SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-8937
FIRST BANKS AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1604965
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 North Meramec, St. Louis, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
_____________________________________________________
(Former name, former address, and former fiscal year,
if changed since last report)
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 practicable date.
Outstanding at
Class October 31, 1998
Common Stock, $.15 par value 2,607,773
Class B Common Stock, $.15 par value 2,500,000
<PAGE>
First Banks America, Inc. First Banks America, Inc.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997....................................... -1-
Consolidated Statements of Income for the three and nine
months ended September 30, 1998 and 1997.................... -3-
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 and 1997 and
the three months ended December 31, 1997.................... -4-
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997........................... -5-
Notes to Consolidated Financial Statements.................... -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... -10-
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. -18-
SIGNATURES................................................................ -19-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST BANKS AMERICA, INC.
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks................................................... $ 26,077 32,257
Interest-bearing deposits with other financial institutions -
with maturities of three months or less................................. 26,902 690
Federal funds sold........................................................ 6,000 2,215
--------- -------
Total cash and cash equivalents....................................... 58,979 35,162
Investment securities:
Available for sale, at fair value......................................... 128,577 148,181
Held to maturity, at amortized cost (estimated fair value of
$2,032 at September 30, 1998)........................................... 2,032 -
------ --- ---- --------- -------
Total investment securities........................................... 130,609 148,181
Loans:
Real estate construction and development.................................. 134,884 93,454
Commercial and financial.................................................. 134,373 109,763
Real estate mortgage...................................................... 156,392 149,951
Consumer and installment.................................................. 68,241 75,023
Loans held for sale....................................................... _- 5,708
Total loans........................................................... 493,890 433,899
Unearned discount......................................................... (2,494) (2,444)
Allowance for possible loan losses........................................ (12,449) (11,407)
-------- -------
Net loans............................................................. 478,947 420,048
-------- -------
Bank premises and equipment, net of
accumulated depreciation.................................................. 11,622 10,697
Intangibles associated with the purchase of subsidiaries..................... 8,559 7,189
Accrued interest receivable.................................................. 4,209 4,819
Other real estate............................................................ 270 601
Deferred tax assets.......................................................... 12,270 14,164
Other assets................................................................. 16,734 2,803
--------- -------
Total assets.......................................................... $ 722,199 643,664
========= =======
</TABLE>
<PAGE>
FIRST BANKS AMERICA, INC.
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
LIABILITIES
Deposits:
Demand:
<S> <C> <C>
Non-interest-bearing.................................................... $ 104,150 97,393
Interest-bearing........................................................ 70,335 73,199
Savings.................................................................. 171,974 147,623
Time deposits:
Time deposits of $100 or more........................................... 53,382 52,472
Other time deposits..................................................... 196,253 185,840
--------- -------
Total deposits........................................................ 596,094 556,527
Short-term borrowings........................................................ 9,513 3,687
Promissory note payable...................................................... - 14,900
Accrued interest payable..................................................... 3,143 4,185
Deferred tax liabilities..................................................... 1,401 1,092
Payable to former shareholders of Surety Bank................................ - 3,829
Accrued expenses and other liabilities....................................... 4,623 5,058
12% convertible debentures................................................... 6,500 6,500
Minority interest in subsidiary.............................................. - 2,795
-------- -------
Total liabilities..................................................... 621,274 598,573
-------- -------
Guaranteed preferred beneficial interest in First Banks
America Inc.'s subordinated debenture.................................... 14,140 -
-------- -------
STOCKHOLDERS' EQUITY
Common Stock:
Common stock, $.15 par value; 6,666,666 shares
authorized; 3,243,140 and 2,144,865 shares issued
at September 30, 1998 and December 31, 1997, respectively............... 486 322
Class B common stock, $.15 par value; 4,000,000 shares
authorized; 2,500,000 shares issued and outstanding..................... 375 375
Capital surplus.............................................................. 60,165 47,329
Retained earnings since elimination of accumulated deficit
of $259,117, effective December 31, 1994................................. 4,724 1,083
Common treasury stock, at cost; 631,167 shares and 386,458
shares at September 30, 1998 and December 31, 1997,
respectively............................................................. (9,718) (4,350)
Accumulated other comprehensive income....................................... 753 332
--------- -------
Total stockholders' equity............................................ 56,785 45,091
--------- -------
Total liabilities and stockholders' equity............................ $ 722,199 643,664
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST BANKS AMERICA, INC.
Consolidated Statements of Income (unaudited)
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans................................................ $ 11,923 8,751 33,493 24,085
Investment securities..................................................... 2,012 1,899 6,167 5,698
Federal funds sold and other.............................................. 307 317 979 1,004
-------- ------ -- --- ------
Total interest income................................................. 14,242 10,967 40,639 30,787
-------- ------ ------ ------
Interest expense:
Deposits:
Interest-bearing demand................................................. 311 349 994 1,050
Savings................................................................. 1,638 894 4,587 2,447
Time deposits of $100 or more........................................... 717 541 2,278 1,581
Other time deposits..................................................... 2,762 2,372 8,437 6,958
Promissory note payable and other borrowings.............................. 319 636 1,385 1,824
-------- ------ ------ ------
Total interest expense................................................ 5,747 4,792 17,681 13,860
-------- ------ ------ ------
Net interest income................................................... 8,495 6,175 22,958 16,927
Provision for possible loan losses........................................... 225 465 725 1,750
-------- ------- ------ ------
Net interest income after provision for possible loan losses.......... 8,270 5,710 22,233 15,177
-------- ------- ------ ------
Noninterest income:
Service charges on deposit accounts and customer service fees............. 771 526 2,114 1,675
Gain on sales of securities, net.......................................... 240 - 341 -
Other income.............................................................. 296 129 881 873
-------- ------- ------ ------
Total noninterest income.............................................. 1,307 655 3,336 2,548
-------- ------- ----- ------
Noninterest expense:
Salaries and employee benefits............................................ 2,076 1,446 6,367 4,565
Occupancy, net of rental income........................................... 551 442 1,617 1,537
Furniture and equipment................................................... 424 269 1,251 825
Postage, printing and supplies............................................ 201 91 607 363
Data processing........................................................... 520 233 1,426 800
Legal, examination and professional fees.................................. 1,122 573 3,191 1,734
Communications............................................................ 157 181 584 473
(Gain) loss on sale of other real estate, net of expenses................. (89) 6 (2) (213)
Guaranteed preferred debenture expense.................................... 765 - 765 -
Other..................................................................... 1,205 975 3,524 2,733
-------- ------ ------ ------
Total noninterest expense............................................. 6,932 4,216 19,330 12,817
-------- ------ ------ ------
Income before provision for income taxes and minority interest
in income of subsidiary............................................ 2,645 2,149 6,239 4,908
Provision for income taxes................................................... 1,125 1,023 2,598 2,093
-------- ------ ------ ------
Income before minority interest in income of subsidiary............... 1,520 1,126 3,641 2,815
Minority interest in income of subsidiary.................................... - 83 - 303
-------- ------ ------ ------
Net income............................................................ $ 1,520 1,043 3,641 2,512
======== ====== ====== ======
Earnings per common share:
Basic................................................................. $ 0.30 .26 0.72 .62
Diluted............................................................... 0.29 .26 0.71 .61
======== ====== ====== ======
Weighted average shares of common stock outstanding (in thousands)........... 5,151 4,039 5,090 4,059
======== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIRST BANKS AMERICA, INC.
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
Nine months ended September 30, 1998 and 1997, and three months ended December 31, 1997
(dollars expressed in thousands, except per share data)
Accu-
mulated
other Total
Class B Compre- Retained Common compre- stock-
Common common Capital hensive earnings treasury hensive holders'
stock stock surplus income (deficit) stock income equity
----- ----- -------------- --------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated balances, January 1, 1997........... $ 282 375 42,862 - (2,450) (2,838) (36) 38,195
Nine months ended September 30, 1997:
Comprehensive income:
Net income.................................. - - - $ 2,512 2,512 - - 2,512
Other comprehensive income, net of tax (1) -
Unrealized gains on securities, net of
reclassification adjustment (2)......... - - 271 - - 271 271
-------
Comprehensive income........................ $ 2,783
=======
Exercise of stock options..................... - - 9 - - - 9
Compensation paid in common stock............. - - 13 - - - 13
Repurchases of common stock................... - - - - (979) - (979)
Redemption of stock options................... - - (290) - - - (290)
--- --- ---- ----- ------ --- -------
Consolidated balances, September 30, 1997........ 282 375 42,594 62 (3,817) 235 39,731
Three months ended December 31, 1997:
Comprehensive income:
Net income.................................. - - - $ 1,021 1,021 - - 1,021
Other comprehensive income, net of tax (1) -
Unrealized gains on securities net of
reclassification adjustment (2)......... - - - 97 - - 97 97
-- -------
Comprehensive income........................ $ 1,118
Issuance of common stock for purchase
accounting acquisition...................... 40 - 4,723 - - - 4,763
Exercise of stock options..................... - - 6 - - - 6
Repurchases of common stock................... - - - - (533) - (533)
Pre-merger transactions of FCB................ - - 6 - - - 6
----- --- ------ ----- ------ --- ------
Consolidated balances, December 31, 1997......... 322 375 47,329 1,083 (4,350) 332 45,091
Nine months ended September 30, 1998:
Comprehensive income:
Net income.................................. - - - $ 3,641 3,641 - - 3,641
Other comprehensive income, net of tax (1) -
Unrealized gains on securities, net
of reclassification adjustment (2)...... - - - 421 - - 421 421
-- -------
Comprehensive income........................ $ 4,062
=======
Issuance of common stock for acquisition
of entity under common control.............. 43 - 2,965 - - - 3,008
Exercise of stock options..................... - - 13 - - - 13
Compensation paid in stock.................... - - 27 - - - 27
Redemption of stock options................... - - (48) - - - (48)
Conversion of promissory note payable......... 121 - 9,879 - - - 10,000
Repurchases of common stock................... - - - - (5,368) - (5,368)
----- --- ------ ----- ------ --- ------
Consolidated balances, September 30, 1998........ $ 486 375 60,165 4,724 (9,718) 753 56,785
=== ===== ===== === ====== ===== ====== === ======
_________
(1) Components of other comprehensive income are shown net of tax.
(2) Disclosure of reclassification adjustment:
Nine months Three months
ended September 30, ended
1998 1997 December 31, 1997
Unrealized gains arising during the period................................ $199 271 21
Less: reclassification adjustment for gains included in net income........ 222 - 76
---- --- --
Unrealized gains on securities............................................ $421 271 97
==== === ==
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FIRST BANKS AMERICA, INC.
Consolidated Statements of Cash Flows (unaudited)
(dollars expressed in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income......................................................................... $ 3,641 2,512
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net.................................... 1,326 593
Provision for possible loan losses............................................... 725 1,750
Decrease in accrued interest receivable.......................................... 709 (79)
Interest accrued on liabilities.................................................. 17,681 13,860
Payments of interest on liabilities.............................................. (18,787) (12,351)
Provision for income taxes....................................................... 2,598 2,093
Payments of income taxes......................................................... (226) (888)
Gain on sales of securities, net.................................................. (341) -
Other operating activities, net.................................................. 466 (1,962)
-------- -------
Net cash provided by operating activities...................................... 7,281 5,528
-------- -------
Cash flows from investing activities:
Cash received from acquired entities, net of cash paid............................. 3,241 -
Sales of investment securities..................................................... 23,306 -
Maturities of investment securities................................................ 51,968 69,181
Purchases of investment securities................................................. (56,373) (76,245)
Net increase in loans.............................................................. (33,433) (20,915)
Recoveries of loans previously charged off......................................... 1,930 1,653
Purchases of bank premises and equipment........................................... (1,576) (341)
Other investing activities, net.................................................... (13,289) 833
-------- -------
Net cash provided by (used in) investing activities............................ (23,715) (25,834)
-------- -------
Cash flows from financing activities:
Increase (decrease) in deposits.................................................... 4,406 17,278
Increase (decrease) in borrowed funds.............................................. (2,903) 6,904
Repurchases of common stock for treasury........................................... (5,368) (979)
Proceeds from issuance of guaranteed
preferred subordinated debenture................................................. 44,124 -
Other financing activities, net ................................................... (8) (276)
-------- -------
Net cash provided by (used in) financing activities............................ 40,251 22,927
-------- -------
Net increase (decrease) in cash and cash equivalents........................... 23,817 2,621
Cash and cash equivalents, beginning of period........................................ 35,162 42,874
-------- -------
Cash and cash equivalents, end of period.............................................. $ 58,979 45,495
======= =======
Noncash investing and financing activities:
Issuance of common stock in purchase accounting acquisition........................ $ 3,008 -
Conversion of promissory note payable to common stock.............................. 10,000 -
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST BANKS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying 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
1997 annual report on Form 10-K. 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 month
periods ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
In connection with FBA's acquisition of First Commercial Bancorp, Inc.
(FCB) and its wholly owned subsidiary, First Commercial Bank (First Commercial),
as of February 2, 1998, FBA's financial information for the periods prior to the
acquisition has been restated to include the 61.48% ownership interest of First
Banks, Inc. (First Banks), FBA's majority shareholder, in FCB consistent with
the accounting treatment applicable to entities under common control. The
remaining interest in FCB acquired by FBA, or 38.52%, is reflected in the
consolidated financial statements as minority interest for the periods prior to
the acquisition. First Banks owned 73.7% of FBA as of September 30, 1998.
The consolidated financial statements include the accounts of FBA and
its subsidiaries, all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated. In addition to the
aforementioned restatement of 1997 financial information, certain
reclassifications of 1997 amounts have been made to conform with the 1998
presentation.
FBA operates through two banking subsidiaries, BankTEXAS N.A.,
headquartered in Houston, Texas (BankTEXAS) and First Bank of California,
headquartered in Roseville, California (FB California), collectively referred to
as the Subsidiary Banks.
(2) Transactions with Related Party
FBA purchases certain services and supplies from or through its
majority shareholder, First Banks. FBA's financial position and operating
results could significantly differ from those that would be obtained if FBA's
relationship with First Banks did not exist. Fees payable to First Banks, as
discussed in the following paragraphs, generally increase as FBA expands through
acquisitions and internal growth, reflecting the higher levels of service
required to operate the Subsidiary Banks.
First Banks provides management services to FBA and the Subsidiary
Banks. Management services are provided under a management fee agreement whereby
FBA compensates First Banks on an hourly basis for its use of personnel for
various functions including internal auditing, 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 this agreement were $528,000 and $1.5 million for the
three and nine months ended September 30, 1998, compared to $388,000 and $1.1
million for the three and nine months ended September 30, 1997, respectively.
Because of its affiliation through First Banks and the geographic
proximity of certain of their banking offices, FB California and First Bank &
Trust (FB&T), a wholly owned subsidiary of First Banks, share the cost of
certain personnel and services used by the banks. This includes the salaries and
benefits of certain loan and administrative personnel. The allocation of the
shared costs are charged and/or credited among the banks under the terms of a
cost sharing agreement. Expenses associated with loan origination personnel are
allocated based on the relative loan volume between the banks. Costs of most
other personnel are allocated on an hourly basis. Because this involves
distributing essentially fixed costs over a larger asset base, it allows each
bank to receive the benefit of personnel and services at a reduced cost. Fees
<PAGE>
paid under the cost sharing agreement were $288,000 and $811,000 for the three
and nine month periods ended September 30, 1998, and $183,000 and $515,000 for
the same periods in 1997, respectively.
First Services L.P., a limited partnership indirectly owned by First
Banks' Chairman and his children through its General Partners and Limited
Partners, provides data processing and various related services to FBA under the
terms of data processing agreements. Fees paid under these agreements were
$515,000 and $1.3 million for the three and nine months ended September 30,
1998, compared to $230,000 and $461,000 for the same periods in 1997,
respectively.
The Subsidiary Banks had $84.8 million and $66.9 million in whole loans
and loan participations outstanding at September 30, 1998 and December 31, 1997,
respectively, that were purchased from banks affiliated with First Banks. In
addition, the Subsidiary Banks had sold $141.8 million and $54.7 million in
whole loans and loan participations to affiliates of First Banks at September
30, 1998 and December 31, 1997, 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
the Subsidiary Banks.
FBA borrowed $14.9 million from First Banks at December 31, 1997 under
a $20.0 million promissory note payable. The borrowings under the note bear
interest at an annual rate of one-quarter percent less than the "Prime Rate" as
reported in the Wall Street Journal. The interest expense was $53,000 and
$302,000 for the three months ended September 30, 1998 and 1997, respectively,
and $599,000 and $874,000 for the nine months ended September 30, 1998 and 1997,
respectively. Future borrowings under the promissory note payable are available
with any principal and accrued interest due and payable on October 31, 2001. The
accrued and unpaid interest under the note was $1.4 million at December 31,
1997. As more fully discussed in Note 4, on February 2, 1998, FBA exchanged
804,000 shares of its common stock for $10.0 million outstanding under the
promissory note payable. In addition, during July 1998, the remaining balance of
$11.3 million under the $20.0 million promissory note payable was repaid from
the proceeds of the sale of 8.50% Cumulative Trust Preferred Securities
(Preferred Securities). See Note 5 for further discussion of the Preferred
Securities.
In connection with FBA's acquisition of FCB, FBA issued convertible
debentures to First Banks of $6.5 million. These debentures replaced similar FCB
debentures previously owned by First Banks. The related interest for these
debentures was $604,000 and $647,000 for the nine months ended September 30,
1998 and 1997, respectively. FBA is not required to pay interest on the
debentures prior to maturity. At maturity in 2000, principal and accrued
interest are payable in FBA common stock (at a conversion rate of $14.06 per
share), unless FBA elects to pay cash and First Banks does not exercise its
right to convert principal and interest into FBA common stock. The accrued
interest payable for these debentures was $2.2 million and $1.6 million at
September 30, 1998 and December 31, 1997, respectively.
(3) Regulatory Capital
FBA and the Subsidiary Banks are subject to various regulatory capital
requirements administered by 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 and the Subsidiary Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for Prompt
Corrective Action, the Subsidiary Banks must meet specific capital guidelines
that involve quantitative measures of the Subsidiary Banks' assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Subsidiary Banks' capital amounts and regulatory classification
are also subject to qualitative judgments by the regulators about components,
risk weighting and other factors which may affect possible regulatory actions.
Quantitative measures established by regulations to ensure capital
adequacy require the Subsidiary Banks to maintain certain minimum capital
ratios. The Subsidiary Banks are required to maintain a minimum risk-based
<PAGE>
capital to risk-weighted assets ratio of 8.00%, with at least 4.00% being "Tier
1" capital (as defined in the regulations). In addition, a minimum leverage
ratio (Tier 1 capital to average assets) of 3.00% plus an additional cushion of
100 to 200 basis points is expected. In order to be considered well capitalized
under Prompt Corrective Action provisions, a bank is required to maintain a risk
weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of
at least 6%, and a leverage ratio of at least 5%. As of December 31, 1997, the
date of the most recent notification from FBA's primary regulator, each of the
Subsidiary Banks was categorized as well capitalized under the regulatory
framework for Prompt Corrective Action.
At September 30, 1998 and December 31, 1997, FBA's and the Subsidiary
Banks' capital ratios were as follows:
<TABLE>
<CAPTION>
Risk-based capital ratios
-------------------------
Total Tier 1 Leverage Ratio
----- ------ --------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
FBA.......................................... 16.03% 6.88% 10.13% 5.62% 8.64% 4.96%
BankTEXAS.................................... 12.33 12.26 11.07 11.00 9.15 8.90
FB California................................ 10.93 13.03 9.67 11.77 8.47 13.80
</TABLE>
(4) Acquisitions
As previously announced, FBA and Redwood Bancorp executed an agreement
on September 3, 1998 providing for the acquisition of Redwood Bancorp, and its
wholly-owned subsidiary, Redwood Bank, for cash consideration of $26.0 million.
Redwood Bank is headquartered in San Francisco, California and operates four
banking locations in the San Francisco Bay area. Redwood Bank had $168.5 million
in total assets, $126.4 million in loans, net of unearned discount, and $148.6
million in deposits at September 30, 1998. FBA anticipates that the transaction,
which is subject to regulatory approval, will be completed on or about December
31, 1998.
On February 2, 1998, FBA completed its acquisition of FCB and its
wholly owned subsidiary, First Commercial. In the transaction, the FCB
shareholders received .8888 shares of FBA common stock for each share of FCB
common stock. Cash was paid in lieu of issuing fractional shares. In total, FCB
shareholders received approximately 752,000 shares of FBA common stock in the
transaction, including 462,176 shares received by First Banks in exchange for
its 61.48% ownership interest in FCB. The transaction also provided for First
Banks to receive 804,000 shares of FBA common stock in exchange for $10.0
million of FBA's promissory note payable to First Banks, and for the exchange of
FCB convertible debentures of $6.5 million, which were owned by First Banks, for
comparable debentures of FBA. The Agreement was negotiated and approved by
special committees of the Boards of Directors of FCB and FBA. These special
committees were comprised solely of independent directors of the two respective
Boards of Directors.
First Commercial had six banking offices located in Sacramento,
Roseville (2), San Francisco, Concord and Campbell, California. At February 2,
1998, FCB had total assets of $192.5 million, investment securities of $64.4
million, loans, net of unearned discount of $118.9 million and deposits of
$173.1 million. The transaction was accounted for as a business combination of
entities under common control. Accordingly, FBA assumed First Banks' 61.48%
interest in FCB at its historical cost basis. The remaining 38.52%, or minority
interest, owned by unaffiliated parties was recorded at fair value. The excess
of the cost over the fair value of the minority interest's share in the fair
value of the net assets acquired was $1.6 million and is being amortized over 15
years. First Commercial was merged into FB California.
On February 2, 1998, FBA also completed its acquisition of Pacific Bay
Bank, San Pablo, California (Pacific Bay). Under the terms of the Pacific Bay
Agreement, Pacific Bay shareholders received $14.00 per share in cash for their
stock, an aggregate of $4.2 million. The transaction was accounted for using the
purchase method of accounting. The excess of the cost over the fair value of the
<PAGE>
net assets acquired was $1.5 million and is being amortized over 15 years. This
transaction was funded from an advance under the promissory note payable to
First Banks.
Pacific Bay operated a banking office in San Pablo, California and a
loan production office in Lafayette, California. At February 2, 1998, Pacific
Bay had total assets of $38.3 million, investment securities of $232,000, loans,
net of unearned discount, of $29.7 million and deposits of $35.2 million.
Pacific Bay was merged into FB California.
(5) Cumulative Trust Preferred Securities of First America Capital Trust
During July 1998, First America Capital Trust (First Capital), a
newly-formed Delaware business trust subsidiary of FBA, issued 1.84 million
shares of Preferred Securities at $25.00 per share in an underwritten public
offering. FBA made certain guarantees and commitments relating to the Preferred
Securities. FBA's proceeds from the issuance of the Preferred Securities, net of
underwriting fees and offering expenses, were approximately $44.0 million.
Distributions payable on the Preferred Securities are payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year
commencing on September 30, 1998. Distributions payable on the Preferred
Securities were $765,000 for the three months ended September 30, 1998 and are
recorded as noninterest expense in the accompanying consolidated financial
statements.
Proceeds from the offering were used to repay outstanding indebtedness
to First Banks under the terms of the $20.0 million promissory note payable,
support possible repurchases of common stock from time to time and for general
corporate purposes. The remaining proceeds have been temporarily invested in
interest-bearing deposits and will be used to fund the pending acquisition of
Redwood Bancorp.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
The discussion herein contains certain forward looking statements
regarding the financial condition, results of operations and business of the
Company. These forward looking statements are subject to 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 such
forward looking statements include general market conditions, conditions
affecting the banking industry generally and factors having a specific impact on
the Company, including but not limited to, fluctuations in interest rates and in
the economy; the impact of laws and regulations applicable to the Company and
changes therein; competitive conditions in the markets in which the Company and
the Subsidiary Banks conduct their operations; and the ability of the Company to
respond to changes in technology, including the Year 2000 problem. Additional
factors potentially affecting the Company's results were identified in the
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Readers should not place undue reliance on any forward looking statements
contained herein.
General
FBA is a registered bank holding company, incorporated in Delaware and
headquartered in Clayton, Missouri. At September 30, 1998, FBA had approximately
$722.2 million in total assets; $491.4 million in total loans, net of unearned
discount; $596.1 million in total deposits; and $56.8 million in total
stockholders' equity. FBA operates through its Subsidiary Banks.
As previously discussed in Notes 1 and 4 to the consolidated financial
statements, FBA's historical financial information presented in this Report on
Form 10-Q has been restated to reflect its acquisition of FCB.
Through the Subsidiary Banks' six locations in Texas and eleven
locations in the San Francisco - Sacramento corridor of northern California, FBA
offers a broad range of commercial and personal banking services including
certificate of deposit accounts, individual retirement and other time deposit
accounts, checking and other demand deposit accounts, interest checking
accounts, savings accounts and money market accounts. Loans include commercial
and financial, real estate construction and development, commercial and
residential real estate and consumer loans. Other financial services include
mortgage banking, automatic teller machines, telephone banking, lockbox
deposits, cash management services, sweep accounts, credit-related insurance and
safe deposit boxes.
The following table lists the Subsidiary Banks at September 30, 1998:
<TABLE>
<CAPTION>
Loans, net of
Number of Total unearned Total
locations assets discount deposits
--------- ------ -------- --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
FB California.................. 11 $ 402,353 297,889 354,272
BankTEXAS...................... 6 286,378 193,507 244,232
</TABLE>
Financial Condition
FBA's total assets were $722.2 million and $643.7 million at September
30, 1998 and December 31, 1997, respectively, after the restatement for the
acquisition of FCB, as previously discussed in Notes 1 and 4 to the consolidated
financial statements. The increase in adjusted total assets from December 31,
1997 is primarily attributable to FBA's acquisition of Pacific Bay, which
provided total assets of $38.3 million, internal loan growth of $30.2 million
and the issuance of the Preferred Securities, of which $26.1 million remains
invested in short-term interest-bearing deposits. Offsetting this increase and
providing an additional source of funds for the loan growth was a reduction in
investment securities of $17.6 million to $130.6 million at September 30, 1998
from $148.2 million at December 31, 1997.
<PAGE>
During the nine months ended September 30, 1998, FBA purchased $5.4
million of its common stock for treasury. FBA utilized available cash to fund
its repurchase of common stock. As announced by FBA on April 29, 1998, the Board
of Directors authorized the purchase of an additional 5% of its common stock for
treasury. FBA has purchased an aggregate total of 631,167 common shares for
treasury as of September 30, 1998.
Results of Operations
Net Income
Net income was $1.5 million, or $0.29 per share on a diluted basis, for
the three months ended September 30, 1998, compared to $1.0 million, or $0.26
per share on a diluted basis, for the same period in 1997. For the nine months
ended September 30, 1998 and 1997, net income was $3.6 million, or $0.71 per
share on a diluted basis, and $2.5 million, or $0.61 per share on a diluted
basis, respectively. The earnings progress was driven by increased interest
income generated by loan growth in FB California and BankTEXAS. The loan growth
was funded through a reduction in lower yielding investment securities and
deposit growth in lower cost demand and savings type deposits. Noninterest
expense for the third quarter, excluding the cost of the Preferred Security
offering, declined from the second quarter by $173,000, reflecting FBA's
progress in assimilating the acquisitions of FCB, Surety Bank and Pacific Bay.
Offsetting the increase in net income for the nine months ended
September 30, 1998 are the additional costs associated with Surety Bank's and
Pacific Bay's data processing and back-office conversions to FBA's systems and
procedures completed during February and May of 1998, respectively. Surety Bank,
Vallejo, California, and Pacific Bay, San Pablo, California, were acquired in
December 1997 and February 1998, respectively. In addition, the results for the
nine months ended September 30, 1998 include a net charge of $225,000 or $0.04
per share on a diluted basis, in settlement of certain litigation.
Net Interest Income
Net interest income was $8.5 million, or 5.33% of average
interest-earning assets, for the three months ended September 30, 1998, compared
to $6.2 million, or 4.91% of average interest-earning assets, for the same
period in 1997. For the nine months ended September 30, 1998 and 1997, net
interest income was $23.0 million, or 4.98% of average interest-earning assets,
compared to $16.9 million, or 4.64% of average interest-earning assets,
respectively. The improved net interest income is primarily attributable to the
net interest-earning assets provided by the acquisitions of Surety Bank and
Pacific Bay, the improved yield on the loan portfolio, resulting from BankTEXAS'
repositioned loan portfolio and internal loan growth, and the effect of the
repayment of advances under the promissory note payable.
<PAGE>
The following table sets forth certain information relating to FBA's
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 three and nine month periods ended
September 30:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
--------------------------------------------- -----------------------------------------------
1998 1997 1998 1997
--------------------- ----------------------- ----------------------- ---------------------
Interest Interest Interest Interest
Average income/ Yield/ Average income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
balance expense rate balance expens rate balance expense rate balance expense rate
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans......................... $478,150 11,923 9.89% $352,234 8,751 9.86% $457,957 33,493 9.78% $337,006 24,085 9.56%
Investment securities......... 130,909 2,012 6.10 123,525 1,899 6.10 135,013 6,167 6.11 125,419 5,698 6.07
Federal funds sold and other.. 22,841 307 5.33 23,075 317 5.45 23,487 979 5.57 25,019 1,004 5.37
------ ----- -------- ------ ---- ------- ------ ---- -------- ----- ----
Total interest-earning assets 631,900 14,242 8.94 498,834 10,967 8.72 616,457 40,639 8.81 487,444 30,787 8.44
------ ------ ------ ------
Nonearning assets................ 73,325 39,127 67,286 41,489
-------- -------- -------- --------
Total assets................ $705,225 $537,961 $683,743 $528,933
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits $ 75,197 311 1.64% $ 65,667 349 2.11% $ 74,293 994 1.79% $ 66,534 1,050 2.11%
Savings deposits.............. 164,954 1,638 3.94 104,529 894 3.39 156,717 4,587 3.91 100,263 2,447 3.26
Time deposits of $100 or more. 51,669 717 5.51 38,469 541 5.58 52,367 2,278 5.82 38,542 1,581 5.48
Other time deposits........... 201,094 2,762 5.45 169,346 2,372 5.56 206,073 8,437 5.47 169,746 6,958 5.48
------- ----- -------- ----- -------- ----- -------- ------
Total interest-bearing deposits 492,914 5,428 4.37 378,011 4,156 4.36 489,450 16,296 4.45 375,085 12,036 4.29
Notes payable and other....... 17,821 319 7.10 28,103 636 8.98 23,527 1,385 7.87 26,521 1,824 9.20
Total interest-bearing
liabilities.............. 510,735 5,747 4.46 406,114 4,792 4.68 512,977 17,681 4.61 401,606 13,860 4.61
----- ----- ------ ------
Noninterest-bearing liabilities:
Demand deposits............... 95,079 79,605 94,196 76,050
Other liabilities............. 42,847 12,839 20,661 12,620
-------- -------- -------- --------
Total liabilities........... 648,661 498,558 627,834 490,276
Stockholders' equity............. 56,564 39,403 55,909 38,657
-------- -------- -------- --------
Total liabilities and
stockholders' equity..... $705,225 $537,961 $683,743 $528,933
======== ======== ======== ========
Net interest income.............. 8,495 6,175 22,958 16,927
===== ===== ====== ======
Net interest margin.............. 5.33% 4.91% 4.98% 4.64%
==== ==== ==== ====
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was $225,000 and $725,000 for
the three and nine month periods ended September 30, 1998, compared to $465,000
and $1.8 million for the same periods in 1997. The decrease in the provision for
possible loan losses for the three and nine months ended September 30, 1998,
compared to the same periods in 1997, is primarily attributable to the improved
loan loss experience, to management's review and evaluation of the credit
quality of the loans in the portfolio and to the assessment of the adequacy of
the allowance for possible loan losses. For further discussion of asset quality,
see "--Lending and Credit Management" for summaries of nonperforming loans and
loan loss experience.
Net loan recoveries were $379,000 for the three month period ended
September 30, 1998, compared to net loan charge-offs of $64,000 for the same
period in 1997. Net loan charge-offs were $568,000 and $982,000 for the nine
month periods ended September 30, 1998 and 1997, respectively. The net loan
charge-offs for the nine month period ended September 30, 1998 is primarily
attributable to the loans obtained through the acquisition of Pacific Bay. The
acquired allowance for possible loan losses totaled $885,000 at the acquisition
date.
<PAGE>
Noninterest Income
Noninterest income was $1.3 million and $3.3 million for the three and
nine month periods ended September 30, 1998, compared to $655,000 and $2.5
million for the same periods in 1997, respectively. Noninterest income consists
primarily of service charges on deposit accounts and customer service fees.
Service charges on deposit accounts and customer service fees increased
to $771,000 and $2.1 million for the three and nine month periods ended
September 30, 1998, from $526,000 and $1.7 million for the same periods in 1997,
respectively. This increase is primarily attributable to the acquisitions of
Surety Bank and Pacific Bay, and the increase of commercial banking services
utilized by FBA's corporate customers.
Noninterest income also includes a $240,000 net gain on sales of
securities for the three months ended September 30, 1998. The gain resulted from
the sales of certain available-for-sale securities to provide funds for FBA's
loan growth.
Noninterest Expense
Noninterest expense was $6.9 million and $19.3 million for the three
and nine month periods ended September 30, 1998, compared to $4.2 million and
$12.8 million for the same periods in 1997. The increase is primarily
attributable to the noninterest expense of Surety Bank and Pacific Bay, acquired
by FBA in December 1997 and February 1998, respectively, and the additional
costs associated with Surety Bank's and Pacific Bay's data processing and
back-office conversions to FBA's systems and procedures. In addition, FBA's
continuing expansion of its corporate lending and retail banking business
development staff, along with the necessary operational support, has contributed
to the overall increase in noninterest expense.
Contrary to the overall increase in noninterest expense resulting from
the aforementioned acquisitions was occupancy, net of rental income, which
remained relatively constant at $551,000 and $1.6 million for the three and nine
months ended September 30, 1998, compared to $442,000 and $1.5 million for the
same periods in 1997, respectively. This is the result of increased sub-leasing
of excess space within FBA's banking premises, relocation of certain California
branches and the related reductions in expenses attributable to centralization
of recently acquired entities' functions into FBA's systems.
Noninterest expense also includes $765,000 of guaranteed preferred
debenture expense for the three and nine month periods ended September 30, 1998.
As more fully discussed in Note 5 of the consolidated financial statements, FBA
issued Preferred Securities during July 1998.
Other noninterest expense for the nine months ended September 30, 1998
includes a $350,000 charge in settlement of
certain litigation.
Lending and Credit Management
Interest earned on the loan portfolio is the primary source of income
of FBA. Total loans, net of unearned discount, represented 68.0% and 67.0% of
total assets as of September 30, 1998 and December 31, 1997, respectively. Total
loans, net of unearned discount, were $491.4 million and $431.5 million at
September 30, 1998 and December 31, 1997, respectively. The increase in loans,
as summarized on the consolidated balance sheets is attributable to the
acquisition of Pacific Bay and to the expansion of the corporate lending
function of FBA. The expansion has generated growth in the commercial and
financial and commercial real estate mortgage loan portfolios. Offsetting the
growth in corporate lending is the decrease in the consumer indirect automobile
loan portfolio. Along with the growth in corporate lending and FBA's prescribed
credit exposure guidelines for extending credit to an individual borrower, loan
<PAGE>
participations sold to and purchased from banks affiliated with First Banks have
increased to $141.8 million from $54.7 million and to $84.8 from $66.9 million
at September 30, 1998 and December 31, 1997, respectively. See Note 2 to the
consolidated financial statements for a further discussion of transactions with
First Banks.
<TABLE>
<CAPTION>
FBA's nonperforming loans consist of loans on nonaccrual status and
loans on which the original terms have been restructured. The following is a
summary of nonperforming assets and past due loans at the dates indicated:
September 30, December 31,
1998 1997
---- ----
(dollars expressed in thousands)
Nonperforming assets:
<S> <C> <C>
Nonperforming loans............................................... $ 6,877 2,846
Other real estate................................................. 270 601
----------- -------
Total nonperforming assets..................................... $ 7,147 3,447
=========== =======
Loans past due and still accruing:
Over 30 days to 90 days........................................... $ 13,498 7,866
Over 90 days...................................................... 428 1,158
----------- -------
Total past due loans........................................... $ 13,926 9,024
=========== =======
Loans, net of unearned discount..................................... $ 491,396 431,455
=========== =======
Asset quality ratios:
Allowance for possible loan losses to loans....................... 2.53% 2.64%
Nonperforming loans to loans ..................................... 1.40 0.66
Allowance for possible loan losses to
nonperforming loans ........................................... 181.02 400.81
Nonperforming assets to loans and other real estate............... 1.45 0.80
=========== =======
</TABLE>
Nonperforming loans, consisting of loans on nonaccrual status and
restructured loans, were $6.9 million at September 30, 199 in comparison to $2.8
million at December 31, 1997, respectively. The increase is primarily
attributable to the loans obtained through the acquisition of Pacific Bay. The
acquired allowance for possible loan losses totaled $885,000 at the acquisition
date.
Impaired loans, consisting of loans on nonaccrual status and certain
indirect consumer and installment loans 60 days or more past due, were $7.6
million and $3.3 million at September 30, 1998 and December 31, 1997,
respectively.
The allowance for possible loan losses is monitored on a monthly basis.
Each month, credit administration provides FBA's management with detailed lists
of loans on the watch list and summaries of the entire loan portfolio of each
Subsidiary Bank by risk rating. These are coupled with analyses of changes in
the risk profiles of the portfolios, changes in past due and nonperforming loans
and changes in watch list and classified loans over time. In this manner, the
overall increases or decreases in the levels of risk in the portfolios are
monitored continually. Factors are applied to the loan portfolios for each
category of loan risk to determine acceptable levels of allowance for possible
loan losses. These factors are derived primarily from the actual loss experience
of the Subsidiary Banks and from published national surveys of norms in the
industry. The calculated allowances required for the portfolios are then
compared to the actual allowance balances to determine the provisions necessary
to maintain the allowances at appropriate levels. In addition, management
exercises judgment in its analysis of determining the overall level of the
allowance for possible loan losses. In its analysis, management considers the
change in the portfolio, including growth and composition, and the economic
conditions of the regions in which FBA operates.
Based on this quantitative and qualitative analysis, the allowance for
possible loan losses is adjusted. Such adjustments are reflected in the
consolidated statements of income.
<PAGE>
The following is a summary of loan loss experience:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Allowance for possible loan losses, beginning of period................ $ 11,845 11,111 11,407 10,744
Acquired allowances for possible loan losses........................ - - 885 -
---------- ------ -- --- ------
11,845 11,111 12,292 10,744
---------- ------ ------ ------
Loans charged-off................................................... (488) (587) (2,498) (2,635)
Recoveries of loans previously charged-off.......................... 867 523 1,930 1,653
---------- ------ ------ ------
Net loan recoveries (charge-offs)................................... 379 (64) (568) (982)
---------- ------ ------ ------
Provision for possible loan losses.................................. 225 465 725 1,750
---------- ------ ------ ------
Allowance for possible loan losses, end of period...................... $ 12,449 11,512 12,449 11,512
========== ====== ====== ======
</TABLE>
Interest Rate Risk Management
Derivative financial instruments held by FBA for purposes of managing
interest rate risk are summarized as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Notional Credit Notional Credit
amount amount amount amount
------ ------ ------ ------
(dollars expressed in thousands)
Interest rate swap agreements......... $ 65,000 - - -
Interest rate cap agreement........... 10,000 28 10,000 222
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
FBA's credit exposure through its use of derivative financial instruments. The
amounts and the other terms of the derivatives are determined by reference to
the notional amounts and the other terms of the derivatives.
FBA entered into $50.0 million and $15.0 million interest rate swap
agreements (Swap Agreements) during the three months ended September 30, 1998
and June 30, 1998, respectively, to effectively shorten the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with its assets, with the objective of stabilizing net interest income
over time. The Swap Agreements provide for FBA to receive a fixed rate of
interest and pay an adjustable rate equivalent to the 90 day London Interbank
offering rate (LIBOR). The terms of the Swap Agreements provide for FBA to pay
quarterly and receive payment semi-annually. The net amount due to FBA under the
Swap Agreements was $225,000 at September 30, 1998. The unrealized gain on the
Swap Agreements was $1.4 million at September 30, 1998.
FBA has a interest rate cap agreement outstanding to limit the interest
expense associated with certain interest-bearing liabilities. At September 30,
1998 and December 31, 1997, the unamortized costs of these agreements were
$158,000 and $242,000, respectively, and were included in other assets. The net
amount due to FBA under these agreements was $5,000 at September 30, 1998.
Liquidity
The liquidity of FBA and the Subsidiary Banks 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. The primary sources of
funds for liquidity are derived from customer deposits, loan payments,
maturities, sales of investments and operations. In addition, FBA and the
Subsidiary Banks may avail themselves of more volatile sources of funds through
issuance of certificates of deposit in denominations of $100,000 or more,
federal funds borrowed, securities sold under agreements to repurchase and
<PAGE>
borrowings from the Federal Home Loan Bank. The aggregate funds acquired from
those sources were $62.9 million and $56.2 million at September 30, 1998 and
December 31, 1997, respectively.
At September 30, 1998, FBA's more volatile sources of funds mature as
follows:
(dollars expressed in thousands)
Three months or less................................... $ 25,258
Over three months through six months................... 11,308
Over six months through twelve months.................. 19,147
Over twelve months..................................... 7,182
--------
Total............................................ $ 62,895
Management believes the available liquidity and earnings of the
Subsidiary Banks will be sufficient to provide funds for FBA's operating and
debt service requirements both on a short-term and long-term basis.
Year 2000
FBA and the Subsidiary Banks are subject to risks associated with the
"Year 2000" problem, a term which refers to uncertainties about the ability of
various data processing hardware and software systems to interpret dates
correctly after the beginning of the Year 2000.
As described in Note 2, data processing services are provided to FBA by
First Services, L.P. under the terms of data processing agreements. To address
the Year 2000 problem, FBA, working jointly with First Banks, has established a
dedicated team to coordinate the overall Year 2000 Preparedness Program
(Program) under the guidelines of the Comprehensive Year 2000 Plan (Plan) as
approved by the Board of Directors. The Plan summarizes each major phase of the
Program and the estimated costs to remediate and test systems in preparation for
the Year 2000. The major phases of the Program are awareness, assessment,
remediation, validation and implementation.
The awareness phase included a company-wide campaign to communicate the
Year 2000 problem and the potential ramifications to the organization.
Concurrent with this phase, the Year 2000 Program Team (Team) began the
assessment phase of the Program. The assessment phase included the inventorying
of systems that may be impacted by the Year 2000 problem. The business use of
each inventoried item was then analyzed and prioritized in varying degrees from
critical to non-critical, based upon the perceived adverse effect on the
financial condition of FBA in the event of a loss or interruption in the use of
each system. The awareness and assessment phases of the Program were completed
as scheduled.
FBA's critical systems are purchased from industry-known vendors. Such
systems are generally used in their standard configuration, that is, with minor
modification. Focusing on these critical systems, FBA is closely reviewing and
monitoring the Year 2000 progress as reported by each vendor and testing, when
possible, on a system separate from the on-line production system. The review of
non-critical in-house systems and external providers of data processing
services, including critical and non-critical systems, has commenced and should
be completed by June 30, 1999.
For the critical systems that have been modified, the vendors provided
remediation for such systems that were not otherwise reported as "Year
2000-ready." As the remediation phase was completed within the stated deadline,
FBA did not invoke any remediation contingency efforts.
With the remediation phase of the Program complete, the objective for
the fourth quarter of 1998 is to complete the validation phase for critical
in-house systems, including remediated systems provided by third party vendors.
A system is deemed validated upon completion of an approved test plan,
contingency plan and system testing of the Year 2000 compliant version without
significant problems.
<PAGE>
FBA, along with First Banks, has accelerated one major project, its
teller system replacement, since the existing system is not Year 2000 compliant.
While planning for the replacement of the teller system has been underway for
several years, the implementation was accelerated based on the potential Year
2000 impact. The reviewing and testing of the selected teller system is in
process and should be completed by December 31, 1998. In addition, FBA has
identified a back-up teller system, which is being subjected to a similar
review, in the event the selected teller system does not meet FBA's
requirements. The new teller system should be installed in selected bank test
locations during the fourth quarter of 1998 with implementation in the remaining
locations to be substantially completed by June 30, 1999. The estimated cost of
the teller replacement is $1.4 million and is expected to be charged to expense
over a 60 month period commencing in the third quarter of 1999. First Banks is
also upgrading its local area network-based systems, networks and core
processor, and is accelerating the purchase of certain item processing
equipment, as the current equipment, which is fully depreciated, is not Year
2000 compliant. The estimated cost of these upgrades and the item processing
equipment will be charged to FBA under the terms of certain data processing and
management services agreements. See Note 2 to the consolidated financial
statements for a further discussion of transactions with related parties.
The final phase of the Program is the implementation of remediated and
other systems into the operating environment of FBA and First Banks. The final
phase of the Program is scheduled to be completed by June 30, 1999.
Concurrent with the development and execution of the Plan is the
evolution of FBA's Year 2000 Contingency Plan (Contingency Plan). The
Contingency Plan is intended to be a living document changing and developing to
reflect the results of the Program. The Contingency Plan includes the
contingency procedures for common systems, coordinated by the Team, and
departmental specific systems, coordinated by the appropriate departmental
manager and the assigned Team member. The Contingency Plan addresses a variety
of issues including critical systems, credit risk, liquidity, loan and deposit
customers, facilities, supplies and computer hot-site location.
FBA is also completing an assessment of Year 2000 risks relating to its
lines of business separate from its dependence on data processing. The
assessment includes a review of larger commercial loan and deposit customers to
ascertain their overall preparedness regarding Year 2000 risks. The process
requires lending and other banking officers to meet with their customers to
review and assess their overall preparedness for Year 2000 risks. While the
process of evaluating the potential adverse effects of Year 2000 risks on these
customers is substantially complete, it is not possible to quantify the overall
potential adverse effects to FBA resulting from these customers' failure to
adequately prepare for the Year 2000. The failure of a commercial bank customer
to prepare adequately for Year 2000 could have a significant adverse effect on
such customer's operations and profitability, in turn inhibiting its ability to
repay loans in accordance with their terms or requiring the use of its deposited
funds. FBA is also reviewing and structuring certain funding sources to
facilitate the Subsidiary Banks' liquidity requirements under varying cash flow
assumptions.
The Plan also provides for the identification and communication with
significant non-data processing third party vendors regarding their preparedness
for Year 2000 risks. The results of this process have revealed no significant
business risks to FBA; however, additional investigation is scheduled for the
fourth quarter of 1998 and the first quarter of 1999.
The total cost of the Program is currently estimated at $2.3 million
comprised of capital improvements of $1.4 million and direct expenses
reimbursable to First Banks of $900,000. The capital improvements, as previously
discussed, will be charged to expense in the form of depreciation expense or
lease expense, generally over a period of 60 months. FBA incurred direct
expenses related to the Program of approximately $60,000 during the third
quarter of 1998. Similarly, FBA expects the Program to incur expenses of
approximately $150,000 for the last quarter of 1998. In addition, FBA is
estimating direct expenses of $690,000 for the duration of the Program. The
total cost could vary significantly from those currently estimated for
unforeseen circumstances which could develop in carrying out the Program.
<PAGE>
While FBA is making a substantial effort to become Year 2000 compliant,
there is no assurance the failure to adequately address all issues relating to
the Year 2000 problem would not have a material adverse effect on its financial
condition or results of operations.
Effect of New Accounting Standards
FBA adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130 - Reporting Comprehensive Income (SFAS 130)
retroactively on January 1, 1998. SFAS 130 established standards for reporting
and displaying income and its components (revenues, gains and losses) in a full
set of general purpose financial statements. SFAS 130 requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comparative financial
statements provided for earlier periods have been restated to reflect the
application of SFAS 130. The implementation of SFAS 130 did not have a material
impact on FBA's consolidated financial statements.
During 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131 - Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). SFAS 131 establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and requires those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
Additionally, SFAS 131 establishes standards for related disclosures about
products and services, geographic areas, and major customers superseding SFAS
No. 14 - Financial Reporting for Segments of a Business Enterprise. FBA is
currently evaluating the requirements of SFAS 131 and believes expanded
disclosure information will be required to be included in FBA's consolidated
financial statements for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It 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. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. Earlier application of SFAS 133 is
encouraged but should not be applied retroactively to financial statements of
prior periods. FBA is currently evaluating the requirements and impact of SFAS
133.
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
11 Calculations of Earnings Per Share
27 Article 9 - Financial Data Schedule (EDGAR only)
(b) A current report on Form 8-K was filed by FBA on September 21, 1998.
Items 5 and 7 of the Report described the execution by FBA on
September 3, 1998 of an Agreement and Plan of Reorganization for the
acquisition of Redwood Bancorp by FBA. In addition, Items 5 and 7 of
the Report included the press release dated September 9, 1998
announcing the execution of the Acquisition Agreement by and between
FBA and Redwood Bancorp.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Registrant
Date: November 10, 1998 By: /s/James F. Dierberg
---------------------
James F. Dierberg
Chairman, President
and Chief Executive Officer
Date: November 10, 1998 By: /s/Allen H. Blake
------------------
Allen H. Blake
Vice President,
Chief Financial Officer
and Secretary
(Principal Financial Officer)
<PAGE>
Exhibit 11
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for the periods
indicated:
<TABLE>
<CAPTION>
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
(dollars expressed in thousands, except per share data)
Three months ended September 30, 1998:
<S> <C> <C> <C>
Basic EPS - income available to common stockholders.... $ 1,520 5,151 $ 0.30
Effect of dilutive securities - stock options.......... - 8
------- -----
Diluted EPS - income available to common stockholders.. $ 1,520 5,159 $ 0.29
======= ===== =======
Three months ended September 30, 1997:
Basic EPS - income available to common stockholders.... $ 1,043 4,039 $ 0.26
Effect of dilutive securities - stock options.......... - 15
------- -----
Diluted EPS - income available to common stockholders.. $ 1,043 4,054 $ 0.26
======= ===== =======
Nine months ended September 30, 1998:
Basic EPS - income available to common stockholders.... $ 3,641 5,090 $ 0.72
Effect of dilutive securities - stock options.......... - 10
------- -----
Diluted EPS - income available to common stockholders.. $ 3,641 5,100 $ 0.71
======= ===== =======
Nine months ended September 30, 1997:
Basic EPS - income available to common stockholders.... $ 2,512 4,059 $ 0.62
Effect of dilutive securities - stock options.......... - 30
------- -----
Diluted EPS - income available to common stockholders.. $ 2,512 4,089 $ 0.61
======= ===== =======
</TABLE>
The 12% convertible debentures are not presented above as they do not
have a significant impact on the calculations of diluted EPS for the periods
presented.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000310979
<NAME> First Banks America,Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 26,077
<INT-BEARING-DEPOSITS> 26,902
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,577
<INVESTMENTS-CARRYING> 2,032
<INVESTMENTS-MARKET> 0
<LOANS> 491,396
<ALLOWANCE> (12,449)
<TOTAL-ASSETS> 722,199
<DEPOSITS> 596,094
<SHORT-TERM> 9,513
<LIABILITIES-OTHER> 53,307
<LONG-TERM> 6,500
0
0
<COMMON> 861
<OTHER-SE> 55,924
<TOTAL-LIABILITIES-AND-EQUITY> 722,199
<INTEREST-LOAN> 33,493
<INTEREST-INVEST> 6,167
<INTEREST-OTHER> 979
<INTEREST-TOTAL> 40,639
<INTEREST-DEPOSIT> 16,296
<INTEREST-EXPENSE> 17,681
<INTEREST-INCOME-NET> 22,958
<LOAN-LOSSES> 725
<SECURITIES-GAINS> 341
<EXPENSE-OTHER> 19,330
<INCOME-PRETAX> 6,239
<INCOME-PRE-EXTRAORDINARY> 6,239
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,641
<EPS-PRIMARY> .72
<EPS-DILUTED> .71
<YIELD-ACTUAL> 8.81
<LOANS-NON> 6,877
<LOANS-PAST> 428
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,828
<ALLOWANCE-OPEN> 11,407
<CHARGE-OFFS> (2,498)
<RECOVERIES> 1,930
<ALLOWANCE-CLOSE> 12,449
<ALLOWANCE-DOMESTIC> 12,449
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,731
</TABLE>
