10-Q 1 fba10q602.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 June 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File No. 0-8937 FIRST BANKS AMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1604965 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 550 Montgomery Street, San Francisco, California 94111 (Address of principal executive offices) (Zip code) (415) 781-7810 (Registrant's telephone number, including area code) ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Shares Outstanding Class at July 31, 2002 ----- ---------------- Common Stock, $0.15 par value 10,346,760 Class B Common Stock, $0.15 par value 2,500,000 FIRST BANKS AMERICA, INC. TABLE OF CONTENTS

---------------------- (1) Disclosure of reclassification adjustment:

FIRST BANKS AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The consolidated financial statements of First Banks America, Inc. and subsidiaries (FBA or the Company) are unaudited and should be read in conjunction with the consolidated financial statements contained in the 2001 Annual Report on Form 10-K. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and conform to predominant practices within the banking industry. Management of FBA has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The consolidated financial statements include the accounts of the parent company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications of 2001 amounts have been made to conform to the 2002 presentation. In particular, the guaranteed preferred beneficial interest in First Banks America, Inc. subordinated debentures has been reclassified into the liabilities section of the consolidated balance sheets rather than presented as a separate line item excluded from the calculation of total liabilities. Consequently, the guaranteed preferred debentures expense has been reclassified to interest expense from noninterest expense in the consolidated statements of income. FBA is majority owned by First Banks, Inc., St. Louis, Missouri (First Banks), headquartered in St. Louis County, Missouri. Accordingly, First Banks has effective control over the management and policies of FBA and the election of its directors. First Banks' ownership interest in FBA was 93.76% and 93.69% at June 30, 2002 and December 31, 2001, respectively. FBA operates through its wholly owned subsidiary bank holding company, The San Francisco Company (SFC), which is headquartered in San Francisco, California, and SFC's wholly owned subsidiary bank, First Bank & Trust (FB&T), which is also headquartered in San Francisco, California. (2) ACQUISITIONS On June 22, 2002, FB&T completed its assumption of the deposits and certain liabilities and the purchase of certain assets of the Garland and Denton, Texas branch offices of Union Planters Bank, National Association. The transaction resulted in the acquisition of $15.3 million in deposits and one branch office in Garland and $49.6 million in deposits and one branch office, including a detached drive-thru facility, in Denton. The core deposit intangibles associated with the branch purchases were $1.4 million and are being amortized over seven years. (3) IMPLEMENTATION OF ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 -- Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144 -- Accounting for the Impairment or Disposal of Long-Lived Assets, as discussed below. The amortization of goodwill ceased upon adoption of SFAS No. 142, which for calendar year-end companies was January 1, 2002. On January 1, 2002, FBA adopted SFAS No. 142. At the date of adoption, FBA had unamortized goodwill of $96.7 million and core deposit intangibles of $6.5 million, which were subject to the transition provisions of SFAS No. 142. Under SFAS No. 142, FBA will continue to amortize, on a straight-line basis, its core deposit intangibles and goodwill associated with purchases of branch offices. Goodwill associated with the purchase of subsidiaries will no longer be amortized, but instead, will be tested annually for impairment following FBA's existing methods of measuring and recording impairment losses. FBA completed the transitional goodwill impairment test required under SFAS No. 142, to determine the potential impact, if any, on the consolidated financial statements. The results of the transitional goodwill impairment testing did not identify any goodwill impairment losses. Intangible assets associated with the purchase of subsidiaries, net of amortization, were comprised of the following at June 30, 2002 and December 31, 2001:

Amortization of intangibles associated with the purchase of subsidiaries and branch offices was $266,000 and $532,000 for the three and six months ended June 30, 2002, respectively, and $1.4 million and $2.8 million for the comparable periods in 2001. Amortization of intangibles associated with the purchase of subsidiaries, including amortization of core deposit intangibles and branch purchases, has been estimated through 2007 in the following table, and does not take into consideration any potential future acquisitions or branch purchases. (dollars expressed in thousands) Year ending December 31: 2002............................................... $ 1,162 2003............................................... 1,260 2004............................................... 1,260 2005............................................... 1,260 2006............................................... 1,260 2007............................................... 1,260 ------- Total........................................... $ 7,462 ======= Changes in the carrying amount of goodwill, all of which is attributable to FB&T, for the three and six months ended June 30, 2002 were as follows:

The following is a reconciliation of reported net income to net income adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented on January 1, 2001.

In August 2001, the FASB issued SFAS No. 144 -- Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 broadens the presentation of discontinued operations to include more disposal transactions. Therefore, the accounting for similar events and circumstances will be the same. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. On January 1, 2002, FBA implemented SFAS No. 144, which did not have a material effect on the consolidated financial statements. (4) EARNINGS PER COMMON SHARE The following is a reconciliation of the numerators and denominators of the basic earnings per share (EPS) computations for the periods indicated. FBA does not have any dilutive potential shares, therefore, basic EPS is equivalent to dilutive EPS for the periods indicated.

(5) TRANSACTIONS WITH RELATED PARTIES FBA purchases certain services and supplies from or through First Banks and its affiliates. FBA's financial position and operating results could significantly differ from those that would be obtained if FBA's relationship with First Banks did not exist. In addition, fees payable to First Banks and its affiliates generally increase as FBA expands through acquisitions and internal growth, reflecting the higher levels of service needed to operate its subsidiaries. First Banks provides management services to FBA and FB&T. Management services are provided under management fee agreements whereby FBA compensates First Banks for its use of personnel for various functions including internal audit, loan review, income tax preparation and assistance, accounting, asset/liability management and investment services, loan servicing and other management and administrative services. Fees paid under these agreements were $2.1 million and $3.9 million for the three and six months ended June 30, 2002, and $1.9 million and $3.6 million for the comparable periods in 2001, respectively. First Services L.P., a limited partnership indirectly owned by First Banks' Chairman and his adult children, provides information technology and operational support for FBA and FB&T under the terms of information technology agreements. Fees paid under these agreements were $2.3 million and $5.0 million for the three and six months ended June 30, 2002, and $2.8 million and $4.8 million for the comparable periods in 2001, respectively. FB&T had $77.7 million and $93.1 million in whole loans and loan participations outstanding at June 30, 2002 and December 31, 2001, respectively, that were purchased from First Bank, a wholly owned banking subsidiary of First Banks. In addition, FB&T had sold $197.4 million and $137.6 million in whole loans and loan participations to First Bank at June 30, 2002 and December 31, 2001, respectively. These loans and loan participations were acquired and sold at interest rates and terms prevailing at the dates of their purchase or sale and under standards and policies followed by FB&T. FBA had a $100.0 million revolving note payable from First Banks on which the outstanding principal and accrued interest under the note payable were due and payable on June 30, 2005. On August 23, 2001, FBA and First Banks modified the note payable by making interest payable quarterly, shortening the maturity date to February 24, 2003, and securing the note by a pledge of FBA's stock in its subsidiaries. The borrowings under the note payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The amounts outstanding under the note payable at June 30, 2002 and December 31, 2001, were $50.0 million and $71.0 million, respectively. The interest expense under the note payable was $580,000 and $1.3 million for the three and six months ended June 30, 2002, and $1.0 million and $2.9 million for the comparable periods in 2001, respectively. (6) REGULATORY CAPITAL FBA and FB&T are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on FBA's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FBA and FB&T must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require FBA and FB&T to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of June 30, 2002, FBA was adequately capitalized and FB&T was well capitalized. As of June 30, 2002, the most recent notification from FBA's primary regulator categorized FBA as adequately capitalized and FB&T as well capitalized, under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized and well capitalized, FBA and FB&T must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. At June 30, 2002 and December 31, 2001, FBA's and FB&T's required and actual capital ratios were as follows:

(7) BUSINESS SEGMENT RESULTS FBA's business segment is FB&T. The reportable business segment is consistent with the management structure of FBA and the internal reporting system that monitors performance. Through its branch network, FB&T provides similar products and services in its defined geographic areas. The products and services offered include a broad range of commercial and personal banking products, including demand, savings, money market and time deposit accounts. In addition, FB&T markets combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. FB&T also offers both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, commercial leasing and trade financing. Other financial services include mortgage banking, debit cards, brokerage services, credit-related insurance, internet banking, automated teller machines, telephone banking, safe deposit boxes, escrow and bankruptcy deposit services, stock option services and trust and private banking services. The revenues generated by FB&T consist primarily of interest income, generated from the loan and investment security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas include Houston, Dallas, Irving, McKinney and Denton, Texas, and southern and northern California. The products and services are offered to customers primarily within their respective geographic areas, with the exception of loan participations executed between FB&T and First Bank. See Note 5 to the consolidated financial statements. The business segment results are consistent with FBA's internal reporting system and, in all material respects, with accounting principles generally accepted in the United States of America and practices predominate in the banking industry. The business segment results are summarized as follows:

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements with respect to our financial condition, results of operations and business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to fluctuations in interest rates and in the economy, including the negative impact on the economy resulting from the events of September 11, 2001 in New York City and Washington D.C. and the national response to those events; the impact of laws and regulations applicable to us and changes therein; the impact of accounting pronouncements applicable to us and changes therein; competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources, some of which may offer and develop products and services that we do not offer; our ability to control the composition of our loan portfolio without adversely affecting interest income; and our ability to respond to changes in technology. With regard to our efforts to grow through acquisitions, factors that could affect the accuracy or completeness of forward-looking statements contained herein include the potential for higher than anticipated operating costs arising from the geographic dispersion of our offices, as compared with competitors operating solely in contiguous markets; the competition of larger acquirers with greater resources than us; fluctuations in the prices at which acquisition targets may be available for sale; and the potential for difficulty or unanticipated costs in realizing the benefits of particular acquisition transactions. Readers of our Form 10-Q should therefore not place undue reliance on forward-looking statements. General We are a registered bank holding company incorporated in Delaware and headquartered in San Francisco, California. Through the operation of our subsidiaries, we offer a broad array of financial services to consumer and commercial customers. Over the years, our organization has grown significantly, primarily as a result of acquisitions, as well as through internal growth. We currently operate one banking subsidiary that has 49 branch offices in northern and southern California and eight branch offices in Houston, Dallas, Irving, McKinney and Denton, Texas. At June 30, 2002, we had total assets of $3.06 billion, loans, net of unearned discount, of $2.28 billion, total deposits of $2.53 billion and total stockholders' equity of $301.9 million. We offer a broad range of commercial and personal banking services, including demand, savings, money market and time deposit accounts. In addition, we market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. We also offer both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, commercial leasing and trade financing. Other financial services include mortgage banking, debit cards, brokerage services, credit-related insurance, internet banking, automated teller machines, telephone banking, safe deposit boxes, escrow and bankruptcy deposit services, stock option services and trust and private banking services. We operate through our wholly owned subsidiary bank holding company, The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned bank subsidiary, First Bank & Trust, or FB&T, also headquartered in San Francisco, California. Primary responsibility for managing FB&T rests with its officers and directors. However, in keeping with our policy, we centralize overall corporate policies, procedures and administrative functions and provide operational support functions. This practice allows us to achieve various operating efficiencies while allowing FB&T to focus on customer service. Financial Condition Our total assets were $3.06 billion at June 30, 2002 and December 31, 2001. The slight increase in total assets of $1.5 million was primarily attributable to our acquisition of the Denton and Garland, Texas branch offices of Union Planters Bank, National Association, completed on June 22, 2002, which provided assets of approximately $67.3 million. Consequently, federal funds sold increased $71.8 million from $11.3 million at December 31, 2001 to $83.1 million at June 30, 2002 due to the investment of excess funds. Derivative instruments also increased $7.1 million from $28.9 million at December 31, 2001 to $36.0 million at June 30, 2002 due to the purchase of an additional interest rate swap agreement in June 2002 and mark-to-market adjustments required under Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities, which was implemented in January 2001. See further discussion under "--Interest Rate Risk Management." The increase in total assets was partially offset by decreases in investment securities and loans resulting primarily from the slowdown in economic conditions, lower loan demand and an anticipated level of attrition associated with our acquisitions of Charter Pacific Bank and BYL Bancorp, which were completed during the fourth quarter of 2001. Loans, net of unearned discount, decreased by $44.9 million, as further discussed under "--Loans and Allowance for Loan Losses." Investment securities decreased by $8.0 million to $360.2 million at June 30, 2002 from $368.2 million at December 31, 2001. The $7.1 million decline in available-for-sale investment securities, primarily reflects the excess maturities of $157.5 million over purchases of $147.2 million. The net proceeds associated with the decline in investment securities were utilized primarily to fund our reduction in total deposits. The increase in total deposits of $64.9 million resulting from our branch office purchases was offset by other decreases in deposits of $93.0 million during the six months ended June 30, 2002. The result was a net decrease in total deposits to $2.53 billion at June 30, 2002 from $2.56 billion at December 31, 2001, which reflects an anticipated level of attrition associated with our acquisitions in the fourth quarter of 2001 and continued aggressive competition within our market areas. In addition, certain large commercial accounts, particularly related to real estate title and escrow business, sharply reduced their deposit levels, reflecting reduced business activity as a result of general economic conditions. Short-term borrowings increased $26.6 million to $86.4 million at June 30, 2002 from $59.8 million at December 31, 2001 due primarily to increases in securities sold under agreements to repurchase. In addition, our note payable decreased by $21.0 million to $50.0 million at June 30, 2002 from $71.0 million at December 31, 2001 due to repayments, which were funded by dividends from FB&T. During the six months ended June 30, 2002, we utilized available cash to repurchase $327,000 of our common stock at an average cost of $36.59 per share. Our Board of Directors, through various resolutions passed from 1995 to 2000, has authorized the purchase of up to a cumulative total of 1,094,797 shares of common stock. As of June 30, 2002, we had purchased a total of 872,757 shares of common stock held for treasury. However, in October 2000, we issued 5,727,340 shares of our common stock and 803,429 shares of our common stock held for treasury to First Banks in conjunction with our acquisition of First Bank & Trust. Consequently, at June 30, 2002, we held 69,300 shares of common stock for treasury at an aggregate cost of $1.7 million. At June 30, 2002, we could purchase approximately 222,000 additional shares under the existing authorization. Buyout of Minority Stockholders Currently, First Banks owns 93.76% of our outstanding voting stock, including 92.25% of our common stock and all of our Class B common stock. First Banks recently proposed to our Board of Directors that it acquire all of the outstanding capital stock of FBA which it does not already own, and all of our other stockholders would receive cash for their shares. Such a transaction would be in the form of a merger of FBA with First Banks and would require prior approval of our Board of Directors and, following the distribution of a proxy statement discussing the terms of a transaction in detail, by our stockholders. Specific terms of the proposed transaction have not been determined. On April 25, 2002, our Board of Directors discussed the proposal and voted to form a Special Committee composed solely of directors who are not affiliated with First Banks, to analyze the terms on which such a transaction might be acceptable to FBA. The Special Committee has engaged outside advisers, including its own independent legal counsel and financial advisor, to assist the Special Committee in evaluating such a transaction, including an analysis of the terms on which the transaction would be considered fair to our stockholders (other than First Banks) from a financial point of view. The transaction is likely to proceed if First Banks and the Special Committee are able to agree on terms, including the price at which all of our shares would be acquired. Discussions between First Banks and the Special Committee and its advisors regarding terms of a transaction have commenced but have not been completed. The process by which the transaction will be reviewed by the Special Committee before any proposal is made to stockholders will consist of several steps, and there is no assurance whether such a transaction will actually be presented to stockholders, voted upon or completed. Results of Operations Net Income Net income was $4.8 million, or $0.37 per share on a diluted basis, for the three months ended June 30, 2002, compared to $7.8 million, or $0.65 per share on a diluted basis, for the comparable period in 2001. Net income for the six months ended June 30, 2002 and 2001 was $10.0 million and $15.1 million, or $0.78 and $1.25 per share on a diluted basis, respectively. The implementation of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, resulted in the discontinuation of the amortization of certain intangibles associated with the purchase of subsidiaries. If we had implemented SFAS No. 142 at the beginning of 2001, net income for the quarter ended June 30, 2001 would have increased $1.3 million to $9.1 million, or $0.76 per share on a fully diluted basis, and net income for the six months ended June 30, 2001 would have increased $2.7 million to $17.7 million, or $1.47 per share on a fully diluted basis. In addition, the implementation of SFAS No. 133, on January 1, 2001, resulted in the recognition of a cumulative effect of change in accounting principle of $459,000, net of tax, which reduced net income in 2001. Excluding this item, net income would have been $15.5 million, or $1.29 per share on a diluted basis, for the six months ended June 30, 2001. The accounting for derivatives under the requirements of SFAS No. 133 will continue to have an impact on future financial results as further discussed under "--Noninterest Income." The decline in earnings for the three and six months ended June 30, 2002 primarily reflects significantly increased provisions for loan losses associated with the increased charge-off, delinquency and higher-than-normal nonperforming trends we are experiencing as a result of current economic conditions. The effects of our asset quality problems were partially offset by the net interest income generated by our acquisitions of Charter Pacific Bank and BYL Bancorp in October 2001. Net Interest Income Net interest income was $32.7 million, or 4.94% of average interest-earning assets, for the three months ended June 30, 2002, in comparison to $29.6 million, or 5.01% of average interest-earning assets, for the comparable period in 2001, respectively. For the six months ended June 30, 2002 and 2001, net interest income was $64.1 million, or 4.85% of interest-earning assets, and $59.3 million, or 5.03% of interest-earning assets, respectively. We credit the increased net interest income primarily to the net interest-earning assets provided by our acquisitions completed during the fourth quarter of 2001, internal loan growth and earnings associated with our interest rate swap agreements that we entered into in connection with our interest rate risk management program. As further discussed under "--Interest Rate Risk Management," for the three and six months ended June 30, 2002, these agreements provided net interest income of $6.3 million and $12.5 million, respectively, in comparison to $2.4 million and $3.0 million for the comparable periods in 2001. The increase in net interest income, however, was partially offset by reductions in prevailing interest rates during 2001, generally weaker loan demand and overall economic conditions, resulting in the decline in our net interest margin. Guaranteed preferred debentures expense was $1.2 million and $2.3 million for the three and six months ended June 30, 2002, compared to $975,000 and $2.0 million for the comparable periods in 2001, respectively. The increase for 2002 reflects a change in estimate regarding the amortization period over which the deferred issuance costs are being amortized. Average loans, net of unearned discount, were $2.28 billion and $2.30 billion for the three and six months ended June 30, 2002, respectively, in comparison to $2.07 billion and $2.06 billion for the comparable periods in 2001. The yield on our loan portfolio, however, decreased to 7.60% and 7.54% for the three and six months ended June 30, 2002, respectively, from 9.21% and 9.44% for the comparable periods in 2001. This was a major contributor to the decline in our net interest margin of seven basis points and 18 basis points for the three and six months ended June 30, 2002, respectively, from the comparable periods in 2001. We attribute the decline in yields and our net interest margin primarily to the decreases in prevailing interest rates during 2001. During the period from January 1, 2001 through December 31, 2001, the Board of Governors of the Federal Reserve System decreased the targeted Federal funds rate 11 times, resulting in 11 decreases in the prime rate of interest from 9.50% to 4.75%. This is reflected not only in the rate of interest earned on loans that are indexed to the prime rate, but also in other assets and liabilities which either have variable or adjustable rates, or which matured or repriced during this period. As discussed above, the reduced level of interest income earned on our loan portfolio as a result of declining interest rates and increased competition within our market areas was partially mitigated by the earnings associated with our interest rate swap agreements. For the three and six months ended June 30, 2002, the aggregate weighted average rate paid on our deposit portfolio decreased to 2.48% and 2.58%, respectively, from 4.48% and 4.67% for the comparable periods in 2001. We attribute the decline primarily to rates paid on savings and time deposits, which have continued to decline in conjunction with the interest rate reductions previously discussed. The decrease in rates paid for the three and six months ended June 30, 2002 is a result of generally decreasing interest rates during 2001. However, the competitive pressures on deposits within our market areas precluded us from fully reflecting the general interest rate decreases in our deposit pricing and still providing an adequate funding source for loans. The aggregate weighted average rate paid on our note payable and short-term borrowings decreased to 3.12% for the three and six months ended June 30, 2002, from 5.52% and 6.43% for the comparable periods in 2001, respectively, which is reflective of the current rate environment for these instruments. Amounts outstanding under our $100.0 million revolving note payable to First Banks bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. Thus, our revolving note payable represents a relatively high-cost funding source as increased advances have the effect of increasing the weighted average rate of non-deposit liabilities. The overall cost of this funding source, however, has been significantly mitigated by the reductions in the prime lending rate during 2001 and in the outstanding balance of the note payable in 2002. The aggregate weighted average rate paid on our guaranteed preferred debentures increased to 11.22% and 10.53% for the three and six months ended June 30, 2002, respectively, from 8.83% and 8.88% for the comparable periods in 2001. The increase is due to the change in estimate regarding the amortization period over which the deferred issuance costs associated with these obligations are being amortized. The following table sets forth certain information relating to our average balance sheets, and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest income for the periods indicated.

Provision for Loan Losses The provision for loan losses was $7.8 million and $15.5 million for the three and six months ended June 30, 2002, compared to $820,000 and $910,000 for the comparable periods in 2001, respectively. The provision for loan losses reflects the level of loan charge-offs and recoveries, the adequacy of the allowance for loan losses and the effect of economic conditions within our markets. We attribute the increase in the provision for loan losses primarily to the significant increase in net loan charge-offs and past due loans. Net loan charge-offs were $3.7 million and $15.8 million for the three and six months ended June 30, 2002, respectively, in comparison to $2.9 million and $4.3 million for the comparable periods in 2001. The increase in net charge-offs for the three and six months ended June 30, 2002 primarily reflects the general slowdown in economic conditions prevalent within our markets as well as an aggregate of $12.9 million of loan charge-offs on four large credit relationships. Loan recoveries were $1.8 million and $3.6 million for the three and six months ended June 30, 2002, respectively, in comparison to $717,000 and $1.5 million for the comparable periods in 2001. Although nonperforming assets and past due loans have declined to $37.3 million at June 30, 2002 from $47.5 million at December 31, 2001, our overall nonperforming and past due trends remain at higher than historical levels and are expected to remain at these levels in the near future. However, we believe these trends represent normal cyclical trends experienced within the banking industry during times of economic slowdown. Management considered these trends in its overall assessment of the adequacy of the allowance for loan losses. Tables summarizing nonperforming assets, past due loans and charge-off and recovery experience are presented under "--Loans and Allowance for Loan Losses." Noninterest Income Noninterest income was $5.2 million and $10.7 million for the three and six months ended June 30, 2002, respectively, in comparison to $6.3 million and $10.7 million for the comparable periods in 2001. Noninterest income primarily consists of service charges on deposit accounts and customer service fees, bank-owned life insurance investment income, net gains or losses on derivative instruments and other income. Service charges on deposit accounts and customer service fees increased to $3.1 million and $5.9 million for the three and six months ended June 30, 2002, respectively, from $2.1 million and $4.3 million for the comparable periods in 2001. We attribute the increase in service charges and customer service fees to: >> increased deposit balances provided by internal growth; >> our acquisitions completed during 2001; >> additional products and services available and utilized by our expanding base of consumer and corporate customers; >> increased fee income resulting from revisions of our customer service charge rates, effective July 1, 2001, and enhanced control of fee waivers; and >> increased income associated with automated teller machine services and debit cards. Bank-owned life insurance investment income was $516,000 and $924,000 for the three and six months ended June 30, 2002, respectively, in comparison to $332,000 and $666,000 for the comparable periods in 2001. The increase for 2002 reflects changes in the portfolio mix of the underlying investments made by management to improve our return on this product as well as the reinvestment of earnings. The net loss on derivative instruments was $3,000 and $139,000 for the three and six months ended June 30, 2002, respectively, in comparison to the net gain of $2.6 million and $2.9 million for the comparable periods in 2001. The decrease in income from derivative instruments reflects $2.1 million of gains resulting from the termination of certain interest rate swap agreements during the second quarter of 2001, the sale of the interest rate floor agreements in November 2001 and changes in the fair value of our interest rate cap agreement and fair value hedges. Other income was $1.6 million and $4.0 million for the three and six months ended June 30, 2002, respectively, in comparison to $1.3 million and $3.1 million for the comparable periods in 2001. We attribute the primary components of the increase to: >> our acquisitions completed during 2001; >> increased earnings associated with our international banking products; >> increased loan servicing fees; >> increased earnings associated with our official check processing program, in which we earn a fee based upon the amount of official checks issued and outstanding; and >> a gain of approximately $448,000 on the sale of certain operating lease equipment associated with equipment leasing activities that were acquired in conjunction with our acquisition of Bank of San Francisco. Noninterest Expense Noninterest expense was $22.2 million and $43.0 million for the three and six months ended June 30, 2002, respectively, compared to $22.3 million and $43.3 million for the comparable periods in 2001. Noninterest expense consists primarily of salaries and employee benefits, occupancy, net of rental income, information technology fees, legal, examination and professional fees and other expense. Salaries and employee benefits were $9.4 million and $17.8 million for the three and six months ended June 30, 2002, respectively, in comparison to $8.3 million and $16.4 million for the comparable periods in 2001. We primarily associate the increase with our 2001 acquisitions. However, the increase also reflects the higher salary and employee benefit costs associated with employing and retaining qualified personnel. In addition, the increase includes various additions to staff throughout 2001 to enhance senior management expertise and expand our product lines. Occupancy, net of rental income, and furniture and equipment expense was $3.9 million and $7.5 million for the three and six months ended June 30, 2002, respectively, in comparison to $3.4 million and $6.8 million for the comparable periods in 2001. We primarily attribute the increase to our 2001 acquisitions, the relocation of certain branches and operational areas, increased depreciation expense associated with numerous capital expenditures and the continued expansion and renovation of various corporate and branch offices. Information technology fees were $2.4 million and $5.2 million for the three months and six months ended June 30, 2002, respectively, in comparison to $2.3 million and $4.8 million for the comparable periods in 2001. As more fully described in Note 5 to our consolidated financial statements, First Services, L.P. provides information technology and operational support to FB&T and us. We attribute the increased fees to growth and technological advancements consistent with our product and services offerings, and continued upgrades to technological equipment, networks and communication channels. Legal, examination and professional fees were $3.1 million and $5.3 million for the three and six months ended June 30, 2002, respectively, in comparison to $2.3 million and $4.7 million for comparable periods in 2001. The increase in these fees is primarily due to our expanded utilization of legal and professional services in conjunction with general corporate activities, commercial loan documentation, collection efforts and an increase in management fees paid to First Banks for various corporate services. See Note 5 to our consolidated financial statements for a further discussion of transactions with related parties. Amortization of intangibles associated with the purchase of subsidiaries was $266,000 and $532,000 for the three and six months ended June 30, 2002, respectively, in comparison to $1.4 million and $2.8 million for the comparable periods in 2001. As more fully discussed in Note 3 to our consolidated financial statements, the significant decrease for 2002 is primarily attributable to the implementation of SFAS No. 142 in January 2002. Other expense was $2.2 million and $4.6 million for the three and six months ended June 30, 2002, respectively, in comparison to $3.7 million and $6.0 million for the comparable periods in 2001. Other expense encompasses numerous general and administrative expenses including travel, meals and entertainment, insurance, freight and courier services, correspondent bank charges, miscellaneous losses and recoveries, memberships and subscriptions and transfer agent fees. We attribute the majority of the decrease in other expense in 2002 to a $1.2 million charge that occurred in June 2001 associated with the establishment of a specific reserve on an unfunded letter of credit. The overall decrease was partially offset by expenses relating to our acquisitions completed during 2001, including certain nonrecurring expenses associated with those acquisitions, and overall continued growth and expansion of our banking franchise. Provision for Income Taxes The provision for income taxes was $3.0 million and $6.3 million for the three and six months ended June 30, 2002, representing an effective income tax rate of 38.8% and 38.6%, respectively, in comparison to $5.0 million and $10.3 million, representing an effective income tax rate of 39.2% and 39.8%, for the comparable periods in 2001, respectively. The decrease in the effective income tax rate for 2002 reflects the significant decline in amortization of intangibles associated with the purchase of subsidiaries, in accordance with the requirements of SFAS No. 142, which is not deductible for tax purposes. Interest Rate Risk Management We utilize derivative financial instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The derivative instruments we hold are summarized as follows:

The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the accounting loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. During the three and six months ended June 30, 2002, the net interest income realized on our derivative financial instruments was $6.3 million and $12.5 million, respectively, in comparison to $2.4 million and $3.0 million for the comparable periods in 2001. In addition, we realized a net loss on derivative instruments, which is included in noninterest income, of $3,000 and $139,000 for the three and six months ended June 30, 2002, respectively, in comparison to a net gain of $2.6 million and $2.9 million for the comparable periods in 2001. The net decrease in income from 2001 reflects $2.1 million of gains resulting from the termination of certain interest rate swap agreements during the second quarter of 2001, the sale of the interest rate floor agreements in November 2001 and changes in the fair value of our interest cap agreement and fair value hedges. Cash Flow Hedges During September 2000, March 2001, April 2001 and March 2002, we entered into $300.0 million, $200.0 million, $130.0 million and $50.0 million notional amount, respectively, of interest rate swap agreements to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income over time. The swap agreements, which have been designated as cash flow hedges, provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus 2.70%, 2.82%, 2.82% and 2.80%, respectively. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. In November 2001, we terminated $75.0 million notional amount of the swap agreements originally entered into in April 2001, which would have expired in April 2006, in order to appropriately modify our overall hedge position in accordance with our interest rate risk management program. We recorded a pre-tax gain of $2.6 million in conjunction with the termination of these swap agreements. The amount receivable by us under the swap agreements was $1.7 million at June 30, 2002 and December 31, 2001, and the amount payable by us was $607,000 and $647,000 at June 30, 2002 and December 31, 2001, respectively. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements designated as cash flow hedges as of June 30, 2002 and December 31, 2001 were as follows:

Fair Value Hedges We entered into the following interest rate swap agreements, designated as fair value hedges, to effectively shorten the repricing characteristics of certain interest-bearing liabilities to correspond more closely with their funding source with the objective of stabilizing net interest income over time: >> During January 2001, we entered into $54.9 million notional amount of interest rate swap agreements that provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate. The terms of the swap agreements provide for us to pay interest on a quarterly basis and receive interest on a semiannual basis. The amount receivable by us under the swap agreements was $1.4 million at June 30, 2002 and December 31, 2001, and the amount payable by us under the swap agreements was $254,000 and $318,000 at June 30, 2002 and December 31, 2001, respectively. >> During June 2002, we entered into $46.0 million notional amount of interest rate swap agreements that provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate plus 1.97%. The underlying hedged liabilities are our guaranteed preferred beneficial interests in First Banks America, Inc. subordinated debentures. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis beginning in September 2002. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements designated as fair value hedges as of June 30, 2002 and December 31, 2001 were as follows:

Interest Rate Cap Agreement In conjunction with the interest rate swap agreements that we entered into in September 2000, we also entered into a four-year $150.0 million notional amount interest rate cap agreement to limit the net interest expense associated with our interest rate swap agreements in the event of a rising rate scenario. The interest rate cap agreement provides for us to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month London Interbank Offering Rate and the strike price of 7.50% should the three-month London Interbank Offering Rate exceed the strike price. At June 30, 2002 and December 31, 2001, the carrying value of this interest rate cap agreement, which is included in derivative instruments in the consolidated balance sheets, was $186,000 and $688,000, respectively. Pledged Collateral At June 30, 2002 and December 31, 2001, we had pledged investment securities available for sale with a carrying value of $771,000 and $894,000, respectively, in connection with our interest rate swap agreements. In addition, at June 30, 2002 and December 31, 2001, we had accepted, as collateral in connection with the interest rate swap agreements, cash of $37.2 million and $1.5 million, respectively. At December 31, 2001, we had also accepted investment securities with a fair value of $28.5 million as collateral in connection with our interest rate swap agreements. We are permitted by contract to sell or repledge the collateral accepted from our counterparties, however, at June 30, 2002 and December 31, 2001, we had not done so. Loans and Allowance for Loan Losses Interest earned on our loan portfolio represents our principal source of income. Interest and fees on loans were 91.3% and 91.4% of total interest income for the three and six months ended June 30, 2002, respectively, in comparison to 90.7% and 89.9% for the comparable periods in 2001. Total loans, net of unearned discount, were $2.28 billion, or 74.4% of total assets, at June 30, 2002, compared to $2.32 billion, or 75.9% of total assets, at December 31, 2001. The decrease in loans, as reflected on our consolidated balance sheets, is primarily attributable to an anticipated amount of attrition associated with our acquisitions completed during the fourth quarter of 2001, current economic conditions prevalent within our markets resulting in lower loan demand, a decreased level of loans purchased from First Bank and the continued decline in our existing consumer and installment portfolio. Commensurate with our prescribed credit exposure guidelines for extending credit, loan participations sold to and purchased from First Bank were $197.4 million and $77.7 million at June 30, 2002, respectively, in comparison to $137.6 million and $93.1 million at December 31, 2001. See Note 5 to the consolidated financial statements for further discussion of transactions with related parties. Nonperforming assets include nonaccrual loans, restructured loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of the dates indicated:

Nonperforming loans, consisting of loans on nonaccrual status and certain restructured loans, were $18.5 million at June 30, 2002, in comparison to $19.6 million at December 31, 2001. Nonperforming and past due loans have decreased 5.5% and 33.3%, respectively, at June 30, 2002 compared to December 31, 2001, however, they remain at higher-than-normal levels. Nonperforming loans at June 30, 2002 increased 25.9% from $14.7 million at June 30, 2001, further contributing to the increased provisions for loan losses in 2002. In addition, net loan charge-offs increased significantly to $3.7 million and $15.8 million for the three and six months ended June 30, 2002, respectively, from $2.9 million and $4.3 million for the comparable periods in 2001, primarily due to the general slowdown in economic conditions as well as charge-offs aggregating $12.9 million on four large credit relationships. We attribute the higher trends in nonperforming and past due loans and charge-offs to cyclical trends experienced within the banking industry, as a result of economic slowdown and we anticipate these trends will continue in the near future. The following table is a summary of our loan loss experience for the periods indicated:

The allowance for loan losses is monitored on a monthly basis. Each month, the credit administration department provides management with detailed lists of loans on the watch list and summaries of the entire loan portfolio of FB&T by risk rating. These are coupled with analyses of changes in the risk profile of the portfolio, changes in past-due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the level of risk in the portfolio. Factors are applied to the loan portfolio for each category of loan risk to determine acceptable levels of allowance for loan losses. We derive these factors primarily from the actual loss experience of FB&T and from published national surveys of norms in the industry. The calculated allowance required for the portfolio is then compared to the actual allowance balance to determine the provision necessary to maintain the allowance at an appropriate level. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for loan losses. In its analysis, management considers the change in the portfolio, including growth, composition, nonperforming loans, the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, provisions are made to our allowance for loan losses. Such provisions are reflected in our consolidated statements of income. Liquidity Our liquidity and the liquidity of FB&T is the ability to maintain a cash flow which is adequate to fund operations, service debt obligations and meet other commitments on a timely basis. FB&T receives funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more, borrowing federal funds, selling securities under agreements to repurchase and utilizing borrowings from the Federal Home Loan Bank and other borrowings, including our revolving note payable to First Banks. The aggregate funds acquired from these sources were $443.6 million and $445.1 million at June 30, 2002 and December 31, 2001, respectively. The following table presents the maturity structure of these other sources of funds, which consists of certificates of deposit of $100,000 or more, short-term borrowings and our revolving note payable, at June 30, 2002:

We have periodically borrowed from First Banks under our revolving note payable. Borrowings under the revolving note payable have been utilized to facilitate the funding of our acquisitions, support repurchases of common stock from time to time and for other corporate purposes. Borrowings under the revolving note payable bear interest at an annual rate of one-quarter percent less than the "Prime Rate" as reported in the Wall Street Journal. The principal under the revolving note payable is due and payable on February 24, 2003 and interest is payable on a quarterly basis. At June 30, 2002 and December 31, 2001, there were $50.0 million and $71.0 million of advances outstanding under our revolving note payable. See Note 5 to the consolidated financial statements. In addition to these sources of funds, FB&T has established a borrowing relationship with the Federal Reserve Bank of San Francisco. This borrowing relationship, which is secured by commercial loans, provides an additional liquidity facility that may be utilized for contingency purposes. At June 30, 2002 and December 31, 2001, FB&T's borrowing capacity under this agreement was approximately $776.7 million and $774.5 million, respectively. In addition, FB&T's borrowing capacity through its relationship with the Federal Home Loan Bank was approximately $1.1 million and $1.0 million at June 30, 2002 and December 31, 2001, respectively. At June 30, 2002 and December 31, 2001, FB&T had no amounts outstanding under either of these agreements. Management believes the available liquidity and operating results of FB&T will be sufficient to provide funds for growth and to permit the distribution of dividends to us sufficient to meet our operating and debt service requirements, both on a short-term and long-term basis, and to pay the dividends on the trust preferred securities issued by our financing subsidiary, First America Capital Trust. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2001, our risk management program's simulation model indicated a loss of projected net interest income in the event of a decline in interest rates. While a decline in interest rates of less than 100 basis points was projected to have a relatively minimal impact on our net interest income, an instantaneous, parallel decline in the interest yield curve of 100 basis points indicated a pre-tax projected loss of approximately 5.5% of net interest income, based on assets and liabilities at December 31, 2001. At June 30, 2002, we remain in an "asset-sensitive" position and thus, remain subject to a higher level of risk in a declining interest rate environment. Although we do not anticipate that instantaneous shifts in the yield curve as projected in our simulation model are likely, these are indications of the effects that changes in interest rates would have over time. Our asset-sensitive position, coupled with reductions in prevailing interest rates throughout 2001, is reflected in our reduced net interest margin for the three and six months ended June 30, 2002 as compared to the comparable periods in 2001 and further discussed under "--Results of Operations." During the three and six months ended June 30, 2002, our asset-sensitive position and overall susceptibility to market risks have not changed materially. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit Number Description -------------- ----------- 99.1 Certification of Periodic Report - Chief Executive Officer 99.2 Certification of Periodic Report - Chief Financial Officer (b) We filed no reports on Form 8-K for the three months ended June 30, 2002. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST BANKS AMERICA, INC. By: /s/ James F. Dierberg ----------------------------------------- James F. Dierberg Chairman of the Board of Directors, President and Chief Executive Officer August 12, 2002 (Principal Executive Officer) By: /s/ Allen H. Blake ----------------------------------------- Allen H. Blake Executive Vice President, and Chief Financial Officer August 12, 2002 (Principal Financial and Accounting Officer) Exhibit 99.1 CERTIFICATION OF PERIODIC REPORT I, James F. Dierberg, Chairman of the Board of Directors, President and Chief Executive Officer of First Banks America, Inc. (the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2002 (the Report) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 12, 2002 /s/ James F. Dierberg ------------------------------------------ James F. Dierberg Chairman of the Board of Directors, President and Chief Executive Officer Exhibit 99.2 CERTIFICATION OF PERIODIC REPORT I, Allen H. Blake, Executive Vice President and Chief Financial Officer of First Banks America, Inc. (the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2002 (the Report) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 12, 2002 /s/ Allen H. Blake ------------------------------------------ Allen H. Blake Executive Vice President and Chief Financial Officer

FIRST BANKS AMERICA INC 10-Q