and nine months ended September 30, 2002, respectively, in comparison to
$2.6 million and $7.4 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 $2.1 million and $7.4
million for the three and nine months ended September 30, 2002, respectively, in
comparison to $3.1 million and $7.8 million for comparable periods in 2001. The
decrease in these fees is primarily due to a decrease in management fees paid to
First Banks for various corporate services offset by our expanded utilization of
legal and professional services in conjunction with general corporate
activities. 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 $300,000 and $832,000 for the three and nine months ended
September 30, 2002, respectively, in comparison to $1.4 million and $4.1 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 $2.6 million and $7.2 million for the three and nine
months ended September 30, 2002, respectively, in comparison to $3.3 million and
$9.3 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 $1.8 million charge in 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 $4.3 million and $10.6 million for
the three and nine months ended September 30, 2002, representing an effective
income tax rate of 37.8% and 38.3%, respectively, in comparison to $6.1 million
and $16.4 million, representing an effective income tax rate of 41.5% and 40.4%,
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:
September 30, 2002 December 31, 2001
------------------------ -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $605,000 1,038 555,000 1,006
Fair value hedges.................................... 100,900 2,196 54,900 1,881
Interest rate cap agreement.......................... 150,000 142 150,000 688
======== ===== ======= ======
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 nine months ended September 30, 2002, the net
interest income realized on our derivative financial instruments was $6.9
million and $19.4 million, respectively, in comparison to $3.5 million and $6.5
million for the comparable periods in 2001. The increase is primarily due to the
interest income associated with the additional swap agreement entered into
during June 2002 as well as the decline in prevailing interest rates. In
addition, we realized a net gain on derivative instruments, which is included in
noninterest income, of $582,000 and $443,000 for the three and nine months ended
September 30, 2002, respectively, in comparison to $5.1 million and $8.0 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
underlying hedged assets are certain loans within our commercial loan portfolio.
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 $1.6 million and $1.7 million at September 30, 2002 and December
31, 2001, respectively, and the amount payable by us was $583,000 and $647,000
at September 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 September 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)
September 30, 2002:
March 14, 2004........................... $ 50,000 1.95% 3.93% $ 1,452
September 20, 2004....................... 300,000 2.05 6.78 26,963
March 21, 2005........................... 200,000 1.93 5.24 14,044
April 2, 2006............................ 55,000 1.93 5.45 4,980
--------- --------
$ 605,000 1.99 5.91 $ 47,439
========= ===== ===== ========
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 underlying hedged liabilities are a portion of other
time deposits. The terms of the swap agreements provide for us to
pay interest on a quarterly basis and receive interest on a
semiannual basis. The amount receivable by us under the swap
agreements was $686,000 and $1.4 million at September 30, 2002
and December 31, 2001, respectively, and the amount payable by us
under the swap agreements was $238,000 and $318,000 at September
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. At
September 30, 2002, there were no amounts receivable or payable
by us under the swap agreement.
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 September 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)
September 30, 2002:
January 9, 2004........................... $ 10,000 1.86% 5.37% $ 444
January 9, 2006........................... 44,900 1.86 5.51 4,013
June 30, 2028............................. 46,000 3.83 8.50 336
--------- -------
$ 100,900 2.76 6.86 $ 4,793
========= ===== ===== =======
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 maturing
September 20, 2004, 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
September 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 $142,000 and $688,000, respectively.
Pledged Collateral
At September 30, 2002 and December 31, 2001, we had pledged investment
securities available for sale with a carrying value of $709,000 and $894,000,
respectively, in connection with our interest rate swap agreements. In addition,
at September 30, 2002 and December 31, 2001, we had accepted, as collateral in
connection with the interest rate swap agreements, cash of $49.6 million and
$1.5 million, respectively. At December 31, 2001, we had also accepted
investment securities with a fair value of $28.5 million as collateral in
connection with our interest rate swap agreements. We are permitted by contract
to sell or repledge the collateral accepted from our counterparties, however, at
September 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 90.4% and 91.1% of total interest
income for the three and nine months ended September 30, 2002, respectively, in
comparison to 89.5% and 89.8% for the comparable periods in 2001. Total loans,
net of unearned discount, were $2.31 billion, or 73.6% of total assets, at
September 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 $184.6 million and
$64.3 million at September 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:
September 30, December 31,
2002 2001
---- ----
(dollars expressed in thousands)
Nonperforming loans........................................................ $ 33,923 19,564
Other real estate.......................................................... 239 547
----------- ---------
Total nonperforming assets........................................ $ 34,162 20,111
=========== =========
Loans, net of unearned discount............................................ $ 2,310,588 2,323,263
=========== =========
Loans past due:
Over 30 days to 90 days................................................ $ 14,834 18,713
Over 90 days and still accruing........................................ 2,644 8,660
----------- ---------
Total past due loans.............................................. $ 17,478 27,373
=========== =========
Ratio of:
Allowance for loan losses to loans..................................... 2.02% 1.84%
Nonperforming loans to loans........................................... 1.47 0.84
Allowance for loan losses to nonperforming loans....................... 137.47 218.37
Nonperforming assets to loans and other real estate.................... 1.48 0.87
=========== =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $33.9 million at September 30, 2002, in
comparison to $19.6 million at December 31, 2001. Past due loans have decreased
36.1% at September 30, 2002 compared to December 31, 2001, however, they remain
at higher-than-normal levels, further contributing to the need for increased
provisions for loan losses in 2002. In addition, net loan charge-offs increased
significantly to $3.0 million and $18.8 million for the three and nine months
ended September 30, 2002, respectively, from $383,000 and $4.6 million for the
comparable periods in 2001, primarily due to the slowdown in economic conditions
as well as charge-offs aggregating $12.9 million on four large credit
relationships, representing over 52% of loan charge-offs in 2002. We attribute
the higher trends in nonperforming and past due loans and charge-offs to
economic conditions in our markets 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 Nine Months Ended
September 30, September 30,
------------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period............ $ 42,459 34,586 42,721 37,930
--------- -------- --------- --------
Loans charged-off......................................... (5,085) (1,902) (24,414) (7,699)
Recoveries of loans previously charged-off................ 2,059 1,519 5,626 3,062
--------- -------- --------- --------
Net loan charge-offs...................................... (3,026) (383) (18,788) (4,637)
--------- -------- --------- --------
Provision for loan losses................................. 7,200 2,000 22,700 2,910
--------- -------- --------- --------
Allowance for loan losses, end of period.................. $ 46,633 36,203 46,633 36,203
========= ======== ========= ========
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 $433.9 million and $445.1 million at September
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 September 30, 2002:
(dollars expressed in thousands)
Three months or less................................................... $ 180,872
Over three months through six months................................... 63,154
Over six months through twelve months.................................. 83,324
Over twelve months..................................................... 106,597
---------
Total......................................................... $ 433,947
=========
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 September 30, 2002 and December 31,
2001, there were $37.0 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 September
30, 2002 and December 31, 2001, FB&T's borrowing capacity under this agreement
was approximately $785.2 million and $774.5 million, respectively. In addition,
FB&T's borrowing capacity through its relationship with the Federal Home Loan
Bank was approximately $1.3 million and $1.0 million at September 30, 2002 and
December 31, 2001, respectively. FB&T had no amounts outstanding under either of
these agreements at September 30, 2002 and December 31, 2001, however, under a
separate Federal Home Loan Bank agreement, FB&T had advances outstanding of
$10.0 million and $10.5 million at September 30, 2002 and December 31, 2001,
respectively.
Management believes the available liquidity and operating results of
FB&T will be sufficient to provide funds for growth and to permit the
distribution of dividends to us sufficient to meet our operating and debt
service requirements, both on a short-term and long-term basis, and to pay the
dividends on the trust preferred securities issued by our financing subsidiary,
First America Capital Trust.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2001, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. While a decline in interest rates of less than 100 basis points
was projected to have a relatively minimal impact on our net interest income, an
instantaneous, parallel decline in the interest yield curve of 100 basis points
indicated a pre-tax projected loss of approximately 5.5% of net interest income,
based on assets and liabilities at December 31, 2001. At September 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 nine months ended September
30, 2002 as compared to the comparable periods in 2001 and further discussed
under "--Results of Operations." During the three and nine months ended
September 30, 2002, our asset-sensitive position and overall susceptibility to
market risks have not changed materially.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, our
Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
of our "disclosure controls and procedures" (as defined in rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) and concluded on the basis
of the evaluation that, as of the date of such evaluation, our disclosure
controls and procedures were effective. There have been no significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of that evaluation.
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
-------------- -----------
10(a) Agreement and Plan of Merger dated
September 23, 2002, by and among
First Banks, Inc., FBA Acquisition
Corporation and First Banks America,
Inc. (filed as Exhibit 99.2 to the
Form 8-K/A, dated November 8, 2002,
and incorporated herein by reference).
(b) We filed two current reports on Form 8-K for the three months ended
September 30, 2002 as follows:
>> August 14, 2002 - Item 5 of the report references a press release
announcing an agreement in principle between FBA and First Banks
for the buyout of FBA's publicly held common shares.
>> September 24, 2002 - Item 5 of the report references a press
release announcing the signing of an agreement and plan of merger
between FBA and First Banks that provides for the buyout of FBA's
publicly held common shares and the merger of a wholly owned
subsidiary of First Banks with and into FBA. (This Form 8-K/A
was corrected in a Form 8-K/A filed on November 8, 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
November 12, 2002 (Principal Executive Officer)
By: /s/ Allen H. Blake
-----------------------------------------
Allen H. Blake
Executive Vice President
and Chief Financial Officer
November 12, 2002 (Principal Financial and
Accounting Officer)
CERTIFICATION
REQUIRED BY RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, James F. Dierberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Banks America,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "evaluation date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
FIRST BANKS AMERICA, INC.
By:/s/ James F. Dierberg
-----------------------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
REQUIRED BY RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Allen H. Blake, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Banks America,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "evaluation date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
FIRST BANKS AMERICA, INC.
By: /s/ Allen H. Blake
--------------------------------
Allen H. Blake
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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 September 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: November 12, 2002 /s/ James F. Dierberg
-----------------------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive Officer
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 September 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: November 12, 2002 /s/ Allen H. Blake
-----------------------------------
Allen H. Blake
Executive Vice President and
Chief Financial Officer