UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File Number - 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 Number)
corporation 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)
-------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of class on which registered
-------------- -------------------
Common Stock, $0.15 Par Value Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
8.50% Cumulative Trust Preferred Securities
(issued by First America Capital Trust and guaranteed by its parent,
First Banks America, Inc.)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the Common Stock on the New York Stock
Exchange on March 22, 2002 was $31,202,798. For purposes of this computation,
officers, directors and 5% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
directors, officers or 5% beneficial owners are, in fact, affiliates of the
registrant.
As of March 22, 2002, there were 10,356,060 shares of the registrant's
Common Stock, $0.15 par value, and 2,500,000 shares of the registrant's Class B
Common Stock, $0.15 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 2001, or our 2001 Annual Report, are incorporated by reference into Parts I,
II and IV of this report, as follows:
The following portions of our 2001 Annual Report to Stockholders, or our
2001 Annual Report, are incorporated by reference in this report:
Page(s) in our 2001
Section Annual Report
------- -------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A")......... 3-26
Selected Consolidated and Other Financial Data............ 2
Consolidated Financial Statements......................... 28-55
Supplementary Financial Data.............................. 27
Range of Prices of Common Stock and Preferred Securities.. 57
Except for the parts of our 2001 Annual Report expressly incorporated by
reference, such report is not deemed filed with the Securities and Exchange
Commission.
PART I
Information appearing in this report, in documents incorporated by
reference herein and in documents subsequently filed with the Securities and
Exchange Commission which are not statements of historical fact may include
forward-looking statements with respect to our financial condition, results of
operations and business. These forward-looking statements are subject to certain
risks and uncertainties, not all of which can be predicted or anticipated.
Factors that may cause our actual results to differ materially from those
contemplated by the forward-looking statements herein include market conditions
as well as conditions affecting the banking industry generally and factors
having a specific impact on us, including but not limited to fluctuations in
interest rates and in the economy, including the negative impact on the economy
resulting from the events of September 11, 2001 in New York City and Washington,
D.C and the national response to those events.; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources, some of
which may offer and develop products and services that we do not offer; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; and our ability to respond to changes in technology.
With regard to our efforts to grow through acquisitions, factors that could
affect the accuracy or completeness of forward-looking statements contained
herein include the potential for higher than anticipated operating costs arising
from the geographic dispersion of our offices, as compared with competitors
operating solely in contiguous markets; the competition of larger acquirers with
greater resources; fluctuations in the prices at which acquisition targets may
be available for sale and in the market for our securities; and the potential
for difficulty or unanticipated costs in realizing the benefits of particular
acquisition transactions. Readers of our Form 10-K and our 2001 Annual Report
should therefore not place undue reliance on forward-looking statements.
Item 1. Business
General. First Banks America, Inc. is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended. We were incorporated in
Delaware in 1978 and our corporate headquarters are located in San Francisco,
California. Our principal function is to assist in the management of our banking
subsidiary.
At December 31, 2001, we had $3.06 billion in total assets, $2.32 billion
in loans, net of unearned discount, $2.56 billion in total deposits and $285.3
million in total stockholders' equity. We operate through one subsidiary bank
and one wholly owned subsidiary bank holding company, as follows:
The San Francisco Company, or SFC, headquartered in San Francisco,
California, and its wholly owned subsidiary:
First Bank & Trust, or FB&T, headquartered in San Francisco, California.
All of our Class B common stock, or Class B Stock, is owned by First Banks,
Inc., or First Banks, a multi-bank holding company headquartered in St. Louis,
Missouri. The Class B Stock has the same voting rights per share as the Common
Stock, and the two classes of stock are generally equivalent except the Class B
Stock is not registered with the Securities and Exchange Commission, not listed
on any exchange and, with limited exceptions, is not transferable, other than to
an affiliate of First Banks. In the event we were to commence the payment of
dividends to our stockholders, the Class B Stock would receive dividends only to
the extent that dividends on the Common Stock exceed $0.45 per share annually.
The terms of the Class B Stock allow First Banks to purchase additional shares
of Class B Stock through 2002 if a sufficient number of additional shares of
Common Stock are issued to cause First Banks' voting power to fall below 55%, at
prices to be determined based on a formula related to the book value per share
of common stock. The Class B Stock is convertible into shares of Common Stock at
the option of First Banks.
In February 1999, First Banks completed its purchase of 314,848 shares of
our Common Stock, pursuant to a tender offer that commenced in January 1999.
This tender offer increased First Banks' ownership interest to 82.34% of our
outstanding voting stock. At December 31, 1999, First Banks owned 83.37% of our
outstanding voting stock.
On October 31, 2000, we completed our acquisition of First Bank & Trust,
Newport Beach, California, a wholly owned subsidiary of First Banks, as
described further in the MD&A section of our 2001 Annual Report and in Note 2 to
our Consolidated Financial Statements. In conjunction with this transaction,
First Bank & Trust and two of our former wholly owned subsidiary banks, First
Bank of California and First Bank Texas N.A., were merged with and into Redwood
Bank, our other wholly owned subsidiary bank, which was renamed "First Bank &
Trust." In addition, in connection with our acquisition of First Bank & Trust,
we issued 5,727,340 shares of our Common Stock and 803,429 shares of our Common
Stock held for treasury to First Banks. At December 31, 2000, First Banks owned
92.86% of our outstanding voting stock.
On October 31, 2001, we completed our acquisition of BYL Bancorp, Orange,
California. In order to maintain our capital position at levels prescribed by
our regulatory agencies for bank holding companies and to provide a portion of
the funds required for this acquisition, we issued 803,757 shares of our common
stock to First Banks in exchange for $32.50 per share, or $26.1 million, in
cash. During the first half of 2002, we plan to offer a proportionate number of
shares of our common stock to our public shareholders at the same price paid by
First Banks. At December 31, 2001, First Banks owned 93.69% of our outstanding
voting stock.
As of March 22, 2002, the total Common Stock and Class B Stock owned by
First Banks constituted approximately 93.69% of our outstanding voting stock.
Accordingly, First Banks exercises control over our management, policies and the
election of our officers and directors.
For the three years ended December 31, 2001, we completed 10 acquisitions
and one branch office purchase. These transactions provided us with total assets
of $2.46 billion and 55 banking locations. For a description of these
acquisitions and our acquisition policies, see "MD&A - Acquisitions" and Note 2
to our Consolidated Financial Statements in our 2001 Annual Report.
Through FB&T, we offer a broad range of commercial and personal deposit
products, including demand, savings, money market and time deposit accounts. In
addition, we market combined basic services for various customer groups,
including packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial customers. We also
offer both consumer and commercial loans. Consumer lending includes residential
real estate, home equity and installment lending. Commercial lending includes
commercial, financial and agricultural loans, real estate construction and
development loans, commercial real estate loans, commercial leasing and trade
financing. Other financial services include mortgage banking, 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.
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.
The following table summarizes selected data about FB&T at December 31,
2001:
Loans, Net of
Number of Total Unearned Total
Locations Assets Discount Deposits
--------- ------ -------- --------
(dollars expressed in thousands)
56 $3,057,920 2,323,263 2,555,396
We purchase certain services and supplies, directly or through FB&T,
including information technology services, internal audit, loan review, income
tax preparation and assistance, accounting, asset/liability management and
investment services, loan servicing and other management and administrative
services, from our majority stockholder, First Banks. Additional information
regarding the nature of our arrangements with First Banks appears in Note 16 to
our Consolidated Financial Statements incorporated herein by reference.
Further discussion of our business operations and our policies is set forth
in the MD&A section of our 2001 Annual Report, which is incorporated herein by
reference.
Competition and Branch Banking. FB&T engages in highly competitive activities.
Those activities and the geographic markets served primarily involve competition
with other banks, some of which are affiliated with large regional or national
holding companies. Financial institutions compete based upon interest rates
offered on deposit accounts, interest rates charged on loans and other credit
and service charges, the quality of services rendered, the convenience of
banking facilities and, in the case of loans to large commercial borrowers,
relative lending limits.
Our principal competitors include other commercial banks, savings banks,
savings and loan associations, mutual funds, finance companies, trust companies,
insurance companies, leasing companies, credit unions, mortgage companies,
private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors have advantages
over us in providing certain services. We also compete with major multi-bank
holding companies, which are significantly larger than us and have greater
access to capital and other resources.
We believe we will continue to face competition in the acquisition of
independent banks and savings banks from bank and financial holding companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks situated in California and
Texas are permitted to establish branches throughout their respective states,
thereby creating the potential for additional competition in our service areas.
Supervision and Regulation
General. Federal and state laws extensively regulate FB&T and us primarily to
protect depositors and customers of FB&T. To the extent this discussion refers
to statutory or regulatory provisions, it is not intended to summarize all such
provisions and is qualified in its entirety by reference to the relevant
statutory and regulatory provisions. Changes in applicable laws, regulations or
regulatory policies may have a material effect on our business and prospects. We
are unable to predict the nature or extent of the effects on our business and
earnings that new federal and state legislation or regulation may have. The
enactment of the legislation described below has significantly affected the
banking industry generally and is likely to have ongoing effects on FB&T and us
in the future.
We are a registered bank holding company under the Bank Holding Company Act
of 1956. Consequently, the Board of Governors of the Federal Reserve System
(Federal Reserve) regulates, supervises and examines us in conjunction with our
majority owner, First Banks. We file annual reports with the Federal Reserve and
provide to the Federal Reserve additional information as it may require.
FB&T is chartered by the State of California and is subject to supervision,
regulation and examination by the California Department of Financial
Institutions. FB&T is also regulated by the Federal Deposit Insurance
Corporation, which provides deposit insurance of up to $100,000 for each insured
depositor.
Bank Holding Company Regulation. Our activities and those of FB&T have in the
past been limited to the business of banking and activities "closely related" or
"incidental" to banking. Under the Gramm-Leach-Bliley Act, which was enacted in
November 1999 and is discussed below, bank holding companies now have the
opportunity to seek broadened authority, subject to limitations on investment,
to engage in activities that are "financial in nature" if all of their
subsidiary depository institutions are well capitalized, well managed and have
at least a satisfactory rating under the Community Reinvestment Act (discussed
briefly below).
We are also subject to capital requirements applied on a consolidated
basis, which are substantially similar to those required of FB&T (briefly
summarized below). The Bank Holding Company Act also requires a bank holding
company to obtain approval from the Federal Reserve before:
o acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares
(unless it already owns or controls a majority of such shares);
o acquiring all or substantially all of the assets of another bank or
bank holding company; or
o merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of FB&T.
These include, but are not limited to, the Federal Reserve's source of strength
policy, which obligates a bank holding company such as us to provide financial
and managerial strength to its subsidiary banks; restrictions on the nature and
size of certain affiliate transactions between a bank holding company and its
subsidiary depository institutions; and restrictions on extensions of credit by
our subsidiary bank to executive officers, directors, principal stockholders and
the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance-sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and in particular those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio of
total capital to risk-adjusted assets required for bank holding companies is 8%.
At least one-half of the total capital must be composed of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum
requirements with respect to the ratio of our Tier I capital to our average
assets less goodwill and certain other intangible assets, or the Leverage Ratio.
Applicable requirements provide for a minimum Leverage Ratio of 3% for bank
holding companies that have the highest supervisory rating, while all other bank
holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%.
The Office of the Comptroller of the Currency (OCC) and the FDIC have
established capital requirements for banks under their respective jurisdictions
that are consistent with those imposed by the Federal Reserve on bank holding
companies. Information regarding our capital levels and FB&T's capital levels
under the federal capital requirements is contained in Note 19 to our
Consolidated Financial Statements incorporated herein by reference.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions will depend
upon how its capital levels compare to various relevant capital measures and
other factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. Under the regulations, a
bank will be:
o "well capitalized" if it has a total risk-based capital ratio of 10%
or greater, a Tier I capital ratio of 6% or greater and a Leverage
Ratio of 5% or greater and is not subject to any order or written
directive by any such regulatory authority to meet and maintain a
specific capital level for any capital measure;
o "adequately capitalized" if it has a total risk-based capital ratio of
8% or greater, a Tier I capital ratio of 4% or greater and a Leverage
Ratio of 4% or greater (3% in certain circumstances);
o "undercapitalized" if it has a total risk-based capital ratio of less
than 8%, a Tier I capital ratio of less than 4% or a Leverage Ratio of
less than 4% (3% in certain circumstances);
o "significantly undercapitalized" if it has a total risk-based capital
ratio of less than 6%, a Tier I capital ratio of less than 3% or a
Leverage Ratio of less than 3%; and
o "critically undercapitalized" if its tangible equity is equal to or
less than 2% of average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding company if
the bank would thereafter be "undercapitalized." Limitations exist for
"undercapitalized" depository institutions regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance of brokered
deposits and borrowings from the Federal Reserve System. These institutions are
also required to submit a capital restoration plan that includes a guarantee
from the institution's holding company. "Significantly undercapitalized"
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. The appointment of a receiver or
conservator may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by FB&T. The ability of FB&T to pay dividends is limited by federal laws,
by regulations promulgated by the bank regulatory agencies and by principles of
prudent bank management. Additional information concerning limitations on the
ability of FB&T to pay dividends appears in Note 15 to our Consolidated
Financial Statements incorporated herein by reference.
Customer Protection. FB&T is also subject to consumer laws and regulations
intended to protect consumers in transactions with depository institutions, as
well as other laws or regulations affecting customers of financial institutions
generally. These laws and regulations mandate various disclosure requirements
and substantively regulate the manner in which financial institutions must deal
with their customers. FB&T must comply with numerous regulations in this regard
and is subject to periodic examinations with respect to its compliance with the
requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act, or GLB Act, enacted in
1999, amended and repealed portions of the Glass-Steagall Act and other federal
laws restricting the ability of bank holding companies, securities firms and
insurance companies to affiliate with each other and to enter new lines of
business. The GLB Act established a comprehensive framework to permit financial
companies to expand their activities, including through such affiliations, and
to modify the federal regulatory structure governing some financial services
activities. This authority of financial firms to broaden the types of financial
services offered to customers and to affiliates with other types of financial
services companies may lead to further consolidation in the financial services
industry. However, it may lead to additional competition in the markets in which
we operate by allowing new entrants into various segments of those markets that
are not the traditional competitors in those segments. Furthermore, the
authority granted by the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring financial
services providers to disclose their policies regarding the privacy of customer
information to their customers and, subject to some exceptions, allowing
customers to "opt out" of policies permitting such companies to disclose
confidential financial information to non-affiliated third parties. Final
regulations implementing the new privacy standards became effective in 2001.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank "discount window," but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
FB&T is a member of the Federal Home Loan Bank System and is required to
hold an investment in the regional bank within that system. FB&T was in
compliance with these requirements at December 31, 2001, with an investment of
$1.3 million in stock of the Federal Home Loan Bank of San Francisco.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following:
o changes in the discount rate on member bank borrowings and the
targeted federal funds rate;
o the availability of credit at the "discount window;"
o open market operations;
o the imposition of changes in reserve requirements against deposits of
domestic banks;
o the imposition of changes in reserve requirements against deposits and
assets of foreign branches; and
o the imposition of and changes in reserve requirements against certain
borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
this use may affect interest rates charged on loans or paid on liabilities. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. We cannot predict the
effect that changes in monetary policy or in the discount rate on member bank
borrowings will have on our future business and earnings or those of FB&T.
Employment
As of March 22, 2002, we employed approximately 665 employees. None of
our employees are subject to a collective bargaining agreement. We consider our
relationships with our employees to be good.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of Part
III hereof (pursuant to General Instruction G) and is incorporated herein by
this reference.
Item 2. Properties
Our executive office and the headquarters of FB&T are located in a
building leased by FB&T, which is located at 550 Montgomery Street, San
Francisco, California. In addition to this office, as of March 22, 2002, FB&T
conducts business at 56 branch offices in Texas and California, of which 17 are
located in buildings that we own and 39 are located in buildings that we lease.
We consider the properties at which we do business to be in good
condition, suitable for our business conducted at each location. To the extent
our properties or those acquired in connection with the acquisition of other
entities provide space in excess of that effectively utilized in the operations
of FB&T, we seek to lease or sublease any excess space to third parties.
Additional information regarding the premises and equipment utilized by FB&T
appears in Note 6 to our Consolidated Financial Statements incorporated herein
by reference.
Item 3. Legal Proceedings
In the ordinary course of business, we and our subsidiaries become
involved in legal proceedings. Our management, in consultation with legal
counsel, believes the ultimate resolution of these proceedings will not have a
material adverse effect on our business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Market Information. We have two classes of common stock. Our Common Stock is
listed on the New York Stock Exchange, or the NYSE, under the symbol "FBA." All
of our Class B Stock is held by First Banks and is not listed or traded. See
"Item 1, Business - General." Continued listing of our Common Stock on the NYSE
is subject to various requirements, including the financial eligibility and
distribution requirements of the NYSE.
Information regarding the number of stockholders and the market prices
for Common Stock since January 1, 2002 is set forth under the caption "Investor
Information" of our 2001 Annual Report and is incorporated herein by reference.
Dividends. In recent years, we have not paid any dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and by the
receipt of dividend payments from FB&T, which is also subject to regulatory
requirements. See Note 15 to our Consolidated Financial Statements incorporated
herein by reference.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by
reference from page 2 of our 2001 Annual Report under the caption "Selected
Consolidated and Other Financial Data."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated herein by
reference from pages 3 through 26 of our 2001 Annual Report under the caption
"MD&A."
Item 7a.Quantitative and Qualitative Disclosure About Market Risk
The information required by this item is incorporated herein by
reference from page 11 of our 2001 Annual Report under the caption "MD&A -
Interest Rate Risk Management."
In addition to the information included in our 2001 Annual Report under the
caption "MD&A - Interest Rate Risk Management," we also prepare and review a
more traditional interest rate sensitivity position in conjunction with the
results of our simulation model. The following table presents the projected
maturities and periods to repricing of our rate sensitive assets and liabilities
as of December 31, 2001, adjusted to account for anticipated prepayments:
Over Over
Three Six Over
Three through through One Over
Months Six Twelve through Five
or Less Months Months Five Years Years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1)...................................... $1,908,960 182,491 154,312 76,306 1,194 2,323,263
Investment securities.......................... 108,096 23,036 25,386 154,986 56,703 368,207
Federal funds sold and other................... 15,676 -- -- -- -- 15,676
---------- ------- -------- ------- ------- ---------
Total interest-earning assets................ 2,032,732 205,527 179,698 231,292 57,897 2,707,146
Effect of interest rate swap agreements........ (555,000) -- -- 555,000 -- --
---------- ------- -------- ------- ------- ---------
Total interest-earning assets after
the effect of interest
rate swap agreements..................... $1,477,732 205,527 179,698 786,292 57,897 2,707,146
========== ======= ======== ======= ======= =========
Interest-bearing liabilities:
Interest-bearing demand accounts............... $ 109,901 68,318 44,555 32,674 41,585 297,033
Money market demand accounts................... 752,703 -- -- -- -- 752,703
Savings accounts............................... 28,566 23,525 20,164 28,566 67,213 168,034
Time deposits.................................. 237,348 193,737 216,827 159,478 177 807,567
Note payable................................... -- -- -- 71,000 -- 71,000
Other borrowed funds........................... 49,236 544 5,000 5,000 -- 59,780
---------- ------- -------- ------- ------- ---------
Total interest-bearing liabilities........... 1,177,754 286,124 286,546 296,718 108,975 2,156,117
Effect of interest rate swap agreements........ 54,900 -- -- (54,900) -- --
---------- ------- -------- ------- ------- ---------
Total interest-bearing liabilities
after the effect of interest
rate swap agreements..................... $1,232,654 286,124 286,546 241,818 108,975 2,156,117
========== ======= ======== ======= ======= =========
Interest-sensitivity gap:
Periodic....................................... $ 245,078 (80,597) (106,848) 544,474 (51,078) 551,029
Cumulative..................................... 245,078 164,481 57,633 602,107 551,029 =========
========== ======= ======== ======= =======
Ratio of interest-sensitive assets
to interest-sensitive liabilities:
Periodic................................ 1.20 0.72 0.63 3.25 0.53 1.26
Cumulative.............................. 1.20 1.11 1.03 1.29 1.26 =========
========== ======= ======== ======= =======
- ----------------------
(1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the table above. These
assumptions included:
o loans will repay at projected repayment speeds;
o mortgage-backed securities, included in investment securities, will
repay at projected repayment speeds;
o interest-bearing demand accounts and savings accounts are
interest-sensitive at rates ranging from 11% to 37% and 12% to 40%,
respectively, of the remaining balance for each period presented; and
o fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these
assumptions could materially affect the results reflected in the table above.
At December 31, 2001 and 2000, our asset-sensitive position on a cumulative
basis through the twelve-month time horizon was $57.6 million, or 1.88% of total
assets, and $154.0 million, or 5.62% of total assets, respectively. The
asset-sensitive position is attributable to the composition of our loan and
investment security portfolios as compared to our deposit base. We attribute the
decrease for 2001 to our interest rate swap agreements entered into in
conjunction with our interest rate risk management program in September 2000 and
during 2001.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of our assets and liabilities and changes in
interest rates. For this reason, we place greater emphasis on our simulation
model for monitoring our interest rate risk exposure.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements are incorporated herein by
reference from pages 28 through 55 of our 2001 Annual Report under the captions
"Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated
Statements of Income," "Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income," "Consolidated Statements of Cash Flows," and
"Notes to Consolidated Financial Statements."
Our Supplementary Financial Information is incorporated herein by
reference from page 27 of our 2001 Annual Report under the caption "Quarterly
Condensed Financial Data - Unaudited."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Board of Directors
Our Board of Directors, consisting of seven members, is identified in
the following table. Each of our directors was elected or appointed to serve a
one-year term and until his/her successor has been duly qualified for office.
Director Principal Occupation(s) During Last Five Years
Name Age Since and Directorships of Public Companies
---- --- ----- -------------------------------------
James F. Dierberg (1) 64 1994 Chairman of the Board of Directors, President and Chief Executive
Officer of FBA since 1994; Chairman of the Board and Chief
Executive Officer of First Banks since 1988; Director of First
Banks since 1979; President of First Banks from 1979 to 1992 and
from 1994 to October 1999; Trustee of First Preferred Capital
Trust,, First America Capital Trust, First Preferred Capital Trust
II and First Preferred Capital Trust III since 1997, 1998, May 2001
and October 2001, respectively.
Allen H. Blake 59 1994 Executive Vice President, Chief Operating Officer and Secretary of
FBA since 1998; Chief Financial Officer of FBA from 1994 to
September 1999 and since June 2001; Vice President and Secretary
of FBA from 1994 to 1998; President of First Banks since October
1999; Chief Operating Officer of First Banks since 1998; Director
and Secretary of First Banks since 1988; Chief Financial Officer
of First Banks from 1984 to September 1999 and since June 2001;
Trustee of First Preferred Capital Trust, First America Capital
Trust, First Preferred Capital Trust II and First Preferred
Capital Trust III since 1997, 1998, 2000 and October 2001,
respectively.
Charles A. Crocco, Jr. (2) 63 1988 Counsel to the law firm of Crocco & De Maio, P.C., Mount Kisco,
New York since April 2000; Counsel to the law firm of Jackson &
Nash, LLP., New York , New York from January 1999 to April 2000;
Counsel to Crocco & De Maio, P.C. in 1998; Partner in Crocco & De
Maio, P.C., New York, New York prior to 1998 ; Director of The
Hallwood Group Incorporated, a merchant banking firm.
Albert M. Lavezzo (2) 65 1998 President and Chief Executive Officer of the law firm of Favaro ,
Lavezzo, Gill, Caretti & Heppell, Vallejo, California, a
professional legal corporation, since 1974; Former Chairman of the
Board of Directors of Surety Bank (15 years) ; Director of FB&T ;
President of North Bay Exchange Co., Inc.
Terrance M. McCarthy 47 2001 Executive Vice President; Chairman of the Board of Directors,
President and Chief Executive Officer of FB&T since 1998. Prior to
1998, Mr. McCarthy was employed in various executive capacities
with First Banks.
Ellen D. Schepman (1) 27 1999 Retail Marketing Officer of First Banks since May 1999; Retail
Marketing Specialist of FB&T from 1997 to May 1999.
Edward T. Story, Jr. (2) 58 1987 President, Chief Executive Officer and Director of SOCO
International, plc, Comfort, Texas, a corporation listed on the
London Stock Exchange and engaged in international oil and gas
operations, since 1991; Director of Cairn Energy, plc and Hallwood
Realty Corporation.
- ----------------------------------
(1) Mrs. Schepman is the daughter of Mr. James F. Dierberg. See Item 12. Security Ownership of Certain Beneficial
Owners and Management.
(2) Member of the Audit Committee.
Executive Officers
Our executive officers, each of whom was elected to the office(s) indicated
by our Board of Directors, as of March 22, 2002, were as follows:
Principal Occupation(s)
Name Age Current FBA Office(s) Held During Last Five Years
---- --- -------------------------- ----------------------
James F. Dierberg 64 Chairman of the Board, President See Item 10 - "Directors and Executive
and Chief Executive Officer. Officers of the Registrant - Board of
Directors."
Allen H. Blake 59 Executive Vice President, Chief See Item 10 - "Directors and
Operating Officer, Chief Financial Executive Officers of the Registrant
Officer and Secretary. - Board of Directors."
Terrance M. McCarthy 47 Executive Vice President; Chairman See Item 10 - "Directors and
of the Board of Directors, Executive Officers of the Registrant
President and Chief Executive - Board of Directors."
Officer of FB&T.
Donald W. Williams 54 Executive Vice President and Chief Senior Executive Vice President and
Credit Officer. Chief Credit Officer of First Banks
since 2000;Executive Vice President and
Chief Credit Officer of First Banks
since 1996; Chairman of the Board
of Directors , President and Chief
Executive Officer of First Bank,a wholly
owned subsidiary of First Banks since
2000 ; and Chairman of the Board of
Directors of First Capital Group, Inc.,
a wholly owned subsidiary of First Banks
since 2000.
Except for the relationship of Mrs. Schepman and Mr. Dierberg described
above, there are no family relationships between any of our nominees for
director, our directors or executive officers or our directors or executive
officers of FB&T.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, our directors, executive officers or shareholders, who
are subject, in their capacity as such, to the reporting obligations set forth
in Section 16 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, filed on a timely basis reports required by Section 16(a) of the
Exchange Act during the year ended December 31, 2001.
Item 11. Executive Compensation
The following table sets forth certain information regarding compensation
earned during the year ended December 31, 2001, and specified information with
respect to the two preceding years, by Mr. McCarthy, who is our only executive
officer whose annual compensation in 2001 from FB&T or us exceeded $100,000.
Messrs. Dierberg, Blake, Williams and McCarthy do not receive any
compensation directly from FB&T or us. We and FB&T have entered into various
contracts with First Banks, of which Messrs. Dierberg, Blake and Williams are
directors and executive officers and Mr. McCarthy is an executive officer,
pursuant to which services are provided to FB&T and us (see "Compensation
Committee Interlocks and Insider Participation" for additional information
regarding contracts with First Banks).
SUMMARY COMPENSATION TABLE
--------------------------
All Other
Name and Principal Position(s) Year Salary (1) Bonus Compensation (2)
------------------------------ ---- ---------- ----- ----------------
Terrance M. McCarthy 2001 $220,000 38,000 5,200
Executive Vice President; 2000 180,000 25,000 6,650
Chairman of the Board of Directors, 1999 147,500 20,000 4,950
President and Chief Executive Officer
of FB&T
- ---------------------
(1) The total of all other annual compensation for Mr. McCarthy is less than
the amount required to be reported which is the lesser of (a) $50,000 or
(b) ten percent (10%) of the total of the annual salary and bonus paid to
that person.
(2) All other compensation reported represents matching contributions to our
401(k) Plan for the year indicated and ownership interests granted in units
of Star Lane Trust, First Bank's unit investment trust that was created on
January 21, 2000.
Compensation of Directors. Directors who are not our officers or affiliated with
First Banks (Messrs. Crocco, Story and Lavezzo) were paid a fee of $2,000 for
each meeting of our Board of Directors attended, and a fee of $500 for each
committee meeting attended. For their service as directors in 2001, Messrs.
Crocco, Story and Lavezzo each received aggregate fees of $10,000. Mrs.
Schepman, who serves as a Retail Marketing Officer of First Banks, but who is
not an officer of FBA, also received $8,000 for her service as a director in
2001. Furthermore, Mr. Lavezzo received $1,500 as a member of the Board of
Directors of FB&T.
Messrs. Crocco, Story and Lavezzo and Mrs. Schepman also participated in
our 1993 Directors' Stock Bonus Plan, or our Stock Bonus Plan, which provides
for an annual grant of 500 shares of our Common Stock to each such director.
Future grants, if any, would apply equally to current directors and to any
individual who becomes our director in the future. The maximum number of shares
that may be issued may not exceed 16,667 shares, and the plan expired on July 1,
2001. Directors' compensation expense of $46,000 was incurred in 2001 in
connection with our Stock Bonus Plan.
None of our three directors who are also executive officers of First Banks
(Messrs. Dierberg, Blake and McCarthy) receive any compensation from FB&T or us
for service as a director, nor do they participate in our Stock Bonus Plan or
any of our other compensation plans. First Banks, of which Messrs. Dierberg,
Blake and Williams are directors and executive officers and Mr. McCarthy is an
executive officer, provides various services to FB&T and us for which it is
compensated (see "Compensation Committee Interlocks and Insider Participation").
Compensation Committee Interlocks and Insider Participation. Messrs. Dierberg,
Blake and Williams, who are our executive officers but do not receive any
compensation for their services as such, are also executive officers and members
of the Board of Directors of First Banks. First Banks does not have a separate
compensation committee, but its Board of Directors performs the functions of
such a committee. Except for the foregoing, none of our executive officers
served during 2001 as a member of our compensation committee, or any other
committee performing similar functions, or as a director of another entity, any
of whose executive officers or directors served on our Board of Directors.
We purchase certain services and supplies from or through First Banks. Our
financial position and operating results could significantly differ from those
that would be obtained if our relationship with First Banks did not exist.
First Banks provides management services to FB&T and us. Management
services are provided under management fee agreements whereby we compensate
First Banks for our use of personnel for various functions including internal
audit, loan review, income tax preparation and assistance, accounting,
asset/liability management and investment services, loan servicing and other
management and administrative services. Fees paid under these agreements were
$8.0 million, $5.2 million and $4.4 million for the years ended December 31,
2001, 2000 and 1999, respectively.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his adult children, provides information technology and
various related services to FB&T and us under the terms of information
technology agreements. Fees paid under these agreements were $9.2 million, $6.8
million and $5.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
FB&T had $93.1 million and $108.2 million in whole loans and loan
participations outstanding at December 31, 2001 and 2000, respectively, that
were purchased from First Bank, a wholly owned subsidiary of First Banks. In
addition, FB&T had sold $137.6 million and $146.1 million in whole loans and
loan participations to First Bank at December 31, 2001 and 2000, respectively.
These loans and loan participations were acquired and sold at interest rates and
terms prevailing at the dates of their purchase or sale and under standards and
policies followed by FB&T.
As more fully discussed in Note 8 to our Consolidated Financial Statements
of our 2001 Annual Report, we have a $100.0 million revolving note payable to
First Banks. At December 31, 2001 and 2000, the amounts outstanding under our
note payable were $71.0 million and $98.0 million, respectively.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 22, 2002, certain
information with respect to the beneficial ownership of our Common Stock and
Class B Stock by each person known to us to be the beneficial owner of more than
five percent of the outstanding shares of either class of our stock, by each of
our directors and executive officers and by all of our executive officers and
directors as a group:
Title of Name of Number of Shares and Nature Percent of
Class Beneficial Owner of Beneficial Ownership Class
----- ---------------- ----------------------- -----
Class B Stock First Banks, Inc. 2,500,000 (1)(2)(3) 100.0%
135 North Meramec
Clayton, Missouri 63105
Class B Stock James F. Dierberg 2,500,000 (1)(2)(3) 100.0
Common Stock First Banks, Inc. 9,545,107 (1)(2)(3) 92.2
Common Stock James F. Dierberg 9,545,107 (1)(2)(3) 92.2
Common Stock Allen H. Blake 1,000 (4) (*)
Common Stock Charles A. Crocco, Jr. 8,272 (4) (*)
Common Stock Albert M. Lavezzo 10,710 (4) (*)
Common Stock Terrance M. McCarthy 2,000 (4) (*)
Common Stock Ellen D. Schepman 1,500 (2)(3)(4) (*)
Common Stock Edward T. Story, Jr. 11,182 (4) (*)
Common Stock Donald W. Williams 100 (4) (*)
All executive officers 9,579,871 shares 92.5% of
and directors as a Common Stock Common Stock
group (8 persons)
2,500,000 shares 100% of
Class B Stock Class B Stock
- ------------------------
(*) Less than one percent
(1) The shares shown as beneficially owned by First Banks and James F. Dierberg
comprise 100% of the outstanding shares of Class B Stock and 92.2% of the
outstanding shares of Common Stock. Each share of Common Stock and Class B
Stock is entitled to one vote on matters subject to stockholder vote. All
of the shares of Class B Stock and Common Stock owned by First Banks are
pledged to secure a loan to First Banks from a group of unaffiliated
lenders. The related credit agreement contains customary provisions which
could ultimately result in the transfer of such shares if First Banks were
to default in the repayment of the loan and such default were not cured, or
other arrangements satisfactory to the lenders were not made, by First
Banks.
(2) The controlling stockholders of First Banks are (i) the James F. Dierberg
II Family Trust, dated December 30, 1992; (ii) Irrevocable Trust of Michael
J. Dierberg, dated May 1, 1998; (iii) the Ellen C. Dierberg Family Trust,
dated December 30, 1992; (iv) James F. Dierberg, trustee of the James F.
Dierberg living trust, dated October 8, 1985; (v) the Michael J. Dierberg
Family Trust, dated December 30, 1992; and (vi) First Trust (Mary W.
Dierberg and First Bank, Trustees) established U/I James F. Dierberg, dated
December 30, 1992. Mr. James F. Dierberg and Mrs. Mary W. Dierberg are
husband and wife, and Messrs. James F. Dierberg II, Michael James Dierberg
and Mrs. Ellen D. Schepman, formerly Ellen C. Dierberg, are their adult
children.
(3) Due to the relationships among James F. Dierberg, Mary W. Dierberg, First
Bank and the three adult children of James F. and Mary W. Dierberg, Mr.
Dierberg is deemed to share voting and investment power over all of the
outstanding voting stock of First Banks which in turn exercises voting and
investment power over the shares of Common Stock and Class B Stock
attributed to it in the table.
(4) All of the shares attributed in the table to Messrs. Blake, Crocco,
Lavezzo, McCarthy, Story and Williams and Mrs. Schepman are owned by them
directly.
Item 13. Certain Relationships and Related Transactions
Outside of normal customer relationships, no directors, executive
officers or stockholders holding over 5% of our voting stock, and no
corporations or firms with which such persons or entities are associated,
currently maintain or have maintained since the beginning of the last full
fiscal year, any significant business or personal relationships with FB&T or us,
other than that which arises by virtue of such position or ownership interest in
FB&T or us, except as set forth in Item 11 - "Executive Compensation -
Compensation of Directors," or as described in the following paragraphs.
FB&T has had in the past, and may have in the future, loan transactions
in the ordinary course of business with our directors or their affiliates. These
loan transactions have been and will be on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not and will not involve more
than the normal risk of collectibility or present other unfavorable features.
FB&T does not extend credit to our officers or to officers of FB&T, except
extensions of credit secured by mortgages on personal residences, loans to
purchase automobiles and personal credit card accounts.
Certain of our directors and officers and their respective affiliates
have deposit accounts with FB&T. It is the policy of FB&T not to permit any of
their officers or directors or their affiliates to overdraw their respective
deposit accounts unless that person has been previously approved for overdraft
protection under a plan whereby a credit limit has been established in
accordance with the standard credit criteria of FB&T.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements and Supplementary Data - The financial
statements and supplementary data filed as part of this
Report are listed under Item 8.
2. Financial Statement Schedules - These schedules are omitted
for the reason they are not required or are not applicable.
3. Exhibits - The exhibits are listed in the index of exhibits
required by Item 601 of Regulation S-K at Item (c) below and
are incorporated herein by reference.
(b) Reports on Form 8-K.
A current report on Form 8-K was filed on November 7, 2001.
Item 2 of the Report describes our acquisition of BYL
Bancorp, and its wholly owned banking subsidiary, BYL Bank
Group, which we completed on October 31, 2001.
(c) The index of required exhibits is included beginning on
page 19 of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS AMERICA, INC.
By: /s/ James F. Dierberg
--------------------------------------------
James F. Dierberg
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
March 25, 2002
By: /s/ Allen H. Blake
--------------------------------------------
Allen H. Blake
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 25, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/James F. Dierberg Director March 25, 2002
-------------------------
James F. Dierberg
/s/Allen H. Blake Director March 25, 2002
-------------------------
Allen H. Blake
/s/Charles A. Crocco, Jr. Director March 25, 2002
-------------------------
Charles A. Crocco, Jr.
/s/Albert M. Lavezzo Director March 25, 2002
-------------------------
Albert M. Lavezzo
/s/Terry M. McCarthy Director March 25, 2002
-------------------------
Terry M. McCarthy
/s/Ellen D. Schepman Director March 25, 2002
-------------------------
Ellen D. Schepman
/s/Edward T. Story, Jr. Director March 25, 2002
-------------------------
Edward T. Story, Jr.
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3(a) Restated Certificate of Incorporation of the Company effective August
31, 1995 (filed as Exhibit 3(a) to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference).
3(b) Amended and Restated Bylaws of the Company (as amended April 21, 1995)
(filed as Exhibit 3(b) to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by reference).
3(c) Certificate of Amendment of the Restated Certificate of Incorporation
of the Company effective June 16, 1999 (filed as Exhibit 3(c) to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference).
3(d) Certificate of Amendment of the Restated Certificate of Incorporation
of the Company effective December 26, 2000 (filed as Exhibit 3(d) on
Form 10-K for the year ended December 31, 2000 and incorporated herein
by reference).
4(a) Specimen Stock Certificate for Common Stock (filed as Exhibit 1.01 to
the Company's Amendment No. I to Form 8-A on Form 8, dated September
4, 1987, and incorporated herein by reference).
4(b) The Company agrees to furnish to the Securities and Exchange
Commission upon request pursuant to Item 601(b)(4)(iii) of Regulation
S-K, copies of instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries.
4(c) Agreement as to Expenses and Liabilities (incorporated herein by
reference to Exhibit 4(a) to the Company's Registration Statement on
Form S-2, file number 333-58355, dated July 1, 1998).
4(d) Preferred Securities Guarantee Agreement (incorporated herein by
reference to Exhibit 4(b) to the Company's Registration Statement on
Form S-2, file number 333-58355, dated July 1, 1998).
4(e) Indenture (incorporated herein by reference to Exhibit 4(c) to the
Company's Registration Statement on Form S-2, file number 333-58355,
dated July 1, 1998).
4(f) Amended and Restated Trust Agreement (incorporated herein by reference
to Exhibit 4(d) to the Company's Registration Statement on Form S-2,
file number 333-58355, dated July 1, 1998).
10(a)* BancTEXAS Group Inc. 1990 Stock Option Plan (as amended July 22,
1993) (filed as Exhibit 10(c) to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993, and incorporated herein by
reference).
10(b)* 1993 Directors' Stock Bonus Plan (filed as Exhibit 10(k) to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and
incorporated herein by reference).
10(c) Stock Purchase and Operating Agreement by and between First Banks,
Inc., a Missouri Corporation and the Company, dated May 19, 1994
(filed as Exhibit 10(d) to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994 and incorporated herein by reference).
10(d)* Financial Management Policy by and between First Banks, Inc. and the
Company, dated September 15, 1994 (filed as Exhibit 10(m) to the
Annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10(e)* Federal Funds Agency Agreement by and between First Banks, Inc. and
the Company, dated September 15, 1994 (filed as Exhibit 10(k) to the
Annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10(f) Promissory note payable to First Banks, Inc. dated August 23, 2001
(filed as Exhibit 10(b) to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 and incorporated herein by
reference).
10(g)* Resignation and General Release Agreement among Anthony S. Dee,
Redwood Bank, First Banks America, Inc. and its affiliates, dated
March 12, 2000 (filed as Exhibit 10(bb) to the Annual Report on Form
10-K for the year ended December 31, 1999 and incorporated herein by
reference).
10(h) Agreement and Plan of Reorganization by and between First Banks
America, Inc. and Commercial Bank of San Francisco, dated June 27,
2000 (filed as Exhibit 10(dd) to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 and incorporated herein by reference).
10(i) Agreement and Plan of Reorganization by and among First Banks
America, Inc., Redwood Bank, First Banks, Inc. and First Bank & Trust,
dated June 29, 2000 (filed as Exhibit 10(ee) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 and incorporated
herein by reference).
10(j) Agreement and Plan of Reorganization by and between First Banks
America, Inc. and Millennium Bank, dated August 23, 2000 (filed as
Exhibit 10(ff) to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 and incorporated herein by reference).
10(k) Agreement and Plan of Merger by and among First Banks America, Inc.,
Redwood Bank, The San Francisco Company and Bank of San Francisco,
dated September 22, 2000 (filed as Exhibit 10(gg) to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference).
10(l) Agreement and Plan of Reorganization by and among First Banks
America, Inc., First Bank & Trust, BYL Bancorp and BYL Bank Group,
dated June 22, 2001 (filed as Exhibit 10(a) to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 and incorporated herein
by reference).
10(m)* Service Agreement by and between First Services, L.P. and First Bank
& Trust, dated October 15, 2001 - filed herewith.
13 The Company's 2001 Annual Report to Stockholders filed herewith.
Portions not specifically incorporated by reference in this Report are
not deemed "filed" for purposes of the Securities Exchange Act of 1934
- filed herewith.
21 Subsidiaries of the Company - filed herewith.
23 Consent of KPMG LLP - filed herewith.
- --------------------
* Exhibits designated by an asterisk in this Index to Exhibits relate to
management contracts and/or compensatory plans or arrangements.
EXHIBIT 10(m)
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into as of the Fifteenth
day of October, 2001, by and between FIRST SERVICES, L.P., a Missouri
Limited Partnership and FIRST BANK & TRUST, a banking institution duly
organized and existing by virtue of the laws of the State of California.
WHEREAS, FIRST BANK & TRUST and FIRST SERVICES, L.P. entered into a
Service Agreement dated April 1, 1997; and
WHEREAS, said Service Agreement was assigned to First Services, L.P.
on or about April 1, 1997; and
WHEREAS, FIRST SERVICES, L.P. and FIRST BANK & TRUST desire to amend
and restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($10.00) in hand
paid, each to the other, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated April 1, 1997, and hereby substitute in its
place the Service Agreement herein contained.
II. SERVICES
A. First Services, L.P. shall furnish First Bank & Trust data
processing and item processing services selected by First
Bank & Trust from the Product and Price Schedule as per
Attachment 1, attached hereto and incorporated herein by
reference thereto. Additional services may be selected upon
prior written notice to First Services, L.P. at First
Services, L.P.'s then current list price by executing an
amended Summary Page.
B. First Services, L.P. will provide conversion and training
services for the fees specified from the Product and Price
Schedule (Attachment 1). Classroom training in the use and
operation of the system for the number of First Bank & Trust
personnel mutually agreed upon in the conversion planning
process will be provided at a training facility mutually
agreed upon. Conversion services are those activities
designed to transfer the processing of First Bank & Trust's
data from its present processing company to First Services,
L.P.
C. First Services, L.P. will also provide Network Support
Service consisting of communication line monitoring and
diagnostic equipment and support personnel to discover,
diagnose, repair or report line problems to the appropriate
telephone company. The fee for this service is also listed
from the Product and Price Schedule (Attachment 1).
D. First Services, L.P. shall upon request act as First Bank &
Trust's designated representative to arrange for the
purchase, and installation of data lines necessary to access
the First Services, L.P. system. Where requested, additional
dial-up lines and equipment to be utilized as a backup to
the regular data lines may also be ordered. First Services,
L.P. shall bill First Bank & Trust for the actual charges
incurred for the data lines and for the maintenance of the
modems and other interface devices.
E. First Services, L.P. will provide and support an Internet
Banking application capability, at a fee listed on the
Product and Pricing Schedule (Attachment 1). First Services,
L.P. will ensure access to this system by employees and
those customers who meet the requirements established by the
First Bank Internet Banking Group. Any request for access
that is denied will be resolved by mutual agreement of the
parties hereto.
F. First Services, L.P. will provide e-mail, Internet, and
Intranet capabilities at a fee listed on the Product and
Pricing Schedule (Attachment 1).
G. Processing priorities will be determined by mutual agreement
of the parties hereto.
H. In addition, First Services, L.P. acknowledges that First
Bank & Trust acts as a correspondent bank to certain
Affiliate Banks and that as part of its duties hereunder
First Services, L.P. will be performing certain services for
First Bank & Trust which are necessary because of its status
as a correspondent bank.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
October 15, 2001. Upon expiration, the Agreement will automatically
renew for successive terms of twelve (12) months each unless either
party shall have provided written notice to the other at least
one-hundred eighty (180) days prior to the expiration of the then
current term, of its intent not to renew. In the event of termination,
First Services, L.P. shall provide reasonable time allowance to allow
First Bank & Trust to convert to another system.
IV. SOFTWARE / FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
A. Fees for First Services, L.P.'s services are set forth from
the Product and Price Schedule (Attachment 1) including
where applicable minimum monthly charges and payment
schedules for onetime fees.
B. Standard Fees shall be invoiced no later than the fifteenth
(15th) of each month for the then current month. Terms of
payment shall be net cash.
C. The Base Service Charge listed from the Product and Price
Schedule (Attachment 1) shall not change more than twice a
year. The fee schedule shall be reviewed annually to ensure
fair market value in pricing. Comparisons will be made with
peers and other providers of similar services. New products
and services can be added as they become available and will
be priced accordingly.
D. This above limitation shall not apply to pass-thru expenses.
A pass-thru expense is a charge for goods or services by
First Services, L.P. on First Bank & Trust's behalf that are
to be billed to First Bank & Trust without mark-up.
E. The fees listed from the Product and Price Schedule
(Attachment 1) do not include and First Bank & Trust is
responsible for furnishing transportation or transmission of
information between First Services, L.P.'s data center,
First Bank & Trust's site and any applicable clearing house,
regulatory agency or Federal Reserve Bank. Where First Bank
& Trust has elected to have First Services, L.P. provide
Telecommunication Services, the price for the Services will
be provided and billed as a pass-thru expense.
F. Network Support Service Fees and Local Network Fees are
based upon services rendered from First Services, L.P.'s
premises. Off-premise support will be provided upon First
Bank & Trust's request on an as available basis at First
Services, L.P. then current charges for time and materials,
plus reasonable travel and living expenses.
VI. CLIENT OBLIGATIONS
A. First Bank & Trust shall be solely responsible for the
input, transmission or delivery of all information and data
required by First Services, L.P. to perform the services
except where First Bank & Trust has retained First Services,
L.P. to handle such responsibilities on its behalf. The data
shall be provided in a format and manner approved by First
Services, L.P. First Bank & Trust will provide at its own
expense or procure from First Services, L.P. all equipment,
computer software communication lines and interface devices
required to access the First services, L.P. System. If First
Bank & Trust has elected to provide such items itself, First
Services, L.P. shall provide First Bank & Trust with a list
of compatible equipment and software.
B. First Bank & Trust shall designate appropriate First Bank &
Trust personnel for training in the use of the First
services, L.P. System, shall allow First Services, L.P.
access to First Bank & Trust's site during normal business
hours for conversion and shall cooperate with First
services, L.P. Personnel in the conversion and
implementation of the services.
C. First Bank & Trust shall comply with any operating
instructions on the use of the First Services, L.P. reports
furnished by First Services, L.P. for accuracy and shall
work with First Services, L.P. to reconcile any out of
balance conditions. First Bank & Trust shall determine and
be responsible for the authenticity and accuracy of all
information and data submitted to First Services, L.P.
D. First Bank & Trust shall furnish, or if First Services, L.P.
agrees to so furnish, reimburse First Services, L.P. for
courier services applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying the First
Services, L.P. system to improve service and to comply with federal
government regulations applicable to the data utilized in providing
services to First Bank & Trust. First Services, L.P. reserves the
right to make changes in the service, including, but not limited to
operating procedures, security procedures, the type of equipment
resident at and the location of First Services, L.P.'s data center.
VIII. CLIENT CONFIDENTIAL INFORMATION
A. First Services, L.P. shall treat all information and data
relating to First Bank & Trust business provided to First
Services, L.P. by First Bank & Trust, or information
relating to First Bank & Trust's customers, as confidential
and shall safe-guard First Bank & Trust's information with
the same degree of care used to protect First Services,
L.P.'s confidential information. First Services, L.P. and
First Bank & Trust agree that master and transaction data
files are owned by and constitute property of First Bank &
Trust data and records shall be subject to regulation and
examination by State and Federal supervisory agencies to the
same extent as if such information were on First Bank &
Trust's premises. First Services, L.P.'s obligations under
this Section VIII shall survive the termination or
expiration of this Agreement.
B. First Services, L.P. agrees now and at all times in the
future that all such Confidential Information shall be held
in strict confidence and disclosed only to those employees
whose duties reasonably require access to such information.
First Services, L.P. may use such Confidential Information
only in connection with its performance under this
Agreement. Confidential Information shall be returned to
First Bank & Trust or destroyed upon First Bank & Trust's
request once the services contemplated by this Agreement
have been completed or upon termination of this Agreement.
C. First Services, L.P. shall maintain adequate backup
procedures including storage of duplicate record files as
necessary to reproduce First Bank & Trust's records and
data. In the event of a service disruption due to reasons
beyond First Services, L.P.'s control, First Services L.P.
shall use diligent efforts to mitigate the effects of such
an occurrence.
D. First Services, L.P. shall establish and maintain policies
and procedures to insure compliance with this section. First
Services, L.P. agrees to permit First Bank & Trust to audit
First Services' compliance with this section during regular
business hours upon reasonable notice to First Services,
L.P. The provisions of this section shall survive any
termination of this Agreement.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
A. First Bank & Trust shall not use or disclose to any third
persons any confidential information concerning First
Services, L.P. confidential information is that which
relates to First Services, L.P.'s software, research,
development, trade secrets or business affairs including,
but not limited to, the terms conditions of this Agreement
but does not include information in the public domain
through no fault of First Bank & Trust. First Bank & Trust
obligations under this Section IX shall survive the
termination or expiration of this agreement.
B. First Services, L.P.'s system contains information and
computer software that is proprietary and confidential
information of First Services, L.P., its suppliers and
licensees. First Bank & Trust agrees not to attempt to
circumvent the devices employed by First Services, L.P. to
prevent unauthorized access to the First Services, L.P.'s
system.
X. WARRANTIES
First Services, L.P. will accurately process First Bank & Trust's work
provided that First Bank & Trust supplies accurate data and follows
the procedures described in First Services, L.P.'s User Manuals,
notices and advises. First Services, L.P. personnel will exercise due
care in the processing of First Bank & Trust's work. In the event of
an error caused by First Services, L.P.'s personnel, programs or
equipment, First Services, L.P. shall correct the data and/or
reprocess the affected report at no additional cost to First Bank &
Trust.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM FIRST BANK & TRUST'S USE OF FIRST SERVICES, L.P.'S SERVICES, OR
FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE, UNDER THIS
AGREEMENT REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN
CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL
CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY
DAMAGE OR LOSS INCURRED OR SUSTAINED BY FIRST BANK & TRUST RELATING TO
THIS AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED
TO THE AMOUNT OF TOTAL FEES PAID BY FIRST BANK & TRUST TO FIRST
SERVICES, L.P. IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE
CLAIM ACCRUED. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A
DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE
AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE.
XII. PERFORMANCE STANDARDS
A. On-Line Availability - First Services, L.P.'s standard of
performance shall be on-line availability of the system 98%
of the time that it is scheduled to be so available over a
three (3) month period (the "Measurement Period"). Actual
on-line performance will be calculated monthly by comparing
the number of hours which the system was scheduled to be
operational on an on-line basis with the number of hours, or
a portion thereof, it was actually operational on an on-line
basis. Downtime may be caused by operator error, hardware
malfunction or failure, or environmental failures such as
loss of power or air conditioning. Downtime caused by
reasons beyond First Services, L.P.'s control should not be
considered in the statistics.
B. Report Availability - First Services, L.P.'s standard of
performance for report availability shall be that, over a
three (3) month period, ninety-five percent (95%) of all
Critical Daily Reports shall be available for remote
printing on time without significant errors. A Critical
Daily Report shall mean priority group reports, which First
Services, L.P. and First Bank & Trust have mutually agreed
in writing, are necessary to properly account for the
previous day's activity and properly notify First Bank &
Trust of overdraft, NSF or return items. A significant error
is one that impairs First Bank & Trust's ability to properly
account for the previous days activity and/or properly
account for overdraft, NSF or return items. Actual
performance will be calculated monthly by comparing the
total number of First Bank & Trust reports scheduled to be
available from First Services, L.P. to the number of reports
which were available on time and without error.
C. Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and
such failure is not the result of First Bank & Trust's error
or omission, First Bank & Trust sole and exclusive remedy
for such default shall be the right to terminate this
Agreement in accordance with the provisions of this
paragraph. In the event that First Services, L.P. fails to
achieve any Performance Standards, alone or in combination,
for the prescribed measurement period, First Bank & Trust
shall notify First Services, L.P. of its intent to terminate
this agreement if First Services, L.P. fails to restore
performance to the committed levels. First Services, L.P.
shall advise First Bank & Trust promptly upon correction of
the system deficiencies (in no event shall corrective action
exceed sixty (60) days from the notice date) and shall begin
an additional measurement period. Should First Services,
L.P. fail to achieve the required Performance Standards
during the remeasurement period, First Bank & Trust may
terminate this Agreement and First Services, L.P. shall
cooperate with First Bank & Trust to achieve an orderly
transition to First Bank & Trust's replacement processing
system. First Bank & Trust may also terminate this Agreement
if First Services, L.P.'s performance for the same standard
is below the relevant performance standard for more than two
(2) measurement periods in any consecutive twelve (12)
months or for more than five (5) measurement periods during
the term of this agreement. During the period of transition,
First Bank & Trust shall pay only such charges as are
incurred for monthly fees until the date of deconversion.
First Services, L.P. shall not charge First Bank & Trust for
services relating to First Bank & Trust's deconversion.
D. Audit - First Bank & Trust shall have the right to perform
reasonable audits, at its cost, upon giving written notice
to First Services, L.P. of its intent to do so. First
Services, L.P. shall provide, upon request, financial
information to First Bank & Trust.
XIII. BUSINESS CONTINUITY / DISASTER RECOVERY
A. A Disaster shall mean any unplanned interruption of the
operations of or inaccessibility to the First Services, L.P.
data center which appears in First Services, L.P.'s
reasonable judgment to require relocation of processing to
an alternative site. First Services, L.P. shall notify First
Bank & Trust as soon as possible after it deems a service
outage to be a Disaster. First Services, L.P. shall move the
processing of First Bank & Trust's critical services to an
alternative processing center as expeditiously as possible.
First Services, L.P. shall work with First Bank & Trust to
define those services deemed as critical to the operation,
revenue, and capital preservation of the Bank. First Bank &
Trust shall maintain adequate records of all transactions
during the period of service interruption and shall have
personnel available to assist First Services, L.P., Inc. in
implementing the switch over to be alternative processing
site. During a disaster, non-critical, optional or
on-request services shall be provided by First Services,
L.P. only to the extent that there is adequate capacity at
the alternate center and only after stabilizing the
provision of critical services.
B. First Services, L.P. shall work with First Bank & Trust to
establish a plan for alternative data communications in the
event of a disaster. First Bank & Trust shall be responsible
for furnishing any additional communications equipment and
data lines required under the adopted plan.
C. First Services, L.P. shall test the Business Continuity Plan
by conducting, at least, one annual test. First Bank & Trust
agrees to participate in and assist First Services, L.P.
with such testing. Test results will be made available to
First Bank & Trust's regulators, internal and external
auditors, and (upon request) to First Bank & Trust's
insurance underwriters.
D. First Bank & Trust understands and agrees that the Business
Continuity Plan is designed to minimize but not eliminate
risks associated with a disaster affecting First Services,
L.P.'s data center. First Services, L.P. does not warrant
that service will be uninterrupted or error free in the
event of a disaster. First Bank & Trust maintains
responsibility for adopting a business continuity plan
relating to disasters affecting First Bank & Trust's
facilities and for securing resources necessary to properly
protect First Bank & Trust's revenues in the event of a
disaster.
XIV. DEFAULT
A. In the event that First Bank & Trust is thirty (30) days in
arrears in making any payment required, or in the event of
any other material default by either First Services, L.P. or
First Bank & Trust in the performance of their obligations,
the affected party shall have the right to give written
notice to the other of the default and its intent to
terminate this Agreement stating with reasonable
particularity the nature of the claimed default. This
Agreement shall terminate if the default has not been cured
within a reasonable time with a minimum being thirty (30)
days from the effective date of the notice.
B. Upon the expiration of this Agreement, or its termination,
First Services, L.P. shall furnish to First Bank & Trust
such copies of First Bank & Trust's data files as First Bank
& Trust may request in machine readable format form along
with such other information and assistance as or is
reasonable and customary to enable First Bank & Trust to
deconvert from the First Services, L.P. system. First Bank &
Trust shall reimburse First Services, L.P. for the
production of data records and other services at First
Services, L.P.'s current fees for such services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability insurance
with primary limits of two million dollars, Commercial Crime Insurance
covering Employee Dishonesty in the amount of thirty million dollars,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Worker Compensation coverage on First
Services, L.P. employees wherever located in the United States. In
addition, First Services, L.P. carries coverage for computer/computer
related theft in the amount of twenty million dollars. First Bank &
Trust shall carry adequate insurance to cover liability for source
documents while in transit and in case of data loss through errors and
omissions.
XVI. GENERAL
A. This Agreement is binding upon the parties and their
respective successors and permitted assigns. Neither party
may assign this Agreement in whole or in part without the
consent of First Bank & Trust and/or First Services, L.P.,
provided, however, that First Services, L.P. may subcontract
any or all of the services to be performed under this
Agreement without the written consent of First Bank & Trust.
Any such subcontractors shall be required to comply with all
of the applicable terms and conditions of this Agreement.
B. The parties agree that, in connection with the performance
of their obligations hereunder, they will comply with
applicable Federal, State, and local laws including the laws
and regulations regarding Equal Employment Opportunities.
C. First Services, L.P. agrees that the Federal Reserve Bank,
and FDIC will have the authority and responsibility pursuant
to the Bank Service Corporation Act, 12 U.S.C.
1867(C)relating to service performed by contract or
otherwise. First Services, L.P., also agrees that its
services shall be subject to oversight by the Federal
Reserve Bank, FDIC or state banking departments as may be
applicable under laws and regulations pertaining to First
Bank & Trust's charter and shall, if applicable, provide the
Federal Reserve Bank and FDIC with a copy of First Services,
L.P.'s current audit and financial statements and a copy of
any current third party review report when a review has been
performed.
D. Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control
including, but not limited to, acts of God, failure or delay
of power or communications, changes in law or regulation or
other acts of governmental authority, strike, weather
conditions or transportation.
E. All written notices required to be given under this
Agreement shall be sent by Registered or Certified Mail,
Return Receipt Requested, postage prepaid, or by confirmed
facsimile to the persons and at the addresses listed below
or to such other address or person as a party shall have
designated in writing.
First Services, L.P. First Bank & Trust
600 James S. McDonnell Blvd. 550 Montgomery Street
Hazelwood, MO 63042 San Francisco, CA 94111
F. The failure of either party to exercise in any respect any
right provided for herein shall not be deemed a waiver of
any rights.
G. Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and
exclusive statement of the Agreement between the parties and
supersedes and merges any prior or simultaneous proposals,
understandings and all other agreements with respect to the
subject matter. This Agreement may not be modified or
altered except by a written instrument duly executed by both
parties.
H. No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly
authorized representative of the party charged therewith. No
waiver of any provision hereof shall extend to or affect any
obligation not expressly waived, impair any rights
consequent on such obligation or imply a subsequent waiver
of that or any other provision.
I. This Agreement shall be governed by, construed and
interpreted in accordance with the laws of the State of
Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date first
above written.
First Bank & Trust First Services, L.P.
550 Montgomery Street 600 James S. McDonnell Boulevard
San Francisco, California 94111 Hazelwood, Missouri 63042
BY:/s/ Terrance M. McCarthy BY:/s/ Michael F. Hickey
------------------------ ----------------------
Terrance M. McCarthy Michael F. Hickey
President President
Attachment 1
First Services, L.P.
Product and Price Schedule
Effective January 1, 2001
ACCOUNT/ITEM/TRANSACTION BASED SERVICES
ACCOUNTS PROCESSED - BASE SERVICES
DDA Accounts $.75
Savings Accounts $.70
Time Accounts $.70
Loan Accounts $.75
CIF Records $.20
ATM/Debit Cards $.225
Accounts Processed - Base Services Include:
Collection System (Cyber Resources) ACH Origination
Recovery System (Cyber Resources) ATM/Debit Card Processing
Organizational Profitability (IPS) General Ledger
Asset/Liability (Bankware) Loan Tracking (Baker Hill)
Fixed Asset Interface Optical System (RVI)
Loan Spread Sheet (Baker Hill) Interactive Voice
MCIF (Okra) Credit Scoring (Fair Issac)
Card Management System Loan Documentation (FTI/CFI)
Cash Management System (Firstlink) Wire Transfer (Fundtech)
Bank Audit Commercial Analysis
NOW Reclassification Accounts Payable Interface
Charge Back System Long Distance Management
Remote Laser Printing Teller (Encore)
Retrofit/New Releases Query Report Writer
Mortgage (Unify) Forms and Supplies
Currency Transaction Reporting Year-end Processing
STATEMENTS PRODUCED
DDA $ .30
Savings $ .10
Time $ .02
Loan $ .15
Year End $1.00
5498 $1.00
TRANSACTIONS PROCESSED - BASE SERVICES - ITEM PROCESSING
Proof Items $.040
POD and EFT Items $.014
Inclearing and Transmission Items $.014
Transactions Processed - Base Services - Item Processing Includes:
MICR Rejects Serial Sort Teller Adjustments
Transit Float Analysis Microfilming Deposit Corrections
Endorsement Services Forms and Supplies Check Truncation
Exception Item Sort Statement Sort Interest Check Mailings
Statement Enclosures Notice Mailings
TRANSACTIONS PROCESSED - OTHER SERVICES
Wire Activity $ 5.00
First Link Activity $ 30.00
ACH Activity $ .042
Research Requests $ 15.00
Adjustments Processed $ 15.00
Lock Box Transactions $ .45
Lock Box Postage as incurred
Lock Box Copies $ .08
Mail Services:
FB Midwest $ 900.00 per month
FB&T $ 900.00 per month
BRANCH BASED SERVICES
CONNECTION CHARGES
Support Unit Data Connections $ varies
Branch Data Connections $ 900.00 per location
ATM Connections $ 100.00 per location
Dierbergs ATM Connections $ 700.00 per location
Contingency Pln/Disaster Rec $ 200.00 per location
Mail Courier Routes (MO/IL) $ 40.00 per day
USER BASED SERVICES
Network/Telecom Support/Infrastructure $ 60.00 per user
Help Desk Support $ 25.00 per user
Microsoft Application Licenses $ 25.00 per user
Email $ 10.00 per user
Web (Internet) Access $ 15.00 per user
Dial-In (Remote) Access $ 20.00 per user
Information Security $ 25.00 per user
User Based Services include:
Network Technical support Network Infrastructure
Help Desk MS Word
MS Excel MS Access
MS Powerpoint Anti-Virus
Email usage Web usage
Dial-In Access capability User/Password Administration
Security Monitoring Access Control
APPLICATION/PROJECT BASED SERVICES
Application Support/Software Maintenance $ 60.00/hr
Project Management and Support $ 60.00/hr
Project Office $ 60.00/hr
Acquisition/New Business Support $ 60.00/hr
Asset Management/Technical Purchasing $ 28.85/hr
The Above Services Include:
Production problem support Application Q/A
Application software upgrades/releases Project Management
Project Office tracking and reporting Acquisition Conversions
Branch Deconversions Mergers
Equipment quotes, orders, and delivery Asset tracking
Invoice payment
Operations Support $ 28.85/hr
IRA Support $ 17.50/hr
Reconciliation/Appl Balancing $ 14.50/hr
Records Management $ 32.00/hr
Bookkeeping Support $ 20.50/hr
Bookkeeping Support includes:
Returns Large Item Notification Signature Verification
Chargebacks Kiting Savings Bonds
Unposted Items OFAC American Express
NSF Notices Year-End Notifications
Exhibit 13
FIRST BANKS AMERICA, INC.
2001 ANNUAL REPORT
TABLE OF CONTENTS
PAGE
LETTER TO SHAREHOLDERS............................................................................ 1
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA.................................................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................... 3
QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED.................................................... 27
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS.................................................................... 28
CONSOLIDATED STATEMENTS OF INCOME.............................................................. 30
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME................................................................... 31
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................................... 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................... 33
INDEPENDENT AUDITORS' REPORT...................................................................... 55
DIRECTORS AND SENIOR MANAGEMENT................................................................... 56
INVESTOR INFORMATION.............................................................................. 57
To Our Valued Shareholders, Customers and Friends:
First Banks America, Inc. continued its solid financial performance in 2001,
boasting a 42.5% increase in net income despite slowing economic conditions and
a significant decline in the overall interest rate environment. The Company
reported earnings of $39.6 million, or $3.25 per share on a diluted basis, for
2001, compared to $27.8 million, or $2.29 per share on a diluted basis, in 2000.
These earnings equated to a return on average assets of 1.44% and a return on
average stockholders' equity of 17.14%. The improved earnings reflect increased
net interest income and noninterest income as well as a reduced provision for
income taxes. The reduced provision for income taxes includes the effect of an
$8.1 million reduction in our deferred tax asset valuation allowance that was no
longer deemed necessary as our overall net deferred tax assets are expected to
be recoverable through future earnings. The overall improvement in our earnings
was partially offset by an increased provision for loan losses and higher
operating expenses.
Our primary objective of achieving progressive and profitable growth remains
constant. We have focused our efforts on building and reorganizing the
infrastructure necessary to accomplish our internal growth objectives. In
addition, we supplement this internal growth through the acquisition of other
financial institutions. Our acquisitions may serve to enhance our presence in a
given market, to expand the extent of our market areas or to enable us to enter
new or noncontiguous markets. During the fourth quarter of 2001, we increased
our presence in our southern California market areas through the acquisitions of
Charter Pacific Bank in Agoura Hills, California, and BYL Bancorp in Orange,
California, which added assets of approximately $383.0 million.
One of the key components of our earnings and growth is net interest income. We
continue to emphasize our commercial and commercial real estate lending
activities, which resulted in an increase in average loans of $487.9 million, or
30.1%, in 2001. This volume increase contributed to the improvement in our net
interest income to $125.3 million in 2001, compared to $105.6 million in 2000.
However, the improvement in our net interest income was significantly mitigated
by continued reductions in prevailing interest rates throughout 2001. Our net
interest rate margin decreased 41 basis points from 2000 to 5.10% of our
interest-earning assets in 2001.
We employ an interest rate risk management program to assist us in limiting the
adverse impact that changes in interest rates, similar to those experienced in
2001, may have on our net interest income. We utilize various derivative
financial instruments, including interest rate swap, floor and cap agreements,
in the overall management of our interest rate exposure. This program
contributed $12.3 million to net interest income and $10.2 million to
noninterest income in 2001.
While our revenue growth improved, our operating expenses for employees,
facilities, technology and general expenditures increased to $93.6 million in
2001, compared to $70.0 million in 2000. We are committed to improving the
efficiency of our Company, while expanding and enhancing the products and
services available to our customers. As a result, these increased expenses
reflect our continued investments in qualified personnel, improved technology
and additional market presence through internal growth as well as our
acquisition strategy.
Our credit quality weakened slightly in 2001, primarily as a result of slowing
economic conditions. Nonperforming loans increased $4.6 million to $19.6
million, representing 0.84% of our loan portfolio at the end of 2001, compared
to 0.73% at the end of 2000. Consistent with current economic conditions
prevalent in our market areas, we also experienced a sizeable increase in past
due loans to $27.4 million at the end of 2001.
The year 2001 certainly represents a memorable year in light of the tragic
events of September 11, 2001 in New York City and Washington, D.C. as well as
the future challenges facing our nation. Now more than ever, I wish to extend my
deepest appreciation for the dedication of our employees, the loyalty of our
customers and the continued support of our shareholders. Your support enabled
First Banks America to have another successful year, and we are dedicated to
serving our existing and future customers by providing high quality, diversified
products and services and the necessary flexibility to meet your changing
financial needs.
Sincerely,
/s/ James F. Dierberg
- --------------------------------------
Chairman of the Board, President
and Chief Executive Officer
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA (1)
The selected consolidated financial data set forth below are derived from
our consolidated financial statements, which have been audited by KPMG LLP. This
information is qualified by reference to our consolidated financial statements
included herein. This information should be read in conjunction with such
consolidated financial statements, the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As of or for the Year Ended December 31, (1)
---------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars expressed in thousands, excep per share data)
Income Statement Data:
Interest income....................................... $ 208,347 177,248 132,720 108,833 85,163
Interest expense...................................... 83,024 71,625 51,239 49,295 39,560
---------- ---------- ---------- ---------- ----------
Net interest income................................... 125,323 105,623 81,481 59,538 45,603
Provision for loan losses............................. 5,010 1,877 4,183 1,750 4,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses... 120,313 103,746 77,298 57,788 41,603
Noninterest income.................................... 27,140 12,077 9,880 7,856 5,469
Noninterest expense................................... 93,568 70,019 58,463 48,965 32,312
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes, minority
interest in income of subsidiary and cumulative
effect of change in accounting principle........... 53,885 45,804 28,715 16,679 14,760
Provision for income taxes............................ 13,811 18,007 11,116 6,605 4,018
---------- ---------- ---------- ---------- ----------
Income before minority interest in income of
subsidiary and cumulative effect of change
in accounting principle.......................... 40,074 27,797 17,599 10,074 10,742
Minority interest in income of subsidiary............. -- -- -- -- 294
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle............................. 40,074 27,797 17,599 10,074 10,448
Cumulative effect of change in accounting
principle, net of tax............................. (459) -- -- -- --
---------- ---------- ---------- ---------- ---------
Net income............................................ $ 39,615 27,797 17,599 10,074 10,448
========== ========== ========== ========== ==========
Per Share Data:
Earnings per common share:
Basic:
Income before cumulative effect of change in
accounting principle........................... $ 3.29 2.29 1.44 0.86 0.99
Cumulative effect of change in accounting
principle, net of tax.......................... (0.04) -- -- -- --
---------- ---------- ---------- ---------- ----------
Basic............................................. $ 3.25 2.29 1.44 0.86 0.99
========== ========== ========== ========== ==========
Diluted:
Income before cumulative effect of change in
accounting principle........................... $ 3.29 2.29 1.44 0.86 0.99
Cumulative effect of change in accounting
principle, net of tax.......................... (0.04) -- -- -- --
---------- ---------- ---------- ---------- ----------
Diluted........................................... $ 3.25 2.29 1.44 0.86 0.99
========== ========== ========== ========== ==========
Weighted average common stock outstanding............. 12,204 12,129 12,235 11,671 10,600
Balance Sheet Data:
Investment securities................................. $ 368,207 335,219 196,174 251,166 372,799
Loans, net of unearned discount....................... 2,323,263 2,058,677 1,469,091 1,089,965 816,707
Total assets.......................................... 3,060,988 2,741,379 1,861,862 1,513,276 1,317,490
Total deposits........................................ 2,555,261 2,306,356 1,584,999 1,297,859 1,154,796
Note payable.......................................... 71,000 98,000 -- -- 14,900
Guaranteed preferred beneficial interest in First
Banks America, Inc. subordinated debentures......... 44,342 44,280 44,218 44,155 --
Stockholders' equity.................................. 285,317 196,909 174,513 143,194 101,190
Earnings Ratios:
Return on average total assets........................ 1.44% 1.32% 1.04% 0.72% 0.97%
Return on average total stockholders' equity.......... 17.14 15.86 11.36 8.43 11.31
Efficiency ratio (2).................................. 61.37 59.49 63.99 72.65 63.27
Net interest margin (3)............................... 5.10 5.51 5.27 4.66 4.52
Asset Quality Ratios:
Allowance for loan losses to loans.................... 1.84 1.84 2.06 2.29 2.52
Nonperforming loans to loans (4)...................... 0.84 0.73 1.11 2.30 1.37
Allowance for loan losses to nonperforming loans (4).. 218.37 252.78 185.87 99.61 184.03
Nonperforming assets to loans and other real
estate (5).......................................... 0.87 0.76 1.13 2.38 1.64
Net loan charge-offs to average loans................. 0.27 0.01 0.15 0.06 0.39
Capital Ratios:
Average total stockholders' equity to average
total assets.......................................... 8.41 8.34 9.12 8.54 8.57
Total risk-based capital ratio........................ 8.82 8.01 12.04 13.51 9.70
Leverage ratio........................................ 7.14 7.34 9.91 10.66 6.62
- --------------------------
(1) The comparability of the selected data presented is affected by the
acquisitions of 12 banks and five branch office purchases during the
five-year period ended December 31, 2001. These acquisitions were accounted
for as purchases and, accordingly, the selected data includes the financial
position and results of operations of each acquired entity only for the
periods subsequent to its respective date of acquisition.
(2) Efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(3) Net interest margin is the ratio of net interest income to average
interest-earning assets.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with
restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion set forth in the Letter to Shareholders and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains certain forward-looking statements with respect to our financial
condition, results of operations and business. These forward-looking statements
are subject to certain risks and uncertainties, not all of which can be
predicted or anticipated. Factors that may cause our actual results to differ
materially from those contemplated by the forward-looking statements herein
include market conditions as well as conditions affecting the banking industry
generally and factors having a specific impact on us, including but not limited
to fluctuations in interest rates and in the economy, including the negative
impact on the economy resulting from the events of September 11, 2001 in New
York City and Washington, D.C. and the national response to those events; the
impact of laws and regulations applicable to us and changes therein; the impact
of accounting pronouncements applicable to us and changes therein; competitive
conditions in the markets in which we conduct our operations, including
competition from banking and non-banking companies with substantially greater
resources, some of which may offer and develop products and services that we do
not offer; our ability to control the composition of our loan portfolio without
adversely affecting interest income; and our ability to respond to changes in
technology. With regard to our efforts to grow through acquisitions, factors
that could affect the accuracy or completeness of forward-looking statements
contained herein include the potential for higher than anticipated operating
costs arising from the geographic dispersion of our offices, as compared with
competitors operating solely in contiguous markets; the competition of larger
acquirers with greater resources; 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 Annual Report should therefore not place undue
reliance on forward-looking statements.
Company Profile
We are a registered bank holding company incorporated in Delaware and
headquartered in 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 operates 56 branch offices in
northern and southern California and Houston, Dallas, Irving and McKinney,
Texas. At December 31, 2001, we had total assets of $3.06 billion, loans, net of
unearned discount, of $2.32 billion, total deposits of $2.56 billion and total
stockholders' equity of $285.3 million.
We offer a broad range of commercial and personal deposit products,
including demand, savings, money market and time deposit accounts. In addition,
we market combined basic services for various customer groups, including
packaged accounts for more affluent customers, and sweep accounts, lock-box
deposits and cash management products for commercial customers. We also offer
both consumer and commercial loans. Consumer lending includes residential real
estate, home equity and installment lending. Commercial lending includes
commercial, financial and agricultural loans, real estate construction and
development loans, commercial real estate loans, commercial leasing and trade
financing. Other financial services include mortgage banking, 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.
We are majority owned by First Banks, Inc., or First Banks, headquartered
in St. Louis County, Missouri. At December 31, 2001, First Banks owned 2,500,000
shares of our Class B common stock and 9,545,107 shares of our common stock,
which represented 93.69% of our total outstanding voting stock. Accordingly,
First Banks has effective control over our management and policies, and the
election of our directors.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In the development of our banking franchise, we emphasize acquiring other
financial institutions as one means of achieving our growth objectives.
Acquisitions may serve to enhance our presence in a given market, to expand the
extent of our market area or to enable us to enter into new or noncontiguous
markets. We believe we must achieve a size sufficient to enable us to take
advantage of many of the efficiencies available to our much larger competitors.
We also view a combination of internal growth and acquisitions as the means by
which we will achieve our overall growth objectives. However, by using cash in
our acquisitions, the characteristics of the acquisition arena may, at times,
place us at a competitive disadvantage relative to other acquirers offering
stock transactions. This results from the market attractiveness of other
financial institutions' stock and the related advantages of tax-free exchanges
to the selling shareholders. Our acquisition activities are generally somewhat
sporadic because we consummate multiple transactions in a particular period,
followed by substantially less active acquisition periods. Furthermore, the
intangible assets recorded in conjunction with these acquisitions create an
immediate reduction in regulatory capital. This reduction, as required by
regulatory policy, provides further financial disincentives to paying large
premiums in cash acquisitions.
Recognizing these facts, we follow certain patterns in our acquisitions.
First, we typically acquire several smaller institutions, sometimes over an
extended period of time, rather than a single larger one. We attribute this
approach to the constraints imposed by the amount of funds required for a larger
transaction, as well as the opportunity to minimize the aggregate premium
required through smaller individual transactions. Secondly, in some
acquisitions, we may acquire institutions having significant asset-quality,
ownership, regulatory or other problems unique to the respective acquisition
target, which we seek to address the risks of this approach through pricing and
other means. In these institutions, these issues may diminish their
attractiveness to other potential acquirers, and we believe it reduces the
amount of acquisition premium required. Finally, we may pursue our acquisition
strategy in other geographic areas, or pursue internal growth more aggressively
because cash transactions may not be economically viable in extremely
competitive acquisition markets.
Although we originally viewed Texas, particularly the Dallas and Houston
areas, as our primary acquisition area, during the mid-1990s prices for
acquisitions escalated sharply in those areas. The prices required to
successfully consummate these transactions would have caused substantial
diminution in the economic benefits that we envisioned would be available in our
acquisition program. This diminution in benefits resulted in our evaluation of
California for acquisition candidates, where acquisition pricing was
considerably more favorable. During the five years ended December 31, 2001, we
have concentrated our acquisitions solely in California, completing 12
acquisitions of banks and five purchases of branch offices. In addition, our
October 2000 acquisition of First Bank & Trust from our parent company, First
Banks, Inc., and the associated internal reorganizations significantly expanded
our presence throughout the state of California in order to improve operational
efficiencies, convey a more consistent image and quality of service and more
cohesively market and deliver our products and services.
In conjunction with our acquisition strategy, we have also focused on
building and reorganizing the infrastructure necessary to accomplish our
objectives for internal growth. This process included expanding our commercial,
financial and agricultural, commercial real estate and real estate construction
business development staff, enhancing our retail service delivery organization
and systems, improving overall asset quality and changing the composition of our
loan portfolio. Previously, our lending strategy had been focused on consumer
lending, particularly indirect automobile lending. With the expansion of our
business development staff, we have continued to build our portfolio of
commercial, financial and agricultural, commercial real estate and real estate
construction loans, while substantially reducing our indirect automobile loan
portfolio as further discussed under "--Loans and Allowance for Loan Losses." We
continue to focus on modifying and effectively repositioning our internal and
external resources to better serve the markets in which we operate. Although
these efforts have led to increased capital expenditures and noninterest
expenses, we anticipate they will lead to additional internal growth, more
efficient operations and improved profitability over the long term.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Our acquisitions have provided us with access into several new major market
areas and, accordingly, an opportunity for future growth and profitability. We
continue to meld the acquired entities into our operations, systems and culture.
Some of the acquired institutions exhibited elements of financial distress prior
to their acquisitions, which generally resulted from asset quality problems
and/or high noninterest expenses. Although we have incurred significant expenses
in the amalgamation of newly acquired entities into our corporate culture and
systems, and in the expansion of our organizational capabilities, the earnings
of the acquired entities and the improved net interest income resulting from the
transition in the composition of our loan portfolio have contributed to
improving net income. For the years ended December 31, 2001 and 2000, net income
was $39.6 million and $27.8 million, respectively, compared with $17.6 million
in 1999.
In July 1998, our financing subsidiary, First America Capital Trust, a
Delaware statutory business trust, issued $46.0 million of 8.50% trust preferred
securities. Proceeds from this offering, net of underwriting fees and offering
expenses, were approximately $44.0 million and were used to reduce borrowings,
to support possible repurchases of our common stock from time to time and for
general corporate purposes. The preferred securities are publicly held and
traded on the New York Stock Exchange and have no voting rights except in
certain limited circumstances.
Acquisitions
In the development of our banking franchise, we emphasize acquiring other
financial institutions as one means of achieving our growth objectives.
Acquisitions may serve to enhance our presence in a given market, to expand the
extent of our market area or to enable us to enter new or noncontiguous markets.
After we consummate an acquisition, we expect to enhance the franchise of the
acquired entity by supplementing the marketing and business development efforts
to broaden the customer bases, strengthening particular segments of the business
or filling voids in the overall market coverage. In addition, our acquisition
program enables us to further leverage the operational support services
available through First Banks and its affiliates and to provide the products and
services typically available only through such a larger organization. We have
primarily utilized cash, voting stock, borrowings and the issuance of trust
preferred securities to meet our growth objectives under our acquisition
program.
Although in the past we have issued voting stock as consideration in some
acquisitions, the majority of our recent acquisitions have been for cash, and
our present intention is to seek cash transactions. Our ability to consummate
additional acquisitions will be dependent, in part, on our access to cash
resources with which to fund such transactions, and the maintenance of capital
levels which are adequate to satisfy regulatory requirements and internal
policies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During the three years ended December 31, 2001, we completed ten bank
acquisitions and one branch office purchase. As demonstrated below, our
acquisitions during the three years ended December 31, 2001 have served to
increase our presence in the California markets that we originally entered
during 1995 and to further augment our existing markets. These transactions are
summarized as follows:
Number
Loans, net of of
Total unearned Investment banking
Entity Date assets discount securities Deposits locations
------ ---- ------ -------- ---------- -------- ---------
(dollars expressed in thousands)
2001
- ----
BYL Bancorp
Orange, California October 31, 2001 $ 281,500 175,000 12,600 251,800 7
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2
---------- --------- -------- --------- ----
$ 383,000 245,200 20,100 340,800 9
========== ========= ======== ========= ====
2000
- ----
The San Francisco Company
San Francisco, California December 31, 2000 $ 183,800 115,700 38,300 137,700 1
Millennium Bank
San Francisco, California December 29, 2000 117,000 81,700 21,100 104,200 2
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 97,700 45,500 109,400 1
First Bank & Trust
Newport Beach, California October 31, 2000 1,104,000 894,200 91,100 959,400 27
Bank of Ventura
Ventura, California August 31, 2000 63,800 39,400 15,500 57,300 1
Lippo Bank
San Francisco, California February 29, 2000 85,300 40,900 37,400 76,400 3
---------- --------- -------- --------- ----
$1,709,500 1,269,600 248,900 1,444,400 35
========== ========= ======== ========= ====
1999
- ----
Brentwood Bank of California
Malibu, California branch
office September 17, 1999 $ 23,600 6,300 -- 17,300 1
Century Bank
Beverly Hills, California August 31, 1999 156,000 94,800 26,100 132,000 6
Redwood Bancorp
San Francisco, California March 4, 1999 183,900 134,400 34,400 162,900 4
---------- --------- -------- --------- ----
$ 363,500 235,500 60,500 312,200 11
========== ========= ======== ========= ====
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Except for the acquisition of First Bank & Trust, we funded these
acquisitions from available cash reserves, proceeds from sales and maturities of
available-for-sale investment securities, borrowings under our revolving note
payable to First Banks and proceeds from the issuance of trust preferred
securities. We acquired First Bank & Trust through an exchange of shares of our
common stock for all of the issued and outstanding shares of its common stock.
Restatements to Reflect Reorganizations
In connection with our acquisition of First Bank & Trust on October 31,
2000, our financial information has been restated to include First Banks'
ownership interest, reflected at historical cost, for all periods subsequent to
First Banks' acquisition of First Bank & Trust, consistent with the accounting
treatment applicable to combinations of entities under common control.
Accordingly, Management's Discussion and Analysis of Financial Condition and
Results of Operations and our accompanying consolidated financial statements are
presented as if First Bank & Trust had been consolidated into our operations for
all periods subsequent to March 15, 1995.
Critical Accounting Policies
Our financial condition and results of operations presented in the
consolidated financial statements, accompanying notes to the consolidated
financial statements, selected consolidated and other financial data appearing
elsewhere within this report, and management's discussion and analysis of
financial condition and results of operations are, to large degree, dependent
upon our accounting policies. The selection and application of our accounting
policies involve judgments, estimates and uncertainties that are susceptible to
change.
We have identified the following accounting policies that we believe are
the most critical to the understanding of our financial condition and results of
operations. These critical accounting policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of a
materially different financial condition and/or results of operations could be a
reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results. For a detailed discussion on the application of these and other
accounting policies, see Note 1 to our consolidated financial statements.
Loans and Allowance for Loan Losses. We maintain an allowance for loan
losses at a level considered adequate to provide for probable losses in our loan
portfolio. The determination of our allowance for loan losses requires
management to make significant judgments and estimates based upon a periodic
analysis of our loans held for portfolio and held for sale considering, among
other factors, current economic conditions, loan portfolio composition, past
loan loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers' ability to pay and selected key financial ratios. If
actual events prove the estimates and assumptions we used in determining our
allowance for loan losses were incorrect, we may need to make additional
provisions for loan losses. See further discussion under "--Loans and Allowance
for Loan Losses" and Note 4 to our consolidated financial statements.
Derivative Financial Instruments. 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 judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based upon quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow or
fair value has correlated and is expected to correlate with changes in the cash
flow or fair value of the underlying hedged asset or liability. Past correlation
is easy to demonstrate, but expected correlation depends upon projections and
trends that may not always hold true within acceptable limits. Changes in
assumptions and conditions could result in greater than expected inefficiencies
that, if large enough, could reduce or eliminate the economic benefits
anticipated when the hedges were established and/or invalidate continuation of
hedge accounting. The consequence of greater inefficiency and discontinuation of
hedge accounting results in increased volatility to reported earnings. For cash
flow hedges, this would result as more or all of the change in the fair value of
the affected derivative would be reported in noninterest income. For fair value
hedges, this would result as less or none of the change in the fair value of the
derivative would be offset by changes in the fair value of the underlying hedged
asset or liability. See further discussion under "--Interest Rate Risk
Management" and Note 5 to our consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Deferred Tax Assets. We recognize deferred tax assets and liabilities for
the estimated future tax effects of temporary differences, net operating loss
carryforwards and tax credits. We recognize deferred tax assets subject to
management's judgment based upon available evidence that realization is more
likely than not. Our deferred tax assets are reduced, if necessary, by a
deferred tax asset valuation allowance. In the event that we determine we would
not be able to realize all or part of our net deferred tax assets in the future,
we would need to adjust the recorded value of our deferred tax assets, which
would result in a direct charge to our provision for income taxes in the period
in such determination is made. See further discussion under "--Comparison of
Results of Operations for the Years Ended December 31, 2001 and 2000 - Provision
for Income Taxes" and Note 10 to our consolidated financial statements.
Business Combinations. We emphasize acquiring other financial institutions
as one means of achieving our growth objectives. The determination of the fair
value of the assets and liabilities acquired in these transactions as well as
the returns on investment that may be achieved requires management to make
significant judgments and estimates based upon detailed analyses of the existing
and future economic value of such assets and liabilities and/or the related
income steams, including the resulting intangible assets. If actual events prove
the estimates and assumptions we used in determining the fair values of the
acquired assets and liabilities or the projected income were incorrect, we may
need to make additional adjustments to the recorded values of such assets and
liabilities, which could result in increased volatility to reported earnings. In
addition, we may need to make additional adjustments to the recorded value of
our intangible assets, which directly impact our regulatory capital levels. See
further discussion under "--Acquisitions," "--Effects of New Accounting
Standards," and Note 2 and Note 19 to our consolidated financial statements.
Financial Condition and Average Balances
Our average total assets were $2.75 billion for the year ended December 31,
2001, compared to $2.10 billion and $1.70 billion for the years ended December
31, 2000 and 1999, respectively. We attribute the increase of $646.6 million in
total average assets for 2001 primarily to the acquisitions completed during the
fourth quarter of 2000 and in 2001; internal loan growth generated through the
efforts of our business development staff and an increase in the amount of
derivative instruments held resulting from a change in accounting principle and
increased utilization of these instruments to hedge our interest rate risk. The
acquisitions of BYL Bancorp and Charter Pacific Bank, completed in October 2001,
provided assets of $281.5 million and $101.5 million, respectively. Similarly,
we attribute the increase of $404.6 million in total average assets for 2000
primarily to the acquisitions of Commercial Bank of San Francisco, Bank of
Ventura and Lippo Bank, which provided total assets of $155.6 million, $63.8
million and $85.3 million, respectively, as well as internal loan growth. The
acquisitions of Millennium Bank and The San Francisco Company were completed on
December 29, 2000 and December 31, 2000, respectively, and therefore did not
have a significant impact on our average total assets for the year ended
December 31, 2000. These acquisitions alone provided $300.8 million, or 49.7% of
the total assets we acquired in 2000.
The increase in assets for 2001 was primarily funded by an increase in
average deposits of $507.7 million to $2.30 billion for the year ended December
31, 2001. We utilized the majority of the funds generated from our deposit
growth to fund a portion of our loan growth, and the remaining funds were either
temporarily invested in federal funds sold or invested in available-for-sale
investment securities, resulting in an increase in average investment securities
of $60.9 million to $266.6 million for the year ended December 31, 2001.
Similarly, we funded the increase in assets for 2000 by an increase in total
average deposits of $357.3 million to $1.80 billion for the year ended December
31, 2000 and a decrease in average investment securities of $2.7 million to
$205.7 million for the year ended December 31, 2000. We utilized the majority of
the funds generated from our deposit growth to fund a portion of our loan
growth, and the remaining funds were temporarily invested in federal funds sold,
resulting in an increase in average federal funds sold and other of $55.7
million to $88.8 million for the year ended December 31, 2000.
Loans, net of unearned discount, averaged $2.11 billion, $1.62 billion and
$1.30 billion for the years ended December 31, 2001, 2000 and 1999,
respectively. The acquisitions we completed during 2000 and 2001, excluding
First Bank & Trust, provided loans, net of unearned discount, of $375.4 million
and $245.2 million, respectively. In addition to the growth provided by these
acquisitions, for 2001, $50.9 million of net loan growth was provided by
corporate banking business development, consisting of an increase of $41.9
million of commercial, financial and agricultural loans, an increase of $71.7
million of commercial real estate loans and a decrease of $62.7 million of real
estate construction and land development loans. These changes were partially
offset by continuing reductions in consumer and installment loans, net of
unearned discount, which consist primarily of indirect automobile loans, of
$17.0 million and residential real estate loans of $13.2 million. These changes
are consistent with our objectives of de-emphasizing consumer lending and
expanding commercial lending, and result from the focus we have placed on our
business development efforts and the portfolio repositioning which we began in
the mid-1990s. This repositioning provided for the origination of indirect
automobile loans to be substantially reduced. In addition, the overall increase
in loans, net of unearned discount, was further offset by anticipated attrition
in the loan portfolios associated with our acquisitions completed during the
fourth quarter of 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Investment securities averaged $266.6 million, $205.7 million and $208.5
million for the years ended December 31, 2001, 2000 and 1999, respectively,
reflecting an increase of $60.9 million for the year ended December 31, 2001 and
a decrease of $2.7 million for the year ended December 31, 2000. The increase
for 2001 is primarily associated with the investment securities that we acquired
in conjunction with our 2000 and 2001 acquisitions and the investment of excess
funds available due to reduced loan demand. This increase was partially offset
by the liquidation of certain acquired investment securities, a higher than
normal level of calls of investment securities prior to their normal maturity
dates throughout 2001 resulting from the general decline in interest rates and
sales of certain available-for-sale investment securities. We attribute the
decrease for 2000 primarily to the liquidation of certain acquired investment
securities and to sales of investment securities available for sale necessary to
provide an additional source of funds for our loan growth.
Our average nonearning assets were $290.6 million for the year ended
December 31, 2001, compared to $186.7 million and $152.8 million for the years
ended December 31, 2000 and 1999, respectively. The increase in average
nonearning assets for the year ended December 31, 2001 is primarily due to our
acquisitions completed during 2000 and 2001 and to derivative instruments of
$28.9 million at December 31, 2001, resulting from the implementation of
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 -
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No.
133, and SFAS No. 138 - Accounting for Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133.
We use deposits as our primary funding source and acquire them from a broad
base of local markets, including both individual and corporate customers.
Deposits averaged $2.30 billion, $1.80 billion and $1.44 billion for the years
ended December 31, 2001, 2000 and 1999, respectively. Total deposits increased
by $248.9 million to $2.56 billion at December 31, 2001 from $2.31 billion at
December 31, 2000. We credit the increases primarily to our acquisitions
completed during the respective periods and the expansion of our deposit product
and service offerings available to our customer base. The overall increase for
2001 was partially offset by an anticipated level of account attrition
associated with our acquisitions completed during the fourth quarter of 2000.
Note payable and short-term borrowings averaged $126.2 million, $38.7
million and $39.7 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Our note payable decreased by $27.0 million to $71.0 million at
December 31, 2001 from $98.0 million at December 31, 2000. The reduction for
2001 was primarily funded with dividends from FB&T. In addition, the merger of
our former subsidiary, First Bank & Trust, with and into Bank of San Francisco,
effective March 29, 2001, allowed us to further reduce our note payable through
a capital reduction of $23.0 million. The overall decline in our note payable
for the year ended December 31, 2001 was partially offset by additional advances
of $26.0 million drawn to fund our acquisitions of Charter Pacific Bank and BYL
Bancorp.
Stockholders' equity averaged $231.1 million, $175.3 million and $154.9
million for the years ended December 31, 2001, 2000 and 1999, respectively. We
associate the increase for 2001 primarily with net income of $39.6 million, an
$18.9 million increase in accumulated other comprehensive income and a $26.2
million increase from the issuance of additional common stock to First Banks,
which served as a partial funding source for our acquisition of BYL Bancorp. The
increase in accumulated other comprehensive income reflects an increase of $17.4
million associated with our derivative financial instruments as accounted for
under SFAS 133, as amended, and an increase of $1.5 million resulting from the
change in unrealized gains and losses on available-for-sale investment
securities. In addition, an increase of $5.0 million was attributed to a
reduction of our deferred tax asset valuation reserve resulting from the
expected utilization of net operating losses. We associate the increase in
stockholders' equity for 2000 primarily to net income of $27.8 million and a
$3.0 million increase in accumulated other comprehensive income, resulting from
the change in unrealized gains and losses on available-for-sale investment
securities. The increase was partially offset by repurchases of $1.5 million of
common stock for treasury and a reduction of $7.0 million associated with
pre-merger transactions of FB&T, which represent transactions that occurred
prior to our acquisition of FB&T.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth certain information relating to our average
balance sheets, and reflects the average yield earned on interest-earning
assets, the average cost of interest-bearing liabilities and the resulting net
interest income for the periods indicated.
Years ended December 31,
--------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Average income/ Yield/ Average income/ Yield/ Average income/ Yield/
balance expense rate balance expense rate balance expense rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1) (2) (3) (4)......... $2,109,284 187,426 8.89% $1,621,432 158,020 9.75% $1,303,742 118,279 9.07%
Investment securities (3)..... 266,643 16,520 6.20 205,746 13,652 6.64 208,481 12,753 6.12
Federal funds sold and other.. 82,710 4,401 5.32 88,782 5,576 6.28 33,041 1,688 5.11
---------- ------- ---------- -------- ---------- -------
Total interest-earning
assets.................... 2,458,637 208,347 8.47 1,915,960 177,248 9.25 1,545,264 132,720 8.59
------- -------- -------
Nonearning assets............... 290,637 186,709 152,827
---------- ---------- ----------
Total assets................ $2,749,274 $2,102,669 $1,698,091
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing demand
deposits.................... $ 238,512 3,634 1.52% $ 152,487 2,415 1.58% $ 133,976 2,053 1.53%
Savings deposits.............. 794,590 27,470 3.46 575,227 25,398 4.42 454,022 17,146 3.78
Time deposits (4)............. 836,017 45,138 5.40 727,695 41,561 5.71 586,970 30,009 5.11
---------- ------- ---------- -------- ---------- -------
Total interest-bearing
deposits.................. 1,869,119 76,242 4.08 1,455,409 69,374 4.77 1,174,968 49,208 4.19
Note payable and
short-term borrowings....... 126,171 6,782 5.38 38,696 2,251 5.82 39,677 2,031 5.12
---------- ------- ---------- -------- ---------- -------
Total interest-bearing
liabilities................ 1,995,290 83,024 4.16 1,494,105 71,625 4.79 1,214,645 51,239 4.22
------- -------- -------
Noninterest-bearing liabilities:
Demand deposits............... 434,290 340,278 263,427
Other liabilities............. 88,547 92,967 65,092
---------- ---------- ----------
Total liabilities........... 2,518,127 1,927,350 1,543,164
Stockholders' equity............ 231,147 175,319 154,927
---------- ---------- ----------
Total liabilities and
stockholders' equity....... $2,749,274 $2,102,669 $1,698,091
========== ========== ==========
Net interest income............. 125,323 105,623 81,481
======= ======== =======
Interest rate spread............ 4.31% 4.46% 4.37%
Net interest margin (5) ........ 5.10 5.51 5.27
==== ==== ====
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) We have no tax-exempt income.
(4) Interest income and interest expense includes the effects of interest rate
swap agreements.
(5) Net interest margin in the ratio of net interest income to average
interest-earning assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table indicates the changes in interest income and interest
expense which are attributable to changes in average volume and changes in
average rates, in comparison with the preceding year. The change in interest due
to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the dollar amounts of the change in each.
Increase (Decrease) Attributable to Change in:
------------------------------------------------------------------
December 31, 2001 compared December 31, 2000 compared
to December 31, 2000 to December 31, 1999
----------------------------- ----------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest-earning assets:
Loans (1) (2) (3) (4).................. $ 44,306 (14,900) 29,406 30,391 9,350 39,741
Investment securities (3).............. 3,823 (955) 2,868 (170) 1,069 899
Federal funds sold and other........... (363) (812) (1,175) 3,404 484 3,888
-------- ------- ------- ------ ------ ------
Total interest income............ 47,766 (16,667) 31,099 33,625 10,903 44,528
-------- ------- ------- ------ ------ ------
Interest-bearing liabilities:
Interest-bearing demand deposits....... 1,314 (95) 1,219 293 69 362
Savings deposits....................... 8,357 (6,285) 2,072 5,049 3,203 8,252
Time deposits.......................... 5,927 (2,350) 3,577 7,648 3,904 11,552
Note payable and
short-term borrowings................ 4,714 (183) 4,531 (51) 271 220
-------- ------- ------- ------ ------ ------
Total interest expense........... 20,312 (8,913) 11,399 12,939 7,447 20,386
-------- ------- ------- ------ ------ ------
Net interest income.............. $ 27,454 (7,754) 19,700 20,686 3,456 24,142
======== ======= ======= ====== ====== ======
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts.
(2) Interest income on loans includes loan fees.
(3) We have no tax-exempt income.
(4) Interest income and interest expense includes the effect of interest rate
swap agreements.
Net Interest Income
The primary source of our income is net interest income, which is the
difference between the interest earned on our interest-earning assets and the
interest paid on our interest-bearing liabilities. Net interest income increased
to $125.3 million, or 5.10% of average interest-earning assets, for the year
ended December 31, 2001, from $105.6 million, or 5.51% of average
interest-earning assets, and $81.5 million, or 5.27% of average interest-earning
assets, for the years ended December 31, 2000 and 1999, respectively. We credit
the increased net interest income for 2001 primarily to the net interest-earning
assets provided by our acquisitions completed during 2000 and 2001, internal
loan growth and earnings on our interest rate swap agreements that we entered
into in conjunction with our interest rate risk management program. The overall
increase in net interest income was partially offset by continued reductions in
prevailing interest rates throughout 2001, resulting in the overall decline in
our net interest rate margin. We credit the increase in net interest income for
2000 primarily to the net interest-earning assets provided by our acquisitions
completed during 1999 and 2000, internal loan growth and increases in prevailing
interest rates which resulted in increased yields on interest-earning assets.
However, the overall increase in net interest income for 2000 was partially
offset by the expense associated with our interest rate swap agreements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Average total loans, net of unearned discount, increased by $487.9 million
to $2.11 billion for the year ended December 31, 2001, from $1.62 billion and
$1.30 billion for the years ended December 31, 2000 and 1999, respectively. The
yield on our loan portfolio, however, declined to 8.89% for the year ended
December 31, 2001, in comparison to 9.75% for 2000. This was a major contributor
to the 41 basis point decline in our net interest rate margin for 2001. We
attribute the decline in yields and our net interest rate margin primarily to
decreases in prevailing interest rates. During 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. In addition, increased competition within our market areas led to
reduced lending rates. As further discussed under "--Interest Rate Risk
Management," the reduced level of interest income earned on our loan portfolio
as a result of declining interest rates was partially mitigated by the earnings
associated with our interest rate swap agreements. For the year ended December
31, 2001, these agreements provided net interest income of $12.3 million.
Conversely, the yield on our loan portfolio for the year ended December 31, 2000
increased to 9.75% from 9.07% for the year ended December 31, 1999, principally
as a result of increases in prevailing interest rates. During the period from
June 30, 1999 to December 31, 2000, the Board of Governors of the Federal
Reserve System increased the targeted federal funds rate six times, resulting in
six increases in the prime rate of interest from 7.75% to 9.50%, respectively.
However, the improved yield on our loan portfolio was partially offset by the
expense associated with our interest rate swap agreements, which was $2.1
million for the year ended December 31, 2000.
For the years ended December 31, 2001, 2000 and 1999, the aggregate
weighted average rate paid on our interest-bearing deposit portfolio was 4.08%,
4.77% and 4.19%, respectively. We attribute the decline in 2001 primarily to
rates paid on savings and time deposits, which have continued to decline in
conjunction with the interest rate reductions previously discussed. The overall
decrease in rates paid is a result of generally decreasing interest rates in
2001 as compared to generally increasing interest rates in 2000. 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 continued loan growth.
The aggregate weighted average rate paid on our revolving note payable and
short-term borrowings decreased to 5.38% for the year ended December 31, 2001,
from 5.82% for the year ended December 31, 2000, reflecting a decrease in market
interest rates. Amounts outstanding under our $100.0 million revolving note
payable to First Banks bear interest at an annual rate of one-quarter percent
less than the "Prime Rate" as reported in the Wall Street Journal. Thus, our
revolving note payable represents a relatively high-cost funding source which,
although it has been mitigated by reductions in the prime lending rate
throughout 2001, has the effect of increasing the weighted average rate of
non-deposit liabilities. During 2000, we utilized the note payable to fund our
acquisitions of Lippo Bank, Commercial Bank of San Francisco, Millennium Bank
and The San Francisco Company, thus resulting in a significantly higher level of
borrowings occurring during the fourth quarter of 2000. During 2001, our
revolving note payable was utilized to fund our acquisitions of Charter Pacific
Bank and BYL Bancorp.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of net
interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios may differ significantly from its deposit structure.
The nature of the loan and deposit markets within which a financial institution
operates, and its objectives for business development within those markets at
any point in time, influence these characteristics. In addition, the ability of
borrowers to repay loans and depositors to withdraw funds prior to stated
maturity dates introduces divergent option characteristics which operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, thereby leading to increases or decreases
in net interest income over time. Depending upon the direction and velocity of
interest rate movements and their effect on the specific components of the
institution's balance sheet, the effects on net interest income can be
substantial. Consequently, managing a financial institution requires
establishing effective control over the exposure of the institution to changes
in interest rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
We manage our interest rate risk by:
>> maintaining an Asset Liability Committee, or ALCO, responsible to our
Board of Directors, to review the overall interest rate risk
management activity and approve actions taken to reduce risk;
>> maintaining an effective simulation model to determine our exposure to
changes in interest rates;
>> coordinating the lending, investing and deposit-generating functions
to control the assumption of interest rate risk; and
>> employing various financial instruments, including derivatives, to
offset inherent interest rate risk when it becomes excessive.
The objective of these procedures is to limit the adverse impact that
changes in interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of
interest rate risk and the approval of policy guidelines. The ALCO includes our
Chairman and Chief Executive Officer, President and the senior executives of
investments, credit, banking support and finance, and certain other officers.
The Asset Liability Management Group, which monitors interest rate risk,
supports the ALCO, prepares analyses for review by the ALCO and implements
actions which are either specifically directed by the ALCO or established by
policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on earnings
by managing interest rate risk within internal policy constraints. Our policy is
to manage exposure to potential risks associated with changing interest rates by
maintaining a balance sheet posture in which annual net interest income is not
significantly impacted by reasonably possible near-term changes in interest
rates. To measure the effect of interest rate changes, we project our net income
over two one-year horizons on a pro forma basis. The analysis assumes various
scenarios for increases and decreases in interest rates including both
instantaneous and gradual, and parallel and non-parallel shifts in the yield
curve, in varying amounts. For purposes of arriving at reasonably possible
near-term changes in interest rates, we include scenarios based on actual
changes in interest rates, which have occurred over a two-year period,
simulating both a declining and rising interest rate scenario. We are
"asset-sensitive," and our simulation model indicates a loss of projected net
interest income should interest rates decline. While a decline in interest rates
of less than 100 basis points has a relatively minimal impact on our net
interest income, an instantaneous, parallel decline in the interest yield curve
of 100 basis points indicates a pre-tax projected loss of approximately 5.5% of
net interest income, based on assets and liabilities at December 31, 2001.
Although we do not anticipate that instantaneous shifts in the yield curve as
projected in our simulation model are likely, these are indications of the
effects that changes in interest rates would have over time.
As previously discussed, 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 financial instruments we hold are summarized as
follows:
December 31
----------------------------------------------
2001 2000
---------------------- ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges.............................. $ 555,000 1,006 535,000 1,112
Fair value hedges............................. 54,900 1,881 -- --
Interest rate cap agreements.................. 150,000 688 150,000 1,251
========= ====== ========= =======
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of our credit
exposure through its 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 2001 and 1999, we realized net interest income on our derivative
financial instruments of $12.3 million and $226,000, respectively, in comparison
to net interest expense of $2.1 million in 2000. In addition, we realized a net
gain on derivative instruments, which is included in noninterest income in the
consolidated statements of income, of $10.2 million for the year ended December
31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cash Flow Hedges. We entered into the following interest rate swap
agreements, designated as cash flow hedges, to effectively lengthen the
repricing characteristics of certain interest-earning assets to correspond more
closely with their funding source with the objective of stabilizing cash flow,
and accordingly, net interest income over time:
>> During 1998, we entered into $105.0 million notional amount of
interest rate swap agreements that provided for us to receive a fixed
rate of interest and pay an adjustable rate of interest equivalent to
the daily weighted average prime lending rate minus 2.705%. The terms
of the swap agreements provided for us to pay quarterly and receive
payment semiannually. In June 2001, we terminated these swap
agreements, which would have expired in 2002, in order to
appropriately modify our overall hedge position in accordance with our
risk management program. In conjunction with the termination of these
swap agreements, we recorded a pre-tax gain of $1.4 million.
>> During September 1999, we entered into $130.0 million notional amount
of interest rate swap agreements that provided for us to receive a
fixed rate of interest and pay an adjustable rate of interest
equivalent to the daily weighted average prime lending rate minus
2.70%. The terms of the swap agreements provided for us to pay and
receive interest on a quarterly basis. In April 2001, we terminated
these swap agreements, which would have expired in September 2001, and
replaced them with similar swap agreements with extended maturities in
order to lengthen the period covered by the swaps. In conjunction with
the termination of these swap agreements, we recorded a pre-tax gain
of $731,000.
>> During September 2000, March 2001 and April 2001, we entered into
$300.0 million, $200.0 million and $130.0 million notional amount,
respectively, of interest rate swap agreements that provide for us to
receive a fixed rate of interest and pay an adjustable rate equivalent
to the weighted average prime lending rate minus either 2.70% or
2.82%. The terms of the swap agreements provide for us to pay and
receive interest on a quarterly basis. In November 2001, we terminated
$75 million notional amount of these swap agreements, which would have
expired in April 2006, in order to appropriately modify our overall
hedge position in accordance with our 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 remaining swap agreements was $1.7 million and $621,000 at
December 31, 2001 and 2000, respectively, and the amount payable by us
under the swap agreements was $647,000 and $623,000 at December 31,
2001 and 2000, 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 December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ----------- ------------- --------
(dollars expressed in thousands)
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
========= ===== ===== ========
December 31, 2000:
September 27, 2001....................... $ 130,000 6.80% 6.14% $ 49
June 11, 2002............................ 15,000 6.80 6.00 7
September 16, 2002....................... 20,000 6.80 5.36 (184)
September 18, 2002....................... 70,000 6.80 5.33 (690)
September 20, 2004....................... 300,000 6.80 6.78 8,434
--------- --------
$ 535,000 6.80 6.35 $ 7,616
========= ===== ===== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Fair Value Hedges. During January 2001, we entered into $54.9 million
notional amount of interest rate swap agreements to effectively shorten the
repricing characteristics of certain interest-bearing liabilities with the
objective of stabilizing net interest income over time. The swap agreements
provide for us to receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the three-month London Interbank Offering Rate. The terms
of the swap agreements provide for us to pay and receive interest on a quarterly
basis. The amount receivable and payable by us under the swap agreements was
$1.4 million and $318,000 at December 31, 2001, respectively.
The maturity dates, notional amounts, interest rates paid and received and
fair value of our interest rate swap agreements designated as fair value hedges
as of December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ----------- ------------- ----------
(dollars expressed in thousands)
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 Floor Agreements. During January 2001 and March 2001, we
entered into $100.0 million and $75.0 million notional amount, respectively, of
four-year interest rate floor agreements to further stabilize net interest
income in the event of a falling rate scenario. The interest rate floor
agreements provided 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 prices of 5.50% or 5.00%, respectively, should the
three-month London Interbank Offering Rate fall below the respective strike
prices. In November 2001, we terminated these interest rate floor agreements in
order to appropriately modify our overall hedge position in accordance with our
risk management program. In conjunction with the termination, we recorded a
pre-tax adjustment of $2.6 million representing the decline in fair value from
our previous month-end measurement date. These agreements provided net interest
income of $1.2 million for the year ended December 31, 2001.
Interest Rate Cap Agreements. In conjunction with the interest rate swap
agreements entered into in September 2000, we also entered into a four-year
$150.0 million notional amount interest rate cap agreement to limit the net
interest expense associated with the 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 December 31, 2001 and 2000, the carrying value of this interest rate
cap agreement, which is included in derivative instruments in the consolidated
balance sheets, was $688,000 and $1.3 million, respectively.
Pledged Collateral. At December 31, 2001 and 2000, we had pledged
investment securities available for sale with a carrying value of $894,000 and
$2.6 million, respectively, in connection with the interest rate swap
agreements. In addition, we had accepted, as collateral in connection with the
interest rate swap agreements, cash of $1.5 million and investment securities
with a fair value of $28.5 million at December 31, 2001, and investment
securities with a fair value of $8.5 million at December 31, 2000. We are
permitted by contract to sell or repledge the collateral accepted from its
counterparties; however, at December 31, 2001 and 2000, we had not done so.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended December 31, 2001 and
2000
Net Income. Net income was $39.6 million, or $3.25 per share on a diluted
basis, for the year ended December 31, 2001, compared to $27.8 million, or $2.29
per share on a diluted basis, for 2000. The implementation of SFAS 133, as
amended, on January 1, 2001, resulted in the recognition of a cumulative effect
of change in accounting principle of $459,000, net of tax, which reduced net
income. Excluding this item, net income was $40.1 million, or $3.29 per share on
a diluted basis, for the year ended December 31, 2001. The improved earnings
primarily result from increased net interest income and noninterest income as
well as a reduced provision for income taxes. The reduced provision for income
taxes includes the effect of an $8.1 million reduction in our deferred tax asset
valuation allowance that was no longer deemed necessary as our overall net
deferred tax assets are expected to be recoverable through future earnings. The
overall improvement in earnings was partially offset by an increased provision
for loan losses and higher operating expenses, including a nonrecurring charge
associated with the establishment of a specific reserve related to a contingent
liability.
Net interest income improved to $125.3 million for the year ended December
31, 2001, compared to $105.6 million for 2000. However, our net interest rate
margin declined to 5.10% for the year ended December 31, 2001 from 5.51% for
2000. Net interest income increased primarily as a result of increased earning
assets generated through internal loan growth along with our acquisitions
completed throughout 2000 and 2001. However, the improvement in net interest
income was significantly mitigated by continued reductions in prevailing
interest rates throughout 2001. We funded the overall loan growth primarily
through deposits added through acquisitions and internal deposit growth. During
the year ended December 31, 2001, noninterest income improved significantly to
$27.1 million from $12.1 million for the years ended December 31, 2001 and 2000,
respectively, as further discussed under "--Noninterest Income."
The improvement in net interest income and noninterest income was partially
offset by increased operating expenses to $93.6 million for the year ended
December 31, 2001, compared to $70.0 million for 2000. The increased operating
expenses reflect the operating expenses of our 2000 and 2001 acquisitions,
exclusive of First Bank & Trust, subsequent to their respective acquisition
dates; increased salaries and employee benefit expenses; increased information
technology fees; increased legal, examination and professional fees; increased
amortization of intangibles associated with the purchase of subsidiaries; and a
charge to other expense associated with the establishment of a specific reserve
on an unfunded letter of credit.
Provision for Loan Losses. The provision for loan losses was $5.0 million
and $1.9 million for the years ended December 31, 2001 and 2000, respectively.
The provisions for loan losses reflect the level of loan charge-offs and
recoveries, the adequacy of the allowance for loan losses and the effect of
economic conditions within our markets. We attribute the increase in the
provision for loan losses primarily to the overall growth in our loan portfolio,
both internal and through acquisitions, a general increase in risk associated
with the continued changing composition of our loan portfolio and an increase in
nonperforming assets and past due loans, which is further discussed under
"--Loans and Allowance for Loan Losses." Loan charge-offs were $10.0 million and
$5.4 million for the years ended December 31, 2001 and 2000, respectively. The
increase in loan charge-offs reflects a $1.4 million charge-off on a single
shared national credit relationship, a $675,000 charge-off with respect to a
loan in an acquired portfolio as well as the effects of the slowdown in economic
conditions prevalent within our markets. Loan recoveries were $4.2 million and
$5.2 million for the years ended December 31, 2001 and 2000, respectively.
Nonperforming assets and past due loans increased by $18.4 million to $47.5
million from $29.1 million at December 31, 2001 and 2000, respectively, and we
anticipate these trends will continue in the near future. However, we believe
these trends represent normal cyclical trends experienced within the banking
industry during times of economic slowdown. Management considered these trends
in its overall assessment of the adequacy of the allowance for loan losses. Our
acquisitions during 2000 and 2001 provided $6.1 million and $5.5 million,
respectively, in additional allowance for loan losses at the respective
acquisition dates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Tables summarizing nonperforming assets, past-due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 2001 and 2000:
Increase (Decrease)
-------------------
2001 2000 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts
and customer service fees........................ $ 9,610 7,626 1,984 26.02%
Net (loss) gain on sales of available-for-sale
securities....................................... (418) 177 (595) (336.16)
Bank-owned life insurance investment income........ 1,539 1,339 200 14.94
Gain on derivative instruments, net................ 10,173 -- 10,173 100.00
Other ............................................. 6,236 2,935 3,301 112.47
-------- ------- --------
Total noninterest income....................... $ 27,140 12,077 15,063 124.72
======== ======= ======== ======
Noninterest expense:
Salaries and employee benefits..................... $ 32,788 25,917 6,871 26.51%
Occupancy, net of rental income.................... 10,671 8,496 2,175 25.60
Furniture and equipment............................ 4,027 3,588 439 12.24
Postage, printing and supplies..................... 1,779 1,459 320 21.93
Information technology fees........................ 10,174 7,406 2,768 37.38
Legal, examination and professional fees........... 10,548 6,995 3,553 50.79
Amortization of intangibles associated with the
purchase of subsidiaries......................... 5,522 3,234 2,288 70.75
Communications..................................... 1,255 943 312 33.09
Advertising and business development............... 735 969 (234) (24.15)
Guaranteed preferred debentures.................... 3,900 3,908 (8) (0.20)
Other.............................................. 12,169 7,104 5,065 71.30
-------- ------- --------
Total noninterest expense...................... $ 93,568 70,019 23,549 33.63
======== ======= ======== ======
Noninterest Income. Noninterest income was $27.1 million for the year ended
December 31, 2001, compared to $12.1 million for 2000. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, net gains on derivative instruments and other income.
Service charges on deposit accounts and customer service fees increased to
$9.6 million for 2001, from $7.6 million for 2000. We attribute the increase in
service charges and customer service fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed throughout 2000 and 2001;
>> additional products and services available and utilized by our
expanding base of retail and commercial customers;
>> increased fee income resulting from revisions of customer service
charge rates, effective June 30, 2000 and July 1, 2001, and enhanced
control of fee waivers; and
>> increased income associated with automated teller machine services and
debit cards.
Noninterest income for the year ended December 31, 2001 included a net loss
on sales of available-for-sale investment securities of $418,000, as compared to
a net gain of $177,000 in 2000. The net loss in 2001 resulted from sales of
certain equity investment securities and a higher than normal level of
investment security calls experienced as a result of the prevailing interest
rate environment. The net gain in 2000 resulted from sales of investment
securities held by acquired institutions that did not meet our overall
investment objectives.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The net gain on derivative instruments of $10.2 million for the year ended
December 31, 2001 is due to gains resulting from the terminations of certain
interest rate floor and swap agreements to adjust our interest rate hedge
position consistent with changes in the portfolio structure and mix. In
addition, the net gain reflects changes in the fair value of our interest rate
cap agreements, interest rate floor agreements and fair value hedges, in
accordance with the requirements of SFAS No. 133, as amended, which was
implemented on January 1, 2001.
Other income was $6.2 million and $2.9 million for the years ended December
31, 2001 and 2000, respectively. We attribute the primary components of the
increase to:
>> our acquisitions completed during 2000 and, to a lesser extent, 2001;
>> increased earnings associated with our international banking products,
which were initially offered in March 2000;
>> increased brokerage revenue of $1.1 million, which is primarily
associated with the stock option services acquired in conjunction with
our acquisition of Bank of San Francisco in December 2000;
>> increased earnings associated with our official check processing
program, in which we earn a fee based upon the amount of official
checks issued and outstanding; and
>> income of approximately $1.2 million associated with equipment leasing
activities that were acquired in conjunction with our acquisition of
Bank of San Francisco.
Noninterest Expense. Noninterest expense was $93.6 million for the year
ended December 31, 2001, compared to $70.0 million for 2000. The increase
reflects:
>> the noninterest expense associated with our acquisitions completed
during 2000 and 2001, including certain nonrecurring expenses
associated with those acquisitions;
>> increased salaries and employee benefit expenses;
>> increased information technology fees;
>> increased legal, examination and professional fees;
>> increased amortization of intangibles associated with our acquisitions
completed during 2000; and
>> increased other expense.
Salaries and employee benefits increased by $6.9 million to $32.8 million
from $25.9 million for the years ended December 31, 2001 and 2000, respectively.
We primarily associate the increase with our 2000 and 2001 acquisitions.
However, the increase also reflects the competitive environment in the
employment market that has resulted in a higher demand for limited resources,
thus escalating industry salary and employee benefit costs associated with
employing and retaining qualified personnel. In addition, the increase includes
various additions to our staff to enhance management expertise.
Occupancy, net of rental income, and furniture and equipment expense
totaled $14.7 million in 2001, in comparison to $12.1 million in 2000. The
increase is primarily attributable to our acquisitions, the relocation of
certain California and Texas branches and increased depreciation expense
associated with numerous capital expenditures.
Information technology fees were $10.2 million and $7.4 million for the
years ended December 31, 2001 and 2000, respectively, of which $9.2 million and
$6.8 million were paid to First Services, L.P., an affiliate of First Banks.
First Services, L.P. provides information technology and various related
services to FB&T and us. We attribute the increased fees to growth and
technological advancements consistent with our product and service offerings,
continued expansion upgrades to technological equipment, networks and
communication channels, and certain nonrecurring expenses associated with the
data processing conversions of Redwood Bank, Commercial Bank of San Francisco,
Bank of San Francisco, Millennium Bank, Charter Pacific Bank and BYL Bancorp
completed in 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Legal, examination and professional fees were $10.5 million and $7.0
million for the years ended December 31, 2001 and 2000, respectively. We
primarily attribute the increase in these fees to the ongoing professional
services utilized by certain of our acquired entities and increased legal fees
associated with commercial loan documentation, collection efforts, expanded
corporate activities and certain defense litigation.
Intangibles associated with the purchase of subsidiaries are amortized on a
straight-line basis generally over 15 years. Amortization of these intangibles
was $5.5 million and $3.2 million in 2001 and 2000, respectively. The increase
for 2001 is primarily attributable to amortization of the cost in excess of the
fair value of the net assets acquired of Commercial Bank of San Francisco, Bank
of Ventura, Lippo Bank, Millennium Bank and The San Francisco Company.
Other expense was $12.2 million and $7.1 million for the years ended
December 31, 2001 and 2000, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges,
miscellaneous losses and recoveries, memberships and subscriptions, transfer
agent fees and sales taxes. We attribute the overall increase in other expense
to:
>> our acquisitions completed during 2000 and 2001;
>> increased travel expenses primarily associated with business
development efforts and the ongoing integration of the recently
acquired entities into our corporate culture and systems;
>> increased losses attributable to certain fraudulent customer
activities;
>> a reduced level of recoveries of loans of acquired entities that had
been fully charged-off prior to the acquisition dates;
>> the establishment of a $1.8 million specific reserve for an unfunded
letter of credit; and
>> overall continued growth and expansion of our banking franchise.
Provision for Income Taxes. The provision for income taxes was $13.8
million for the year ended December 31, 2001, representing an effective income
tax rate of 25.6%, in comparison to $18.0 million, representing an effective
income tax rate of 39.3%, for the year ended December 31, 2000. The decrease in
the effective income tax rate is primarily attributable to:
>> a reduction of our deferred tax asset valuation allowance of $13.1
million recorded in December 2001. This reduction, of which $8.1
million represented a reduction in our provision for income taxes and
$5.0 million represented an increase in capital surplus, reflects the
recognition of deferred tax assets for net operating loss
carryforwards and the expectation of future taxable income sufficient
to realize the net deferred tax assets; partially offset by
>> the increase in amortization of intangibles associated with the
purchase of subsidiaries, which is not deductible for tax purposes.
Comparison of Results of Operations for the Years Ended December 31, 2000 and
1999
Net Income. Net income was $27.8 million, or $2.29 per share on a diluted
basis, for the year ended December 31, 2000, compared to $17.6 million, or $1.44
per share on a diluted basis, for 1999. The earnings progress was primarily
driven by increased net interest income generated from our acquisitions
completed during 1999 and 2000; the continued change in the composition of our
loan portfolio; increased yields on earning assets; internal loan growth; a
reduced provision for loan losses; and increased noninterest income. We funded
the overall loan growth primarily through internal deposit growth. As previously
discussed under "--Financial Condition and Average Balances" and "--Net Interest
Income," net interest income increased by $24.1 million to $105.6 million, or
5.51% of average interest-earning assets, from $81.5 million, or 5.27% of
average interest-earnings assets, for the years ended December 31, 2000 and
1999, respectively.
The improvement in net income was partially offset by increased operating
expenses. The increased operating expenses reflect the operating expenses of our
1999 and 2000 acquisitions, exclusive of First Bank & Trust, subsequent to their
respective acquisition dates; increased salaries and employee benefit expenses;
increased information technology fees; increased legal, examination and
professional fees and increased amortization of intangibles associated with the
purchase of subsidiaries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Provision for Loan Losses. The provision for loan losses was $1.9 million
and $4.2 million for the years ended December 31, 2000 and 1999, respectively.
We attribute the decrease in the provision for loan losses primarily to improved
asset quality, as determined by management's review and evaluation of the credit
quality of the loans in our portfolio, reduced charge-offs, and management's
assessment of the adequacy of our allowance for loan losses. Nonperforming
assets decreased by $934,000 to $15.7 million from $16.6 million at December 31,
2000 and 1999, respectively, resulting in a reduced ratio of nonperforming loans
to loans from 1.11% at December 31, 1999 to 0.73% at December 31, 2000.
Our loan loss experience further supported the decrease in the provision
for loan losses. For the year ended December 31, 2000, loan charge-offs were
$5.4 million, in comparison to $7.1 million for the year ended December 31,
1999. The decrease in loan charge-offs shows the generally strong economic
conditions prevalent in our markets, as well as a decline in nonperforming
assets and management's continued efforts to effectively monitor and manage our
loan portfolio. In addition, loan charge-offs for the year ended December 31,
2000 included a charge-off of $1.6 million on a single loan. Loan recoveries
were $5.2 million for the years ended December 31, 2000 and 1999, in comparison
to $4.3 million for the year ended December 31, 1998, reflecting continued
aggressive collection efforts. Our acquisitions during 1999 and 2000 provided
$3.0 million and $6.1 million, respectively, in additional allowance for loan
losses at the respective acquisition dates.
Tables summarizing nonperforming assets, past-due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 2000 and 1999:
Increase (Decrease)
-------------------
2000 1999 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts
and customer service fees........................ $ 7,626 6,210 1,416 22.80%
Net gain on sales of available-for-sale
securities....................................... 177 485 (308) (63.51)
Bank-owned life insurance investment income........ 1,339 1,222 117 9.57
Other ............................................. 2,935 1,963 972 49.52
-------- ------- --------
Total noninterest income....................... $ 12,077 9,880 2,197 22.24
======== ======= ======== ========
Noninterest expense:
Salaries and employee benefits..................... $ 25,917 21,889 4,028 18.40%
Occupancy, net of rental income.................... 8,496 6,980 1,516 21.72
Furniture and equipment............................ 3,588 3,232 356 11.01
Postage, printing and supplies..................... 1,459 1,362 97 7.12
Information technology fees........................ 7,406 5,570 1,836 32.96
Legal, examination and professional fees........... 6,995 5,753 1,242 21.59
Amortization of intangibles associated with the
purchase of subsidiaries......................... 3,234 2,296 938 40.85
Communications..................................... 943 1,098 (155) (14.12)
Advertising and business development............... 969 819 150 18.32
Guaranteed preferred debentures.................... 3,908 3,966 (58) (1.46)
Other.............................................. 7,104 5,498 1,606 29.21
-------- ------- --------
Total noninterest expense...................... $ 70,019 58,463 11,556 19.77
======== ======= ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Noninterest Income. Noninterest income was $12.1 million for the year ended
December 31, 2000, compared to $9.9 million for 1999.
Service charges on deposit accounts and customer service fees increased to
$7.6 million for 2000, from $6.2 million for 1999. We attribute the increase in
service charges and customer service fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed throughout 1999 and 2000;
>> additional services available and utilized by our expanding base of
retail and corporate customers;
>> increased fee income resulting from revisions of customer service
charge rates, effective April 1, 1999 and June 30, 2000, and enhanced
control of fee waivers; and
>> increased income associated with automated teller machine services and
debit cards.
The net gain on sales of available-for-sale investment securities was
$177,000 and $485,000 for the years ended December 31, 2000 and 1999,
respectively. The net gain in 2000 resulted from sales of certain investment
securities held by acquired institutions that did not meet our overall
investment objectives, whereas the net gain in 1999 resulted from sales of
certain investment securities to facilitate the funding of loan growth.
Bank-owned life insurance investment income was $1.3 million and $1.2
million for the years ended December 31, 2000 and 1999, respectively. The
increase for 2000 reflects an increased rate of return on this product primarily
associated with the current interest rate environment as well as the
reinvestment of product earnings.
Other income was $2.9 million and $2.0 million for the years ended December
31, 2000 and 1999, respectively. We attribute the increase to increased earnings
associated with our International Banking Division, which was initially acquired
in conjunction with our Lippo Bank acquisition and has subsequently been
expanded to offer these services to our entire customer base; and approximately
$620,000 relating to the repayment of an acquired loan in excess of our
historical cost basis.
Noninterest Expense. Noninterest expense was $70.0 million for the year
ended December 31, 2000, compared to $58.5 million for 1999. The increase
reflects:
>> the noninterest expense of our acquisitions completed throughout 1999
and 2000 subsequent to the respective acquisition dates, including
certain nonrecurring expenses associated with those acquisitions;
>> increased salaries and employee benefit expenses;
>> increased information technology fees;
>> increased legal, examination and professional fees; and
>> increased amortization of intangibles associated with the purchase of
subsidiaries.
Salaries and employee benefits increased by $4.0 million to $25.9 million
from $21.9 million for the years ended December 31, 2000 and 1999, respectively.
We primarily associate the increase with our 1999 and 2000 acquisitions.
However, the increase also reflects the competitive environment in the
employment market that has resulted in a higher demand for limited resources,
thus escalating industry salary and employee benefit costs associated with
employing and retaining qualified personnel. In addition, the increase includes
various additions to our staff to enhance management expertise.
Occupancy, net of rental income, and furniture and equipment expense
totaled $12.1 million in 2000, in comparison to $10.2 million in 1999. The
increase is primarily attributable to acquisitions, the relocation of certain
California and Texas branches and increased depreciation expense associated with
numerous capital expenditures made throughout 1999, including the implementation
of our new teller system.
Information technology fees were $7.4 million and $5.6 million for the
years ended December 31, 2000 and 1999, respectively, of which $6.8 million and
$5.3 million were paid to First Services, L.P., an affiliate of First Banks.
First Services, L.P. provides information technology and various related
services to FB&T and us. We attribute the increased fees to growth and
technological advancements consistent with our product and service offerings and
upgrades to technological equipment, networks and communication channels.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Legal, examination and professional fees were $7.0 million and $5.8 million
for the years ended December 31, 2000 and 1999, respectively. We attribute the
increase in these fees to our expanded utilization of legal and professional
services in conjunction with general corporate activities.
Intangibles associated with the purchase of subsidiaries are amortized on a
straight-line basis generally over 15 years. Amortization of these intangibles
was $3.2 million and $2.3 million in 2000 and 1999, respectively. The increase
for 2000 is primarily attributable to amortization of the cost in excess of the
fair value of the net assets acquired of Commercial Bank of San Francisco, Bank
of Ventura, Lippo Bank, Century Bank and Redwood Bancorp.
Other expense was $7.1 million and $5.5 million for the years ended
December 31, 2000 and 1999, respectively. Other expense encompasses numerous
general and administrative expenses including but not limited to travel, meals
and entertainment, insurance, freight and courier services, correspondent bank
charges, miscellaneous losses and recoveries, memberships and subscriptions,
transfer agent fees and sales taxes. We attribute the overall increase in these
expenses to the continued growth and expansion of our banking franchise.
Provision for Income Taxes. The provision for income taxes was $18.0
million for the year ended December 31, 2000, representing an effective income
tax rate of 39.3%, in comparison to $11.1 million, representing an effective
income tax rate of 38.7%, for the year ended December 31, 1999. The increase in
the effective income tax rate is primarily attributable to:
>> the increase in amortization of intangibles associated with the
purchase of subsidiaries, which is not deductible for tax purposes;
and
>> a reduction of the deferred tax asset valuation reserve of
approximately $405,000 related to the utilization of net operating
losses associated with a previously acquired entity, which was
recorded in March 2000.
Investment Securities
We classify the securities within our investment portfolio as held to
maturity or available for sale. We do not engage in the trading of investment
securities. Our investment security portfolio consists primarily of securities
designated as available for sale. The investment security portfolio was $368.2
million at December 31, 2001, compared to $335.2 million and $196.2 million at
December 31, 2000 and 1999, respectively. We attribute the increase in
investment securities during 2000 and 2001 to securities acquired through
acquisitions and the overall level of loan demand within our market areas, which
affects the amount of funds available for investment. In addition, the increase
for 2001 is partially offset by the liquidation of certain investment securities
and a significant increase in calls of investment securities prior to their
normal maturity dates resulting from the general decline in interest rates
during 2001.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents our principal source of
income. Interest and fees on loans were 90.0%, 89.2% and 89.1% of total interest
income for the years ended December 31, 2001, 2000 and 1999, respectively.
Loans, net of unearned discount, represented 75.9% of total assets as of
December 31, 2001, compared to 75.1% and 78.9% as of December 31, 2000 and 1999,
respectively. Total loans, net of unearned discount, increased $264.6 million to
$2.32 billion for the year ended December 31, 2001, and $589.6 million to $2.06
billion for the year ended December 31, 2000. We view the quality, yield and
growth of our loan portfolio to be instrumental elements in determining our
profitability.
During the five years ended December 31, 2001, total loans, net of unearned
discount, increased substantially from $816.7 million at December 31, 1997 to
$2.32 billion at December 31, 2001. Throughout this period, we have
significantly enhanced our capabilities for achieving and managing internal
growth. A key element of this process has been the expansion of our corporate
business development staff, which is responsible for the internal development
and management of both loan and deposit relationships with commercial customers.
While this process was occurring, in an attempt to achieve more diversification,
a higher level of interest yield and a reduction in interest rate risk within
our loan portfolio, we also focused on repositioning our portfolio. As the
corporate business development effort continued to originate a substantial new
volume of commercial, financial and agricultural, real estate construction and
development and real estate mortgage loans, we substantially reduced our
consumer lending, which had been primarily concentrated in indirect automobile
lending. The decrease in consumer lending is primarily attributable to
reductions in new loan volumes and the repayment of principal on our existing
loan portfolio. This allowed us to fund a part of the growth in corporate
lending through the reduction in indirect automobile lending.
In addition, our acquisitions added substantial portfolios of new loans.
Some of these portfolios, particularly those from acquisitions completed in the
mid-1990s, contained significant loan problems, which we anticipated and
considered in our acquisition pricing. As we resolved the asset quality issues,
the portfolios of the acquired entities tended to decline because many of the
resources which would otherwise be directed toward generating new loans were
concentrated on improving or eliminating existing relationships.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table summarizes the effects of these factors on our loan
portfolio for the five years ended December 31, 2001:
Increase (Decrease) For the Years Ended December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volume increase (decrease):
Commercial lending................................... $ 50,856 273,099 191,223 235,202 166,805
Indirect automobile lending.......................... (8,419) (13,865) (21,841) (14,343) (28,317)
Other................................................ (23,051) (45,048) (25,756) (75,201) (23,481)
Loans provided by acquisition............................ 245,200 375,400 235,500 127,600 54,400
-------- ------- ------- ------- -------
Total increase in loans, net of unearned discount $264,586 589,586 379,126 273,258 169,407
======== ======= ======= ======= =======
Our lending strategy stresses quality, growth and diversification.
Throughout our organization, we employ a common credit underwriting policy. Our
commercial lenders focus principally on small to middle-market companies.
Consumer lenders focus principally on residential loans, including home equity
loans, and other consumer financing opportunities arising out of our branch
banking network.
Commercial, financial and agricultural loans include loans that are made
primarily based on the borrowers' general credit strength and ability to
generate cash flows for repayment from income sources even though such loans may
also be secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and commercial
properties, represent financing during the period projects are being developed,
secured by the real estate under construction. Real estate mortgage loans
consist primarily of loans secured by single-family, owner-occupied properties
and various types of commercial properties on which the income from the property
is the intended source of repayment. Consumer and installment loans are loans to
individuals and consist primarily of loans secured by automobiles.
The following table summarizes the composition of our loan portfolio by
major category and the percent of each category to the total portfolio as of the
dates presented:
December 31,
----------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ----------------- ------------------ --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Commercial, financial
and agricultural....... $ 770,992 33.2% $ 686,426 33.3% $ 427,974 29.1% $ 337,084 30.9% 217,214 26.6%
Real estate construction
and development........ 518,325 22.3 444,218 21.6 377,254 25.7 293,665 26.9 146,147 17.9
Real estate mortgage..... 1,001,663 43.1 883,103 42.9 607,171 41.3 394,255 36.2 370,790 45.4
Consumer and installment,
net of unearned
discount............... 32,283 1.4 44,930 2.2 56,692 3.9 64,961 6.0 82,556 10.1
---------- ----- ---------- ----- ---------- ----- ---------- ----- -------- -----
Total loans.......... $2,323,263 100.0% $2,058,677 100.0% $1,469,091 100.0% $1,089,965 100.0% $816,707 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ======== =====
Loans at December 31, 2001 mature as follows:
Over One Year
Through Five
Years Over Five Years
----------------- ---------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial, financial and agricultural.................... $ 691,123 62,918 9,687 7,264 -- 770,992
Real estate construction and development.................. 495,970 21,115 -- 1,240 -- 518,325
Real estate mortgage...................................... 722,244 118,253 52,386 106,086 2,694 1,001,663
Consumer and installment, net of unearned discount........ 13,591 17,755 127 810 -- 32,283
----------- -------- -------- ------- ------- ---------
Total loans......................................... $ 1,922,928 220,041 62,200 115,400 2,694 2,323,263
=========== ======== ======== ======= ======= =========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table is a summary of loan loss experience for the five years
ended December 31, 2001:
As of or For the Years Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of year.. $ 37,930 30,192 24,947 20,586 19,156
Acquired allowances for loan losses........... 5,493 6,062 3,008 3,200 30
---------- --------- --------- --------- ---------
43,423 36,254 27,955 23,786 19,186
---------- --------- --------- --------- ---------
Loans charged off:
Commercial, financial and agricultural...... (9,110) (4,893) (5,458) (2,347) (1,158)
Real estate construction and development.... -- -- (228) -- (15)
Real estate mortgage........................ (554) (113) (586) (1,416) (4,528)
Consumer and installment.................... (296) (384) (835) (1,099) (2,524)
---------- --------- --------- --------- ---------
Total loans charged-off................. (9,960) (5,390) (7,107) (4,862) (8,225)
---------- --------- --------- --------- ---------
Recoveries of loans previously charged off:
Commercial, financial and agricultural...... 2,723 3,575 2,201 2,357 1,188
Real estate construction and development.... 8 75 400 219 183
Real estate mortgage........................ 1,183 1,066 1,745 912 3,075
Consumer and installment.................... 334 473 815 785 1,179
---------- --------- --------- --------- ---------
Total recoveries of loans previously
charged off.......................... 4,248 5,189 5,161 4,273 5,625
---------- --------- --------- --------- ---------
Net loan charge-offs.................... (5,712) (201) (1,946) (589) (2,600)
---------- --------- --------- --------- ---------
Provision for loan losses..................... 5,010 1,877 4,183 1,750 4,000
---------- --------- --------- --------- ---------
Allowance for loan losses, end of year........ $ 42,721 37,930 30,192 24,947 20,586
========== ========= ========= ========= =========
Loans outstanding, net of unearned discount:
Average..................................... $2,109,284 1,621,432 1,303,742 935,284 669,902
End of year................................. 2,323,263 2,058,677 1,469,091 1,089,965 816,707
Ratio of allowance for loan losses
to loans outstanding:
Average................................... 2.03% 2.34% 2.32% 2.67% 3.07%
End of year............................... 1.84 1.84 2.06 2.29 2.52
Ratio of net loan charge-offs to
average loans outstanding................... 0.27 0.01 0.15 0.06 0.39
Ratio of current year recoveries to
preceding year's total charge-offs.......... 78.81 73.01 106.15 51.95 31.23
========== ========= ========= ========= =========
Allocation of allowance for loan losses
at end of year:
Commercial, financial and agricultural.... $ 20,595 13,626 10,051 7,413 5,256
Real estate construction and development.. 10,147 8,038 6,582 6,982 2,979
Real estate mortgage...................... 11,525 11,665 8,405 5,987 6,865
Consumer and installment.................. 454 929 1,933 2,166 2,464
Unallocated (1) .......................... -- 3,672 3,221 2,399 3,022
---------- --------- --------- --------- ---------
Total................................... $ 42,721 37,930 30,192 24,947 20,586
========== ========= ========= ========= =========
- --------------------
(1) During 2001, we reviewed our practice of maintaining unallocated reserves
in light of continuing refinement in our loss estimation processes. We
concluded the use of unallocated reserves would be discontinued.
Consequently, these unallocated reserves were aligned with their respective
portfolios.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Nonperforming assets include nonaccrual loans, restructured loans and other
real estate. The following table presents the categories of nonperforming assets
and certain ratios as of the dates indicated:
December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars expressed in thousands)
Nonperforming loans......................... $ 19,564 15,005 16,244 25,044 11,186
Other real estate, net...................... 547 694 389 935 2,254
---------- --------- --------- --------- -------
Total nonperforming assets............ $ 20,111 15,699 16,633 25,979 13,440
========== ========= ========= ========= =======
Loans, net of unearned discount............. $2,323,263 2,058,677 1,469,091 1,089,965 816,707
========== ========= ========= ========= =======
Loans past due:
Over 30 days to 90 days.................. $ 18,713 12,387 6,284 17,497 9,673
Over 90 days and still accruing.......... 8,660 985 4,626 816 1,314
---------- --------- --------- --------- -------
Total past-due loans.................. $ 27,373 13,372 10,910 18,313 10,987
========== ========= ========= ========= =======
Ratio of:
Allowance for loan losses to loans....... 1.84% 1.84% 2.06% 2.29% 2.52%
Nonperforming loans to loans............. 0.84 0.73 1.11 2.30 1.37
Allowance for loan losses
to nonperforming loans................ 218.37 252.78 185.87 99.61 184.03
Nonperforming assets to loans
and other real estate................. 0.87 0.76 1.13 2.38 1.64
========== ========= ========= ========= =======
Nonperforming loans, consisting of loans on nonaccrual status and certain
restructured loans, were $19.6 million at December 31, 2001, in comparison to
$15.0 million at December 31, 2000. The increase in nonperforming and past-due
loans for 2001 reflects cyclical trends experienced within the banking industry
as a result of economic slowdown as well as the asset quality of acquired
institutions. Consistent with the economic slowdown experienced within our
primary markets, we anticipate this trend will continue in the upcoming months.
The decrease in nonperforming loans in 2000 and 1999 primarily results from
continued aggressive collection efforts and management's continued efforts to
effectively monitor and manage the loan portfolios of acquired entities. As
previously discussed, certain acquired loan portfolios, particularly those
acquired during the mid-1990s, exhibited varying degrees of distress prior to
their acquisition. While these problems had been identified and considered in
the acquisition pricing, the acquisitions led to an increase in nonperforming
assets and problem loans. Nonperforming assets and problem loans were $24.7
million at December 31, 1997. At December 31, 1998, nonperforming assets and
problem loans increased to $30.5 million. We associate the increase for 1998
primarily with our acquisitions of Republic Bank and Pacific Bay Bank and the
overall growth of our loan portfolio, principally in commercial, financial and
agricultural, real estate construction and development and real estate mortgage
loans.
As of December 31, 2001, 2000 and 1999, $39.0 million, $8.1 million and
$13.2 million, respectively, of loans not included in the table above were
identified by management as having potential credit problems (problem loans). We
attribute the increase for 2001 primarily to our acquisitions and to portfolio
growth, as well as the slowdown and uncertainties that have occurred in the
economy surrounding the markets in which we operate. Problem loans totaled $4.5
million and $11.3 million at December 31, 1998 and 1997, respectively.
Our credit management policies and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews, external
audits and regulatory bank examinations. The system requires rating all loans at
the time they are originated, except for homogeneous categories of loans, such
as residential real estate mortgage loans and other various types of consumer
loans. These homogeneous loans are assigned an initial rating based on our
experience with each type of loan. We adjust these ratings based on payment
performance subsequent to their origination.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
We include adversely rated credits, including loans requiring close
monitoring which would not normally be considered criticized credits by
regulators, on a monthly loan watch list. Loans may be added to our watch list
for reasons that are temporary and correctable, such as the absence of current
financial statements of the borrower or a deficiency in loan documentation.
Other loans are added whenever any adverse circumstance is detected which might
affect the borrower's ability to meet the terms of the loan. The delinquency of
a scheduled loan payment, a deterioration in the borrower's financial condition
identified in a review of periodic financial statements, a decrease in the value
of the collateral securing the loan, or a change in the economic environment
within which the borrower operates could initiate the addition of a loan to the
list. Loans on the watch list require periodic detailed loan status reports
prepared by the responsible officer, which are discussed in formal meetings with
loan review and credit administration staff members. Downgrades of loan risk
ratings may be initiated by the responsible loan officer at any time. However,
upgrades of risk ratings may only be made with the concurrence of selected loan
review and credit administration staff members generally at the time of the
formal watch list review meetings.
Each month, the credit administration department provides 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 profiles 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 levels 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 losses. In its analysis,
management considers the change in the portfolio, including growth, composition
and the ratio of net loans to total assets, and the economic conditions of the
regions in which we operate. Based on this quantitative and qualitative
analysis, provisions are made to our allowance for loan losses. Such provisions
are reflected in our consolidated statements of income.
Deposits
Deposits are the primary source of funds for FB&T. Our deposits consist
principally of core deposits from FB&T's local market areas, including
individual and corporate customers. The following table sets forth the
distribution of our average deposit accounts for the years indicated and the
weighted average interest rates on each category of deposits:
December 31,
-------------------------------------------------------------------------------
2001 2000 1999
---------------------- ------------------------- ------------------------
Percent Percent Percent
of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
Noninterest-bearing demand..... $ 434,290 18.85% --% $ 340,278 18.95% --% $ 263,427 18.31% --%
Interest-bearing demand........ 238,512 10.35 1.52 152,487 8.49 1.58 133,976 9.31 1.53
Savings........................ 794,590 34.50 3.46 575,227 32.04 4.42 454,022 31.56 3.78
Time deposits.................. 836,017 36.30 5.40 727,695 40.52 5.71 586,970 40.82 5.11
---------- ------ ==== ---------- ------ ==== ---------- ------ =====
Total average deposits...... $2,303,409 100.00% $1,795,687 100.00% $1,438,395 100.00%
========== ====== ========== ====== ========== ======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Capital
On October 31, 2000, we completed our acquisition of First Bank & Trust. In
connection with this acquisition, we issued 5,727,340 shares of our common stock
and 803,429 shares of our common stock held for treasury to First Banks. The
consolidated statements of changes in stockholders' equity and comprehensive
income reflect our accounts as if the common stock, excluding the treasury
shares, issued to acquire First Banks' interest in First Bank & Trust, had been
outstanding since March 15, 1995. In addition, for the years ended December 31,
2000 and 1999, the statements of changes in stockholders' equity and other
comprehensive income includes $7.0 million and $18.2 million, respectively, of
pre-merger transactions of FB&T.
On October 31, 2001, we completed our acquisition of BYL Bancorp. In order
to maintain our capital position at levels prescribed by our regulatory agencies
for bank holding companies and to provide a portion of the funds required for
this acquisition, we issued 803,757 shares of our common stock to First Banks in
exchange for $32.50 per share, or $26.1 million in cash. During the first half
of 2002, we plan to offer a proportionate number of shares of our common stock
to our public shareholders at the same price paid by First Banks.
Our Board of Directors, through various resolutions passed from 1995 to
2001, has authorized the purchase of up to a cumulative total of 1,094,797
shares of common stock. As of December 31, 2001, we had purchased a cumulative
total of 863,857 shares of common stock held for treasury. However, as
previously discussed, we issued 803,429 treasury shares to First Banks in
conjunction with our acquisition of First Bank & Trust. As a result, at December
31, 2001, we held 60,400 shares of common stock for treasury at an aggregate
cost of $1.3 million. At December 31, 2001, we could purchase approximately
231,000 additional shares under the existing authorization.
Management believes as of December 31, 2001 and 2000, FB&T was "well
capitalized" as defined by the Federal Deposit Insurance Corporation Improvement
Act of 1991. In 2000, our consolidated total capital ratio fell below the well
capitalized level, however we remained adequately capitalized at December 31,
2001 and 2000. The reduction in our total capital for 2000 is primarily
attributable to our acquisitions of Millennium Bank and The San Francisco
Company in December 2000, which added assets of approximately $300.8 million.
The improvement in our total capital for 2001 is primarily attributable to
increased earnings and the issuance of additional shares of our common stock to
First Banks.
In July 1998, we formed First America Capital Trust for the purpose of
issuing $46.0 million of trust preferred securities. For regulatory reporting
purposes, the trust preferred securities are eligible for inclusion, subject to
certain limitations, in our Tier 1 capital.
Liquidity
Our liquidity and the liquidity of 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 Banks and other borrowings,
including our revolving note payable to First Banks. The aggregate funds
acquired from these sources were $445.1 million and $457.2 million at December
31, 2001 and 2000, respectively.
The following table presents the maturity structure of these other sources
of funds, which consists of certificates of deposit of $100,000 or more, our
revolving note payable and other short-term borrowings, at December 31, 2001:
(dollars expressed in thousands)
3 months or less......................... $ 159,710
Over 3 through 6 months.................. 76,350
Over 6 through 12 months................. 88,160
Over 12 months........................... 120,847
----------
Total.................................. $ 445,067
==========
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 December 31, 2001 and 2000, there
were $71.0 million and $98.0 million, respectively, of advances outstanding
under our revolving note payable.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 December
31, 2001 and 2000, FB&T's borrowing capacity under this agreement was
approximately $774.5 million and $756.4 million, respectively. In addition,
FB&T's borrowing capacity through its relationship with the Federal Home Loan
Bank was approximately $1.0 million and $20.4 million at December 31, 2001 and
2000, respectively.
Management believes the available liquidity and operating results of FB&T
will be sufficient to provide funds for growth and to permit the distribution of
dividends to us sufficient to meet our operating and debt service requirements,
both on a short-term and long-term basis, and to pay the dividends on the trust
preferred securities issued by our financing subsidiary.
Effects of New Accounting Standards
In September 2000, the FASB issued SFAS No. 140 -- Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125. SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS 140 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities which are based on the consistent application of a
financial-components approach. SFAS 140 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001, and is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. On December 31, 2000, we
implemented the disclosure requirements of SFAS 140, which did not have a
material effect on our consolidated financial statements. In addition, on April
1, 2001, we implemented the additional requirements of SFAS 140, which did not
have a material effect on our consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141 -- Business Combinations, and
SFAS No. 142 -- Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. 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. 121 -- Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The amortization of goodwill
ceases upon adoption of SFAS No. 142, which for calendar year-end companies will
be January 1, 2002.
On July 1, 2001, we implemented SFAS No. 141, which did not have a material
effect on our consolidated financial statements as all of our acquisitions, with
the exception of First Bank & Trust completed in October 2000 and First
Commercial Bancorp, Inc. completed in February 1998, have been accounted for
under the purchase method of accounting. As of January 1, 2002, the date we
adopted SFAS No. 142, we had unamortized goodwill of $96.7 million and core
deposit intangibles of $6.5 million, all of which are subject to the transition
provisions of SFAS No. 141 and SFAS No. 142. Amortization of intangibles
associated with the purchase of subsidiaries was $5.5 million, $3.2 million and
$2.3 million for the years ended December 31, 2001, 2000 and 1999, respectively.
Under SFAS No. 142, we will continue to amortize our core deposit intangibles
and goodwill associated with purchases of branch offices. We are currently
evaluating the ongoing future requirements of SFAS No. 142, particularly the
impairment testing provisions, to determine their potential impact on our
consolidated financial statements. However, we do not believe these requirements
will have a material effect on our consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. We are currently evaluating the
requirements of SFAS No. 144 to determine their potential impact on our
consolidated financial statements. However, we do not believe these requirements
will have a material effect on our consolidated financial statements.
Effects of Inflation
Inflation affects financial institutions less than other types of
companies. Financial institutions make relatively few significant asset
acquisitions that are directly affected by changing prices. Instead, the assets
and liabilities are primarily monetary in nature. Consequently, interest rates
are more significant to the performance of financial institutions than the
effect of general inflation levels. While a relationship exists between the
inflation rate and interest rates, we believe this is generally manageable
through our asset-liability management program.
QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED
2001 Quarter Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
--------- -------- ------------ -----------
(dollars in thousands, except per share data)
Interest income.................................................. $ 54,823 52,297 50,785 50,442
Interest expense................................................. 24,195 21,724 19,610 17,495
--------- -------- ------- --------
Net interest income....................................... 30,628 30,573 31,175 32,947
Provision for loan losses........................................ 90 820 2,000 2,100
--------- -------- ------- --------
Net interest income after provision for loan losses....... 30,538 29,753 29,175 30,847
Noninterest income............................................... 4,379 6,343 9,023 7,395
Noninterest expense.............................................. 21,969 23,260 23,519 24,820
--------- -------- ------- --------
Income before provision (benefit) for income taxes and
cumulative effect of change in accounting principle..... 12,948 12,836 14,679 13,422
Provision (benefit) for income taxes............................ 5,222 5,037 6,095 (2,543)
--------- -------- ------- --------
Income before cumulative effect of change in
accounting principle.................................... 7,726 7,799 8,584 15,965
Cumulative effect of change in accounting principle, net of tax.. (459) -- -- --
--------- -------- ------- --------
Net income................................................ $ 7,267 7,799 8,584 15,965
========= ======== ======= ========
Earnings per common share:
Basic:
Income before cumulative effect of change in
accounting principle..................................... $ 0.64 0.65 0.71 1.27
Cumulative effect of change in accounting principle....... (0.04) -- -- --
--------- -------- ------- --------
Basic..................................................... $ 0.60 0.65 0.71 1.27
========= ======== ======= ========
Diluted:
Income before cumulative effect of change in
accounting principle.................................... $ 0.64 0.65 0.71 1.27
Cumulative effect of change in accounting principle....... (0.04) -- -- --
--------- -------- ------- --------
Diluted................................................... $ 0.60 0.65 0.71 1.27
========= ======== ======= ========
2000 Quarter Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
--------- -------- ------------ -----------
(dollars in thousands, except per share data)
Interest income.................................................. $ 38,888 42,752 45,015 50,593
Interest expense................................................. 15,137 17,094 18,386 21,008
--------- -------- ------- --------
Net interest income....................................... 23,751 25,658 26,629 29,585
Provision for loan losses........................................ 982 470 365 60
--------- -------- ------- --------
Net interest income after provision for loan losses....... 22,769 25,188 26,264 29,525
Noninterest income............................................... 2,914 2,752 3,285 3,126
Noninterest expense.............................................. 15,610 17,418 17,472 19,519
--------- -------- ------- --------
Income before provision for income tax expense............ 10,073 10,522 12,077 13,132
Provision for income tax expense................................. 3,655 4,249 4,872 5,231
--------- -------- ------- --------
Net income................................................ $ 6,418 6,273 7,205 7,901
========= ======== ======= ========
Earnings per common share:
Basic..................................................... $ 0.53 0.52 0.59 0.65
Diluted................................................... 0.53 0.52 0.59 0.65
========= ======== ======= ========
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
December 31,
--------------------------
2001 2000
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks............................................................. $ 103,421 96,934
Interest-bearing deposits with other financial institutions
with maturities of three months or less.......................................... 4,376 3,101
Federal funds sold.................................................................. 11,300 53,175
----------- -----------
Total cash and cash equivalents................................................ 119,097 153,210
----------- -----------
Investment securities:
Available for sale, at fair value................................................... 364,518 330,557
Held to maturity, at amortized cost (fair value of $3,745 and
$4,615 at December 31, 2001 and 2000, respectively).............................. 3,689 4,662
----------- -----------
Total investment securities.................................................... 368,207 335,219
----------- -----------
Loans:
Commercial, financial and agricultural.............................................. 770,992 686,426
Real estate construction and development............................................ 518,325 444,218
Real estate mortgage................................................................ 1,001,663 883,103
Consumer and installment............................................................ 33,578 50,247
----------- -----------
Total loans.................................................................... 2,324,558 2,063,994
Unearned discount................................................................... (1,295) (5,317)
Allowance for loan losses........................................................... (42,721) (37,930)
----------- -----------
Net loans...................................................................... 2,280,542 2,020,747
----------- -----------
Derivative instruments.................................................................. 28,909 1,251
Bank premises and equipment, net of accumulated depreciation and amortization........... 46,746 45,526
Intangibles associated with the purchase of subsidiaries, net of amortization........... 103,153 74,609
Bank-owned life insurance............................................................... 28,119 26,866
Accrued interest receivable............................................................. 15,233 20,048
Deferred income taxes................................................................... 57,746 45,308
Other assets............................................................................ 13,236 18,595
----------- -----------
Total assets................................................................... $ 3,060,988 2,741,379
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS, CONTINUED
(dollars expressed in thousands, except share and per share data)
December 31,
--------------------------
2001 2000
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing............................................................ $ 529,924 475,785
Interest-bearing................................................................ 297,033 195,585
Savings........................................................................... 920,737 766,587
Time deposits:
Time deposits of $100 or more................................................... 314,287 301,649
Other time deposits............................................................. 493,280 566,750
----------- -----------
Total deposits............................................................... 2,555,261 2,306,356
Note payable.......................................................................... 71,000 98,000
Short-term borrowings................................................................. 59,780 57,585
Accrued interest payable.............................................................. 6,277 8,434
Deferred income taxes................................................................. 19,054 5,525
Accrued expenses and other liabilities................................................ 19,957 24,290
----------- -----------
Total liabilities............................................................ 2,731,329 2,500,190
----------- -----------
Guaranteed preferred beneficial interest in First Banks
America, Inc. subordinated debentures............................................. 44,342 44,280
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Common stock:
Common stock, $0.15 par value; 15,000,000 shares authorized
at December 31, 2001 and 2000; 10,416,460 shares and
9,610,703 shares issued at December 31, 2001 and 2000,
respectively.................................................................... 1,562 1,442
Class B common stock, $0.15 par value; 4,000,000 shares
authorized; 2,500,000 shares issued and outstanding
at December 31, 2001 and 2000................................................... 375 375
Capital surplus....................................................................... 184,979 153,929
Retained earnings since elimination of accumulated
deficit, effective December 31, 1994.............................................. 80,509 40,894
Common treasury stock, at cost; 60,400 shares and 4,500
shares at December 31, 2001 and 2000, respectively................................ (1,332) (76)
Accumulated other comprehensive income................................................ 19,224 345
----------- -----------
Total stockholders' equity................................................... 285,317 196,909
----------- -----------
Total liabilities and stockholders' equity................................... $ 3,060,988 2,741,379
=========== ===========
CONSOLIDATED STATEMENTS OF INCOME
(dollars expressed in thousands, except per share data)
Years Ended December 31,
---------------------------------
2001 2000 1999
---- ---- ----
Interest income:
Interest and fees on loans.................................................. $ 187,426 158,020 118,279
Investment securities....................................................... 16,520 13,652 12,753
Federal funds sold and other................................................ 4,401 5,576 1,688
--------- --------- ---------
Total interest income.................................................. 208,347 177,248 132,720
--------- --------- ---------
Interest expense:
Deposits:
Interest-bearing demand................................................... 3,634 2,415 2,053
Savings................................................................... 27,470 25,398 17,146
Time deposits of $100 or more............................................. 16,598 11,288 6,283
Other time deposits....................................................... 28,540 30,273 23,726
Short-term borrowings....................................................... 2,305 1,769 2,031
Note payable................................................................ 4,477 482 --
--------- --------- ---------
Total interest expense................................................. 83,024 71,625 51,239
--------- --------- ---------
Net interest income.................................................... 125,323 105,623 81,481
Provision for loan losses....................................................... 5,010 1,877 4,183
--------- --------- ---------
Net interest income after provision for loan losses.................... 120,313 103,746 77,298
--------- --------- ---------
Noninterest income:
Service charges on deposit accounts and customer service fees............... 9,610 7,626 6,210
Net (loss) gain on sales of available-for-sale securities................... (418) 177 485
Bank-owned life insurance investment income................................. 1,539 1,339 1,222
Gain on derivative instruments, net......................................... 10,173 -- --
Other....................................................................... 6,236 2,935 1,963
--------- --------- ---------
Total noninterest income............................................... 27,140 12,077 9,880
--------- --------- ---------
Noninterest expense:
Salaries and employee benefits.............................................. 32,788 25,917 21,889
Occupancy, net of rental income............................................. 10,671 8,496 6,980
Furniture and equipment..................................................... 4,027 3,588 3,232
Postage, printing and supplies.............................................. 1,779 1,459 1,362
Information technology fees................................................. 10,174 7,406 5,570
Legal, examination and professional fees.................................... 10,548 6,995 5,753
Amortization of intangibles associated with the purchase of subsidiaries.... 5,522 3,234 2,296
Communications.............................................................. 1,255 943 1,098
Advertising and business development........................................ 735 969 819
Guaranteed preferred debentures............................................. 3,900 3,908 3,966
Other....................................................................... 12,169 7,104 5,498
--------- --------- ---------
Total noninterest expense.............................................. 93,568 70,019 58,463
--------- --------- ---------
Income before provision for income taxes and cumulative
effect of change in accounting principle............................. 53,885 45,804 28,715
Provision for income taxes...................................................... 13,811 18,007 11,116
--------- --------- ---------
Income before cumulative effect of change in accounting principle...... 40,074 27,797 17,599
Cumulative effect of change in accounting principle, net of tax................. (459) -- --
--------- --------- ---------
Net income............................................................. $ 39,615 27,797 17,599
========= ========= =========
Earnings per common share:
Basic:
Income before cumulative effect of change in accounting principle.......... $ 3.29 2.29 1.44
Cumulative effect of change in accounting principle, net of tax............ (0.04) -- --
--------- --------- ---------
Basic...................................................................... $ 3.25 2.29 1.44
========= ========= =========
Diluted:
Income before cumulative effect of change in accounting principle.......... $ 3.29 2.29 1.44
Cumulative effect of change in accounting principle, net of tax............ (0.04) -- --
--------- --------- ---------
Diluted.................................................................... $ 3.25 2.29 1.44
========= ========= =========
Weighted average common stock outstanding (in thousands)........................ 12,204 12,129 12,235
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
Three Years Ended December 31, 2001
(dollars expressed in thousands, except per share data)
Accu-
mulated
Other
Compre- Total
Class B Compre- Common hensive Stock-
Common Common Capital hensive Retained Treasury Income holders'
Stock Stock Surplus Income Earnings Stock (Loss) Equity
----- ----- ------- ------ -------- ----- ------ ------
Consolidated balances, January 1, 1999.......... $1,441 375 128,985 20,860 (10,088) 1,621 143,194
Year ended December 31, 1999:
Comprehensive income:
Net income.................................. -- -- -- 17,599 17,599 -- -- 17,599
Other comprehensive income, net of tax -
unrealized losses on securities, net
of reclassification adjustment (1)........ -- -- -- (4,265) -- -- (4,265) (4,265)
------
Comprehensive income........................ 13,334
======
Reduction of deferred tax asset
valuation allowance....................... -- -- 981 -- -- -- 981
Compensation paid in stock................... -- -- 36 -- -- -- 36
Repurchases of common stock.................. -- -- -- -- (1,281) -- (1,281)
Pre-merger transactions of FB&T.............. -- -- 31,611 (13,362) -- -- 18,249
------ --- ------- ------- -------- ------ -------
Consolidated balances, December 31, 1999........ 1,441 375 161,613 25,097 (11,369) (2,644) 174,513
Year ended December 31, 2000:
Comprehensive income:
Net income.................................. -- -- -- 27,797 27,797 -- -- 27,797
Other comprehensive income, net of tax -
unrealized gains on securities, net
of reclassification adjustment (1)........ -- -- -- 2,989 -- -- 2,989 2,989
------
Comprehensive income........................ 30,786
======
Exercise of stock options.................... 1 -- 24 -- -- -- 25
Compensation paid in stock................... -- -- 36 -- -- -- 36
Repurchases of common stock.................. -- -- -- -- (1,454) -- (1,454)
Retirement and reissuance of treasury stock.. -- -- (12,747) -- 12,747 -- --
Pre-merger transactions of FB&T.............. -- -- 5,003 (12,000) -- -- (6,997)
------ --- ------- ------- -------- ------ -------
Consolidated balances, December 31, 2000........ 1,442 375 153,929 40,894 (76) 345 196,909
Year ended December 31, 2001:
Comprehensive income:
Net income.................................. -- -- -- 39,615 39,615 -- -- 39,615
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment (1)..... -- -- -- 1,519 -- -- 1,519 1,519
Derivative instruments:
Cumulative effect of change in
accounting principle, net............ -- -- -- 4,950 -- -- 4,950 4,950
Current period transactions............ -- -- -- 16,567 -- -- 16,567 16,567
Reclassification to earnings........... -- -- -- (4,157) -- -- (4,157) (4,157)
------
Comprehensive income................ ....... 58,494
======
Reduction of deferred tax asset
valuation allowance....................... -- -- 4,971 -- -- -- 4,971
Compensation paid in stock................... -- -- 46 -- -- -- 46
Repurchases of common stock.................. -- -- -- -- (1,256) -- (1,256)
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
====== === ======= ======= ======== ====== =======
- -------------------------------------
(1) Disclosure of reclassification adjustment:
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Unrealized gains (losses) arising during the year................................... $1,247 3,104 (3,950)
Less reclassification adjustment for (losses) gains included in net income.......... (272) 115 315
----- ----- ------
Unrealized gains (losses) on investment securities.................................. $1,519 2,989 (4,265)
====== ===== ======
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars expressed in thousands)
Years Ended December 31,
-----------------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income............................................................... $ 39,615 27,797 17,599
Adjustments to reconcile net income to cash
provided by operating activities:
Cumulative effect of change in accounting principle, net of tax........ 459 -- --
Depreciation, amortization and accretion, net.......................... 9,447 5,695 5,070
Provision for loan losses.............................................. 5,010 1,877 4,183
Provision for income tax expense....................................... 13,811 18,007 11,116
Payments of income taxes............................................... (5,970) (15,162) (5,912)
Net gain (loss) on sales of available-for-sale securities.............. 418 (177) (485)
Gain on derivative instruments, net.................................... (10,173) -- --
Increase (decrease) in accrued interest receivable..................... 5,846 (3,017) (713)
Interest accrued on liabilities........................................ 83,024 71,625 51,239
Payments of interest on liabilities.................................... (85,547) (68,630) (50,185)
Other operating activities, net........................................ 733 7,173 (5,536)
--------- --------- ---------
Net cash provided by operating activities...................... 56,673 45,188 26,376
--------- --------- ---------
Cash flows from investing activities:
Cash received (paid) for acquired entities, net of
cash and cash equivalents (paid) received............................... 31,963 (86,106) 15,538
Proceeds from sales of investment securities............................. 60,682 25,062 60,891
Maturities of investment securities available for sale................... 552,020 165,897 134,404
Maturities of investment securities held to maturity..................... 1,102 46 143
Purchases of investment securities available for sale.................... (625,517) (155,680) (88,708)
Purchases of investment securities held to maturity...................... (100) (2,828) --
Proceeds from terminations of derivative instruments..................... 12,902 -- --
Net increase in loans.................................................... (29,398) (236,158) (152,689)
Recoveries of loans previously charged-off............................... 4,248 5,189 5,161
Purchases of bank premises and equipment................................. (2,060) (3,738) (5,719)
Proceeds from sales of other real estate................................. 10 899 2,868
Other investing activities, net.......................................... (4,114) (1,239) (1,524)
--------- --------- ---------
Net cash provided by (used in) investing activities............ 1,738 (288,656) (29,635)
--------- --------- ---------
Cash flows from financing activities:
Other increases (decreases) in deposits:
Demand and savings deposits............................................. 54,258 183,774 (20,017)
Time deposits .......................................................... (146,843) 52,305 12,180
(Decrease) increase in federal funds purchased and
short-term borrowings.................................................. -- (54,600) 27,500
Repayments of Federal Home Loan Bank advances............................ (5,000) -- --
Increase in securities sold under agreements to repurchase............... 7,195 28,329 200
Advances drawn on note payable........................................... 26,000 124,200 --
Repayments of note payable............................................... (53,000) (26,200) --
Exercise of stock options................................................ -- 25 --
Proceeds from issuance of common stock to First Banks.................... 26,122 -- --
Repurchases of common stock.............................................. (1,256) (1,454) (1,281)
Pre-merger transactions of FB&T.......................................... -- (6,997) (13,250)
--------- --------- ---------
Net cash (used in) provided by financing activities............ (92,524) 299,382 5,332
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........... (34,113) 55,914 2,073
Cash and cash equivalents, beginning of year................................. 153,210 97,296 95,223
--------- --------- ---------
Cash and cash equivalents, end of year....................................... $ 119,097 153,210 97,296
========= ========= =========
Noncash investing and financing activities:
Loans transferred to other real estate................................... $ -- 295 1,443
Loans exchanged for and transferred to
available-for-sale investment securities................................ -- 17,207 --
Compensation paid in stock............................................... 46 36 36
Reduction of deferred tax valuation reserve.............................. 4,971 -- 981
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
by First Banks America, Inc. and subsidiaries (FBA or the Company):
Basis of Presentation. The accompanying consolidated financial statements
of FBA have been prepared in accordance with accounting principles generally
accepted in the United States of America and conform to predominant practices
within the banking industry. Management of FBA has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates.
Restatements. Effective October 31, 2000, FBA completed its acquisition of
First Bank & Trust in a transaction accounted for as a combination of entities
under common control. FBA acquired First Bank & Trust from First Banks, Inc.,
St. Louis, Missouri (First Banks). Prior to the acquisition, First Banks owned
84.42% of the outstanding common stock of FBA and all of the outstanding common
stock of First Bank & Trust.
The accompanying consolidated financial statements give retroactive effect
to this transaction and, as a result, the consolidated balance sheets,
statements of income and statements of cash flows are presented as if the
combining entities had been consolidated for all periods presented that are
subsequent to First Banks' acquisitions of First Bank & Trust on March 15, 1995.
The consolidated statements of changes in stockholders' equity and comprehensive
income reflect the accounts of FBA as if the common stock, excluding treasury
shares, issued to First Banks in exchange for its interest in First Bank & Trust
had been outstanding for all periods subsequent to March 15, 1995.
Principles of Consolidation. The consolidated financial statements include
the accounts of the parent company and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications of 2000 and 1999 amounts have been made to
conform with the 2001 presentation.
FBA is majority owned by First Banks. Accordingly, First Banks has
effective control over the management and policies of FBA and the election of
its directors. First Banks' ownership interest in FBA at December 31, 2001 and
2000 was 93.69% and 92.86%, respectively.
FBA operates through its wholly owned subsidiary bank holding company, The
San Francisco Company, headquartered in San Francisco, California (SFC), and its
wholly owned subsidiary bank, First Bank & Trust, also headquartered in San
Francisco, California (FB&T).
Cash and Cash Equivalents. Cash, due from banks, federal funds sold and
interest-bearing deposits with maturities of three months or less are considered
to be cash and cash equivalents for purposes of the consolidated statements of
cash flows.
FB&T is required to maintain certain daily reserve balances in accordance
with regulatory requirements. These reserve balances maintained in accordance
with such requirements were $15.1 million and $15.4 million at December 31, 2001
and 2000, respectively.
Investment Securities. The classification of investment securities as
available for sale or held to maturity is determined at the date of purchase.
FBA does not engage in the trading of investment securities.
Investment securities designated as available for sale, which include any
security that FBA has no immediate plan to sell but which may be sold in the
future under different circumstances, are stated at fair value. Realized gains
and losses are included in noninterest income upon commitment to sell, based on
the amortized cost of the individual security sold. Unrealized gains and losses
are recorded, net of related income tax effects, in accumulated other
comprehensive income. All previous fair value adjustments included in the
separate component of accumulated other comprehensive income are reversed upon
sale.
Investment securities designated as held to maturity, which include any
security that FBA has the positive intent and ability to hold until maturity,
are stated at cost, net of amortization of premiums and accretion of discounts
computed on the level-yield method taking into consideration the level of
current and anticipated prepayments.
Loans. Loans are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the interest method. Interest and fees on loans are
recognized as income using the interest method. Loan origination fees are
deferred and accreted to interest income over the estimated life of the loans
using the interest method. Loans are stated at cost as FBA has the ability and
it is management's intention to hold them to maturity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business. Generally, payments received on nonaccrual and impaired loans are
recorded as principal reductions. Interest income is recognized after all
principal has been repaid or an improvement in the condition of the loan has
occurred which would warrant resumption of interest accruals.
A loan is considered impaired when it is probable FBA will be unable to
collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When measuring impairment, the expected
future cash flows of an impaired loan are discounted at the loan's effective
interest rate. Alternatively, impairment is measured by reference to an
observable market price, if one exists, or the fair value of the collateral for
a collateral-dependent loan. Regardless of the historical measurement method
used, FBA measures impairment based on the fair value of the collateral when
foreclosure is probable. Additionally, impairment of a restructured loan is
measured by discounting the total expected future cash flows at the loan's
effective rate of interest as stated in the original loan agreement.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level considered adequate to provide for probable losses. The provision for loan
losses is based on a periodic analysis of loans by management, considering,
among other factors, current economic conditions, loan portfolio composition,
past loan loss experience, independent appraisals, loan collateral, payment
experience and selected key financial ratios. As adjustments become necessary,
they are reflected in the results of operations in the periods in which they
become known. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require FBA to increase its allowance for loan losses based on
their judgment about information available to them at the time of their
examination.
Derivative Instruments and Hedging Activities. In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133 -- Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). In June 1999 and June 2000, the FASB issued SFAS No. 137
- - Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No.
133, and SFAS No. 138 - Accounting for Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133, respectively. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133, as amended, requires an entity
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge in
one of three categories. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. Under SFAS 133, as amended, an entity
that elects to apply hedge accounting is required to establish, at the inception
of the hedge, the method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining the ineffective
aspect of the hedge. Those methods must be consistent with the entity's approach
to managing risk.
On January 1, 2001, FBA implemented SFAS 133, as amended. The
implementation of SFAS 133, as amended, resulted in an increase in derivative
instruments of $6.9 million, an increase in deferred tax liabilities of $2.7
million and an increase in other comprehensive income of $5.0 million. In
addition, FBA recorded a cumulative effect of change in accounting principle of
$459,000, net of taxes of $247,000, as a reduction of net income.
FBA utilizes derivative instruments and hedging activities to assist in the
management of interest rate sensitivity and to modify the repricing, maturity
and option characteristics of certain assets and liabilities. FBA uses such
derivative instruments solely to reduce its interest rate risk exposure. FBA's
accounting policies for derivative instruments and hedging activities under SFAS
133, as amended, are as follows:
>> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap
agreements designated as cash flow hedges are accounted for at fair
value. The effective portion of the change in the cash flow hedge's
gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into noninterest
income when the underlying transaction affects earnings. The
ineffective portion of the change in the cash flow hedge's gain or
loss is recorded in noninterest income on each monthly measurement
date. The net interest differential is recognized as an adjustment to
interest income or interest expense of the related asset or liability
being hedged.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
>> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap
agreements designated as fair value hedges are accounted for at fair
value. Changes in the fair value of the swap agreements are recognized
currently in noninterest income. The change in the fair value of the
underlying hedged item attributable to the hedged risk adjusts the
carrying amount of the underlying hedged item and is also recognized
currently in noninterest income. All changes in fair value are
measured on a monthly basis. The net interest differential is
recognized as an adjustment to interest income or interest expense of
the related asset or liability.
>> Interest Rate Cap and Floor Agreements. Interest rate cap and floor
agreements are accounted for at fair value. Changes in the fair value
of interest rate cap and floor agreements are recognized in
noninterest income on each monthly measurement date.
Prior to the implementation of SFAS 133, interest rate swap, floor and cap
agreements were accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest income or interest
expense of the related asset or liability. Premiums and fees paid upon the
purchase of interest rate swap, floor and cap agreements were amortized over the
life of the agreements using the straight-line method. In the event of early
termination of the derivative financial instruments, the net proceeds received
or paid were deferred and amortized over the shorter of the remaining contract
life of the derivative financial instrument or the maturity of the related asset
or liability. If, however, the amount of the underlying asset or liability was
repaid, then the gains or losses on the agreements were recognized immediately
in the consolidated statements of income. The unamortized premiums and fees paid
are included in derivative instruments in the accompanying consolidated balance
sheets.
Bank Premises and Equipment. Bank premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation is computed
primarily using the straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the improvement or
term of the lease. Bank premises and improvements are depreciated over five to
40 years and equipment over three to seven years.
Intangibles Associated With the Purchase of Subsidiaries. Intangibles
associated with the purchase of subsidiaries include excess of cost over net
assets acquired and core deposit intangibles. The excess of cost over net assets
acquired of purchased subsidiaries is amortized using the straight-line method
over the estimated periods to be benefited, which generally has been estimated
at 15 years. The core deposit intangibles are amortized using the straight-line
method over the estimated periods to be benefited, which has been estimated at
seven years. FBA reviews intangibles for impairment whenever events or changes
in circumstances indicate the carrying value of an underlying asset associated
with the intangibles may not be recoverable. FBA measures recoverability based
upon the future cash flows expected to result from the use of the underlying
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying value of
the underlying asset, FBA recognizes an impairment loss. The impairment loss
recognized represents the amount by which the carrying value of the underlying
asset exceeds the fair value of the underlying asset. As such adjustments become
necessary, they are reflected in the results of operations in the periods in
which they become known.
Other Real Estate. Other real estate, consisting of real estate acquired
through foreclosure or deed in lieu of foreclosure, is stated at the lower of
cost or fair value less applicable selling costs. The excess of cost over fair
value of the property at the date of acquisition is charged to the allowance for
loan losses. Subsequent reductions in carrying value, to reflect current fair
value or costs incurred in maintaining the properties, are charged to expense as
incurred.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
FBA and its subsidiaries filed a consolidated federal income tax return
through February 19, 1999. Each subsidiary paid its allocation of federal income
taxes to FBA, or received payment from FBA to the extent tax benefits were
realized. Subsequent to February 19, 1999, FBA and its subsidiaries join in
filing a consolidated federal and unitary or consolidated state income tax
returns with First Banks, as First Banks' ownership of FBA is greater than 80%.
FBA and its subsidiaries pay their allocation of federal income taxes to First
Banks, or receive payment from First Banks to the extent tax benefits are
realized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Instruments. A financial instrument is defined as cash, evidence
of an ownership interest in an entity, or a contract that conveys or imposes on
an entity the contractual right or obligation to either receive or deliver cash
or another financial instrument.
Financial Instruments With Off-Balance-Sheet Risk. FBA uses financial
instruments to reduce the interest rate risk arising from its financial assets
and liabilities. These instruments involve, in varying degrees, elements of
interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets. "Interest rate risk" is defined as the possibility
that interest rates may move unfavorably from the perspective of FBA. The risk
that a counterparty to an agreement entered into by FBA may default is defined
as "credit risk."
FBA is party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These commitments involve, in varying degrees, elements of
interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
Earnings Per Common Share. Basic earnings per common share (EPS) are
computed by dividing the income available to common stockholders (the numerator)
by the weighted average number of common shares outstanding (the denominator)
during the year. The computation of diluted EPS is similar except the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential shares had been issued. In
addition, in computing the dilutive effect of convertible securities, the
numerator is adjusted to add back (a) any convertible preferred dividends and
(b) the after-tax amount of interest recognized in the period associated with
any convertible debt.
(2) ACQUISITIONS
During the three years ended December 31, 2001, FBA completed the following
acquisitions:
Total Purchase Excess
Entity Date Assets Price Cost
------ ---- ----- ----- ----
(dollars expressed in thousands)
2001
----
BYL Bancorp
Orange, California October 31, 2001 $ 281,500 49,000 19,000
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 18,900 6,300
---------- -------- --------
$ 383,000 67,900 25,300
========== ======== ========
2000
----
The San Francisco Company
San Francisco, California December 31, 2000 $ 183,800 62,200 16,300
Millennium Bank
San Francisco, California December 29, 2000 117,000 20,700 8,700
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 26,400 9,300
First Bank & Trust
Newport Beach, California October 31, 2000 1,104,000 120,800 --
Bank of Ventura
Ventura, California August 31, 2000 63,800 14,200 7,200
Lippo Bank
San Francisco, California February 29, 2000 85,300 17,200 4,800
---------- -------- --------
$1,709,500 261,500 46,300
========== ======== ========
1999
----
Century Bank
Beverly Hills, California August 31, 1999 $ 156,000 31,500 4,500
Redwood Bancorp
San Francisco, California March 4, 1999 183,900 26,000 9,500
---------- -------- --------
$ 339,900 57,500 14,000
========== ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the acquisitions included in the table above, on September
17, 1999, First Bank & Trust completed its assumption of the deposits and
certain liabilities and the purchase of selected assets of the Malibu,
California branch office of Brentwood Bank of California. The transaction
resulted in the acquisition of approximately $6.3 million in loans, $17.3
million in deposits and one branch office. The excess of the cost over the fair
value of the net assets acquired was $325,000 and is being amortized over 15
years.
With the exception of First Bank & Trust, the aforementioned acquisition
transactions were accounted for using the purchase method of accounting and,
accordingly, the consolidated financial statements include the financial
position and results of operations for the periods subsequent to the respective
acquisition dates, and the assets acquired and liabilities assumed were recorded
at fair value at the acquisition dates. These acquisitions, exclusive of First
Bank & Trust, were funded from available cash reserves, proceeds from sales and
maturities of available-for-sale investment securities, borrowing under FBA's
$100.0 million revolving note payable to First Banks and the proceeds from First
America Capital Trust's issuance of trust preferred securities. As further
described below, First Bank & Trust was acquired through an exchange of shares
of FBA common stock for all of the issued and outstanding shares of common stock
of First Bank & Trust.
On October 31, 2000, FBA acquired First Bank & Trust. In conjunction with
this transaction, First Bank & Trust and two of FBA's former wholly owned
subsidiary banks, First Bank of California and First Bank Texas N.A., were
merged with and into Redwood Bank, FBA's other wholly owned subsidiary bank, and
Redwood Bank was renamed FB&T. In accordance with the terms of the Agreement and
Plan of Reorganization, FBA issued 5,727,340 shares of its common stock and
803,429 shares of its common shares held for treasury to First Banks in exchange
for First Banks' 100% interest in First Bank & Trust. First Bank & Trust had 27
banking offices in the counties of Los Angeles, Orange, Ventura and Santa
Barbara, California as well as branches in San Jose and Walnut Creek, in
Northern California. At the time of the transaction, First Bank & Trust had
$1.10 billion in total assets, $91.1 million in investment securities, $894.2
million in total loans, net of unearned discount, and $959.4 million in total
deposits.
Prior to this transaction, First Banks owned majority interests in FBA and
First Bank & Trust. Consistent with the accounting treatment for a combination
of entities under common control, FBA accounted for the acquisition of First
Bank & Trust as follows:
>> First Banks' interest in First Bank & Trust was accounted for at First
Banks' historical cost. First Banks' historical cost basis in First
Bank & Trust was determined utilizing the purchase method of
accounting, effective upon First Banks' acquisition of First Bank &
Trust on March 15, 1995. Accordingly, First Banks' historical cost
basis includes the financial position and results of operations of
First Bank & Trust for the periods subsequent to March 15, 1995, and
the assets acquired and liabilities assumed were recorded at fair
value at March 15, 1995.
>> FBA's consolidated financial statements were restated to reflect First
Banks' interest in the financial condition and results of operations
of First Bank & Trust for the periods subsequent to March 15, 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities
available for sale at December 31, 2001 and 2000 were as follows:
Maturity Total
-----------------------------------------
After Amor- Gross Weighted
1 Year 1-5 5-10 10 tized Unrealized Fair Average
-------------
or Less Years Years Years Cost Gains Losses Value Yield
-------- ------- ------ ------- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2001:
Carrying value:
U.S. Treasury.................. $ 85,816 -- -- -- 85,816 2 (24) 85,794 1.79%
U.S. Government agencies
and corporations:
Mortgage-backed......... -- 14,722 10,327 207,252 232,301 1,360 -- 233,661 5.82
Other................... 9,476 29,228 1,184 -- 39,888 1,434 (13) 41,309 5.96
Corporate debt securities...... -- 1,985 -- -- 1,985 107 -- 2,092 6.76
Equity investments in other
financial institutions
(no stated maturity)........ 319 -- -- -- 319 -- -- 319 --
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 1,343 -- -- -- 1,343 -- -- 1,343 5.31
-------- ------- ------ ------- ------ ----- ------ -------
Total................. $ 96,954 45,935 11,511 207,252 361,652 2,903 (37) 364,518 4.87
======== ======= ====== ======= ======= ===== ====== ======= ====
Fair value:
Debt securities................ $ 95,461 47,585 11,797 208,013
Equity securities.............. 1,662 -- -- --
-------- ------- ------ -------
Total................. $ 97,123 47,585 11,797 208,013
======== ======= ====== =======
Weighted average yield............ 2.34% 5.68% 6.34% 5.74%
======== ======= ====== =======
December 31, 2000:
Carrying value:
U.S. Treasury.................. $ 65,193 801 -- -- 65,994 23 (23) 65,994 5.88%
U.S. Government agencies
and corporations:
Mortgage-backed......... 576 19,248 6,568 73,600 99,992 418 (132) 100,278 6.87
Other................... 17,065 104,005 10,131 20,256 151,457 1,664 (1,483) 151,638 6.68
Corporate debt securities...... 912 1,961 -- 500 3,373 -- (20) 3,353 7.65
Equity investments in other
financial institutions
(no stated maturity)........ 5,082 -- -- -- 5,082 28 (369) 4,741 7.77
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 4,553 -- -- -- 4,553 -- -- 4,553 6.45
-------- ------- ------ ------- ------ ----- ------ -------
Total................. $ 93,381 126,015 16,699 94,356 330,451 2,133 (2,027) 330,557 6.61
======== ======= ====== ======= ======= ===== ====== ======= ====
Fair value:
Debt securities................ $ 83,767 126,957 16,896 93,643
Equity securities.............. 9,294 -- -- --
-------- ------- ------ -------
Total................. $ 93,061 126,957 16,896 93,643
======== ======= ====== =======
Weighted average yield............ 6.10% 6.76% 7.06% 6.92%
======== ======= ====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities Held to Maturity. The amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities held
to maturity at December 31, 2001 and 2000 were as follows:
Maturity Total
---------------------------
After Amor- Gross Weighted
1 Year 1-5 5-10 10 tized Unrealized Fair Average
--------------
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2001:
Carrying value:
Mortgage-backed securities........... $ -- -- -- 3,589 3,589 67 (8) 3,648 6.89%
State and political subdivisions..... -- 100 -- 100 -- (4) 96 5.75
---- ---- ----- ----- ---- --- ----- ----
Total....................... $ -- -- 100 3,589 3,689 67 (12) 3,744 6.85
======= ==== ==== ===== ===== ==== === ===== ====
Fair value:
Debt securities...................... $ -- -- 96 3,648
======= ==== ==== =====
Weighted average yield.................. --% --% 5.75% 6.89%
======= ==== ==== =====
December 31, 2000:
Carrying value:
Mortgage-backed securities........... $ -- -- -- 4,662 4,662 3 (50) 4,615 6.75%
======= ==== ==== ===== ===== ==== === ===== ====
Fair value:
Debt securities...................... $ -- -- -- 4,615
======= ==== ==== =====
Weighted average yield.................. --% --% --% 6.75%
======= ==== ==== =====
Proceeds from sales of available-for-sale investment securities were $60.7
million, $25.1 million and $60.9 million for the years ended December 31, 2001,
2000 and 1999, respectively. Gross gains of $20,000, $565,000 and $485,000 were
realized on these sales during the years ended December 31, 2001, 2000 and 1999,
respectively. Gross losses of $438,000 and $388,000 were realized on these sales
during the years ended December 31, 2001 and 2000, respectively. There were no
losses realized on these sales in 1999.
FB&T is a member of the Federal Home Loan Bank (FHLB) system and maintains
an investment in the FHLB. This investment is recorded at cost, which represents
redemption value. The investment in FHLB stock is maintained at a minimum amount
equal to the greater of 1% of the aggregate outstanding balance of FB&T's loans
secured by residential real estate, or 5% of advances from the FHLB to FB&T.
Investment securities with a carrying value of approximately $145.2 million
and $28.1 million at December 31, 2001 and 2000, respectively, were pledged in
connection with deposits of public and trust funds, securities sold under
agreements to repurchase and for other purposes as required by law.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31
were as follows:
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year................................... $37,930 30,192 24,947
Acquired allowances for loan losses.......................... 5,493 6,062 3,008
------- ------- -------
43,423 36,254 27,955
------- ------- -------
Loans charged-off............................................ (9,960) (5,390) (7,107)
Recoveries of loans previously charged-off................... 4,248 5,189 5,161
------- ------- -------
Net loan charge-offs..................................... (5,712) (201) (1,946)
------- ------- -------
Provision for loan losses.................................... 5,010 1,877 4,183
------- ------- -------
Balance, end of year......................................... $42,721 37,930 30,192
======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2001 and 2000, FBA had $19.6 million and $15.0 million of
impaired loans, including $17.6 million and $12.1 million, respectively, of
loans on nonaccrual status. At December 31, 2001 and 2000, impaired loans also
included $2.0 million and $2.9 million, respectively, of restructured loans.
Interest on nonaccrual loans, which would have been recorded under the original
terms of the loans, was $1.9 million, $1.5 million and $2.4 million for the
years ended December 31, 2001, 2000 and 1999, respectively. Of these amounts,
$860,000, $630,000 and $1.3 million were actually recorded as interest income on
such loans in 2001, 2000 and 1999, respectively. The allowance for loan losses
includes an allocation for each impaired loan. The aggregate allocation of the
allowance for loan losses related to impaired loans was approximately $5.6
million and $3.2 million at December 31, 2001 and 2000, respectively. The
average recorded investment in impaired loans was $17.6 million, $13.9 million
and $20.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The amount of interest income recognized using a cash basis method
of accounting during the time those loans were impaired was $1.9 million,
$895,000 and $1.5 million in 2001, 2000 and 1999, respectively.
FBA's primary market areas are southern and northern California and
Houston, Dallas, Irving and McKinney, Texas. At December 31, 2001 and 2000,
approximately 90.5% and 88.5% of the total loan portfolio, respectively, and
89.7% and 89.8% of the commercial, financial and agricultural loan portfolio,
respectively, were made to borrowers within these regions.
Real estate lending constituted the only significant concentration of
credit risk. Real estate loans comprised approximately 65.4% and 64.5% of the
loan portfolio at December 31, 2001 and 2000, respectively.
FBA is, in general, a secured lender. At December 31, 2001 and 2000,
approximately 96.9% and 93.9%, respectively, of the loan portfolio was secured.
Collateral is required in accordance with the normal credit evaluation process
based upon the creditworthiness of the customer and the credit risk associated
with the particular transaction.
(5) DERIVATIVE INSTRUMENTS
FBA utilizes derivative financial instruments to assist in the management
of interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments FBA holds are summarized as follows:
December 31
----------------------------------------------
2001 2000
---------------------- ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ -------
(dollars expressed in thousands)
Cash flow hedges.............................. $ 555,000 1,006 535,000 1,112
Fair value hedges............................. 54,900 1,881 -- --
Interest rate cap agreements.................. 150,000 688 150,000 1,251
========= ====== ======== ======
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of FBA's
credit exposure through its use of these instruments. The credit exposure
represents the accounting loss FBA would incur in the event the counterparties
failed completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During 2001 and 1999, FBA realized net interest income on its derivative
financial instruments of $12.3 million and $226,000, respectively, in comparison
to net interest expense of $2.1 million in 2000. In addition, FBA realized a net
gain on derivative instruments, which is included in noninterest income in the
consolidated statements of income, of $10.2 million for the year ended December
31, 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash Flow Hedges
FBA entered into the following interest rate swap agreements, designated as
cash flow hedges, to effectively lengthen the repricing characteristics of
certain interest-earning assets to correspond more closely with their funding
source with the objective of stabilizing cash flow, and accordingly, net
interest income, over time:
>> During 1998, FBA entered into $105.0 million notional amount of
interest rate swap agreements that provided for FBA to receive a fixed
rate of interest and pay an adjustable rate of interest equivalent to
the daily weighted average prime lending rate minus 2.705%. The terms
of the swap agreements provided for FBA to pay quarterly and receive
payment semiannually. In June 2001, FBA terminated these swap
agreements, which would have expired in 2002, in order to
appropriately modify its overall hedge position in accordance with its
risk management program. In conjunction with the termination of these
swap agreements, FBA recorded a pre-tax gain of $1.4 million.
>> During September 1999, FBA entered into $130.0 million notional amount
of interest rate swap agreements that provided for FBA to receive a
fixed rate of interest and pay an adjustable rate of interest
equivalent to the daily weighted average prime lending rate minus
2.70%. The terms of the swap agreements provided for FBA to pay and
receive interest on a quarterly basis. In April 2001, FBA terminated
these swap agreements, which would have expired in September 2001, and
replaced them with similar swap agreements with extended maturities in
order to lengthen the period covered by the swaps. In conjunction with
the termination of these swap agreements, FBA recorded a pre-tax gain
of $731,000.
>> During September 2000, March 2001 and April 2001, FBA entered into
$300.0 million, $200.0 million and $130.0 million notional amount,
respectively, of interest rate swap agreements that provide for FBA to
receive a fixed rate of interest and pay an adjustable rate equivalent
to the weighted average prime lending rate minus either 2.70% or
2.82%. The terms of the swap agreements provide for FBA to pay and
receive interest on a quarterly basis. In November 2001, FBA
terminated $75 million notional amount of these swap agreements, which
would have expired in April 2006, in order to appropriately modify its
overall hedge position in accordance with its risk management program.
FBA recorded a pre-tax gain of $2.6 million in conjunction with the
termination of these swap agreements. The amount receivable by FBA
under the remaining swap agreements was $1.7 million and $621,000 at
December 31, 2001 and 2000, respectively, and the amount payable by
FBA under the swap agreements was $647,000 and $623,000 at December
31, 2001 and 2000, respectively.
The maturity dates, notional amounts, interest rates paid and received and
fair value of FBA's interest rate swap agreements designated as cash flow hedges
as of December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ----------- ------------- --------
(dollars expressed in thousands)
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
========= ===== ===== ========
December 31, 2000:
September 27, 2001....................... $ 130,000 6.80% 6.14% $ 49
June 11, 2002............................ 15,000 6.80 6.00 7
September 16, 2002....................... 20,000 6.80 5.36 (184)
September 18, 2002....................... 70,000 6.80 5.33 (690)
September 20, 2004....................... 300,000 6.80 6.78 8,434
--------- --------
$ 535,000 6.80 6.35 $ 7,616
========= ===== ===== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value Hedges
During January 2001, FBA entered into $54.9 million notional amount of
interest rate swap agreements to effectively shorten the repricing
characteristics of certain interest-bearing liabilities with the objective of
stabilizing net interest income over time. The swap agreements provide for FBA
to receive a fixed rate of interest and pay an adjustable rate of interest
equivalent to the three-month London Interbank Offering Rate. The terms of the
swap agreements provide for FBA to pay and receive interest on a quarterly
basis. The amount receivable and payable by FBA under the swap agreements was
$1.4 million and $318,000 at December 31, 2001, respectively.
The maturity dates, notional amounts, interest rates paid and received and
fair value of FBA's interest rate swap agreements designated as fair value
hedges as of December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ----------- ------------- ----------
(dollars expressed in thousands)
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 Floor Agreements
During January 2001 and March 2001, FBA entered into $100.0 million and
$75.0 million notional amount, respectively, of four-year interest rate floor
agreements to further stabilize net interest income in the event of a falling
rate scenario. The interest rate floor agreements provided for FBA to receive a
quarterly adjustable rate of interest equivalent to the differential between the
three-month London Interbank Offering Rate and the strike prices of 5.50% or
5.00%, respectively, should the three-month London Interbank Offering Rate fall
below the respective strike prices. In November 2001, FBA terminated these
interest rate floor agreements in order to appropriately modify its overall
hedge position in accordance with its risk management program. In conjunction
with the termination, FBA recorded a pre-tax adjustment of $2.6 million
representing the decline in fair value from the previous month-end measurement
date. These agreements provided net interest income of $1.2 million for the year
ended December 31, 2001.
Interest Rate Cap Agreements
In conjunction with the interest rate swap agreements entered into in
September 2000, FBA also entered into a four-year $150.0 million notional amount
interest rate cap agreement to limit the net interest expense associated with
the interest rate swap agreements in the event of a rising rate scenario. The
interest rate cap agreement provides for FBA 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 December 31, 2001 and
2000, the carrying value of this interest rate cap agreement, which is included
in derivative instruments in the consolidated balance sheets, was $688,000 and
$1.3 million, respectively.
Pledged Collateral
At December 31, 2001 and 2000, FBA had pledged investment securities
available for sale with a carrying value of $894,000 and $2.6 million,
respectively, in connection with the interest rate swap agreements. In addition,
FBA had accepted, as collateral in connection with the interest rate swap
agreements, cash of $1.5 million and investment securities with a fair value of
$28.5 million at December 31, 2001, and investment securities with a fair value
of $8.5 million at December 31, 2000. FBA is permitted by contract to sell or
repledge the collateral accepted from its counterparties; however, at December
31, 2001 and 2000, FBA had not done so.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
2001 2000
---- ----
(dollars expressed in thousands)
Land............................................................. $ 8,455 7,512
Buildings and improvements....................................... 25,896 15,462
Furniture, fixtures and equipment................................ 28,937 22,470
Leasehold improvements........................................... 29,897 32,853
Construction in progress......................................... 770 2,084
-------- -------
Total........................................................ 93,955 80,381
Less accumulated depreciation and amortization .................. 47,209 34,855
-------- -------
Bank premises and equipment, net............................. $ 46,746 45,526
======== =======
Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999 totaled $4.7 million, $2.8 million and $3.2 million,
respectively.
FBA leases land, office properties and equipment under operating leases. Certain
of the leases contain renewal options and escalation clauses. Total rent expense
was $7.7 million, $6.5 million and $4.3 million for the years ended December 31,
2001, 2000 and 1999, respectively. Future minimum lease payments under
noncancellable operating leases extend through 2020 as follows:
(dollars expressed in thousands)
Year ending December 31:
2002.................................................... $ 7,619
2003.................................................... 6,945
2004.................................................... 5,198
2005.................................................... 4,447
2006.................................................... 3,645
Thereafter.............................................. 7,150
--------
Total future minimum lease payments................. $ 35,004
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FBA leases to unrelated parties a portion of its banking facilities. Total
rental income was $3.1 million, $1.3 million and $1.6 million for the years
ended December 31, 2001, 2000 and 1999, respectively.
(7) SHORT-TERM BORROWINGS
Short-term borrowings were comprised of the following at December 31:
2001 2000
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase......... $ 49,236 42,041
FHLB borrowings ....................................... 10,544 15,544
--------- -------
Total short-term borrowings........................ $ 59,780 57,585
========= =======
The average balance of short-term borrowings was $60.8 million and $32.6
million, respectively, and the maximum month-end balance of short-term
borrowings was $69.7 million and $60.0 million, respectively, for the years
ended December 31, 2001 and 2000. The average rates paid on short-term
borrowings during the years ended December 31, 2001, 2000 and 1999 were 3.79%,
5.43% and 5.12%, respectively. The assets underlying the short-term borrowings
are under FBA's physical control.
(8) NOTE PAYABLE
FBA had a $100.0 million revolving note payable from First Banks on which
the outstanding principal and accrued interest were due and payable on June 30,
2005. On August 23, 2001, FBA and First Banks modified the revolving note
payable by making interest payable quarterly, shortening the maturity date to
February 24, 2003 and securing the revolving note payable by a pledge of FBA's
stock in its subsidiaries. The 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 amounts outstanding under the revolving
note payable at December 31, 2001 and 2000 were $71.0 million and $98.0 million,
respectively. The interest expense under the revolving note payable was $4.5
million and $482,000 for the years ended December 31, 2001 and 2000,
respectively. There were no amounts outstanding under the revolving note payable
during 1999.
The average balance and maximum month-end balance outstanding under the
revolving note payable during the years ended December 31 were as follows:
2001 2000
---- ----
(dollars expressed in thousands)
Average balance................................ $ 65,368 6,114
Maximum month-end balance ..................... 86,000 98,000
========= ======
The average rates paid on the revolving note payable during the years ended
December 31, 2001 and 2000 were 6.8% and 7.9%, respectively.
(9) GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBENTURES
In July 1998, First America Capital Trust (FACT), a newly formed Delaware
business trust subsidiary of FBA, issued 1.84 million shares of 8.50% cumulative
trust preferred securities at $25 per share in an underwritten public offering,
and issued 56,908 shares of common securities to FBA at $25 per share. FBA owns
all of FACT's common securities. The gross proceeds of the offering were used by
FACT to purchase $47.4 million of 8.50% subordinated debentures from FBA,
maturing on June 30, 2028. The maturity date may be shortened to a date not
earlier than June 30, 2003 or extended to a date not later than June 30, 2037 if
certain conditions are met. The subordinated debentures are the sole asset of
FACT. In connection with the issuance of the FACT preferred securities, FBA made
certain guarantees and commitments that, in the aggregate, constitute a full and
unconditional guarantee by FBA of the obligations of FACT under the FACT
preferred securities. FBA's proceeds from the issuance of the subordinated
debentures to FACT, net of underwriting fees and offering expenses, were $44.0
million. Distributions payable on the FACT preferred securities, which are
payable quarterly in arrears, were $3.9 million, $3.9 million and $4.0 million
for the years ended December 31, 2001, 2000 and 1999, respectively, and are
included in noninterest expense in the consolidated statements of income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES
Income tax expense attributable to income from continuing operations for
the years ended December 31 consists of:
Years Ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Current income tax expense:
Federal................................................ $ 12,581 12,083 3,734
State.................................................. 1,283 2,344 2,172
-------- ------- -------
13,864 14,427 5,906
-------- ------- -------
Deferred income tax expense:
Federal................................................ 7,682 4,026 5,808
State.................................................. 369 (41) 137
-------- ------- -------
8,051 3,985 5,945
-------- ------- -------
Reduction in deferred valuation allowance................... (8,104) (405) (735)
-------- ------- -------
Total............................................... $ 13,811 18,007 11,116
======== ======= =======
The effective rates of federal income taxes for the years ended December 31
differ from statutory rates of taxation as follows:
Years Ended December 31,
----------------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income before provision for income
taxes and cumulative effect
of change in accounting
principle........................ $ 53,885 $45,804 $ 28,715
======== ======= ========
Provision for income taxes
calculated at federal
statutory income tax rates....... $ 18,860 35.0% $16,031 35.0% $ 10,050 35.0%
Effects of differences in tax
reporting:
Reduction in deferred
valuation allowance........... (8,104) (15.0) (405) (0.9) (735) (2.6)
State income taxes............... 1,074 2.0 1,497 3.3 1,501 5.2
Amortization of intangibles
associated with the purchase
of subsidiaries............... 1,873 3.5 901 2.0 584 2.0
Other, net....................... 108 0.1 (17) (0.1) (284) (0.9)
-------- ------ ------- ----- -------- -----
Provision for income taxes.. $ 13,811 25.6% $18,007 39.3% $ 11,116 38.7%
======== ====== ======= ===== ======== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31,
-------------------
2001 2000
---- ----
(dollars expressed
in thousands)
Deferred tax assets:
Net operating loss carryforwards............................................. $ 36,140 38,993
Allowance for loan losses.................................................... 15,350 12,815
Quasi-reorganization adjustment of bank premises............................. 1,176 1,226
Alternative minimum tax credits.............................................. 2,031 2,509
Other real estate............................................................ 142 42
Other........................................................................ 2,907 2,798
-------- -------
Gross deferred tax assets.............................................. 57,746 58,383
Valuation allowance.......................................................... -- (13,075)
-------- -------
Deferred tax assets, net of valuation allowance........................ 57,746 45,308
-------- -------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
-------------------
2001 2000
---- ----
(dollars expressed
in thousands)
Deferred tax liabilities:
Net fair value adjustment for securities available for sale.................. 1,003 181
Net fair value adjustment for derivative instruments......................... 9,348 --
Core deposit intangibles..................................................... 2,062 --
Depreciation on bank premises and equipment.................................. 4,591 4,387
FHLB stock dividends......................................................... 178 528
Other ....................................................................... 1,872 429
-------- -------
Deferred tax liabilities............................................... 19,054 5,525
-------- -------
Net deferred tax assets................................................ $ 38,692 39,783
======== =======
The realization of FBA's net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that FBA will realize
the recognized net deferred tax asset of $38.7 million. The net change in the
valuation allowance, related to deferred tax assets, was a decrease of $13.1
million for the year ended December 31, 2001. The decrease was comprised of the
reversal of valuation allowances resulting from the expected utilization of net
operating losses and the reversal of the valuation allowances due to
management's expectation of future taxable income sufficient to realize the net
deferred tax assets of $38.7 million.
Changes to the deferred tax asset valuation allowance for the years ended
December 31 were as follows:
Years Ended December 31,
---------------------------
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year................................ $13,075 13,480 15,912
Current year deferred provision, change in
deferred tax valuation allowance....................... (8,104) (405) (735)
Reduction attributable to utilization of deferred
tax assets:
Adjustment to capital surplus........................ (4,971) -- (981)
Adjustment to intangibles associated with the
purchase of subsidiaries......................... -- -- (716)
------- ------ ------
Balance, end of year...................................... $ -- 13,075 13,480
======= ====== ======
The valuation allowance for deferred tax assets at December 31, 1998
included $716,000 that was recognized in 1999 and credited to intangibles
associated with the purchase of subsidiaries. In addition, the valuation
allowance for deferred tax assets at December 31, 2000 included $5.0 million
which was credited to capital surplus in 2001 under the terms of the
quasi-reorganizations implemented for FBA and First Commercial Bancorp, Inc. as
of December 31, 1994 and 1996, respectively.
At December 31, 2001, FBA has separate return limitation year net operating
loss carryforwards of $103.3 million and alternative minimum tax credits of $2.3
million. Their utilization is subject to annual limitations. The net operating
loss carryforwards for FBA at December 31, 2001 expire as follows:
(dollars expressed in thousands)
Year ending December 31:
2002............................................ $ 1,362
2003............................................ 1,362
2004............................................ 2,379
2005............................................ 16,491
2006............................................ 3,412
2007 through 2020............................... 78,250
----------
Total....................................... $ 103,256
==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars expressed in thousands,
except per share data)
Year ended December 31, 2001:
Basic EPS - income before cumulative effect.................. $ 40,074 12,204 $ 3.29
Cumulative effect of change in accounting principle,
net of tax................................................ (459) -- (0.04)
--------- ------ ------
Basic EPS - income available to common stockholders.......... 39,615 12,204 3.25
Effect of dilutive securities - stock options................ -- -- --
--------- ------ ------
Diluted EPS - income available to common stockholders........ $ 39,615 12,204 $ 3.25
========= ====== ======
Year ended December 31, 2000:
Basic EPS - income available to common stockholders.......... $ 27,797 12,129 $ 2.29
Effect of dilutive securities - stock options................ -- 1 --
--------- ------ ------
Diluted EPS - income available to common stockholders........ $ 27,797 12,130 $ 2.29
========= ====== ======
Year ended December 31, 1999:
Basic EPS - income available to common stockholders.......... $ 17,599 12,235 $ 1.44
Effect of dilutive securities - stock options................ -- 5 --
--------- ------ ------
Diluted EPS - income available to common stockholders........ $ 17,599 12,240 $ 1.44
========= ====== ======
(12) EMPLOYEE BENEFIT PLANS
401(K) Plan. FBA's 401(k) plan is a self-administered savings and incentive
plan covering substantially all employees. Under the plan, employer matching
contributions are determined annually by FBA's Board of Directors. Employee
contributions are limited to 15% of the employee's annual compensation not to
exceed $10,500 for 2001. Total employer contributions under the plan were
$456,000, $441,000 and $318,000 for the years ended December 31, 2001, 2000 and
1999, respectively. The plan assets are held and managed under a trust agreement
with the trust department of an affiliated bank.
Pension Plan. Previously, FBA had a noncontributory defined benefit pension
plan covering substantially all officers and employees. In conjunction with the
acquisition of FBA by First Banks, the accumulation of benefits under the plan
were discontinued during 1994. While the plan continues in existence and
provides benefits which had then accumulated, no additional benefits have
accrued to participants since 1994, and no new participants will become eligible
for benefits thereafter. During 2001, 2000 and 1999, no contributions were made
to the pension plan.
(13) DIRECTORS' STOCK BONUS PLAN
The 1993 Directors' Stock Bonus Plan provided for annual grants of FBA
common stock to the nonemployee directors of FBA. Directors' compensation of
$46,000, $36,000 and $36,000 was recorded relating to this plan for the years
ended December 31, 2001, 2000 and 1999, respectively. These amounts represented
the fair value of the 2,000 shares granted for the years ended December 31,
2001, 2000 and 1999, respectively.
The plan expired on July 1, 2001. The plan was self-operative, and the
timing, amounts, recipients and terms of individual grants were determined
automatically. On July 1 of each year, each nonemployee director automatically
received a grant of 500 shares of common stock. The maximum number of plan
shares that could be issued under the plan were 16,667 shares.
(14) CREDIT COMMITMENTS
FBA is a party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These instruments involve, to varying degrees, elements of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
credit risk and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The interest rate risk associated with these credit
commitments relates primarily to the commitments to originate fixed-rate loans.
The credit risk amounts are equal to the contractual amounts, assuming the
amounts are fully advanced and the collateral or other security is of no value.
FBA uses the same credit policies in granting commitments and conditional
obligations as it does for on-balance-sheet items.
Commitments to extend credit at December 31 were as follows:
2001 2000
---- ----
(dollars expressed in thousands)
Commitments to extend credit...................... $ 863,398 719,039
Commercial and standby letters of credit.......... 2,227 37,077
--------- -------
$ 905,625 756,116
========= =======
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial properties or
single family residential properties. Collateral is generally required except
for consumer credit card commitments.
Commercial and standby letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. The letters of
credit are primarily issued to support private borrowing arrangements and
commercial transactions. Most letters of credit extend for less than one year.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Upon issuance of the
commitments, FBA holds marketable securities, certificates of deposit,
inventory, real property or other assets as collateral supporting those
commitments for which collateral is deemed necessary.
(15) STOCKHOLDERS' EQUITY
Classes of Common Stock. FBA is majority owned by First Banks. At December
31, 2001, First Banks owned 2,500,000 shares of Class B common stock and
9,545,107 shares of common stock, which represented 93.69% of FBA's outstanding
voting stock. Accordingly, First Banks has effective control over the management
and policies of FBA and the election of its directors.
As of December 31, 2001, FBA had issued and outstanding 10,356,060 shares
and 2,500,000 shares of common stock and Class B common stock, respectively. The
rights of Class B common stock are in most respects equivalent to the rights
associated with common stock, except the common stock has a dividend preference
over the Class B common stock, and the Class B common stock is unregistered and
transferable only in certain limited circumstances. The outstanding shares of
Class B common stock became convertible on August 31, 1999, at the option of the
holder, into an equal number of shares of common stock. Each share of common
stock and Class B common stock is entitled to one vote in the election of FBA's
directors and in other matters on which a vote of stockholders is taken.
Stock Options. On April 19, 1990, FBA's Board of Directors adopted the 1990
Stock Option Plan (1990 Plan). The 1990 Plan provided that no more than 200,000
shares of common stock would be available for stock options. One-fourth of each
stock option became exercisable at the date of the grant and at each anniversary
date of the grant. The options expired ten years from the date of the grant.
There were no options granted under this plan during the two years ended
December 31, 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2000, all stock options either had expired or had been
exercised, and there were no shares available for future stock options and no
shares of common stock reserved for the exercise of outstanding options.
Transactions relating to the 1990 Plan for the years ended December 31 are as
follows:
2000 1999
------------------- -------------------
Average Average
Option Option
Amount Price Amount Price
------ ----- ------ -----
Outstanding options, January 1.............................. 6,667 $ 3.75 6,667 $ 3.75
Options exercised and redeemed.............................. (6,667) 3.75 -- 3.75
------ -------
Outstanding options, December 31............................ -- 3.75 6,667 3.75
====== ====== ======= ======
Options exercisable, December 31............................ -- 6,667
====== =======
Distribution of Earnings of FB&T. FB&T is restricted by various state and
federal regulations as to the amount of dividends which are available for
payment to FBA. Under the most restrictive of these requirements, the future
payment of dividends from FB&T is limited to approximately $15.1 million at
December 31, 2001, unless prior permission from the regulatory authorities is
obtained.
(16) TRANSACTIONS WITH RELATED PARTIES
FBA purchases certain services and supplies from or through First Banks.
FBA's financial position and operating results could significantly differ from
those that would be obtained if FBA's relationship with First Banks did not
exist.
First Banks provides management services to FBA and 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
$8.0 million, $5.2 million and $4.4 million for the years ended December 31,
2001, 2000 and 1999, 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 $9.2 million, $6.8 million and
$5.3 million for the years ended December 31, 2001, 2000 and 1999, respectively.
FB&T had $93.1 million and $108.2 million in whole loans and loan
participations outstanding at December 31, 2001 and 2000, respectively, that
were purchased from First Bank, a wholly owned subsidiary of First Banks. In
addition, FB&T had sold $137.6 million and $146.1 million in whole loans and
loan participations to First Bank at December 31, 2001 and 2000, respectively.
These loans and loan participations were acquired and sold at interest rates and
terms prevailing at the dates of their purchase or sale and under standards and
policies followed by FB&T.
As more fully discussed in Note 8 to the consolidated financial statements,
FBA has a revolving note payable from First Banks. At December 31, 2001 and
2000, the amount outstanding under the revolving note payable was $71.0 million
and $98.0 million, respectively.
Outside of normal customer relationships, no directors, executive officers
or stockholders holding over 5% of FBA's voting stock, and no corporations or
firms with which such persons or entities are associated, currently maintain or
have maintained, since the beginning of the last full fiscal year, any
significant business or personal relationships with FBA or FB&T, other than that
which arises by virtue of such position or ownership interest in FBA, except as
described above.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including deferred tax
assets, bank premises and equipment and intangibles associated with the purchase
of subsidiaries. Further, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered in any of the estimates.
The estimated fair value of FBA's financial instruments at December 31 were
as follows:
December 31, 2001 December 31, 2000
----------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(dollars expressed in thousands)
Financial assets:
Cash and cash equivalents.............. $ 119,097 119,097 153,210 153,210
Investment securities:
Available for sale................... 364,518 364,518 330,557 330,557
Held to maturity..................... 3,689 3,745 4,662 4,615
Net loans.............................. 2,280,542 2,288,221 2,020,747 2,027,284
Derivative instruments................. 28,909 28,909 1,251 8,162
Accrued interest receivable............ 15,233 15,233 20,048 20,048
========== ========= ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2001 December 31, 2000
----------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------- ---------- ------- ----------
(dollars expressed in thousands)
Financial liabilities:
Deposits:
Demand:
Non-interest-bearing............... $ 529,924 529,924 475,785 475,785
Interest-bearing................... 297,033 297,033 195,585 195,585
Savings and money market............... 920,737 920,737 766,587 766,587
Time deposits.......................... 807,567 820,117 868,399 880,807
Short-term borrowings.................. 59,780 59,780 57,585 57,585
Note payable........................... 71,000 71,000 98,000 98,000
Accrued interest payable............... 6,277 6,277 8,434 8,434
FACT preferred securities.............. 44,342 46,276 44,280 40,259
========== ========= ========= =========
Off-balance-sheet:
Credit commitments..................... $ -- -- -- --
========== ========= ========= =========
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Financial Assets:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: The fair value of investment securities available
for sale is the amount reported in the consolidated balance sheets. The fair
value of investment securities held to maturity is based on quoted market prices
where available. If quoted market prices were not available, the fair value was
based upon quoted market prices of comparable instruments.
Net loans: The fair value of most loans was estimated utilizing discounted
cash flow calculations that applied interest rates currently being offered for
similar loans to borrowers with similar risk profiles. The carrying value of
loans is net of the allowance for loan losses and unearned discount.
Derivative instruments: The fair value of derivative instruments is based
on quoted market prices where available. If quoted market prices were not
available, the fair value was based upon quoted market prices of comparable
instruments.
Financial Liabilities:
Deposits: The fair value disclosed for deposits generally payable on demand
(i.e., non-interest-bearing and interest-bearing demand, savings and money
market accounts) is considered equal to their respective carrying amounts as
reported in the consolidated balance sheets. The fair value disclosed for demand
deposits does not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in the
market. The fair value disclosed for certificates of deposit was estimated
utilizing a discounted cash flow calculation that applied interest rates
currently being offered on similar certificates to a schedule of aggregated
monthly maturities of time deposits.
FACT preferred securities: The fair value is based on quoted market prices.
Short-term borrowings, note payable and accrued interest payable: The
carrying values reported in the consolidated balance sheets approximate fair
value.
Off-Balance-Sheet:
Credit commitments: The majority of the commitments to extend credit and
commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments reported in the consolidated balance sheets approximates fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) BUSINESS SEGMENT RESULTS
FBA's business segment is FB&T. The reportable business segments are
consistent with the management structure of FBA and the internal reporting
system that monitors performance.
Through its branch network, FB&T provides similar products and services in
its defined geographic areas. The products and services offered include a broad
range of commercial and personal banking products, including demand, savings,
money market and time deposit accounts. In addition, FB&T markets combined basic
services for various customer groups, including packaged accounts for more
affluent customers, and sweep accounts, lock-box deposits and cash management
products for commercial customers. FB&T also offers both consumer and commercial
loans. Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial, financial and
agricultural loans, real estate construction and development loans, commercial
real estate loans, commercial leasing and trade financing.
FB&T
----------------------------------------
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities.................................................... $ 368,207 330,478 192,357
Loans, net of unearned discount.......................................... 2,323,263 2,058,628 1,469,093
Total assets............................................................. 3,057,920 2,733,545 1,854,827
Deposits................................................................. 2,555,396 2,306,469 1,590,490
Stockholders' equity..................................................... 398,713 333,186 204,617
========== ========= =========
Income statement information:
Interest income.......................................................... $ 208,291 176,902 132,407
Interest expense......................................................... 78,547 71,167 51,544
---------- --------- ---------
Net interest income................................................. 129,744 105,735 80,863
Provision for loan losses................................................ 5,010 1,877 4,183
---------- --------- ---------
Net interest income after provision for loan losses................. 124,734 103,858 76,680
Noninterest income....................................................... 27,469 12,343 10,774
Noninterest expense...................................................... 89,112 65,567 54,992
---------- --------- ---------
Income (loss) before provision for income taxes and cumulative
effect of change in accounting principle.......................... 63,091 50,634 32,462
Provision for income taxes............................................... 16,972 20,064 12,353
---------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle.................................... 46,119 30,570 20,109
Cumulative effect of change in accounting principle, net of tax.......... (459) -- --
---------- --------- ---------
Net income.......................................................... $ 45,660 30,570 20,109
========== ========= =========
- ----------------------
(1) Corporate and other includes $2.5 million, $2.5 million and $2.6 million of
guaranteed preferred debenture expense, after applicable income tax benefit
of $1.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. See Note 9 to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other financial services include mortgage banking, debit cards, brokerage
services, credit-related insurance, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services, stock
option services and trust and private banking services. The revenues generated
by FB&T consist primarily of interest income, generated from the loan and
investment security portfolios, and service charges and fees, generated from the
deposit products and services. The geographic areas include Houston, Dallas,
Irving and McKinney, Texas and southern and northern California. The products
and services are offered to customers primarily within their respective
geographic areas, with the exception of loan participations executed between
FB&T and First Bank. See Note 16 to the consolidated financial statements.
The business segment results are consistent with FBA's internal reporting
system and, in all material respects, with generally accepted accounting
principles and practices predominant in the banking industry. Such principles
and practices are summarized in Note 1 to the consolidated financial statements.
Corporate and Other (1) Consolidated Totals
------------------------------------------ --------------------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
-- 4,741 3,817 368,207 335,219 196,174
-- 49 (2) 2,323,263 2,058,677 1,469,091
3,068 7,834 7,035 3,060,988 2,741,379 1,861,862
(135) (113) (5,491) 2,555,261 2,306,356 1,584,999
(113,396) (136,277) (30,104) 285,317 196,909 174,513
========= ======== ======= ========= ======== ==========
56 346 313 208,347 177,248 132,720
4,477 458 (305) 83,024 71,625 51,239
--------- -------- ------- --------- -------- ----------
(4,421) (112) 618 125,323 105,623 81,481
-- -- -- 5,010 1,877 4,183
--------- -------- ------- --------- -------- ----------
(4,421) (112) 618 120,313 103,746 77,298
(329) (266) (894) 27,140 12,077 9,880
4,456 4,452 3,471 93,568 70,019 58,463
--------- -------- ------- --------- -------- ----------
(9,206) (4,830) (3,747) 53,885 45,804 28,715
(3,161) (2,057) (1,237) 13,811 18,007 11,116
--------- -------- ------- --------- -------- ----------
(6,045) (2,773) (2,510) 40,074 27,797 17,599
-- -- -- (459) -- --
--------- -------- ------- --------- -------- ----------
(6,045) (2,773) (2,510) 39,615 27,797 17,599
========= ======== ======= ========= ======== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) 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 December 31, 2001, FB&T
was well capitalized. At December 31, 2000, FBA's total capital ratio fell below
the well-capitalized level, however, FBA remained adequately capitalized. FBA's
reduction in total capital for 2000 was primarily attributable to the
acquisitions of Millennium Bank and SFC in December 2000, which added total
assets of approximately $300.8 million. The improvement in FBA's total capital
for 2001 is primarily attributable to increased earnings and the issuance of
additional shares of common stock to First Banks.
As of December 31, 2001, the most recent notification from FBA's primary
regulator categorized FBA and FB&T as adequately capitalized and well
capitalized, respectively, under the regulatory framework for prompt corrective
action. To be categorized as 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 December 31, 2001 and 2000, FBA's and FB&T's required and actual capital
ratios were as follows:
To Be Well
Capitalized Under
Actual For Capital Prompt Corrective
-------------------
2001 2000 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
FBA.................................. 8.82% 8.01% 8.0% 10.0%
FB&T................................. 11.27 10.58 8.0 10.0
Tier 1 capital (to risk-weighted assets):
FBA.................................. 7.57 6.76 4.0 6.0
FB&T................................. 10.02 9.32 4.0 6.0
Tier 1 capital (to average assets):
FBA.................................. 7.14 7.34 3.0 5.0
FB&T................................. 9.47 9.27 3.0 5.0
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balances sheets of First Banks America, Inc. as of
December 31, 2001 and 2000, and condensed statements of income and cash flows
for the years ended December 31, 2001, 2000 and 1999:
CONDENSED BALANCE SHEETS
December 31,
---------------------------
2001 2000
---- ----
(dollars expressed in thousands)
Assets
------
Cash deposited in FB&T................................................ $ 856 1,650
Investment securities................................................. -- 4,741
Investment in subsidiaries............................................ 400,968 334,711
Deferred tax assets................................................... 752 144
Other assets.......................................................... 2,436 3,068
---------- ---------
Total assets.................................................. $ 405,012 344,314
========== =========
Liabilities and Stockholders' Equity
------------------------------------
Note payable.......................................................... $ 71,000 98,000
Subordinated debentures............................................... 47,423 47,423
Accrued expenses and other liabilities................................ 1,272 1,982
---------- ---------
Total liabilities............................................. 119,695 147,405
Stockholders' equity.................................................. 285,317 196,909
---------- ---------
Total liabilities and stockholders' equity.................... $ 405,012 344,314
========== =========
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
-------------------------------------
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Income:
Dividends from subsidiaries....................................... $ 46,500 14,509 5,000
Other............................................................. 249 523 744
-------- -------- -------
Total income............................................... 46,749 15,032 5,744
-------- -------- -------
Expense:
Interest.......................................................... 4,477 482 --
Other............................................................. 4,976 4,870 4,492
-------- -------- -------
Total expense.............................................. 9,453 5,352 4,492
-------- -------- -------
Income before benefit for income taxes and equity
in undistributed (loss) income of subsidiaries .......... 37,296 9,680 1,252
Benefit for income taxes............................................ (3,161) (2,057) (1,238)
-------- -------- -------
Income before equity in undistributed
(loss) income of subsidiaries............................ 40,457 11,737 2,490
Equity in undistributed (loss) income of subsidiaries............... (842) 16,060 15,109
-------- -------- -------
Net income................................................. $ 39,615 27,797 17,599
======== ======== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------------------
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
Net income.................................................... $ 39,615 27,797 17,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed loss (income) of subsidiaries...... 842 (16,060) (15,109)
Dividends from subsidiaries................................ 46,500 14,509 5,000
Other, net................................................. (501) 2,726 (4,787)
--------- -------- ---------
Net cash provided by operating activities............ 86,456 28,972 2,703
--------- -------- ---------
Cash flows from investing activities:
Acquisition of subsidiaries................................... (67,401) (131,984) (26,000)
Purchase of investment securities............................. -- (1,687) (649)
Proceeds from sales of investment securities.................. 5,082 268 --
Return of subsidiary capital.................................. (23,000) 17,000 2,000
Other, net.................................................... 203 (15,569) --
--------- -------- ---------
Net cash used in investing activities................ (85,116) (131,972) (24,649)
--------- -------- ---------
Cash flows from financing activities:
Advances drawn on note payable................................ 26,000 124,200 --
Repayments on note payable.................................... (53,000) (26,200) --
Proceeds from issuance of common stock to First Banks......... 26,122 -- --
Exercise of stock options..................................... -- 25 --
Repurchases of common stock................................... (1,256) (1,454) (1,281)
--------- --------- ---------
Net cash (used in) provided by financing activities.. (2,134) 96,571 (1,281)
--------- --------- ---------
Net decrease in cash and cash equivalents............ (794) (6,429) (23,227)
Cash and cash equivalents, beginning of year.................... 1,650 8,079 31,306
--------- --------- ---------
Cash and cash equivalents, end of year.......................... $ 856 1,650 8,079
========= ========= =========
Noncash investing and financing activities:
Reduction of deferred tax valuation reserve................... $ 4,971 -- 981
Compensation paid in common stock............................. 46 36 36
Cash paid for interest........................................ 4,143 245 --
========= ========= =========
(21) CONTINGENT LIABILITIES
In the ordinary course of business, FBA and its subsidiaries become
involved in legal proceedings. Management, in consultation with legal counsel,
believes the ultimate resolution of these proceedings will not have a material
adverse effect on the financial condition or results of operations of FBA and/or
its subsidiaries.
INDEPENDENT AUDITORS' REPORT
[KPMG Logo]
The Board of Directors and Stockholders
First Banks America, Inc.
We have audited the accompanying consolidated balance sheets of First Banks
America, Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000,
and the related consolidated statements of income, changes in stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Banks America,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
/s/ KPMG LLP
--------------
St. Louis, Missouri
March 15, 2002
DIRECTORS AND SENIOR MANAGEMENT
Directors of First Banks America, Inc.
James F. Dierberg Chairman of the Board, President and Chief Executive Officer, First Banks America, Inc.,
Chairman of the Board and Chief Executive Officer, First Banks, Inc., St. Louis, Missouri
Allen H. Blake Executive Vice President, Chief Operating Officer, Chief Financial Officer and Secretary, First
Banks America, Inc., Director, President, Chief Operating Officer, Chief Financial Officer
and Secretary, First Banks, Inc., St. Louis, Missouri
Charles A. Crocco, Jr. Counsel to the law firm of Crocco & De Maio, P.C., Mount Kisco, New York.
Albert M. Lavezzo President and Chief Executive Officer of the law firm of Favaro, Lavezzo, Gill, Caretti &
Heppell, Vallejo, California
Ellen D. Schepman Retail Marketing Officer, First Banks, Inc., St. Louis, Missouri
Edward T. Story, Jr. President and Chief Executive Officer of SOCO International, plc, Comfort, Texas.
Terrance M. McCarthy Executive Vice President, First Banks America, Inc.; Chairman of the Board, President and Chief
Executive Officer, First Bank & Trust, San Francisco, California; Executive Vice President,
First Banks, Inc., St. Louis, Missouri
Executive Officers of First Banks America, Inc.
James F. Dierberg Chairman of the Board, President and Chief Executive Officer
Allen H. Blake Executive Vice President, Chief Operating Officer, Chief Financial Officer and Secretary
Terrance M. McCarthy Executive Vice President
Directors and Senior Officers of First Bank & Trust
Terrance M. McCarthy Chairman of the Board, President and Chief Executive Officer
Gilbert J. Dalmau Director and Regional President - Southern California
Patrick S. Day Director, Senior Vice President and Senior Credit Officer - Northern California
Michael J. Dierberg Director and Regional President - Northern California
Albert M. Lavezzo Director
Kathryn L. Perrine Director, Senior Vice President and Chief Financial Officer
David F. Weaver Director and Regional President - Texas Region
INVESTOR INFORMATION
FBA's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, is available without charge to any stockholder upon request.
Requests should be directed, in writing, to Lisa K. Vansickle, First Banks
America, Inc., 600 James S. McDonnell Boulevard, Mail Code - 014, Hazelwood,
Missouri 63042.
Common Stock
The common stock of FBA is traded on the New York Stock Exchange with the
ticker symbol "FBA" and is frequently reported in newspapers of general
circulation with the symbol "FBKSAM" and in the Wall Street Journal with the
symbol "FBA." As of March 22, 2002, there were approximately 1,250 registered
common stockholders of record. This number does not include any persons or
entities that hold their stock in nominee or "street" name through various
brokerage firms. The high and low common stock prices for 2001 and 2000 are
summarized as follows:
2001 2000
------------------ ------------------
High Low High Low
---- --- ---- ---
First quarter........................................ $22.75 17.75 18.13 16.88
Second quarter....................................... 29.53 21.00 18.63 16.88
Third quarter........................................ 30.75 22.65 19.06 17.63
Fourth quarter....................................... 32.93 29.65 17.63 14.00
Preferred Securities
The preferred securities of FBA are traded on the New York Stock Exchange
with the ticker symbol "FBAPrt." As of March 22, 2002, there were approximately
200 record holders of preferred securities. This number does not include any
persons or entities that hold their preferred securities in nominee or "street"
name through various brokerage firms. The high and low preferred securities
prices and the dividends declared for 2001 and 2000 are summarized as follows:
2001 2000 Dividend
---------------- ---------------
High Low High Low Declared
---- --- ---- --- --------
First quarter............................. $ 25.00 21.63 23.00 19.50 $ 0.53125
Second quarter............................ 25.05 23.95 23.88 20.69 0.53125
Third quarter............................. 25.80 24.80 23.75 21.13 0.53125
Fourth quarter............................ 25.67 24.75 22.63 20.75 0.53125
----------
$ 2.12500
==========
For information concerning FBA, please contact:
Allen H. Blake Terrance M. McCarthy
Executive Vice President, Chief Operating Officer, Executive Vice President, Chairman of
Chief Financial Officer and Secretary the Board, President and Chief
600 James S. McDonnell Boulevard Executive Officer of FB&T
Mail Code - #014 550 Montgomery Street
Hazelwood, Missouri 63042 San Francisco, California 94111
Telephone - (314) 592-5000 Telephone - (415) 781-7810
Transfer Agents:
Common Stock: Preferred Securities:
Mellon Investor Services, L.L.C. State Street Bank and Trust Company
85 Challenger Road Corporate Trust Department
Overpeck Centre P.O. Box 778
Ridgefield Park, New Jersey 07660 Boston, Massachusetts 02102-0778
Telephone - (888) 213-0965 Telephone - (800) 531-0368
www.melloninvestor.com www.statestreet.com
EXHIBIT 21
FIRST BANKS AMERICA, INC.
Subsidiaries
The following is a list of our subsidiaries and the jurisdiction of
incorporation or organization.
Jurisdiction of Incorporation
Name of Subsidiary of Organization
------------------ ---------------
The San Francisco Company Delaware
First Bank & Trust California
Bank of San Francisco Realty Investors, Inc. California
EXHIBIT 23
The Board of Directors
First Banks America, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-42607) on Form S-8 of First Banks America, Inc. and subsidiaries of our
report dated March 15, 2002, relating to the consolidated balance sheets of
First Banks America, Inc. and subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2001, which report appears in the December 31, 2001
annual report on Form 10-K of First Banks America, Inc.
Our report refers to First Bank America, Inc. changing its method of accounting
for derivative instruments and hedging activities in 2001.
/s/ KPMG LLP
------------
St. Louis, Missouri
March 25, 2002