<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT 1934
For the transition period from _______ to _______
Commission File Number: 0-23890
FIRST STATE CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1439347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 W. Broad Avenue, Albany, Georgia 31703
(Address of principal executive offices)
(912) 432-8000
(Registrant's telephone number, including area code)
Not Applicabl
(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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 30, 1997.
6,892,769 shares
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The following financial statements are provided for First State Corporation and
subsidiaries:
A. Consolidated Balance Sheets as of September 30, 1997 and December 31,
1996.
B. Consolidated Statements of Income for the three months ended September
30, 1997 and 1996 and for the nine months ended September 30, 1997 and
1996.
C. Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996.
The consolidated statements furnished have not been examined by independent
certified public accountants, but, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results of operations. Results of operations for the nine
months are not necessarily indicative of the results of operations for the
entire year.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
FIRST STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1997 and December 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------- ------------
<S> <C> <C>
Cash and due from banks....................... $ 25,875 $ 30,151
Interest-bearing deposits in banks............ 1,504 6,298
Investment securities--held to maturity....... 31,711 34,813
Investment securities--available for sale..... 75,904 87,026
Federal funds sold............................ 0 875
Loans......................................... 382,188 334,332
Less allowance for loan losses................ 5,382 5,062
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Loans, net................................ 376,806 329,270
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Premises and equipment, net................... 9,781 10,358
Other assets.................................. 18,368 17,708
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$539,949 $516,499
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LIABILITIES & STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand.................. $ 80,570 $ 90,636
Interest-bearing demand..................... 108,339 111,837
Savings..................................... 28,506 28,380
Time, $100,000 and over..................... 79,747 50,347
Other time.................................. 164,495 171,251
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Total deposits................................ 461,657 452,451
Federal funds purchased and securities sold
under repurchase agreements................. 17,046 7,771
Debenture bonds and notes payable............. 3,058 3,395
Other liabilities............................. 6,194 4,752
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Total liabilities............................. 487,955 468,369
Stockholders' Equity
7% cumulative nonvoting preferred stock, par
value $50; 100,000 shares authorized; 0 shares
issued
Common stock, par value $1; 20,000,000 shares
authorized: 6,952,720 shares and 6,824,382
shares issued............................... 6,953 6,824
Additional paid-in capital.................... 1,189 74
Retained earnings............................. 44,863 41,142
Net unrealized gains on available for sale
securities (net of taxes)................... 188 90
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53,193 48,130
Less cost of common treasury stock
59,951 shares and 0 shares.................. 1,199 0
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Total stockholders' equity................ 51,994 48,130
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$539,949 $516,499
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</TABLE>
<PAGE>
FIRST STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the periods ended September 30, 1997 and 1996
(Dollars in Thousands, except earnings per share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans........................................... $ 8,936 $7,861 $25,514 $22,545
Interest on investment securities
Taxable............................................................ 1,505 1,301 4,670 3,033
Nontaxable......................................................... 262 314 798 961
Interest on federal funds sold....................................... 0 23 19 197
Interest on deposits in banks........................................ 57 17 169 215
--------- --------- --------- ---------
$10,760 $9,516 $31,170 $26,951
--------- --------- --------- ---------
Interest Expense
Interest on deposits................................................... $ 4,321 $3,687 $12,442 $10,190
Interest on federal funds purchased and securities sold under
repurchase agreements................................................ 109 158 221 244
Interest on other borrowings........................................... 59 52 178 61
--------- --------- --------- ---------
$ 4,489 $3,897 $12,841 $10,495
--------- --------- --------- ---------
Net interest income................................................ 6,271 5,619 18,329 16,456
Provision for loan losses............................................ 330 82 825 350
--------- --------- --------- ---------
Net interest income after provision for loan losses................ $ 5,941 $5,537 $17,504 $16,106
--------- --------- --------- ---------
Other Income
Service charges on deposit accounts.................................. 918 787 2,618 2,203
Other loan income.................................................... 436 465 1,218 1,677
Trust department income.............................................. 300 301 902 901
Other................................................................ 170 49 434 277
--------- --------- --------- ---------
$ 1,824 $1,602 $ 5,172 $ 5,058
--------- --------- --------- ---------
Other Expense
Salaries and employee benefits....................................... 2,469 2,392 $ 7,350 $ 7,191
Equipment and occupancy, net......................................... 889 811 2,668 2,304
Data processing expense.............................................. 217 177 693 595
Stationery and supplies.............................................. 124 129 341 336
Amortization of intangible assets.................................... 181 142 546 259
Legal fees........................................................... 111 26 579 146
Advertising and marketing............................................ 145 101 491 332
Other operating expenses............................................. 684 527 1,922 2,055
--------- --------- --------- ---------
4,820 4,305 $14,590 $13,218
--------- --------- --------- ---------
Income before taxes................................................ 2,945 2,834 8,086 7,946
Applicable income taxes.............................................. 979 835 2,626 2,463
--------- --------- --------- ---------
Net Income............................................................. $ 1,966 $1,999 $ 5,460 $ 5,483
--------- --------- --------- ---------
--------- --------- --------- ---------
Per share of common stock
Net Income, fully-diluted.......................................... $ 0.28 $ 0.28 $ 0.77 $ 0.78
</TABLE>
<PAGE>
First State Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Period Ended September 30, 1997 and 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................................................ $ 5,460 $ 5,483
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 1,799 1,301
Provision for loan losses................................................................. 825 350
Provision for deferred tax benefits....................................................... (145) (13)
Increase in taxes payable................................................................. 246 233
Increase in interest payable.............................................................. 487 54
Increase in interest receivable........................................................... (705) (1,171)
Gain (loss) on sale of fixed assets and other real estate owned........................... 15 (42)
Other prepaids, deferrals and accruals, net............................................... 148 (16)
-------- ---------
Total adjustments..................................................................... 2,670 696
-------- ---------
Net cash provided by operatiing activities............................................ $ 8,130 $ 6,179
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in interest bearing deposits with banks............................................ $ 4,794 $ 2,217
Proceeds from maturities of securities held to maturity................................... 3,102 8,881
Proceeds from maturities of securities held for sale...................................... 20,131 53,149
Purchase of securities held to maturity................................................... 0 (4,209)
Purchase of securities held for sale...................................................... (8,860) (104,780)
Decrease in federal funds sold............................................................ 875 7,358
Increase in loans......................................................................... (48,361) (33,458)
Net cash received from acquisition of deposits............................................ 0 73,447
Sale of premises and equipment............................................................ 525 465
Purchase of premises and equipment........................................................ (1,062) (1,339)
-------- ---------
Net cash provided by (used in) investing activities....................................... $(28,856) $ 1,731
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits...................................................................... $ 9,206 $ (13,870)
Increase in federal funds purchased and securities sold under repurchase agreements....... 9,275 2,923
Proceeds from long-term debt.............................................................. 0 4,850
Principal payments on debt................................................................ (337) (912)
Proceeds from exercise of stock options................................................... 1,246 2
Treasury stock transactions, net.......................................................... (1,199) (569)
Dividends paid............................................................................ (1,739) (1,358)
Purchase of fractional shares............................................................. (2) (1)
-------- ---------
Net cash provided by (used in) financing activities..................................... $ 16,450 $ (8,935)
-------- ---------
Net increase (decrease) in cash and due from banks........................................ (4,276) (1,025)
Cash and due from banks at beginning of period............................................ 30,151 26,130
-------- ---------
Cash and due from banks at end of period.................................................. $ 25,875 $ 25,105
-------- ---------
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and other borrowings............................................. $ 12,354 $ 10,441
Income taxes paid..................................................................... $ 2,682 $ 2,609
</TABLE>
<PAGE>
FIRST STATE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
First State Corporation is a multi-bank holding company whose business is
presently conducted by its wholly-owned subsidiaries, First State Bank and
Trust Company of Albany, Georgia and subsidiary and First State Bank and
Trust Company of Cordele, Georgia. The Company provides a full range of
banking services to individual and corporate customers in its primary market
area of southwest Georgia. The Company and its subsidiaries are subject to
the regulations of certain Federal and state agencies and are periodically
examined by certain regulatory authorities.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the financial
services industry. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Actual results could differ from those
estimates.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany transactions and accounts are
eliminated in consolidation. Assets held by the Banks in a fiduciary or
agency capacity are not assets of the Banks and are not included in the
financial statements.
The principles which significantly affect the determination of financial
position, results of operations and cash flows are summarized below.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and due from banks includes cash
on hand and amounts due from banks (including cash items in process of
clearing). Cash flows from loans originated by the Company, deposits,
interest-bearing deposits and Federal funds purchased and sold are reported
net.
The Company maintains amounts due from banks which, at times, may exceed
Federally insured limits. The Company has not experienced any losses in such
accounts.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
Securities are classified based on management's intention on the date of
purchase. Securities which management has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost.
All other debt securities are classified as available-for-sale and carried at
fair value with net unrealized gains and losses included in stockholders'
equity net of tax. Marketable equity securities are carried at fair value
with net unrealized gains and losses included in stockholders' equity. Other
equity securities without a readily determinable fair value are carried at
cost.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts, are included in interest income. Realized gains and
losses from the sales of securities are determined using the specific
identification method.
Loans Held for Sale
Loans held for sale include mortgage and other loans and are carried at the
lower of aggregate cost or fair value.
Loans
Loans are carried at their principal amounts outstanding less unearned income
and the allowance for loan losses. Interest income on loans is credited to
income based on the principal amount outstanding.
Loan origination fees and certain direct costs of most loans are recognized
at the time the loan is recorded. Because net origination loan fees and
costs are not material, the results of operations are not materially
different than the results which would be obtained by accounting for loan
fees and costs in accordance with generally accepted accounting principles.
The allowance for loan losses is maintained at a level that management
believes to be adequate to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth, composition of the loan portfolio, and other
risks inherent in the portfolio. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Company
to record additions to the allowance based on their judgment about
information available to them at the time of their examinations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
accrual of interest is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
A loan is impaired when it is probable the Company will be unable to collect all
principal and interest payments due in accordance with the terms of the loan
agreement. Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the contractual loan
rate as the discount rate. Alternatively, measurement may be based on the
observable market prices or, for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value of the
collateral.
If the recorded investment in the impaired loan exceeds the measure of fair
value, a valuation allowance is established as a component of the allowance for
loan losses. Changes to the valuation allowance are recorded as a component of
the provision for loan losses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally on the straight-line method over the
estimated useful lives of the assets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate Owned
Other real estate owned represents properties acquired through foreclosure and
acquisition. Other real estate owned is held for sale and is carried at the
lower of the recorded amount of the loan or fair value of the properties less
estimated selling costs. Any write-down to fair value at the time of transfer
to other real estate owned is charged to the allowance for loan losses.
Subsequent gains or losses on sales and any subsequent adjustment to the value
are recorded as other expenses.
Intangible Assets
Intangible assets arising from excess of purchase price over net assets
acquired of purchased banks are being amortized on the straight-line method over
various periods not exceeding 25 years. Premiums paid for deposits are being
amortized on the straight-line basis over 15 years.
Income Taxes
The Company and its subsidiaries file a consolidated income tax return. Each
subsidiary provides for income taxes based on its contribution to income taxes
(benefits) of the consolidated group.
Income tax expense consists of current and deferred taxes. Current income tax
provisions approximate taxes to be paid or refunded for the applicable year.
Deferred tax assets and liabilities are recognized on the temporary differences
between the bases of assets and liabilities as measured by tax laws and their
bases as reported in the financial statements. Deferred tax expense or benefit
is then recognized for the change in deferred tax assets or liabilities between
periods.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences, tax operating loss carryforwards, and tax credits
will be realized. A valuation allowance is recorded for those deferred tax
items for which it is more likely than not that realization will not occur.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Profit-Sharing Plan
Profit-sharing plan costs are funded as accrued and are based on a percentage of
individual employee's salary, not to exceed the amount that can be deducted for
Federal income tax purposes.
Pension Plan
The Company has a defined benefit pension plan covering substantially all
employees. The Company's policy is to fund accrued pension costs.
Earnings Per Share
Earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding. All per share amounts for prior periods have been adjusted to
reflect the 3-for-2 stock split effected in the form of a 50% stock dividend
effective July 1, 1996 and the 3-for-2 stock split effected in the form of a 50%
stock dividend effective May 20, 1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Capital Requirements
The minimum capital requirements to be "well capitalized" and the actual capital
ratios for the Company at September 30,1997, and December 31, 1996, are as
follows:
--Actual Ratio--
September 30, December 31, Regulatory
1997 1996 Minimum
Tier-1 Leverage Ratio 8.60% 7.99% 5.00%
Tier-1 Risk Based Capital Ratio 12.24% 12.98% 6.00%
Total Risk Based Capital Ratio 13.49% 14.24% 10.00%
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended September 30, 1997 compared to the three months ended
September 30, 1996
and
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996
Results of Operations
Interest Income
Interest income for the quarter ended September 30, 1997 was $10,760,000, as
compared to $9,516,000 in the same period of 1996. This is an increase of
$1,244,000, or 13.07%. The increase is attributable to growth in quarterly
average earning assets to $487,116,000 at 9/30/97 from $436,029,000 at 9/30/96,
an increase of 11.72%. The effect of the increase in earning assets was
partially offset by the effect of a decrease in average loan yields. Average
loan yield declined from 9.62% for the quarter ended September 30, 1996, to
9.58% for the quarter ended September 30, 1997, a decrease of 0.42%. Average
yields on investments, federal funds sold, and interest-bearing deposits as a
group grew from 5.94% for the quarter ended September 30, 1996, to 6.19% for the
quarter ended September 30, 1997, an increase of 4.21%.
The increase in average earning assets was the result of a 13.82% increase in
average loan balances and a 5.37% increase in average balances of investments
(including federal funds sold and interest-bearing deposits) as compared to the
quarter ended September 30, 1996. The increase in investments was primarily due
to the fact that the funds acquired in the acquisition of approximately $82
million in Dougherty County deposits of First Union National Bank of Georgia, NA
did not occur until the middle of the third quarter of 1996.
Interest income for the nine months ended September 30, 1997 was $31,170,000, as
compared to $26,951,000 in the same period of 1996. This is an increase of
$4,219,000, or 15.65%. The increase is primarily attributable to growth in
year-to-date average earning assets to $475,997,000 at 9/30/97 from $407,552,000
at 9/30/96, an increase of 16.79%. The effect of the increase in earning assets
was aided by an increase in average investment yields, but was offset by the
effect of a decrease in average loan yield. Average loan yield declined from
9.70% for the nine months ended September 30, 1996, to 9.22% for the nine months
ended September 30, 1997, a decrease of 4.95%. Average yields on investments,
federal funds sold, and interest-bearing deposits as a group increased slightly
from 6.07% for the nine months ended September 30, 1996, to 6.17% for the
quarter ended September 30, 1997, an increase of 1.65%.
The increase in average earning assets was the result of a 19.16% increase in
nine-month average loan balances and a 26.41% increase in nine-month average
balances of investments (including federal funds sold and interest-bearing
deposits) as compared to the nine month
<PAGE>
average balances at September 30, 1996. As stated above, the increase in
investments was primarily due to funds acquired in the August 9, 1996
acquisition of approximately $82 million in Dougherty County deposits of
First Union National Bank of Georgia, NA.
Interest Expense
Interest expense for the three months ended September 30, 1997 was $4,489,000,
as compared to $3,897,000 for the third quarter of 1996. This is an increase of
$592,000, or 15.19%. The increase is due to an increase in average deposit
balances of $48.3 million, or 11.75%, since September 30, 1996. Deposit
expense averaged 3.73% of deposit balances for the third quarter of 1997, up
from the 3.57% figure for the third quarter of 1996. An analysis of average
deposit balances also shows a 1.72% shift in deposit composition to savings and
time deposits (with higher interest rates) since the third quarter of 1996.
Interest on federal funds purchased and securities sold under repurchase
agreements amounted to $109,000 as compared to $158,000 for the third quarter of
1996. This was primarily due to an increase in the average balance of
securities sold under repurchase agreements. Interest on other borrowings
during the third quarter of 1997 was $59,000, up slightly from the third quarter
of 1996, when interest on borrowings totaled $52,000. The Corporation has
long-term debt related to the matching of one large variable-rate commercial
loan with a variable-rate borrowing of the same maturity and thus incurs this
expense item.
Interest expense for the nine months ended September 30, 1997 was $12,841,000,
as compared to $10,495,000 for the nine months ended September 30, 1996. This
is an increase of $2,346,000, or 22.35%. The increase is due to an increase in
nine-month average deposit balances of $68.0 million, or 17.55%, as compared to
the nine-month average at September 30, 1996. Deposit expense has increased as
a percent of deposit liabilities since 1996. Deposit expense averaged 3.65% of
deposit balances for the nine month period ended September 30, 1997, up from the
3.51% figure for the same period in 1996. Again, an analysis of average deposit
balances also shows a shift in deposit composition to savings and time deposits
(with higher interest rates) since September 30, 1996.
Interest on federal funds purchased and securities sold under repurchase
agreements amounted to $221,000 as compared to $244,000 for the nine months
ended September 30, 1996, due to decreased average balances of federal funds
purchased, offset by increased balances of repurchase agreements. Average
federal funds purchased was approximately $4,853,000 for the nine months ended
September 30, 1996, while it was only $2,016,000 for the nine months ended
September 30, 1997. Average balances of repurchase agreements were $1,352,000
for the nine months ended September 30, 1996, while they increased to $5,621,000
for the nine months ended September 30, 1997. Interest on other borrowings
during the first nine months of 1997 was $178,000, up from the nine months ended
September 30, 1996, when interest on borrowings totaled $61,000. Again, this
expense is attributable to the Corporation's long-term debt.
Provision for Loan Losses
The provision for loan losses for the three months ended September 30, 1997 was
$330,000 as compared to $82,000 for the three months ended September 30, 1996,
an increase of $248,000 or 302.44%. Given the large amount of loan growth in
1997 ($47.9 million, or 14.31% since year-end 1996), management increased the
loan loss provision to maintain a proportionate level
<PAGE>
of reserves. The current provision maintains the allowance for loan losses
at levels deemed acceptable by management and the regulators of the
affiliated institutions.
For the nine month period ended September 30, 1997, the loan loss provision was
$825,000 as compared to $350,000 for the nine months ended September 30, 1996.
This represents a 135.71% increase. The provision was increased to allow for
increased growth in the loan portfolio.
Other (Noninterest) Income
Noninterest income for the quarter ended September 30, 1997 was $1,824,000,
versus $1,602,000 for the quarter ended September 30, 1996. The net increase of
$222,000 in other income is the result of two factors: service charges on
deposit accounts increased by $131,000 over the third quarter of 1996, and
income from miscellaneous sources increased by $121,000. Service charges were
higher due to the increased number of accounts as a result of the First Union
deposit acquisition and other deposit growth, and also due to an increase in
certain deposit fees at September 1, 1997.
Noninterest income for the nine-month period ended September 30, 1997 was
$5,172,000, versus $5,058,000 for the nine-month period ended September 30,
1996. The net increase of $114,000, or 2.25%, in noninterest income
year-to-date is the result of three factors: (a) service charges on deposit
accounts increased by $415,000 over the first nine months of 1996; (b) other
noninterest income increased by $157,000 over the first nine months of 1996 and
(c) a decrease other loan income of $459,000 resulting chiefly from a decrease
in volume of loan sales in the secondary market. Service charges were higher
due to the increased number of accounts as a result of the First Union deposit
acquisition and other deposit growth, and also due to an increase in certain
deposit fees at September 1, 1997. The increase in other noninterest income is
chiefly explained by several offsetting factors: increases in customer check
income, gains on sale of other real estate, other fee income, and miscellaneous
income totaling $262,000 (versus the prior September 30, 1996 figure) were
offset by losses on the sale of fixed assets and decreased gains on sale of
investments that had an aggregate effect of $81,000 on earnings.
Other (Noninterest) Expenses
Other noninterest expenses were $4,820,000 in the third quarter of 1997, an
11.96% increase from the $4,305,000 reported in the same period of 1996. The
$515,000 increase is due to a number of factors. First, the Company's other
operating expenses increased by $157,000. The increase in other operating
expenses was primarily due to (a) an increase in personnel training costs of
$41,000; (b) increased stockholder expense of $43,000; (c) a $35,000 increase
in consultant fees; (d) a $26,000 increase in postage expense; (e) a $24,000
increase in bank dues; (f) a $22,000 increase in fees paid to outside
accountants; offset by (g) a $23,000 decrease in operational losses. Secondly,
legal fees rose $85,000, or 326.9%, over the third quarter figure for 1996, due
to nonrecurring fees arising from a lawsuit completed in the second quarter of
1997. In addition, salary and benefit expenses for the second quarter exceeded
the third quarter of 1996 amount by $77,000, a 3.22% increase. The Company also
experienced increased equipment maintenance and depreciation charges related
primarily to upgrades to the Corporation's data processing systems, which
resulted in $78,000 of additional expense. Advertising and marketing expenses
rose $44,000, primarily due to increased media costs. Finally, amortization of
intangibles attributable to the First Union deposit acquisition of 1996 resulted
in an increase in intangible expenses of $39,000.
<PAGE>
For the nine-month period ended September 30, 1997, other noninterest expenses
were $14,590,000, a 10.38% increase from the $13,218,000 reported in the same
period of 1996. The $1,372,000 increase is due to a number of factors. First,
legal fees rose $433,000, or 296.6%, over the September 30, 1996 figure due to
the nonrecurring fees arising from the lawsuit noted above. Secondly, the
Company experienced increased equipment maintenance and depreciation charges
principally related to upgrades to the Corporation's data processing systems,
which resulted in $364,000 of additional expense for the nine-month period. In
addition, amortization of intangibles attributable to the First Union deposit
acquisition of August 1996 resulted in an increase in intangible expenses of
$287,000 on a year-to-date basis. Advertising and marketing expenses rose
$159,000 from the prior September 30, 1996 figure of $332,000, a result of (a)
the retention of a Nashville-based advertising agency since the third quarter of
1996; and (b) increased charitable contributions to the community. Salary and
benefit expenses for the period ended September 30, 1997 exceeded the amount for
the period ended September 30, 1996 by $159,000, a 2.21% increase. Data
processing expense rose $98,000, or 16.47% for the year-to-date, primarily due
to an accounting reclassification of data communication expenses in 1997.
Finally, offsetting these increases for the nine month period, the Company's
other operating expenses decreased by $133,000. The decrease was primarily due
to (a) a $120,000 decline in other real estate expense; (b) a $75,000 decrease
in other operational losses; (c) a $44,000 decrease in consulting fee expense;
which were offset by (d) an increase in training expenses of $88,000; (e)
increases in credit information costs of $31,000; (f) an increase in customer
check cost of $30,000; and (g) an increase in stockholder expense of $27,000.
An accounting reclassification of certain modem and computer network-related
telephone expenses to the data processing expense line item also served to
decrease other operating expense by $97,000 compared to the figure for September
30, 1996.
Net Income
Net income for the third quarter of 1997 was $1,966,000, as compared to
$1,999,000 during the third quarter of 1996. This represents an decrease of
1.65%. Fully-diluted earnings per share for the quarter were $.28 per share,
equal to the split-adjusted third quarter 1996 figure.
The slight decrease in earnings for the third quarter of 1997 was the result of
an increase in noninterest expenses, increased additions to the allowance for
loan losses, and higher provisions for income taxes, almost entirely offset by
increases in net interest income from loans and investments and by other
noninterest income. As mentioned earlier, net interest income increased
$652,000 from the third quarter of 1996. Noninterest income increased by
$222,000 over that of the third quarter of 1996. This was offset by $515,000 in
noninterest expense increases, $248,000 in increased provision for loan losses,
and a tax provision that was $144,000 larger that that for the third quarter of
1996.
Management allocated more funds to loan loss reserves in its member banks, First
State Bank & Trust Company, Albany, and First State Bank & Trust in Cordele, to
maintain these reserves in step with recent increases in loan growth.
Other noninterest expenses increased $515,000 due to a number of factors.
First, the Company's other operating expenses increased by $157,000. Secondly,
legal fees rose $85,000, or 326.9%, over the third quarter figure for 1996, due
to nonrecurring fees arising from a lawsuit
<PAGE>
adjudicated in the third quarter of 1997. In addition, salary and benefit
expenses for the second quarter exceeded the third quarter of 1996 amount by
$77,000. The Company experienced increased equipment maintenance and
depreciation charges related primarily to upgrades to the Corporation's data
processing systems, which resulted in $78,000 of additional expense.
Advertising and marketing expenses rose $44,000, primarily due to increased
media costs. Finally, amortization of intangibles attributable to the First
Union deposit acquisition of 1996 resulted in an increase in intangible
expenses of $39,000.
The above cost increases were offset by (a) an increase in net interest income
of $652,000 over the same quarter in 1996 (an 11.6% increase); and (b)
increases in noninterest income of $222,000 (a 13.9% increase).
For the nine-month period ended September 30, 1997, net income was down $23,000
from the prior September 30 figure, or 0.42%. Due to the dilutive effect of
stock options issued and outstanding, the fully-diluted net income per share
declined from $.78 per share at September 30, 1996 to $.77 per share at
September 30, 1997.
The net change in income for the nine month period occurred chiefly as the
result of increased net interest income and increased noninterest expenses. Net
interest income increased (up $1,873,000 or 11.38%, over the nine months ended
September 30, 1996), primarily due to the net increase in assets resulting from
the 1996 acquisition of First Union deposits in Dougherty County, GA. This
increase was primarily offset by (a) an increase in noninterest expenses (up
$1,372,000, or 10.38% from the first nine months of 1996), due to nonrecurring
legal fees (accounting for $433,000 of the increase), increased amortization of
intangibles attributable to the First Union deposit acquisition ($287,000 of the
increase), increased depreciation charges related to upgrades to the
Corporation's data processing systems ($364,000 increase), and increased
salaries and marketing costs of $318,000; (b) an increase in the Corporation's
provision for loan losses (up $475,000, or 135.71% from the nine months of
1996); offset by (c) an increase in noninterest income (up $114,000 or 2.25%
from the period ended September 30, 1996), due to increased service charges on
customer accounts and reduced fees from loan sales, due to a decline in activity
in the First State Mortgage lending division.
Balance Sheet Comments
Total assets at September 30, 1997 were $539,949,000, as compared to
$516,499,000 at year-end 1996, an increase of $23,450,000 or 4.54%. The growth
is the result of several factors: (a) a growth in loans of $47,856,000, or
14.31%, due to commercial, commercial real estate, and consumer real estate loan
growth; offset by (b) a decline in investments held-to-maturity of $3,102,000
due to maturities of municipal bonds; (c) declines in investments available for
sale and federal funds sold of $11,997,000, due principally to the calling of
agency bonds, the proceeds of which satisfied increased liquidity demands; (d)
declines in balances of interest bearing deposits and cash of $9,070,000 due to
liquidity demands; and, (e) a decline in premises and equipment of $577,000,
resulting from normal depreciation of existing assets.
Deposits at September 30, 1997 were $461,657,000, having increased $9,206,000,
or 2.03%, since December 31, 1996. The overall composition of the Company's
deposits continues to trend toward higher-yielding time deposits. Growth in
1997 has been dominated by the acquisition of public fund certificates of
deposit and maintenance of the remainder of the deposit portfolio.
<PAGE>
Debenture bonds and notes payable, and federal funds purchased and securities
sold under repurchase agreements increased by $8,938,000 to $20,104,000 at
September 30, 1997. Increased use of federal funds purchased to satisfy
liquidity demands (an increase of $8 million) accounted for most of the
increase. The remainder was due to increases in balances subject to repurchase
agreements (a $1.3 million increase) offset by a decrease in borrowings under
lines of credit (decrease of $250,000). The $3,058,000 in debentures and notes
payable consists entirely of funds borrowed under a note payable to the Federal
Home Loan Bank of Atlanta to match and fund a variable-rate commercial loan.
Capital Resources
Stockholders' equity at September 30, 1997 totaled $51,994,000, as compared to
$48,130,000 at year-end 1996. This is an increase of 8.03%. At September 30,
1997, total capital was 9.63% of total assets. Due to favorable changes in
market conditions, the FAS 115 allowance for unrealized gains on securities
increased by $98,000 (net of tax effect) during the year-to-date, resulting in
an net effect on capital of $188,000 (net of tax effect) at September 30, 1997.
Liquidity
Management of the Company's liquidity position involves the understanding and
matching of customers' cash flow needs. This includes the depositors' desire to
withdraw funds from the Company, as well as the borrowers' assurance of the
ability to fund their credit needs. The Company meets these needs primarily
through the management of its short term investments. Another source of
liquidity is the repayment of installment and single payment loans. Should the
need arise, the Company maintains relationships with several correspondent banks
who can provide funds on short notice.
Liquidity is monitored on a regular basis by management and the Company's
Asset Liability Management Committee, and by state and federal regulatory
authorities. Regulatory guidelines and management policies of the Company
establish liquidity ratios to be maintained by the Company. The current
liquidity levels are considered satisfactory.
Outlook for the remainder of 1997 and Forward Looking Statement
The remainder of 1997 brings with it new opportunities for growth in our
existing markets, as well as opportunities to expand into new market areas
through profitable bank acquisitions and branch purchases. Our philosophy
remains to provide the services, products, and customer service that our
customers have come to expect, while further enhancing stockholder value.
In order for the Company to sustain the track record of growth established over
the past several years, both internal and external growth must occur. While we
strive for core internal growth of the Company, factors outside our control
could affect future growth opportunities.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material pending proceedings to which the Company is a party
or to which any of its properties are subject; nor are there material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the company, or any associate of the foregoing, is a party or
has an interest adverse to the Company.
On December 31, 1993, Frederick D. Ledbetter filed suit against FSB
Albany in the U. S. District Court, Albany Division. The suit alleged
certain fiduciary violations with respect to a revocable management trust
established by Mr. Ledbetter at FSB Albany. The suit was based on
dissatisfaction with a number of actions taken by the Board of Directors of
the Company, including authorization of the stock offering which commenced
December 2, 1993 (Count One), the failure of the Board of Directors to take
affirmative action to sell the Company to a third party (Count Two) and the
compensation of senior management of the Company (Count Three). The suit was
later amended to add a fourth claim that the Bank improperly resigned as
trustee of plaintiff's trust (Count Four). On March 15, 1995, the district
court granted to FSB Albany summary judgment and complete dismissal of all
claims. Mr. Ledbetter appealed the district court's judgment to the United
States Court of Appeals for the Eleventh Circuit. On June 25, 1996, the
Eleventh Circuit reversed the trial court's grant of summary judgment and
remanded the case for trial before a jury. The suit was tried before a jury
starting Tuesday, February 25, 1997 in U. S. District Court in Albany,
Georgia. At the conclusion of the trial, the Court decided in favor of the
plaintiff as a matter of law as to Count One, but left to the jury whether
any damages should be awarded to plaintiff under Count One. On March 6, 1997,
the jury returned its verdict in which it found the defendant not liable on
Counts Two and Three of the suit and liable on Count Four of the suit. The
jury awarded no compensatory damages under the two counts in which the jury
and the Court found for plaintiff, and awarded $100 in nominal damages and
$42,000 in attorneys' fees. The parties agreed not to appeal the verdict and
judgment, and on April 23, 1997, FSB Albany paid $42,100 plus interest and
costs, in satisfaction of the judgment.
In a matter related to the Ledbetter litigation discussed above, the Board
of Directors of FSB Albany and First State received a derivative demand letter
dated October 4, 1996, from Sarah Haley Hixon, a shareholder from Greenville,
South Carolina. Ms. Hixon, through her attorneys, demanded that an action be
filed against the Directors of FSB Albany to indemnify FSB Albany for any
liabilities which might arise from the Ledbetter litigation. In accordance with
Georgia law, FSB Albany's Board established an independent committee to
determine whether the demand was in the best interests of FSB Albany and its
shareholders. First State Corporation's Board has also
<PAGE>
established an independent committee to determine whether the demand was in
the best interests of First State Corporation and its shareholders. The
Committee of independent directors recommended, and the boards of the Company
and FSB Albany accepted the recommendation, that the corporations take no
action to seek indemnification from their directors. The Committee
recommended that the Company deposit the sum of $50.00 into the accounts of
each trust that held the Company stock among its trust assets. No litigation
has been filed at this time.
ITEM 2. Changes in Securities.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
None
ITEM 5. Other Information.
None
ITEM 6. Exhibits and reports on Form 8-K
A. Exhibits - 27 Financial Data Schedule (for SEC use only)
B. There were no reports filed on Form 8-K for the quarter ended
September 30, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST STATE CORPORATION
November 10, 1997 /s/ Douglas E. Wren
_____________________ ____________________________
Date Douglas E. Wren,
President & Chief Operating
Officer
November 10, 1997 /s/ Robert E. Lee
______________________ ___________________________
Date Robert E. Lee,
Senior Vice President and
Chief Financial Officer
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<PAGE>
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