10-Q 1 fba10q901.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File No. 0-8937 FIRST BANKS AMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1604965 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 135 North Meramec, Clayton, Missouri 63105 (Address of principal executive offices) (Zip code) (314) 854-4600 (Registrant's telephone number, including area code) ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X -------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Shares outstanding Class at October 31, 2001 ----- ------------------- Common Stock, $0.15 par value 10,356,060 Class B Common Stock, $0.15 par value 2,500,000 FIRST BANKS AMERICA, INC. TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS FIRST BANKS AMERICA, INC. CONSOLIDATED BALANCE SHEETS - (UNAUDITED) (dollars expressed in thousands, except share and per share data)

FIRST BANKS AMERICA, INC. CONSOLIDATED BALANCE SHEETS, CONTINUED - (UNAUDITED) (dollars expressed in thousands, except share and per share data)

FIRST BANKS AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED) (dollars expressed in thousands, except per share data)

FIRST BANKS AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The consolidated financial statements of First Banks America, Inc. and subsidiaries (FBA or the Company) are unaudited and should be read in conjunction with the consolidated financial statements contained in the 2000 Annual Report on Form 10-K. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and conform to predominant practices within the banking industry. Management of FBA has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Operating results for the three and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The consolidated financial statements include the accounts of the parent company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications of 2000 amounts have been made to conform to the 2001 presentation. FBA is majority owned by First Banks, Inc., St. Louis, Missouri (First Banks). Accordingly, First Banks has effective control over the management and policies of FBA and the election of its directors. First Banks' ownership interest in FBA was 93.27% and 92.86% at September 30, 2001 and December 31, 2000, respectively. FBA operates through its wholly owned subsidiary bank holding company, The San Francisco Company (SFC), which is headquartered in San Francisco, California, and SFC's wholly owned subsidiary bank, First Bank & Trust (FB&T), which is also headquartered in San Francisco, California. (2) ACQUISITION OF FIRST BANK & TRUST/RESTATEMENT OF FINANCIAL INFORMATION Effective October 31, 2000, FBA completed its acquisition of First Bank & Trust in a transaction accounted for as a combination of entities under common control. FBA acquired First Bank & Trust from First Banks. Prior to the acquisition, First Banks owned 84.42% of the outstanding common stock of FBA and all of the outstanding common stock of First Bank & Trust. The consolidated financial statements at September 30, 2000, and for the three and nine months then ended, give retroactive effect to this transaction and, as a result, the consolidated balance sheets, statements of income and statements of cash flows are presented as if the combining entities had been consolidated for all periods subsequent to First Banks' acquisition of First Bank & Trust on March 15, 1995. The consolidated statements of changes in stockholders' equity and comprehensive income reflect the accounts of FBA as if the common stock, excluding the treasury shares, issued to First Banks in exchange for its interest in First Bank & Trust had been outstanding for all periods subsequent to March 15, 1995. (3) ACQUISITIONS On October 16, 2001, FBA completed its acquisition of Charter Pacific Bank (Charter Pacific), Agoura Hills, California, in exchange for $19.3 million in cash. Charter Pacific was headquartered in Agoura Hills, California, and had one other branch office in Beverly Hills, California. At the time of the transaction, Charter Pacific had $101.5 million in total assets, $70.2 million in loans, net of unearned discount, $7.5 million in investment securities and $89.0 million in deposits. FBA funded the acquisition from an advance on the revolving line of credit it maintains with First Banks. Charter Pacific was merged with and into First Bank & Trust at the time of the transaction. On October 31, 2001, FBA completed its acquisition of BYL Bancorp (BYL), and its wholly owned banking subsidiary, BYL Bank Group, in exchange for $49.0 million in cash. BYL was headquartered in Orange, California, and had six other branch offices located in Orange and Riverside counties. At the time of the transaction, BYL had $281.5 million in total assets, $175.0 million in loans, net of unearned discount, $12.6 million in investment securities and $251.8 million in deposits. FBA funded the acquisition using a combination of dividends from FB&T, borrowings under a line of credit FBA maintains with First Banks and the sale of approximately 804,000 shares of additional common stock to First Banks. The common stock was sold to First Banks for $32.50 per share, a price set by FBA's Board of Directors based on recent trading prices for FBA's stock on the New York Stock Exchange. FBA intends to conduct a rights offering during the first quarter of 2002, whereby all of its stockholders will be given the right to purchase proportionate amounts of FBA common stock at the same price paid by First Banks. BYL Bank Group was merged with and into FB&T at the time of the transaction. (4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 -- Accounting for Derivative Instruments and Hedging Activities (SFAS 133). In June 1999 and June 2000, the FASB issued SFAS No. 137 - Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133, and SFAS No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, respectively. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge in one of three categories. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under SFAS 133, as amended, an entity that elects to apply hedge accounting is required to establish, at the inception of the hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. FBA utilizes derivative instruments and hedging activities to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities. FBA uses such derivative instruments solely to reduce its interest rate risk exposure. The following is a summary of FBA's accounting policies for derivative instruments and hedging activities under SFAS 133, as amended. Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap agreements designated as cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into noninterest income when the underlying transaction affects earnings. The ineffective portion of the change in the cash flow hedge's gain or loss is recorded in noninterest income on each monthly measurement date. The swap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability being hedged. Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap agreements designated as fair value hedges are accounted for at fair value. Changes in the fair value of the swap agreements are recognized currently in noninterest income. The change in the fair value 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 swap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability. Interest Rate Cap and Floor Agreements. Interest rate cap and floor agreements are accounted for at fair value. Changes in the fair value of interest rate cap and floor agreements are recognized in noninterest income on each monthly measurement date. On January 1, 2001, FBA implemented SFAS 133, as amended. The implementation of SFAS 133, as amended, resulted in an increase in derivative instruments of $6.9 million, an increase in deferred tax liabilities of $2.7 million and an increase in other comprehensive income of $5.0 million. In addition, FBA recorded a cumulative effect of change in accounting principle of $459,000, net of taxes of $247,000, as a reduction of net income. (5) EARNINGS PER COMMON SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the periods indicated:

(6) TRANSACTIONS WITH RELATED PARTIES FBA purchases certain services and supplies from or through First Banks, its affiliates and First Services, L.P. FBA's financial position and operating results could significantly differ from those that would be obtained if FBA's relationship with First Banks did not exist. In addition, fees payable to First Banks, its affiliates and First Services, L.P. generally increase as FBA expands through acquisitions and internal growth, reflecting the higher levels of service needed to operate its subsidiaries. First Banks provides management services to FBA and FB&T. Management services are provided under management fee agreements whereby FBA compensates First Banks for its use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services. Fees paid under these agreements were $2.2 million and $5.8 million for the three and nine months ended September 30, 2001, and $1.4 million and $4.0 million for the comparable periods in 2000, respectively. First Services L.P., a limited partnership indirectly owned by First Banks' Chairman and his adult children, provides data processing services and various related services to FBA and FB&T under the terms of data processing agreements. Fees paid under these agreements were $2.6 million and $7.4 million for the three and nine months ended September 30, 2001, and $1.6 million and $4.7 million for the comparable periods in 2000, respectively. FB&T had $87.5 million and $108.2 million in whole loans and loan participations outstanding at September 30, 2001 and December 31, 2000, respectively, that were purchased from First Bank, a wholly owned banking subsidiary of First Banks. In addition, FB&T had sold $137.6 million and $146.1 million in whole loan and loan participations to First Bank at September 30, 2001 and December 31, 2000, respectively. FBA has a $100.0 million revolving note payable from First Banks on which the outstanding principal and accrued interest under the note payable were due and payable on June 30, 2005. On August 23, 2001, FBA and First Banks modified the note payable by making interest payable quarterly, shortening the maturity date to February 24, 2003, and securing the note by a pledge of FBA's stock in its subsidiaries. The borrowings under the note payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The amounts outstanding under the note payable at September 30, 2001 and December 31, 2000, were $46.1 million and $98.0 million, respectively. The interest expense under the note payable was $792,000 and $3.7 million for the three and nine months ended September 30, 2001, and $32,000 and $246,000 for the comparable periods in 2000, respectively. (7) REGULATORY CAPITAL FBA and its subsidiary banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on FBA's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FBA and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require FBA and its subsidiary banks to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of September 30, 2001, FB&T was well capitalized under the applicable regulations. At September 30, 2001 and December 31, 2000, FBA's total capital ratio fell below the well-capitalized level, however, FBA remained adequately capitalized. FBA's reduction in the total capital ratio is primarily attributable to the acquisitions of Millennium Bank and SFC in December 2000, which added total assets of approximately $300.8 million. As of September 30, 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 September 30, 2001 and December 31, 2000, FBA's, FB&T's and Bank of San Francisco's (BSF) required and actual capital ratios were as follows:

-------------------------- (1) BSF was acquired by FBA on December 31, 2000. FB&T merged with BSF on March 29, 2001, and BSF was renamed First Bank & Trust. (8) BUSINESS SEGMENT RESULTS FBA's business segments are the parent company (which includes intercompany eliminations) and FB&T. The reportable business segments are consistent with the management structure of FBA and the internal reporting system that monitors performance. Through its branch network, FB&T provides similar products and services in its defined geographic areas. The products and services offered include a broad range of commercial and personal banking products, including demand, savings, money market and time deposit accounts. In addition, FB&T markets combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. FB&T also offers both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, commercial leasing and trade financing. Other financial services include mortgage banking, 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 6 to the consolidated financial statements. The business segment results are consistent with FBA's internal reporting system and, in all material respects, with accounting principles generally accepted in the United States of America and practices predominate in the banking industry.

----------------- (1) Includes BSF, which was acquired by FBA on December 31, 2000. FB&T merged with BSF on March 29, 2001, and BSF was renamed First Bank & Trust. (2) Corporate and other includes $634,000 and $1.9 million of guaranteed preferred debentures expense, after applicable income tax benefit of $342,000 and $1.0 million for the three and nine months ended September 30, 2001 and 2000, respectively. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements with respect to our financial condition, results of operations and business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to fluctuations in interest rates and in the economy, including the negative impact on the economy resulting from the events of September 11, 2001 in New York City and Washington D.C.; the impact of laws and regulations applicable to us and changes therein; the impact of accounting pronouncements applicable to us and changes therein; competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources than us, some of which may offer and develop products and services not offered by us; our ability to control the composition of our loan portfolio without adversely affecting interest income; and our ability to respond to changes in technology. With regard to our efforts to grow through acquisitions, factors that could affect the accuracy or completeness of forward-looking statements contained herein include the potential for higher than anticipated operating costs arising from the geographic dispersion of our offices, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources than us; fluctuations in the prices at which acquisition targets may be available for sale; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of our Form 10-Q should therefore not place undue reliance on forward-looking statements. General We are a registered bank holding company incorporated in Delaware and headquartered in St. Louis County, Missouri. Through the operation of our subsidiaries, we offer a broad array of financial services to consumer and commercial customers. We currently operate one banking subsidiary that has 56 branch offices in California and Texas. At September 30, 2001, we had total assets of $2.74 billion, loans, net of unearned discount, of $2.04 billion, total deposits of $2.29 billion and total stockholders' equity of $247.1 million. We operate through our subsidiary bank holding company, The San Francisco Company, or SFC, which is headquartered in San Francisco, California, and our subsidiary bank, First Bank & Trust, or FB&T, which is also headquartered in San Francisco, California. Our subsidiaries are wholly owned by their respective parent companies. We offer a broad range of commercial and personal banking services, including demand, savings, money market and time deposit accounts. In addition, we market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. We also offer both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, commercial leasing and trade financing. Other financial services include mortgage banking, 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 the officers and directors. However, we centralize overall corporate policies, procedures and administrative functions and provide operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our subsidiary banking units to focus on customer service. Financial Condition Our total assets were $2.74 billion at September 30, 2001 and December 31, 2000. The slight decline in total assets, which was primarily attributable to an anticipated level of attrition associated with our acquisitions of Commercial Bank of San Francisco, Millennium Bank and Bank of San Francisco, which were completed during the fourth quarter of 2000, was offset by an increase in derivative instruments of $48.6 million, resulting solely from the implementation of Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 - Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133, and SFAS No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133. Loans, net of unearned discount, decreased by $22.8 million, which is further discussed under "--Loans and Allowance for Loan Losses." Investment securities increased by $8.8 million to $344.0 million at September 30, 2001 from $335.2 million at December 31, 2000. We attribute the increase to a $138.8 million increase in available-for-sale investment securities during the third quarter of 2001 offset by the overall decline in deposits, the liquidation of certain investment securities acquired through acquisitions that did not meet our investment objectives and a higher than normal level of investment security calls experienced during the nine months ended September 30, 2001. Total deposits decreased by $16.3 million to $2.29 billion at September 30, 2001 from $2.31 billion at December 31, 2000, which reflects an anticipated level of attrition associated with our acquisitions in the fourth quarter of 2000 and continued aggressive competition within our market areas. In addition, our note payable decreased by $51.9 million to $46.1 million at September 30, 2001 from $98.0 million at December 31, 2000. The reduction of our note payable was funded with dividends from FB&T and a capital reduction of $23.0 million that was recorded in conjunction with the merger of our former subsidiary, First Bank & Trust, with Bank of San Francisco, effective March 29, 2001. In conjunction with this merger, Bank of San Francisco was renamed First Bank & Trust. Furthermore, accrued expenses and other liabilities decreased by $8.1 million to $16.2 million at September 30, 2001 from $24.3 million at December 31, 2000. We attribute this decrease primarily to our quarterly tax payments and the timing of certain other routine payments. During the three and nine months ended September 30, 2001, we purchased $392,000 and $1,256,000 of our common stock at an average cost of $22.67 per share and $21.67 per share, respectively. We utilized available cash and the proceeds from sales of available-for-sale investment securities to fund our repurchases of common stock. Our Board of Directors, through various resolutions passed from 1995 to 2000, has authorized the purchase of up to a cumulative total of 1,094,797 shares of common stock. As of September 30, 2001, we had purchased a total of 863,857 shares of common stock held for treasury. On October 31, 2000, we issued 803,429 treasury shares to First Banks in conjunction with our acquisition of First Bank & Trust. At September 30, 2001, we could purchase approximately 231,000 additional shares under the existing authorization. Results of Operations Net Income Net income was $8.6 million, or $0.71 per share on a diluted basis, for the three months ended September 30, 2001, in comparison to $7.2 million, or $0.59 per share on a diluted basis, for the comparable period in 2000. For the nine months ended September 30, 2001 and 2000, net income was $23.7 million, or $1.96 per share on a diluted basis, and $19.9 million, or $1.64 per share on a diluted basis, respectively. The implementation of SFAS No. 133, as amended, on January 1, 2001, resulted in the recognition of a cumulative effect of change in accounting principle of $459,000, net of tax, which reduced net income. Excluding this item, net income was $24.1 million, or $2.00 per share on a diluted basis, for the nine months ended September 30, 2001. The accounting for derivatives under the requirements of SFAS No. 133 will continue to have an impact on future financial results as further discussed under "--Noninterest Income." The earnings progress for the first nine months of 2001 was primarily driven by increased net interest income and noninterest income offset by higher operating expenses, an increased provision for loan losses as further discussed under "--Provision for Loan Losses," and the impact of a change in accounting principle. The increased net interest income was generated through internal loan growth and our acquisitions of Lippo Bank, Bank of Ventura, Commercial Bank of San Francisco, Millennium Bank and Bank of San Francisco, completed during 2000. However, the improvement in net interest income for the three and nine months ended September 30, 2001, was partially offset by reductions in prevailing interest rates that occurred during the first nine months of 2001. The improvement in net interest income and noninterest income for the three and nine months ended September 30, 2001, was partially offset by increased operating expenses. The increased operating expenses are primarily attributable to the operating expenses of the acquisitions completed during 2000; increased salaries and employee benefit expenses; increased data processing fees; increased legal, examination and professional fees; increased amortization of intangibles associated with the purchase of the aforementioned banks; and a $1.8 million charge to other expense associated with the establishment of a specific reserve for an unfunded letter of credit. Net Interest Income Net interest income was $31.2 million, or 5.13% of average interest-earning assets, for the three months ended September 30, 2001, in comparison to $26.6 million, or 5.50% of average interest-earning assets, for the comparable period in 2000. For the nine months ended September 30, 2001 and 2000, net interest income was $92.4 million, or 5.18% of average interest-earning assets, in comparison to $76.0 million, or 5.49% of average interest-earning assets, respectively. We credit the increased net interest income for the three and nine months ended September 30, 2001, primarily to the net interest-earning assets provided by our acquisitions completed during 2000 and earnings on interest rate swap agreements that we entered into in conjunction with our risk management program. Average loans, net of unearned discount, increased by $440.0 million to $2.07 billion for the three months ended September 30, 2001 from $1.63 billion for the comparable period in 2000. For the nine months ended September 30, 2001 and 2000, average loans, net of unearned discount, were $2.06 billion and $1.56 billion, respectively. The yield on our loan portfolio decreased to 8.72% and 9.19% for the three and nine months ended September 30, 2001, respectively, in comparison to 9.77% and 9.63% for the comparable periods in 2000. This was a major contributor to the decline in our net interest rate margin of 37 basis points and 31 basis points for the three and nine months ended September 30, 2001, respectively, from the comparable periods in 2000. We attribute the decline in yields and our net interest rate margin primarily to the continued decreases in prevailing interest rates. During the period from December 31, 2000 through September 30, 2001, the Board of Governors of the Federal Reserve System decreased the targeted Federal funds rate eight times, resulting in eight decreases in the prime rate of interest from 9.5% to 6.0%. This is reflected not only in the rate of interest earned on loans that are indexed to the prime rate, but also in other assets and liabilities which either have variable or adjustable rates, or which matured or repriced during this period. As further discussed under "--Interest Rate Risk Management," the reduced level of interest income earned on our loan portfolio as a result of declining interest rates was partially mitigated by the earnings associated with our interest rate swap agreements. For the three and nine months ended September 30, 2001, these agreements provided net interest income of $3.5 million and $6.5 million, respectively, in comparison to net interest expense of $667,000 and $1.3 million incurred for the comparable periods in 2000. For the three and nine months ended September 30, 2001, the aggregate weighted average rate paid on our deposit portfolio was 3.93% and 4.42%, respectively, compared to 4.83% and 4.63% for the comparable periods in 2000, respectively. We attribute the decline primarily to rates paid on savings deposits, which have continued to decline in conjunction with interest rate reductions as previously discussed. The decrease in rates paid for the three and nine months ended September 30, 2001, is a result of generally decreasing interest rates during the first nine months of 2001 as compared to generally increasing rates for the comparable period in 2000, offset by increased rates paid by us to attract and retain deposits due to the high level of competition within our market areas. In addition, the aggregate weighted average rate paid on our note payable and short-term borrowings decreased to 4.89% from 5.27% for the three months ended September 30, 2001 and 2000, respectively, and increased to 5.95% from 5.56% for the nine months ended September 30, 2001 and 2000, respectively. Amounts outstanding under our $100.0 million revolving note payable to First Banks bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. Thus, our revolving note payable represents a relatively high-cost funding source, although it has been mitigated by the continued reductions in the prime lending rate, as increased advances under the revolving note payable have the effect of increasing the weighted average rate of non-deposit liabilities. During 2000, we utilized the note payable to fund our acquisitions of Commercial Bank of San Francisco, Millennium Bank and Bank of San Francisco, thus resulting in a significantly higher level of borrowings occurring during the fourth quarter of 2000. The following table sets forth certain information relating to our average balance sheets, and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest income for the periods indicated.

------------------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) FBA has no tax-exempt income. (4) Interest income/expense includes the effects of interest rate exchange agreements. Provision for Loan Losses The provision for loan losses was $2.0 million and $2.9 million for the three and nine months ended September 30, 2001, in comparison to $365,000 and $1.8 million for the comparable periods in 2000, respectively. We attribute the change in the provision for loan losses primarily to an increase in net loan charge-offs and nonperforming loans. Loan charge-offs were $1.9 million and $7.7 million for the three and nine months ended September 30, 2001, in comparison to $893,000 and $2.9 million for the comparable periods in 2000. The increase in loan charge-offs reflects a $1.4 million charge-off on a single credit relationship, a $675,000 charge-off with respect to a loan in an acquired portfolio as well as the general slow down in economic conditions prevalent within our markets. Loan recoveries were $1.5 million and $3.1 million for the three and nine months ended September 30, 2001, in comparison to $1.0 million and $4.2 million for the comparable periods in 2000. Loan recoveries for the nine months ended September 30, 2000 included a recovery of $1.3 million on a single credit relationship. Nonperforming assets and past-due loans have increased during the three and nine months ended September 30, 2001, and we anticipate these trends will continue in the near future. However, we believe these trends represent normal cyclical trends experienced within the banking industry during times of economic slow down. Management considered these trends in its overall assessment of the adequacy of the allowance for loan losses. Tables summarizing nonperforming assets, past-due loans and charge-off and recovery experience are presented under "--Loans and Allowance for Loan Losses." Noninterest Income Noninterest income was $9.0 million and $19.7 million for the three and nine months ended September 30, 2001, in comparison to $3.3 million and $9.0 million for the comparable periods in 2000, respectively. 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 $2.4 million and $6.6 million for the three and nine months ended September 30, 2001, from $2.0 million and $5.5 million for the comparable periods in 2000, respectively. We attribute the increase in service charges and customer service fees to: >> increased savings and interest-bearing deposit balances provided by internal growth; >> our acquisitions completed during 2000; >> additional products and services available and utilized by our expanding base of retail and corporate customers; >> increased fee income resulting from revisions of customer service charge rates, effective June 1, 2000 and July 1, 2001, and enhanced control of fee waivers; and >> increased income associated with automated teller machine services and debit cards. The net gain on derivative instruments of $5.1 million and $8.0 million for the three and nine months ended September 30, 2001, respectively, includes $2.2 million of gains resulting from the termination of certain interest rate swap agreements in April and June 2001 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. See "--Interest Rate Risk Management" and Note 3 to our consolidated financial statements. Other income was $1.6 million and $5.4 million for the three and nine months ended September 30, 2001, in comparison to $1.5 million and $3.2 million for the comparable periods in 2000, respectively. We attribute the primary components of the increase to: >> our acquisitions completed during 2000; >> increased earnings associated with our international banking products, which were initially offered in March 2000; >> increased brokerage revenue associated with the stock option services acquired in conjunction with our acquisition of Bank of San Francisco; >> increased earnings associated with our official check processing program, in which we earn a fee based upon the amount of official checks issued and outstanding; and, >> income of approximately $300,000 and $900,000 for the three and nine months ended September 30, 2001, respectively, associated with equipment leasing activities that were acquired in conjunction with our acquisition of Bank of San Francisco in December 2000. Noninterest Expense Noninterest expense was $23.5 million and $68.7 million for the three and nine months ended September 30, 2001, in comparison to $17.5 million and $50.5 million for the comparable periods in 2000, respectively. The increase reflects: >> the noninterest expense of our acquisitions completed during 2000, including certain nonrecurring expenses associated with those acquisitions; >> increased salaries and employee benefit expenses; >> increased data processing 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 were $8.0 million and $24.3 million for the three and nine months ended September 30, 2001, in comparison to $6.2 million and $19.0 million for the comparable periods in 2000, respectively. We primarily associate the increase with our 2000 acquisitions. However, the increase also reflects the competitive environment in the employment market that has resulted in a higher demand for limited resources, thus escalating industry salary and employee benefit costs associated with employing and retaining qualified personnel. In addition, the increase includes various additions to our staff to enhance management expertise. Data processing fees were $2.6 million and $7.4 million for the three and nine months ended September 30, 2001, in comparison to $1.9 million and $5.3 million for the comparable periods in 2000, respectively. As more fully described in Note 6 to our consolidated financial statements, First Services, L.P. provides data processing and various related services to FB&T and us. We attribute the increased data processing fees to growth and technological advancements consistent with our product and services offerings, continued upgrades to technological equipment, networks and communication channels, and certain nonrecurring expenses associated with the data processing conversions of Redwood Bank, Commercial Bank of San Francisco, Bank of San Francisco and Millennium Bank, completed in February 2001, March 2001, June 2001 and July 2001, respectively. Legal, examination and professional fees were $3.1 million and $7.8 million for the three and nine months ended September 30, 2001, in comparison to $1.8 million and $5.2 million for comparable periods in 2000, respectively. The increase in these fees is primarily attributable to our expanded utilization of legal and professional services in conjunction with general corporate activities, commercial loan documentation, collection efforts and an increase in management fees paid to First Banks for various corporate services. See Note 6 to our consolidated financial statements for a further discussion of transactions with related parties. Amortization of intangibles associated with the purchase of subsidiaries was $1.4 million and $4.1 million for the three and nine months ended September 30, 2001, in comparison to $797,000 and $2.1 million for the comparable periods in 2000, respectively. The increase for 2001 is primarily attributable to amortization of the cost in excess of the fair value of the net assets acquired of the five acquisitions that we completed during 2000. Other expense was $3.6 million and $10.6 million for the three and nine months ended September 30, 2001, in comparison to $2.5 million and $6.3 million for the comparable periods in 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 majority of the increase in other expense to: >> our acquisitions completed during 2000; >> 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 Tax Expense The provision for income tax expense was $6.1 million and $16.4 million for the three and nine months ended September 30, 2001, representing an effective income tax rate of 41.5% and 40.4%, respectively, in comparison to $4.9 million and $12.8 million, representing an effective income tax rate of 40.3% and 39.1% for the comparable periods in 2000, respectively. The increase in the effective income tax rate for the three and nine months ended September 30, 2001 reflects: >> 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. Interest Rate Risk Management We utilize derivative financial instruments and hedging activities to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The derivative instruments we hold are summarized as follows:

The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the accounting loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. During the three and nine months ended September 30, 2001, the net interest income realized on our derivative financial instruments was $3.5 million and $6.5 million, respectively, in comparison to net interest expense of $667,000 and $1.3 million realized on our derivative financial instruments for the comparable periods in 2000. Cash Flow Hedges During 1998, we entered into $105.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements, which had been designated as cash flow hedges, provided for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the daily weighted average prime lending rate minus 2.705%. The terms of the swap agreements provide for us to pay quarterly and receive payment semiannually. 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 gain on derivative instruments of $1.4 million. During September 1999, we entered into $130.0 million notional amount of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements, which had been designated as cash flow hedges, provided for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus 2.70%. The terms of the swap agreements provided for us to pay and receive interest on a quarterly basis. In April 2001, we terminated these swap agreements, which would have expired in September 2001, in order to lengthen the period covered by the swaps. In conjunction with the termination of these swap agreements, we recorded a gain on derivative instruments 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 to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income, over time. The swap agreements, which have been designated as cash flow hedges, provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus either 2.70% or 2.82%. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. The amount receivable by us under the swap agreements was $2.7 million and $621,000 at September 30, 2001 and December 31, 2000, respectively, and the amount payable by us under the swap agreements was $1.7 million and $623,000 at September 30, 2001 and December 31, 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 September 30, 2001 and December 31, 2000 were as follows:

Fair Value Hedges During January 2001, we entered into $54.9 million notional amount of interest rate swap agreements to effectively shorten the repricing characteristics of certain interest-bearing liabilities with the objective of stabilizing net interest income over time. The swap agreements, which have been designated as fair value hedges, provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. The amount receivable and payable by us under the swap agreements was $686,000 and $489,000 at September 30, 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 September 30, 2001 were as follows:

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 provide 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. At September 30, 2001, the carrying value of the interest rate floor agreements, which is included in derivative instruments in the consolidated balance sheet at fair value, was $8.2 million. For the three and nine months ended September 30, 2001, these agreements provided net interest income of $692,000 and $852,000, respectively. Interest Rate Cap Agreement In conjunction with the interest rate swap agreements that we entered into in September 2000, we also entered into a four-year $150.0 million notional amount interest rate cap agreement to limit the net interest expense associated with our interest rate swap agreements in the event of a rising rate scenario. The interest rate cap agreement provides for us to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month London Interbank Offering Rate and the strike price of 7.50% should the three-month London Interbank Offering Rate exceed the strike price. At September 30, 2001 and December 31, 2000, the carrying value of this interest rate cap agreement, which is included in derivative instruments in the consolidated balance sheet, was $354,000 and $1.3 million, respectively. Pledged Collateral At September 30, 2001, we had pledged investment securities available for sale with a carrying value of $954,000 in connection with our interest rate swap agreements. In addition, at September 30, 2001, we had accepted investment securities with a fair value of $41.2 million as collateral in connection with our interest rate swap agreements. We are permitted by contract to sell or repledge the collateral accepted from our counterparties, however, at September 30, 2001, we had not sold or repledged any of this collateral. Loans and Allowance for Loan Losses Interest earned on our loan portfolio represents our principal source of income. Interest and fees on loans were 89.5% and 88.6% of total interest income for the three months ended September 30, 2001 and 2000, respectively, and 89.8% and 89.0% for the nine months ended September 30, 2001 and 2000, respectively. Total loans, net of unearned discount, were $2.04 billion, or 74.3% of total assets, at September 30, 2001, compared to $2.06 billion, or 75.1% of total assets, at December 31, 2000. The decrease in loans, as summarized on our consolidated balance sheets, is primarily attributable to an anticipated amount of attrition associated with our acquisitions completed during the fourth quarter of 2000, current economic conditions prevalent in our markets, a decreased level of loans purchased from First Bank and the continued decline in our existing consumer and installment portfolio. Commensurate with our prescribed credit exposure guidelines for extending credit to an individual borrower, loan participations sold to and purchased from First Bank were $137.6 million and $87.5 million at September 30, 2001, respectively, in comparison to $146.1 million and $108.2 million at December 31, 2000, respectively. See Note 6 to the consolidated financial statements for a further discussion of transactions with related parties. Nonperforming assets include nonaccrual loans, restructured loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated:

Nonperforming loans, consisting of loans on nonaccrual status and certain restructured loans, were $20.4 million at September 30, 2001, in comparison to $15.0 million at December 31, 2000. While nonperforming loans have increased at September 30, 2001 compared to December 31, 2000, past-due loans have decreased slightly to $13.1 million at September 30, 2001 from $13.4 million at December 31, 2000. We attribute these trends to be reflective of cyclical trends experienced within the banking industry as a result of economic slow down. Consistent with the general economic slow down experienced within our primary markets, we anticipate this trend will continue in the upcoming months. The following table is a summary of our loan loss experience for the periods indicated:

The allowance for loan losses is monitored on a monthly basis. Each month, the credit administration department provides management with detailed lists of loans on the watch list and summaries of the entire loan portfolio of FB&T by risk rating. These are coupled with analyses of changes in the risk profile of the portfolio, changes in past due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the level of risk in the portfolio. Factors are applied to the loan portfolio for each category of loan risk to determine acceptable levels of allowance for loan losses. We derive these factors primarily from the actual loss experience of FB&T and from published national surveys of norms in the industry. The calculated allowance required for the portfolio is then compared to the actual allowance balance to determine the provision necessary to maintain the allowance at an appropriate level. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for loan losses. In its analysis, management considers the change in the portfolio, including growth, composition, nonperforming loans, the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, provisions are made to our allowance for loan losses. Such provisions are reflected in our consolidated statements of income. Liquidity Our liquidity and the liquidity of FB&T is the ability to maintain a cash flow which is adequate to fund operations, service debt obligations and meet other commitments on a timely basis. FB&T receives funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more, borrowing federal funds, selling securities sold under agreements to repurchase and utilizing borrowings from the Federal Home Loan Bank and other borrowings, including our revolving note payable to First Banks. The aggregate funds acquired from these sources were $416.9 million and $457.2 million at September 30, 2001 and December 31, 2000, respectively. The following table presents the maturity structure of these other sources of funds, which consists of certificates of deposit of $100,000 or more, the revolving note payable and other short-term borrowings, at September 30, 2001: (dollars expressed in thousands) 3 months or less.......................... $136,182 Over 3 through 6 months................... 72,329 Over 6 through 12 months.................. 96,303 Over 12 months............................ 112,118 -------- Total................................... $416,932 ======== We have periodically borrowed from First Banks under our revolving note payable. Borrowings under the revolving note payable have been utilized to facilitate the funding of our acquisitions, support repurchases of common stock from time to time and for other corporate purposes. Borrowings under the revolving note payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The principal under the revolving note payable is due and payable on February 24, 2003 and interest is payable on a quarterly basis. At September 30, 2001 and December 31, 2000, there were $46.1 million and $98.0 million in advances outstanding under the revolving note payable. See Note 6 to the consolidated financial statements. In 1999, FB&T established a borrowing relationship with the Federal Reserve Bank of San Francisco. This borrowing relationship, which is secured by commercial loans, provides an additional liquidity facility that may be utilized for contingency purposes. At September 30, 2001 and December 31, 2000, the borrowing capacity under this agreement was approximately $774.7 million and $756.4 million, respectively. In addition, FB&T's borrowing capacity through its relationship with the Federal Home Loan Bank was approximately $7.7 million and $20.4 million at September 30, 2001 and December 31, 2000, respectively. Management believes the available liquidity and operating results of FB&T will be sufficient to provide funds for growth and to permit the distribution of dividends to us sufficient to meet our operating and debt service requirements, both on a short-term and long-term basis, and to pay the dividends on the trust preferred securities issued by our financing subsidiary, First America Capital Trust. Effect of New Accounting Standards In September 2000, the FASB issued SFAS No. 140 -- Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities which are based on the consistent application of a financial-components approach. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2001. On December 31, 2000, we implemented the disclosure requirements of SFAS 140, which did not have a material effect on our consolidated financial statements. We have evaluated the additional requirements of SFAS 140 to determine their potential impact on our consolidated financial statements and do not believe they will have a material effect on our consolidated financial statements. 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. As of January 1, 2002, the date of adoption, we expect to have unamortized goodwill, exclusive of our acquisitions of Charter Pacific and BYL, of approximately $72.2 million, all of which will be subject to the transition provisions of SFAS No. 141 and SFAS No. 142. Amortization of intangibles associated with the purchase of subsidiaries was $1.4 million and $4.1 million for the three and nine months ended September 30, 2001, in comparison to $797,000 and $2.1 million for the comparable periods in 2000, respectively. We are currently evaluating the additional requirements of SFAS No. 141 and SFAS No. 142 to determine their potential impact on our consolidated financial statements. In August 2001, the FASB issued SFAS No. 144 -- Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement 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 its potential impact on our consolidated financial statements. However, we do not believe these requirements will have a material effect on our consolidated financial statements. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2000, our risk management program's simulation model indicated a loss of projected net interest income in the event of a decline in interest rates. While a decline in interest rates of less than 100 basis points was projected to have a relatively minimal impact on our net interest income, an instantaneous, parallel decline in the interest yield curve of 100 basis points indicated a pre-tax projected loss of approximately 7.5% of net interest income. An instantaneous, parallel shift in the yield curve of 200 basis points and 300 basis points indicated a pre-tax projected loss of approximately 10.5% and 14.8% of net interest income, respectively, based on assets and liabilities at December 31, 2000. At September 30, 2001, we remain in an "asset-sensitive" position and thus, remain subject to a higher level of risk in a declining interest-rate environment, as experienced during the first nine months of 2001. Although we do not anticipate that instantaneous shifts in the yield curve as projected in our simulation model are likely, these are indications of the effects that changes in interest rates would have over time. Our asset-sensitive position, coupled with reductions in prevailing interest rates throughout the last nine months, is reflected in our reduced net interest rate margin for the three and nine months ended September 30, 2001, as further discussed under "--Results of Operations." During the three and nine months ended September 30, 2001, our asset-sensitive position and overall susceptibility to market risks have not changed materially. PART II-OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit Number Description -------------- ----------- 10(b) Promissory note payable to First Banks, Inc., dated August 23, 2001 - filed herewith. (b) FBA filed no reports on Form 8-K during the three months ended September 30, 2001. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST BANKS AMERICA, INC. By: /s/James F. Dierberg ----------------------------------------- James F. Dierberg Chairman of the Board of Directors, President and Chief Executive Officer November 13, 2001 (Principal Executive Officer) By: /s/Allen H. Blake ---------------------------------------- Allen H. Blake Executive Vice President and Chief Financial Officer November 13, 2001 (Principal Financial and Accounting Officer) Exhibit 10(b) INTERCOMPANY NOTE $100,000,000.00 CLAYTON, MISSOURI August 23, 2001 On or before February 24, 2003, First Banks America, Inc., a Delaware corporation (hereinafter called "Borrower"), promises to pay to the order of First Banks, Inc., a Missouri corporation (hereinafter called "Lender") at its offices at 135 North Meramec, Clayton, Missouri, in lawful money of the United States of America, the sum of One Hundred Million Dollars ($100,000,000.00), or so much thereof as is advanced from time to time and remains outstanding, together with interest thereon from the date hereof until maturity at a varying rate per annum which is one-quarter percent per annum less than the "Prime Rate" as hereinafter defined (but in no event to exceed the maximum rate of non-usurious interest allowed from time to time by law, hereinafter called the "Highest Lawful Rate"), with adjustments in such varying rate to be made on the first day of each month beginning on September 1, 2001, and adjustments due to changes in the Highest Lawful Rate to be made on the effective date of any change in the Highest Lawful Rate. All past due principal and interest shall, at the option of Lender, bear interest at the Highest Lawful Rate from maturity until paid. Interest shall be computed on a per annum basis of a year of 365 days and for the actual number of days (including the first but excluding the last day) elapsed. Interest accruing on the principal balance of this Note shall be payable in arrears on the last days of October, January, April and July, with the first quarterly payment of interest due on the last day of October, 2001. Principal owing on this Note and any accrued but then-unpaid interest shall be due and payable on February 24, 2003. This Note is secured by (i) a Collateral Pledge Agreement of even date herewith by and between Borrower and Lender and (ii) a Third Party Pledge Agreement of even date herewith by and between The San Francisco Company, a Delaware corporation which is a wholly-owned subsidiary of Borrower, and Lender. If any default shall occur in the payment of any amount due pursuant to this Note, then, at the option of Lender, the unpaid principal balance and accrued, unpaid interest shall become due and payable forthwith without any further demand, notice of default, notice of acceleration, notice of intent to accelerate the maturity hereof, notice of nonpayment, presentment, protest or notice of dishonor, all of which are hereby expressly waived by Borrower. Lender may waive any default without waiving any prior or subsequent default. If this Note is not paid at maturity and is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in probate, bankruptcy, receivership, reorganization, arrangement or other legal proceedings for collection hereof, Borrower agrees to pay Lender its collection costs, including a reasonable amount for attorneys' fees. Borrower hereby expressly waives bringing of suit and diligence in taking any action to collect any sums owing hereon. Borrower reserves the option of prepaying the principal of this note, in whole or in part, at any time after the date hereof without penalty. Unless otherwise agreed at the time of payment, the amount of any partial payment shall be applied first to accrued unpaid interest, then to any amount due as collection costs, and then to the unpaid principal of the Note. This Note is given by Borrower in replacement of that certain Note dated November 30, 2000 in the principal amount of one hundred million dollars ($100,000,000.00) (the "2000 Note"), and the accrued interest on the 2000 Note as of the date of this Note shall become accrued interest on this Note from and after the date hereof. This Note shall be construed under and governed by the laws of the State of Missouri. "Prime Rate" shall mean at any time that variable rate of interest per annum published under "Money Rates" in the then most recent edition of The Wall Street Journal and defined therein as "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks," or any successor to such rate announced as such by The Wall Street Journal. If the foregoing rate ceases to be published, Lender will choose a new basis for the prime rate, based upon comparable information, and Lender will give Borrower notice of such change. EXECUTED effective as of the 23rd day of August, 2001. BORROWER: FIRST BANKS AMERICA, INC. By:/s/Allen H. Blake ---------------------------- Allen H. Blake Executive Vice President ADDRESS: 135 North Meramec Clayton, Missouri 63105

FIRST BANKS AMERICA INC 10-Q