<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM _____TO _____.
Commission file number: 22-25144
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FIRST STATE BANCORPORATION
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(Name of small business issuer in its charter)
New Mexico 85-0366665
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 Lomas, Albuquerque, New Mexico 87102
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(Address of principal executive officers) (Zip Code)
Securities registered under Section 12(b) of the Act:
None
________________________________________________________________________________
Securities registered under Section 12(g) of the Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 _____
--
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
Revenues for most recent fiscal year: $28,615,000
Aggregate market value of the voting stock held by non-affiliates: $29,234,000
as of February 28, 1997.
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,227,332 shares of Common Stock as of March
26, 1997.
Documents incorporated by reference: The Company's Registration Statement on
Form SB-2, Commission File No. 33-68166, declared effective November 3, 1993, is
incorporated by reference into Part III of this Form 10-KSB. The Company's Forms
10-KSB for the fiscal year ended December 31, 1993, 1994 and 1995 are
incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Format. Yes No X
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I Page
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<S> <C>
Item 1: Description of Business 3
Item 2: Description of Property 9
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote of Securities Holders 10
PART II
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Item 5: Market for Common Equity and Related Stockholders Matters 10
Item 6: Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7: Financial Statements 11
Item 8: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
PART III
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Item 9: Directors, Executive Officers, Promoters and Control Persons; 11
Compliance with Section 16(a) of the Exchange Act
Item 10: Executive Compensation 14
Item 11: Security Ownership of Certain Beneficial Owners and Management 18
Item 12: Certain Relationships and Related Transactions 19
Item 13: Exhibits and Reports on Form 8-K 20
</TABLE>
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
THE COMPANY
The Company is a New Mexico based bank holding company that provides commercial
banking services primarily to small and medium sized businesses through its
subsidiary bank First State Bank. The Company operates four offices in Taos
County, five offices in Albuquerque, two offices in Santa Fe, and one office
each in Rio Rancho, Los Lunas, Bernalillo, and Placitas, New Mexico. In
addition, the Company has received approval to open a new branch in the Moriarty
market, with the opening tentatively scheduled for the third quarter of 1997.
First State Bank, the largest bank in Taos County, has operated in the county
since 1922. The Company acquired three Albuquerque branches in 1991 by merging
the business operations of First State Bank with an affiliated bank. The Company
entered the Santa Fe market with the acquisition of a controlling interest in
First State Bank of Santa Fe (the "Santa Fe Bank") on December 1, 1993. The
Santa Fe Bank was merged into First State Bank on June 5, 1994. See " --
History." At December 31, 1996, the Company had total assets, total deposits and
total stockholders' equity of $325.0 million, $277.4 million and $21.1 million,
respectively.
Management's strategy is to provide a business culture in which customers are
provided individualized service. As part of its operating and growth strategies,
the Company is seeking to (i) place greater emphasis on attracting core deposits
from, and providing financial services to, small and medium-sized businesses;
(ii) expand operations in Albuquerque, Santa Fe and other strategic areas in New
Mexico; (iii) maintain asset quality through reductions in nonperforming assets
and strict adherence to credit administration standards; (iv) manage interest
rate risk; (v) continue to improve internal operating systems; and (vi) manage
noninterest expenses.
Management believes that the Company is qualified to pursue an aggressive growth
strategy throughout New Mexico due to its responsive customer service, its
streamlined management structure, the strong community involvement of the
Company's management and employees and recent trends in the New Mexico banking
environment. Changes in banking laws have allowed out-of-state bank holding
companies to acquire New Mexico banking institutions. As a result, several
competing banks have been acquired by large out-of-state institutions. See " --
Growth Strategy." Management believes that, in certain cases, the acquiring
institutions have shifted the focus of the acquired banks away from the small
and medium-sized businesses that are at the core of the Company's marketing
efforts. The Company is seeking to capitalize on this environment by expanding
internally and through de novo branching opportunities and select acquisitions.
Management believes that the changes in the competitive environment have created
expansion opportunities for the Company. These opportunities are primarily
centered in the Albuquerque, Santa Fe, Rio Rancho, and Los Lunas markets. The
Company has added staff to service the additional volume of loans and deposits
obtained as a result of expansion in these marketplaces. The level of any
additional staffing and related expenses will depend on the magnitude of
continued growth. In addition, the Company will consider potential acquisition
opportunities that complement the Company's existing operations and provide
economies of scale when combined with its existing locations. The Company is not
in negotiations with respect to any potential acquisition. See "-- Growth
Strategy."
At December 31, 1996, First State Bank was "adequately capitalized" under
regulatory capital guidelines.
The Company's executive offices are located at 111 Lomas, Albuquerque, New
Mexico 87102, and its telephone number is (505) 241-7500.
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HISTORY
In 1988, Livingston & Co. Southwest L.P. ("Livingston & Co.") formed the Company
and an affiliated Company, New Mexico Bank Corporation, to acquire banking
institutions in New Mexico. In December 1988, the Company acquired First State
Bank and New Mexico Bank Corporation acquired National Bank of Albuquerque
("NBA"). After a change in New Mexico banking laws in 1991, the Company and New
Mexico Bank Corporation merged and the operations of NBA was merged into First
State Bank in December 1991.
At the time of its acquisition, First State Bank had high levels of problem
assets relative to total assets and an unacceptable record of loan charge-offs.
To address these problems, Michael R. Stanford, who had been appointed President
of First State Bank in April 1988 and is President of the Company, and his
management team focused on (i) strengthening underwriting standards and
increasing senior management involvement in loan approvals and (ii) pursuing an
aggressive policy of foreclosing upon nonperforming loans and selling the
underlying collateral. In addition, the Company sought to manage noninterest
expense by implementing expense and overhead reductions, including eliminating
two unprofitable branch offices and one redundant branch and reducing staffing
levels in the remaining three branches.
On December 1, 1993, the Company acquired 94.5% of the outstanding shares of
common stock (the "Santa Fe Stock") of the Santa Fe Bank (the "Santa Fe Bank
Transaction"). The selling shareholders of the Santa Fe Bank (the "Selling Santa
Fe Shareholders") included individuals who were (and continue to be) members of
the Company's senior management team, as well as individuals who subsequently
became members of the Board of Directors of the Company (collectively, the
"Affiliated Sellers"). The Affiliated Sellers owned, in the aggregate,
approximately 70% of the outstanding shares of Santa Fe Stock. The Company
issued 236,239 shares of the Company's Common Stock to the Selling Santa Fe
Shareholders in the Santa Fe Bank Transaction. Based on the closing sale price
of the Company's Common Stock on December 1, 1993, of $8.40 per share, the total
market value of the consideration received by the Selling Santa Fe Shareholders
in the Santa Fe Bank transaction equaled approximately $2.0 million, which
represented 150% of the book value of the Santa Fe Bank at June 30, 1993.
The Selling Santa Fe Shareholders acquired their ownership interest in the Santa
Fe Bank in March 1993 (the "March Transaction") for an aggregate amount of $1.3
million from another bank holding company which had acquired such stock through
foreclosure of a bank stock loan. The terms of such acquisition were favorable
to the Selling Santa Fe Shareholders in part because the prior owner had held
the shares of Santa Fe Stock in excess of the permitted holding period and was
under pressure from its regulators to divest such holdings. The Selling Santa Fe
Shareholders entered into an agreement to sell the shares of Santa Fe Stock to
the Company on July 30, 1993. In addition to recognizing an aggregate gain of
approximately $700,000 from the Santa Fe Bank Transaction, the Selling Santa Fe
Shareholders received dividends in respect of the Santa Fe Stock of
approximately $84,000 on June 30, 1993, and $215,000 on September 30, 1993. The
consideration to be paid by the Company in the Santa Fe Bank Transaction was
negotiated between representatives of the Selling Santa Fe Shareholders
(primarily Mr. Stanford, President and Chief Executive Officer of the Company,
and Mr. H. Patrick Dee, Executive Vice President of the Company) and the
Company. Because the Selling Santa Fe Shareholders included members of the
Company's management, the transaction cannot be said to have been negotiated at
arms length. The Company believes that the purchase price for the Santa Fe Bank
was appropriate based on its review of comparable transactions, the Santa Fe
Bank's earnings performance, asset quality and growth potential in the Santa Fe
market, as well as the potential for operating efficiencies presented by
combining the banks.
The Company had been interested in acquiring the Santa Fe Bank prior to the
March Transaction. However, the Company was precluded from purchasing the Santa
Fe Bank at the time because the Federal Reserve Board had indicated that it
would prohibit Livingston & Co., as well as any affiliate of Livingston & Co.
(including the Company), from acquiring any additional financial institutions.
In connection with the Company's initial public offering of Common Stock in
November 1993, Livingston & Co.'s ownership interest in the Company was
redeemed, thus allowing the Company to purchase the Santa Fe Bank.
Since its initial public offering in 1993, the Company has made significant
investments in expansion and technology. Since 1993, First State Bank has opened
seven new branches which have contributed $80,364,000 in deposits and
$64,378,000 in loans.
In 1996, First State Bank opened a de novo leasing department. Management
believes that the leasing department will provide portfolio diversification as
well as an additional vehicle for investing deposits resulting from branch
expansions. The leasing department had funded leases of approximately
$20,676,000 as of December 31, 1996.
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During 1996, First State Bank completed a conversion of its banking application
software. Management believes that the new software will enhance First State
Bank's ability to service customers while realizing operational efficiencies.
First State Bank also implemented a telephone banking system which is allowing
it to handle growth without a proportionate increase in staff. In 1996, a
deposit imaging system was implemented. This system has improved operational
efficiencies and reduced certain direct costs.
OPERATING STRATEGY
The Company's operating strategies include:
. Providing responsive, personal customer service
. Attracting new account relationships
. Emphasizing community involvement
. Developing new business opportunities
. Increasing efficiency
. Optimizing asset/liability management
Customer Service. The Company's objective is to increase market share in both
lending volume and deposits by providing responsive customer service that is
tailored to its customers' needs. By maximizing personal contact with customers,
maintaining low employee turnover, and endeavoring to understand the needs and
preferences of its customers, the Company is working to maintain and further
enhance its reputation of providing excellent customer service, allowing it to
achieve its growth and earnings goals.
The Company has developed a streamlined management structure that allows it to
make credit and other banking decisions rapidly. Management believes that this
structure, when compared to other competing institutions, enables the Company to
provide a higher degree of service and increased flexibility to creditworthy
customers.
New Account Relationships. The Company's strategy is to increase its emphasis on
relationship banking with small and medium-sized businesses and individual
customers across all product lines. The Company believes that the acquisition of
many of the Company's local competitors by out of state banking companies has
reduced the service level offered to customers of those banks and has created an
opportunity for the Company to expand its customer base. The Company intends to
capitalize on this opportunity by targeting its marketing efforts to those
businesses and individuals who prefer the personalized customer service
emphasized by the Company.
Community Involvement. First State Bank management and other employees
participate actively in a wide variety of civic and community activities and
organizations, including local chambers of commerce, a board of education,
United Way, and Habitat for Humanity. First State Bank also sponsors a number of
community-oriented events each year. The Company believes that these activities
assist First State Bank through increased visibility and through development and
maintenance of customer relationships.
New Business Opportunities. The Company has and will continue to consider a
variety of new banking opportunities, whether through the opening of de novo
branches, acquisition of an existing commercial bank or bank holding company, or
other opportunities permissible under state and federal banking regulations.
Expansion efforts will be focused in areas or markets that are complementary to
the First State Bank's existing customer base and areas of operation. See "--
Growth Strategy."
Increasing Efficiency. Management believes that investments in technology and
facilities made since 1993 will allow the Company to grow revenues significantly
faster than expenses over the next three years. These investments should allow
the Company to expand its asset base without a commensurate increase in
noninterest expense.
5
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Asset/Liability Management. The Company's asset/liability management policy is
designed to provide stable net interest income growth by protecting its earnings
from undue interest rate risk. The Company maintains a strategy of keeping the
rate adjustment period on the majority of both assets and liabilities to an
earnings neutral position, with a substantial amount of these assets and
liabilities adjustable in 90 days or less. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset/Liability
Management."
GROWTH STRATEGY
The Company expects to pursue an aggressive growth strategy through a
combination of internal growth, de novo branching, and select acquisitions.
Several banks that compete with the Company have been acquired by large out-of-
state financial institutions since 1993. Management believes that these changes
in the competitive environment have caused the acquired banks to significantly
alter their operating procedures and their approach to customer service
affording the Company an opportunity to gain profitable new account
relationships and to expand existing relationships.
In addition, management believes that there may be attractive opportunities to
open new branches and acquire branches of existing or merged institutions in New
Mexico. Consolidation in the banking industry and increased regulatory burdens
on existing institutions provide a favorable environment for such openings and
acquisitions. Management considers a variety of criteria when evaluating
potential branch expansion, including (i) the short-and long-term growth
prospects for the location, (ii) the management and other resources required to
integrate the operations, if such integration is desirable, (iii) the degree to
which the branch would enhance the geographic diversification of the Company,
(iv) the degree to which the branch would enhance the Company's presence in an
existing market, and (v) the costs of operating the branch. First State Bank has
obtained approval to open one new branch in the Moriarty market, with the
opening tentatively scheduled for the third quarter of 1997. An additional
future branch site has been acquired in Santa Fe, and the Company is also
evaluating other potential locations for new branches, one each in Albuquerque
and Belen.
The Company's goal over the next five years is to create a broad-based, well-
capitalized, customer-focused New Mexico financial institution with assets of
$600 to $700 million. Management believes that a financial institution of this
size is large enough to meet the needs of most customers, yet small enough to
deliver personal, high-quality service. To accommodate the Company's anticipated
growth, management intends to further develop the existing middle management of
the Company and further develop its MIS and other appropriate internal
management systems. There can be no assurance, however, that the Company will
achieve its growth objectives.
MARKET AREAS AND BANKS
Markets. First State Bank serves three distinct market areas within New Mexico:
Taos County; Albuquerque, Rio Rancho and Los Lunas; and Santa Fe. Taos County
is a popular year-round recreation and tourist area. Ski and golf resorts in the
area attract visitors from throughout the southwestern and western United
States. Taos also has an active art community catering to the tourist trade.
The Albuquerque, Rio Rancho and Los Lunas area comprises the largest
metropolitan area in New Mexico and is the financial center of the state. It has
a diverse economy centered around federal and state government, military,
service, and technology industries. Military facilities include Kirtland Air
Force Base and Sandia National Laboratories. A number of companies, including
Intel, Lockheed Martin, Taco Bell, Intuit, Sumitomo and General Mills, have
initiated or expanded operations in the area in the past several years.
Santa Fe is the state capital of New Mexico. Its principal industries are
government and tourism. Like Taos, Santa Fe is widely known for its southwestern
art galleries and amenities, including the Santa Fe Opera. Santa Fe
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is one of the largest art markets in the United States, attracting visitors from
all parts of the United States and many foreign countries.
First State Bank. The following table sets forth certain information concerning
the banking offices of First State Bank as of December 31, 1996:
<TABLE>
<CAPTION>
Number of Total Total
Location facilities Deposits Loans and Leases
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(Dollars in thousands)
<S> <C> <C> <C>
First State Bank:
Taos County 4 $ 75,471 $ 47,512
Albuquerque 5 112,951 124,471
Santa Fe 2 48,490 35,804
Los Lunas 1 15,767 23,235
Rio 3 25,854 19,904
Rancho/Placitas/Bernalillo
----------------------------------------
Total 15 $278,533 $250,926
========================================
</TABLE>
First State Bank offers a full range of financial services to commercial and
individual customers, including checking accounts, short- and medium-term loans,
revolving credit facilities, inventory and accounts receivable financing,
equipment financing, residential and small commercial construction lending,
commercial leases, various savings programs, installment and personal loans,
safe deposit services, credit cards, and brokerage services.
The Taos County locations provide conventional commercial and SBA loans to
established commercial businesses and businesses that support the tourism and
ski industries. The Taos branches also provide a broad range of consumer banking
services, including a full complement of deposit and residential construction
and other loan services.
The Albuquerque, Rio Rancho and Los Lunas locations primarily serve established
commercial businesses and individuals who may require a full range of banking
services. In addition to an emphasis on conventional commercial and SBA lending,
these locations are active in residential construction lending in the
metropolitan Albuquerque area.
The Santa Fe locations primarily serve a diverse group of small to medium-sized
business and individual customers, including commercial businesses that support
the tourism industry. See "Management--Certain Relationships and Related
Transactions--Sale of Santa Fe Bank Building and Santa Fe Branch Location."
First State Bank is the largest bank in Taos County with 39.4% of the total
deposits as of June 30, 1996 the latest date as of which information is
available. Management believes that the Company's growth in this market will be
through general economic growth and not as a result of increased market share.
In Albuquerque and Santa Fe, First State Bank had approximately 2.7% and 4.0%,
respectively, of the total deposits as of June 30, 1996. Management believes
that the Albuquerque, Los Lunas, and Rio Rancho market, and the Santa Fe market
offer the greatest growth opportunity for the Company. The Albuquerque market
offers the Company a variety of expansion opportunities including a number of
potential sites for new branch locations. As the Company pursues its growth
objectives of providing high-quality personal banking services, future branch
expansion will be a high priority. See "--Growth Strategy."
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COMPETITION
First State Bank competes for loans, leases and deposits with other commercial
banks, savings banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
firms, asset-based non-bank lenders, governmental organizations and other
institutions with respect to the scope and type of services offered, interest
rates paid on deposits and pricing of loans, among other things. Many of these
competitors have significantly greater financial and other resources than the
Company. First State Bank also faces significant competition for investors'
funds from sellers of short-term money market securities and other corporate and
government securities.
First State Bank competes for loans and leases principally through the range and
quality of its services, interest rates and loan fees. First State Bank
believes its personal service philosophy enables it to compete favorably with
other financial institutions in its focus market of small and medium-sized
businesses. First State Bank actively solicits deposit-related clients and
competes for deposits by offering customers personal attention and professional
service.
EMPLOYEES
As of December 31, 1996, the Company had 183 full-time equivalent employees. The
Company places a high priority on staff development, training and selective
hiring. New hires are selected on the basis of both technical skills and
customer-service capabilities. Staff development involves intensive training in
marketing, customer service, and regulatory compliance. None of the Company's
employees is covered by a collective bargaining agreement and management
believes that its relationship with its employees is good.
OTHER
For a discussion of asset/liability management, the investment portfolio, loan
portfolio, nonperforming assets, allowance for loan losses and deposits see Item
6: "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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ITEM 2: DESCRIPTION OF PROPERTY
With the exception of its Southside facility in Taos, the Journal Center
facility in Albuquerque and the Bernalillo facility, which are owned by First
State Bank, the Company leases its banking facilities in Albuquerque, Taos,
Santa Fe, Rio Rancho and Los Lunas. See Item 12: "Certain Relationships and
Related Transactions." The following table shows the size and age of each of the
banking facilities owned or leased by the Company:
<TABLE>
<CAPTION>
Approximate
square footage
Approximate building area now
Approximate square footage utilized for banking
land area building area services Year constructed
(sq. ft.) (sq. ft.) (sq. ft.) or last renovated
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<S> <C> <C> <C> <C>
Facilities:
Taos
Main 19,800 8,940 8,940 Renovated 6-93
North 45,215 2,239 2,239 Renovated 9-95
Questa 17,947 1,050 1,050 Renovated 8-93
South 36,590 5,550 5,550 Renovated 9-92
Albuquerque
Lomas 9,119 9,199 9,199 Renovated 3-95
Carlisle 16,256 1,880 1,880 Constructed 9-95
Montgomery 14,514 3,742 3,742 Renovated 7-91
Sycamore 45,834 5,164 4,164 Constructed 9-94
Journal Center 88,427 13,200 13,200 Constructed 9-95
Santa Fe
San Mateo 62,334 6,955 6,955 Renovated 11-95
Downtown 5,100 2,116 2,116 Constructed 12-95
Rio Rancho
Rio Rancho 50,214 5,500 4,000 Constructed 3-95
Placitas 0 807 807 Constructed 9-94
Bernalillo 43,539 4,610 4,610 Constructed 8-96
Los Lunas 57,243 4,327 4,327 Constructed 8-95
</TABLE>
ITEM 3: LEGAL PROCEEDINGS
Periodically and in the ordinary course of business, various claims and lawsuits
are brought against the Company, such as claims to enforce liens, condemnation
proceedings on properties in which the Company holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Company's business. In the opinion of the Company's management,
the ultimate liability, if any, resulting from such claims or lawsuits will not
have a material adverse effect on the financial position or results of
operations of the Company.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1996.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the NASDAQ National Market System Stock
Market under the symbol "FSNM." The following table sets forth, for the periods
indicated, the high and low closing sale prices on the NASDAQ National Market
System as reported by NASDAQ. The Company's Common Stock commenced trading on
November 3, 1993. The quotations in the over-the-counter market reflect inter-
dealer prices, without retail markup, markdown or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
1996
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First Quarter $12.75 $11.25
Second Quarter $13.00 $10.88
Third Quarter $14.00 $12.25
Fourth Quarter $15.25 $13.25
1995
----
First Quarter $11.80 $ 9.20
Second Quarter $11.80 $11.20
Third Quarter $12.20 $10.67
Fourth Quarter $13.00 $11.40
</TABLE>
The last reported sale price of the Company's Common Stock on March 26, 1997 was
$15.50 per share. As of March 26, 1997, there were approximately 83 shareholders
of record, not including shareholders who beneficially own Common Stock held in
nominee or street name.
DIVIDEND POLICY
Cash dividends of $408,489 or $0.20 per common share in 1996, $302,545 or $0.154
per common share in 1995 and $125,572 or $0.064 per common share in 1994 were
paid, which amounted to 19.82%, 18.06% and 5.25% of net income in 1996, 1995 and
1994, respectively. No dividends were paid from the commencement of trading on
November 3, 1993 through December 31, 1993. The declaration and payment of cash
dividends are determined by the Board of Directors in light of the earnings,
capital requirements and financial condition of the Company, and other relevant
factors. The ability of the Company to pay cash dividends depends on the amount
of cash dividends paid to it by First State Bank and the capital position of the
Company. Capital distributions, including dividends, by First State Bank are
subject to federal and state regulatory restrictions tied to its earnings
10
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and capital. In addition, the terms of the Convertible Debentures limit cash
dividends, distributions and redemptions with respect to the Common Stock. See
Note 7 of Notes to Consolidated Financial Statements of the Company.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations are filed as part of this report and appear immediately following the
signature page.
ITEM 7: FINANCIAL STATEMENTS.
The Company's financial statements are filed as a part of this report and appear
immediately following the Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth information concerning the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Company
---- --- -------
<S> <C> <C>
Michael R. Stanford (1) 44 President, Chief Executive Officer and
Director
H. Patrick Dee 42 Executive Vice President, Chief Operating
Officer, Secretary, Treasurer and Director
Brian C. Reinhardt 38 Senior Vice President and Chief Financial
Officer
Eloy A. Jeantete (1) 69 Chairman of the Board and Director
Leonard J. DeLayo, Jr. (3) 48 Director
Bradford M. Johnson (1)(2) 46 Director
Sherman McCorkle (1)(2) 53 Director
Douglas M. Smith, M.D. (1)(2) 63 Director
Herman N. Wisenteiner (1)(3) 66 Director
Manuel Lujan, Jr. 68 Director
</TABLE>
_____________________________
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Each officer of the Company serves at the discretion of the Board of Directors.
There are no family relationships among any of the directors, officers or key
employees of the Company. The current authorized number of directors of the
Company is ten.
Michael R. Stanford, a Director of the Company since its organization in 1988,
is President and Chief Executive Officer of the Company and First State Bank.
Mr. Stanford's entire career has been in the banking industry. Prior to joining
the Bank in 1987, Mr. Stanford spent five years with New Mexico Banquest
Corporation as Senior
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Vice President in charge of loan administration. Mr. Stanford is a past director
of the New Mexico Bankers Association. In addition, Mr. Stanford is involved in
a variety of civic organizations.
H. Patrick Dee has been a Director of the Company since 1991 and presently
serves as Executive Vice President, Chief Operating Officer and
Secretary/Treasurer of the Company, and Executive Vice President and Chief
Operating Officer of the Bank, a position he has held since December 1991.
Prior to joining the Company, Mr. Dee spent four years with New Mexico Banquest
Corporation and, after its acquisition by Livingston & Co. Southwest L.P. in
1988 with NBA. In 1989, Mr. Dee became Senior Vice President and Chief Financial
Officer of Livingston & Co. Southwest, L.P. Mr. Dee is a certified public
accountant.
Brian C. Reinhardt, a Senior Vice President and Chief Financial Officer of the
Company since 1995, joined the Bank in September 1994. Prior to joining the
Bank, Mr. Reinhardt was a Senior Manager with KPMG Peat Marwick LLP. Mr.
Reinhardt joined KPMG Peat Marwick LLP in 1984.
Eloy A. Jeantete, a Director of the Company since August 1993 and Chairman of
the Board since January 1994, joined the Bank 48 years ago as a bookkeeper and
has spent his entire working career with the Bank rising to his present position
of Chairman of the Board of the Company. As a lifetime resident of Taos, N.M.,
Mr. Jeantete has accumulated a long list of civic achievements and community
involvement, culminating with his election in 1990 as Mayor of Taos, N.M., a
position he held until March 1994.
Leonard J. DeLayo, Jr., a Director of the Company since November 1993, served as
a director of First State Bank from 1988 to January 1992. Mr. DeLayo has been
engaged in a general corporate and commercial law practice in New Mexico since
1974 and is the President and sole shareholder of Leonard J. DeLayo, Jr., P.C.,
which currently provides legal services to the Company and the Bank as outside
counsel. Mr. DeLayo is a member of the Albuquerque Board of Education.
Bradford M. Johnson, a Director of the Company since November 1993, is
President of Heron Hill Corporation, a private company engaged in investments
and financial consulting. From 1991 to November 1993 Mr. Johnson was a partner
and Director of Research of Sterne, Agee & Leach, Inc., an investment banking
firm in Atlanta, Georgia. Mr. Johnson studied at the University de Paris-
Sorbonne from 1987 to 1991. Mr. Johnson is a director of Community Bank
Capital Corporation, a privately owned thrift holding company in Atlanta,
Georgia.
Sherman McCorkle, a Director of the Company since November l993, is the
President of Technology Ventures Corporation, a wholly owned subsidiary of
Lockheed Martin, and has over fifteen years of banking experience. Mr. McCorkle
served as President and Chief Executive Officer of Sunwest Credit Services
Corporation from December 1988 to April 1992. Prior to that time, Mr. McCorkle
held a variety of positions with Sunwest Credit Services Corporation's parent,
Sunwest Bank of Albuquerque, N.A. Mr. McCorkle was a past Chairman of the
Greater Albuquerque Chamber of Commerce, a Board member of United Way and a
member of the American Bankers Association.
Douglas M. Smith, M.D., a Director of the Company since November 1993, is a
Board Certified radiologist and the owner/general partner of The Historic Taos
Inn, Taos, New Mexico. Dr. Smith is the co-founder and former President of
Palm Beach Imaging, Inc., West Palm Beach, Florida and a former member of the
Board of Directors of the PIE Medical Insurance Co., a physician-owned medical
malpractice insurance company headquartered in Cleveland, Ohio.
Herman N. Wisenteiner, a Director of the Company since November 1993, is
President and Chief Executive Officer of Horn Distributing Company, a real
estate holding company which he founded in 1971 in Santa Fe, New Mexico. In
addition to his many civic activities in northern New Mexico, from 1984 to 1993
Mr. Wisenteiner was also Chairman and Chief Executive Officer of CLX Exploration
Inc., a publicly traded oil and natural gas exploration and production company
headquartered in Denver, Colorado and served as a Director of First Interstate
Bank, Santa Fe, New Mexico from 1980 to 1993.
12
<PAGE>
Manuel Lujan Jr., a Director of the Company since June 1995, is a self employed
consultant on federal legislative matters. Mr. Lujan is also a self employed
real estate agent and an insurance agent for the Manuel Lujan Insurance Agency.
Mr. Lujan served as Secretary of the Interior during the Bush administration
until January 1993. Prior to serving as Secretary of the Interior, Mr. Lujan
was a member of the United States House of Representatives representing New
Mexico.
Committees. The Board of Directors has an Executive Committee, an Audit
Committee and a Compensation Committee. A majority of the members of the Audit
Committee and Compensation Committee are outside directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than 10% of a registered class of
the Company's equity securities and certain other affiliated persons to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no other forms were required, the Company believes
that during the fiscal year ended December 31, 1996, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with, except that Michael R. Stanford,
President, Chief Executive Officer and Director, failed to timely file a report
of an exercise of stock options. The report has now been filed.
13
<PAGE>
ITEM 10: EXECUTIVE COMPENSATION.
The following tables set forth the compensation paid by the Company to the two
executive officers of the Company and one officer of the bank subsidiary who
received in excess of $100,000 in cash compensation.
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------
Name and Annual Compensation Stock
------------------------------------------
Principal Position Year Salary ($) Bonus ($) Other ($)(1) Options Granted (#)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael R. Stanford 1996 $183,333 $24,000 $41,621 0
President and Chief 1995 $175,000 $45,000 $42,636 0
Executive Officer 1994 $166,250 $37,500 $44,485 0
H. Patrick Dee 1996 $130,000 $16,000 $42,836 0
Secretary and 1995 $116,250 $30,000 $39,369 0
Treasurer 1994 $ 97,083 $22,500 $36,580 0
W. Gary Millholon
Senior Vice President
Bank Subsidiary
Leasing division 1996 $ 86,575 $20,829 - 0
__________________________
</TABLE>
(1) Represents insurance premiums paid by the Company on behalf of the employee
amounts contributed by the Company to the employee's Section 401(k)
plan, auto allowance and dues.
Aggregated Option Exercises in Fiscal Year
------------------------------------------
and Fiscal Year-End Options Value
---------------------------------
<TABLE>
<CAPTION>
Number of
Unexercised Options Value of In-the-Money
Shares Value at 12/31/96 (#) Options at 12/31/96
Acquired on Realized Exercisable/ ($) (1) Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael R. Stanford 19,600 $124,754 100,113(2) $830,629
12,000 $82,500
H. Patrick Dee - - 35,000 $231,000
8,750 $57,750
</TABLE>
_______________________________
(1) The closing price of the Company's Common Stock on December 31, 1996 was
$15.00 per share.
(2) On January 30, 1997, Mr. Stanford exercised options to acquire 21,500
shares of Common Stock at an exercise price of $5.01 per share.
EXECUTIVE INSURANCE
First State Bank has key-person insurance policies on each of Messrs. Stanford
and Dee. Under these policies, First State Bank is named as beneficiary of
$810,000 of term life insurance on Mr. Stanford and $533,000 of term life
insurance on Mr. Dee (the "Term Life Policies"). In addition, First State Bank
also pays the premiums on $690,000 of additional whole life insurance for Mr.
Stanford and $667,000 for Mr. Dee under which each of these individuals is able
to name the beneficiary (the "Whole Life Policies"). Under the provisions of the
Term Life Policies the amount of term insurance under each policy is gradually
decreased over a period of 10 years. However, First State Bank's premium
payments are kept level during the entire 10 year period with the excess
premiums from the Term Life Policies being applied to the Whole Life Policies.
As a result of the increasing
14
<PAGE>
portion of the premiums which are allocated to the Whole Life Policies, at the
end of the 10 year period the Whole Life Policies are fully paid. Upon
termination of employment, the Whole Life Policies would be transferable to
Messrs. Stanford or Dee, as the case may be, who could elect to continue making
the premium payment if such termination occurred prior to the tenth year of the
policy. The annual premium which will be paid for the Whole Life Policies will
constitute compensation to such individuals.
STOCK OPTION AGREEMENT
Under the terms of a stock option agreement, Michael R. Stanford can exercise an
option to purchase 28,613 shares of Common Stock at a price of $5.01 per share.
As originally granted, the option allowed Mr. Stanford to purchase up to 10% of
the common stock of New Mexico Bank Corporation ("NMBC"), the parent holding
company of NBA, at the book value of the NMBC common stock as of November 19,
1990. In December 1991, the option was converted to an option to purchase the
Company's Common Stock when NMBC was merged into the Company. The option may be
exercised at any time by Mr. Stanford and will expire on October 12, 2003.
EXECUTIVE INCOME PROTECTION PLAN
The Company has an Executive Income Protection Plan (the "Plan") with the
following participants: Patrick G. Cahalan, Robert L. Chavez, H. Patrick Dee,
Brian C. Reinhardt and Michael R. Stanford, which provides for benefits upon a
Control Change. Following a Control Change (as defined in the Plan), the Plan
provides for a three-year employment term and specifies the employee's position,
salary, bonus, and benefits payable during that period. If the employee (i)
resigns; (ii) is discharged for any reason other than cause, death or
disability; (iii) experiences a Reduction in Position (as defined in the Plan)
within a three-year period beginning on the date of the Control Change, then the
employee shall have income protection benefits consisting of (a) a compensation
benefit, payable in a single sum, equal to three times his Compensation (as
defined in the Plan) in the case of Messrs. Dee and Stanford and two times his
Compensation in the case of Messrs. Cahalan, Chavez, and Reinhardt; (b) the
same level of fringe benefits as existed on the date of the Control Change for a
period ending three years after the Control Change including, without
limitation, any plan or arrangement to receive and exercise stock options and/or
stock appreciation rights, restricted stock or grants thereof in which the
employee is participating on the date of the Control Change (or plans or
arrangements providing him with substantially similar benefits); (c) an amount
equal to the employee's non-vested accrued benefit in the Company's retirement
plans, determined as of the last valuation date under such plans, if the
employee is not fully vested under the terms of such plans; (d) up to a maximum
of 30 percent of his Compensation for out-placement services for the employee;
and (e) a lump sum payment at the same time as the compensation payment
described in (a) above, if the Company has purchased a split-dollar life
insurance policy on the life of an employee.
"Control Change" is defined in the Plan as (i) a sale or sales (including an
exchange) of shares of the Company, other than pursuant to a public offering, at
one or more times by the Company, a stockholder or stockholders of the Company,
or by any combination of the foregoing, which in the aggregate results in the
beneficial ownership of more than 50% of the combined voting power of the
Company's outstanding securities after the sale or sales by one or more
stockholders who are not stockholders of the Company on April 19, 1996 (the
effective date of the Plan), and who were not controlled after the sale or
sales, directly or indirectly, by one or more of the stockholders of the Company
on April 19, 1996; (ii) a sale or sales by the Company of all or substantially
all of its assets to one or more persons or entities who were not stockholders
of the Company on April 19, 1996, and who are not controlled after the sale or
sales, directly or indirectly, by one or more of such stockholders; or (iii) a
merger or other combination in which the Company is either the surviving or
disappearing corporation, which results in the beneficial ownership of more than
50% of the combined voting power of the outstanding securities of the surviving
corporation by one or more persons or entities which were not stockholders of
the Company on April 19, 1996, and which are not controlled after such merger or
other combination, directly or indirectly, by one or more of such stockholders;
(iv) the approval by the stockholders of the Company of any plan or proposal to
liquidate or dissolve the Company; or (v) during any period of two consecutive
years, individuals
15
<PAGE>
who at the beginning of the period constitute the entire Board of Directors of
the Company cease for any reason to constitute a majority thereof, unless the
election or the nomination for election by the Company's stockholders of each
new director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
"Compensation" means the sum of; (i) the employee's average taxable compensation
from the Company; (ii) the employee's average elective salary reduction
contributions to plans under Internal Revenue Code (the "Code") Sections 401(k)
and/or 125; and (iii) the product of the average percent of covered payroll
contributed by the Company to the Company's 401(k) profit sharing plan
multiplied by the sum of (i) and (ii) in each case for the five calendar years
preceding the Control Change.
"Reduction in Position" shall occur if an employee (i) is removed as an officer
or director; (ii) experiences significant decrease in managerial or supervisory
authority; (iii) experiences a reduction in salary or bonus; (iv) is required by
the Company to relocate to an office more than 50 miles from his location before
the Control Change; (v) is reduced in the rate of his awards under any stock
option plan in effect before the Control Change; (vi) experiences a material
adverse change in his terms and conditions of employment.
The Plan provides that the employees will be entitled to a gross-up payment if
it is determined that any payment would be subject to the excise tax imposed by
Section 4999 of the Code. The Plan also provides for the Company to pay the
employee's legal fees incurred in any contest relating to the Plan and certain
other indemnifications to the extent permitted under applicable New Mexico or
federal law and under the Company's Bylaws and Articles of Incorporation.
The aggregate cost to the Company of the requirements for payments to employees
covered under the Plan (including the cost of early vesting under employee
plans) would not exceed $2.4 million.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company (the "Outside Directors")
is paid an annual fee of $3,000 and a per meeting fee of $500 and will be
reimbursed for expenses incurred in attending meetings of the Board of Directors
and the committee meetings of the Board of Directors.
SECTION 401(K) PLAN
In 1991 the Company adopted a tax-qualified profit sharing 401(k) plan (the
"Saving Plan") covering all employees who have attained 21 years of age and have
completed one year of service with the Company. Each participant in the Saving
Plan may reduce his or her salary by as much as the lesser of 20% of his or her
compensation or, in 1996, $9,500. The dollar limit is adjusted each year for
inflation. The Company is required to make matching contributions of up to 50%
of the first 6% of a participant's deferred compensation up to a maximum of 3%.
The Company may, but is not required to, contribute additional amounts to the
Saving Plan. Any such additional amounts are allocated to the accounts of
participants who were active participants on the last day of the plan year or
who retired or died or were disabled during the plan year. The allocation is in
proportion to the eligible participants' compensation. During 1996, 1995 and
1994, First State Bank made contributions to the Saving Plan of $106,000,
$70,000 and $53,000, respectively.
16
<PAGE>
All contributions by a participant are 100% vested and nonforfeitable at all
times. The Company's contributions become 100% vested after three years of
service with the Company. A participant may direct the investment of his or her
account pursuant to the investment options offered by the trustee of the Saving
Plan. Distribution of a participant's account under the Saving Plan normally
occurs upon the participant's retirement or the participant's termination of
employment with the Company.
INCENTIVE PLANS
The Company has adopted a Stock Option Plan (the "Stock Option Plan"). Under
the Stock Option Plan, the Company has reserved an aggregate of 225,000 shares
of Common Stock for issuance pursuant to the exercise of options. Options may
be granted to key employees of the Company, including directors who are also
employees of the Company, and to certain outside consultants. As of February
28, 1997, options to purchase 199,753 shares of Common Stock were outstanding
under the Stock Option Plan.
The Stock Option Plan is to be administered by a committee which is composed of
disinterested members of the Board of Directors (the "Committee"). Subject to
the terms of the Stock Option Plan, the Committee determines the persons to whom
awards are granted, the type of award granted, the number of shares granted, the
vesting schedule, the type of consideration to be paid to the Company upon
exercise of options and the term of each option (not to exceed ten years).
Under the Stock Option Plan, the Company may grant both incentive stock options
("incentive stock options") intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and options which are
not qualified as incentive stock options ("nonqualified stock options").
Incentive stock options must be granted at an exercise price equal to or greater
than the fair market value of the Common Stock on the date of grant. The
exercise price of nonqualified stock options granted under the Stock Option Plan
will be determined by the Committee on the date of grant. The exercise price of
incentive stock options granted to holders of more than 10% of the Common Stock
must be at least 110% of the fair market value of the Common Stock on the date
of grant, and the term of these options may not exceed five years.
The Stock Option Plan provides that the total number of shares covered by such
plan, the number of shares covered by each option and the exercise price per
share may be proportionately adjusted by the Board of Directors or the Committee
in the event of a stock split, reverse stock split, stock dividend or similar
capital adjustment effected without receipt of consideration by the Company.
Upon a change in control of the Company, stock options outstanding under the
Stock Option Plan immediately become fully vested and exercisable. Also, in the
event of a merger or consolidation in which the Company is not the surviving
corporation, the sale of all or substantially all of the Company's assets,
certain reorganizations or the liquidation of the Company, each option granted
under the Stock Option Plan may, at the election of the holder, become
immediately exercisable.
17
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1997, by (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director of the Company, and (iii) all
directors and executive officers as a group. Unless otherwise indicated, based
on information furnished by such owners, the Company believes that the
shareholders listed below have sole investment and voting power with respect to
their shares. Unless otherwise indicated, the address of such person is the
Company's address, 111 Lomas Avenue N.W., Albuquerque, New Mexico 87102.
<TABLE>
<CAPTION>
Name Number of Shares Owned (1) Percentage of Shares Owned
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard L. Duchossois
845 Larch Avenue
Elmhurst, IL 60126 112,500 5.12%
John Hancock Advisors, Inc.
101 Humington Avenue
Boston, MA 02199 170,125 7.74%
Michael R. Stanford 112,772 (2) (3) 4.95%
H. Patrick Dee 42,855 (2) (4) 1.92%
Eloy A. Jeantete 1,000 0.05%
Leonard J. DeLayo, Jr. 98,089 (2) (5) 4.41%
Bradford M. Johnson 164,009 (2) 7.43%
Sherman McCorkle 1,051 0.05%
Douglas M. Smith, M.D. 23,750 1.08%
Herman N. Wisenteiner 9,454 (2) 0.43%
Manuel Lujan, Jr. 10,625 0.48%
All executive officers and
directors as a group (13 persons) 503,018 21.16%
_________________________________
</TABLE>
(1) Includes shares of Common Stock issuable on conversion of Convertible
Debentures.
(2) Includes shares of Common Stock that were acquired as a result of the
individuals' sale of shares of the Santa Fe Bank to the Company. See Item
12: "Certain Relationships and Related Transactions."
(3) Includes 28,613 shares that are subject to an option held by Mr. Stanford
which is exercisable at $5.01 per share and 50,000 shares that are subject
to an option held by Mr. Stanford which is exercisable at $8.40 per share.
(4) Includes 35,000 shares that are subject to an option held by Mr. Dee which
is exercisable at $8.40 per share.
(5) Includes 10,000 shares that are subject to an option held by Mr. DeLayo
which is exercisable at $8.40 per share.
18
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CREDIT TRANSACTIONS
The executive officers, directors and principal shareholders of the Company and
the Bank, and members of their immediate families and businesses in which these
individuals hold controlling interests, are customers of the Bank and it is
anticipated that such parties will continue to be customers of the Bank in the
future. Credit transactions with these parties are subject to review by the
Banks' Board of Directors. All outstanding loans and extensions of credit by
the Bank to these parties were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and in
the opinion of management did not involve more than the normal risk of
collectability or present other unfavorable features. At December 31, 1996, the
aggregate balance of the Bank's loans and advances under existing lines of
credit to these parties was approximately $1,946,000, or 0.78% of the Bank's
total loans. All payments of principal and interest on these loans are current.
These loans represented 9.24% of the Company's equity as of December 31, 1996.
LEGAL SERVICES
Mr. DeLayo was a director of First State Bank from 1988 through January 1992,
was a director of the Santa Fe Bank from March 1993 to June 1994 and was
appointed as a director of the Company in November 1993. Mr. DeLayo acts as
general counsel to the Company and First State Bank. Mr. DeLayo and his firm,
Leonard J. DeLayo, P.C., are involved in representing the Company in numerous
collection matters. The Company paid Mr. DeLayo's firm approximately $144,000,
$187,000 and $161,000 for its services in 1996, 1995 and 1994.
SANTA FE BRANCH LOCATION
The Downtown Santa Fe location was constructed on land owned by Herman
Wisenteiner, a Director of the Company. The Company is leasing the site from
Mr. Wisenteiner for an initial term of 15 years at an initial rate of $60,000
per year. In the opinion of management, the lease is on terms similar to other
third party commercial transactions in the ordinary course of business.
19
<PAGE>
ITEM 13(A): EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
2.1 Santa Fe Bank Stock Purchase Agreement(1)
2.2 Merger Agreement with the Santa Fe Bank(2)
3.1 Restated Articles of Incorporation of First State Bancorporation(1)
3.2 Bylaws of First State Bancorporation(1)
3.3 Article of Amendment to the Articles of Incorporation of First State Bank(4)
4.a Form of Shareholder Protection Rights Agreement dated October 25, 1996.(5)
4.1 Form of Indenture relating to the Convertible Debentures (including Form of Convertible Debenture)(1)
10.1 Redemption Agreement between the Company and Livingston Partnership and Richard Duchossois with
respect to the sale of 1,066,666 shares of Common Stock(1)
10.4 Lease Agreement between First State Bank of Taos and John M. Brenner and Barbara B. Brenner as
Co- Trustees of the John M. Brenner and Barbara B. Brenner Revocable Trust for the main office of First
State Bank of Taos, New Mexico(1)
10.5 Lease Agreement between the Second and Lomas Partnership and Banquest National Bank of Albuquerque dated
February 19, 1989 together with the First Amendment to Lease Agreement
dated May 22, 1989(1)
10.7 Stock Option Plan of the Company(1)
10.8 Stock Option Agreement with Michael R. Stanford(1)
10.9 Agreement between the Company and Financial Network Investment Corporation(1)
10.10 Limited Partnership Agreement of Credit Card Services, Ltd., a Limited Partnership(3)
10.11 Amendment One to Limited Partnership Agreement of Credit Card Services, Ltd., a Limited
Partnership(3)
10.12 Amendment Two to Limited Partnership Agreement of Credit Card Services, Ltd., a Limited Partnership(3)
10.13 Lease agreement between the Company and Horn Distributing, Herman N. Wisenteiner, President(4)
10.14 Executive Income Protection Plan(4)
22 Subsidiaries of the Small Business Issuer(1)
27.4 Financial Data Schedule
</TABLE>
______________
(1) Incorporated by reference from the Company's Registration Statement on Form
SB-2, Commission File No. 33-68166, declared effective November 3, 1993.
(2) Incorporated by reference from the Company's Form 10-KSB for the year ended
December 31, 1993.
(3) Incorporated by reference from the Company's Form 10-KSB for the year ended
December 31, 1994.
(4) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended June 30, 1996.
(5) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended September 30, 1996.
ITEM 13(B): REPORTS ON FORM 8-K.
None
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST STATE BANCORPORATION
By: /s/ Michael R. Stanford
------------------------------------
Michael R. Stanford, President
In accordance with the Exchange Act, this report has been signed by
the following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
President and Chief Executive Officer March 25, 1997
and a Director (Principal Executive Officer)
/s/ Michael R. Stanford
- -------------------------------
Michael R. Stanford
/s/ Eloy A. Jeantete Director March 25, 1997
_______________________________
Eloy A. Jeantete
/s/ Leonard J. DeLayo, Jr. Director
- ------------------------------- March 25, 1997
Leonard J. DeLayo, Jr.
/s/ Bradford M. Johnson Director
- ------------------------------- March 25, 1997
Bradford M. Johnson
/s/ Sherman McCorkle Director
- ------------------------------- March 25, 1997
Sherman McCorkle
/s/ Douglas M. Smith, M.D. Director
- ------------------------------- March 25, 1997
Douglas M. Smith, M.D.
/s/ Herman N. Wisenteiner Director
- ------------------------------- March 25, 1997
Herman N. Wisenteiner
/s/ H. Patrick Dee Secretary, Treasurer and a Director
- ------------------------------- March 25, 1997
H. Patrick Dee
/s/ Brian C. Reinhardt Senior Vice President and CFO
- ------------------------------- March 25, 1997
Brian C. Reinhardt
/s/ Manual Lujan, Jr. Director
- ------------------------------- March 25, 1997
Manual Lujan, Jr.
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
First State Bancorporation was established in 1988 to acquire First State Bank
of Taos ("First State Bank"), the Company's wholly owned subsidiary, which has
been in existence since 1922. On December 1, 1993, the Company acquired First
State Bank of Santa Fe ("Santa Fe Bank"). During 1994, the Santa Fe Bank was
merged into First State Bank.
The Company's net income increased in 1996 from 1995 due to increased net
interest income which was the result of an increase in average loans of
approximately $54,604,000. The increase in net interest margin was reduced by an
increase in the provision for loan losses of $813,403, operating costs related
to branch expansion, addition of a commercial leasing division and expansion of
the credit card merchant program.
Net Interest Income
The primary component of earnings for financial institutions is net interest
income. Net interest income is the difference between interest income,
principally from loan, lease and investment securities portfolios, and interest
expense, principally on customer deposits and borrowings. Changes in net
interest income result from changes in volume, spread and margin. Volume refers
to the average dollar level of interest-earning assets and interest-bearing
liabilities. Spread refers to the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
Margin refers to net interest income divided by average interest-earning assets
and is influenced by the level and relative mix of interest-earning assets and
interest-bearing liabilities. During the years ended December 31, 1996, 1995
and 1994, the Company's average interest-earning assets were $257,157,000,
$205,139,000 and $169,738,000, respectively. For the same periods, the
Company's net interest margins were 6.25%, 6.49% and 6.46%.
The following tables set forth, for the periods indicated, information with
regard to average balances of assets and liabilities, as well as the total
dollar amounts of interest income from interest-earning assets and interest
expense from interest-bearing liabilities, resultant yields or costs, net
interest income, net interest spread, net interest margin and the ratio of
average interest-earning assets to average interest-bearing liabilities for the
Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
------------------------------------------------------------------------
Interest Average Interest Average
Average income or yield or Average income or yield or
balance expense cost balance expense cost
------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases:
Commercial $31,164 $3,152 10.11% $18,503 $1,885 10.19%
Real Estate - mortgage 130,347 13,500 10.36 99,566 10,552 10.60
Real Estate - construction 36,320 4,533 12.48 37,235 4,918 13.21
Consumer 12,017 1,413 11.76 8,535 907 10.63
Leases 8,607 725 8.42 - - -
Other 321 - - 333 - -
------------------------------------------------------------------------
Total loans and leases 218,776 23,323 10.66 164,172 18,262 11.12
Allowance for loan and lease losses (2,181) (1,636)
Securities:
U.S. government 30,656 1,916 6.25 30,925 1,850 5.98
State and political subdivisions:
Nontaxable 3,607 198 5.49 2,293 136 5.93
Taxable 35 3 8.57 145 13 8.97
Other 1,313 96 7.31 887 45 5.07
------------------------------------------------------------------------
Total securities 35,611 2,213 6.21 34,250 2,044 5.97
Federal funds sold 2,770 145 5.23 6,717 387 5.76
------------------------------------------------------------------------
Total interest-earning assets 257,157 25,681 9.99% 205,139 20,693 10.09%
------------------------------------------------------------------------
Noninterest-earning assets:
Cash and due from banks 13,158 12,004
Other 17,494 13,875
------------------------------------------------------------------------
Total noninterest-earning assets 30,652 25,879
------------------------------------------------------------------------
Total assets $285,628 $229,382
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing demand accounts $46,737 $1,097 2.35% $45,752 $1,224 2.68%
Certificates of deposit 102,078 5,777 5.66 72,681 4,015 5.52
Money market savings accounts 31,210 1,023 3.28 23,375 758 3.24
Regular savings accounts 16,174 478 2.96 14,544 418 2.87
------------------------------------------------------------------------
Total interest-bearing deposits 196,199 8,375 4.27 156,352 6,415 4.10
Short-term borrowings 17,006 855 5.03 9,804 536 5.47
Note payable 226 19 8.41 240 18 7.50
Convertible subordinated debt 5,500 362 6.58 5,750 405 7.04
Capital leases 60 5 8.47 100 12 12.00
------------------------------------------------------------------------
Total interest-bearing liabilities 218,991 9,616 4.39% 172,246 7,386 4.29%
Noninterest-bearing demand accounts 46,167 38,727
Other noninterest-bearing liabilities 2,157 1,592
------------------------------------------------------------------------
Total liabilities 267,315 212,565
Stockholders' equity 18,313 16,817
------------------------------------------------------------------------
Total liabilities and stockholders'
equity $285,628 $229,382
========================================================================
Net interest income $16,065 $13,307
========================================================================
Net interest spread (annualized) 5.60% 5.80%
Net interest margin (annualized) 6.25% 6.49%
Ratio of average interest-earning assets to
average interest-bearing liabilities 117.43% 119.10%
</TABLE>
Loan fees of $1,939,000 and $1,683,000 are included in interest income for the
years ended December 31, 1996 and 1995, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The following table illustrates the changes in the Company's net interest income
due to changes in volume and changes in interest rate. Changes attributable to
the combined effect of volume and interest rates have been included in the
changes due to rate.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 vs. 1995 1995 vs. 1994
------------- -------------
Increase (decrease) Increase (decrease)
due to changes in due to changes in
--------------------------------------------------------------------
Volume Rate Total Volume Rate Total
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans and leases:
Commercial $1,290 ($23) $1,267 $(895) $214 ($681)
Real estate - mortgage 3,262 (314) 2,948 3,990 1,301 5,291
Real estate - construction (121) (264) (385) 78 54 132
Consumer 370 136 506 (295) 128 (167)
Leases 725 - 725 - - -
--------------------------------------------------------------------
Total loans and leases 5,526 (465) 5,061 2,878 1,697 4,575
Securities:
U.S. government (16) 82 66 38 153 191
States and political subdivisions:
Nontaxable 78 (16) 62 74 (17) 57
Taxable (10) - (10) 3 (2) 1
Other 22 29 51 11 - 11
--------------------------------------------------------------------
Total securities 74 95 169 126 134 260
Federal funds sold (227) (15) (242) 114 120 234
--------------------------------------------------------------------
Total interest-earning assets 5,373 (385) 4,988 3,118 1,951 5,069
--------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand accounts 26 (153) (127) 128 153 281
Certificates of deposit 1,624 139 1,763 812 1,048 1,860
Money market savings accounts 254 11 265 51 125 176
Regular savings accounts 47 13 60 30 47 77
--------------------------------------------------------------------
Total interest-bearing deposits 1,951 10 1,961 1,021 1,373 2,394
Short-term borrowings 394 (75) 319 230 103 333
Note payable (1) 2 1 - 18 18
Convertible subordinated debt (18) (25) (43) - - -
Capital leases (5) (2) (7) (22) (4) (26)
--------------------------------------------------------------------
Total interest-bearing liabilities 2,321 (90) 2,231 1,229 1,490 2,719
--------------------------------------------------------------------
Total increase (decrease) in net interest income $3,052 ($295) $2,757 $1,889 $461 $2,350
====================================================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Asset/Liability Management
The Company's results of operations depend substantially on its net interest
income. Like most financial institutions, the Company's interest income and
cost of funds are affected by general economic conditions and by competition in
the marketplace.
The purpose of asset/liability management is to provide stable net interest
income growth by protecting the Company's earnings from undue interest rate
risk. Exposure to interest rate risk arises from volatile interest rates and
changes in the balance sheet mix. The Company maintains an asset/liability
management policy that provides guidelines for controlling exposure to interest
rate risk. The Company's policy is to control the exposure of its earnings to
changing interest rates by generally maintaining a position within a narrow
range around an "earnings neutral position," which is defined as the mix of
assets and liabilities that generate a net interest margin that is least
affected by interest rate changes.
Rising and falling interest rate environments can have various impacts on a
bank's net interest income, depending on the short-term interest rate gap that
the bank maintains, the relative changes in interest rates that occur when the
bank's various assets and liabilities reprice, unscheduled repayments of loans,
early withdrawals of deposits and other factors. As of December 31, 1996, the
Company's cumulative interest rate gap for the period up to three months was a
negative $16,796,000 and for the period up to one year was a negative
$23,962,000. Based solely on the Company's interest rate gap of twelve months
or less, net income of the Company could be unfavorably impacted by an increase
in interest rates or favorably impacted by a decrease in interest rates.
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap, of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1996. The amounts are based upon
regulatory reporting formats and, therefore, may not be consistent with
financial information appearing elsewhere in this report that has been prepared
in accordance with generally accepted accounting principles. The amounts could
be significantly affected by external factors such as changes in prepayment
assumptions, early withdrawals of deposits and competition.
<TABLE>
<CAPTION>
Three
Less than months to
three less than One to five Over five
months one year years years Total
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $1,700 $500 $31,589 $6,807 $40,596
Loans and leases:
Commercial 21,833 6,902 7,801 42 36,578
Real estate 106,219 54,782 23,180 271 184,452
Consumer 3,323 3,490 6,425 - 13,238
Leases 669 2,104 13,885 - 16,658
-----------------------------------------------------------------
Total interest-earning assets 133,744 67,778 82,880 7,120 291,522
-----------------------------------------------------------------
Interest-bearing liabilities:
Savings and NOW accounts 98,138 - - - 98,138
Certificates of deposits of $100,000
or more 11,654 34,431 5,611 - 51,696
Other time accounts 20,078 40,513 14,889 - 75,480
Subordinated debentures - - - 3,788 3,788
Other interest-bearing liabilities 20,670 - - - 20,670
-----------------------------------------------------------------
Total interest-bearing liabilities $ 150,540 $ 74,944 $20,500 $ 3,788 $249,772
-----------------------------------------------------------------
Interest rate gap (16,796) (7,166) 62,380 3,332 41,750
=================================================================
Cumulative interest rate gap
at December 31, 1996 ($16,796) ($23,962) $38,418 $41,750
====================================================
Cumulative gap ratio
at December 31, 1996 0.89% 0.89% 1.16% 1.17%
====================================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Investment Portfolio
The following table provides the carrying value of the Company's investment
portfolio at each of the dates indicated. At December 31, 1996 and 1995, the
market value of the Company's investment portfolio exceeded the carrying value
by approximately $50,000 and $174,000, respectively.
<TABLE>
<CAPTION>
As of December 31,
1996 1995
---------------------------------------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury securities $9,789 $5,667
U.S. government agency securities 25,994 28,119
Obligations of states and political subdivisions 3,271 4,004
Other securities 1,542 886
---------------------------------------
Total investment securities $40,596 $38,676
=======================================
</TABLE>
The table below provides the carrying values, maturities and weighted average
yield of the investment portfolio of the Company as of December 31, 1996.
<TABLE>
<CAPTION>
Average Weighted
Carrying value maturity (years) average yields
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury securities
One year or less $700 0.59 5.85%
After one through five years 9,089 2.02 6.13%
-----------------------------------------------------------
Total U.S. Treasury securities 9,789 1.91 6.11%
U.S. government agency securities
One year or less 1,500 0.17 5.28%
After one through five years 21,520 3.22 6.44%
After five through ten years 1,989 7.26 7.09%
After ten years 985 14.17 7.37%
-----------------------------------------------------------
Total U.S. government agency securities 25,994 3.77 6.46%
Obligations of states and political subdivisions
One year or less - - -
After one through five years 981 3.63 5.12%
After five through ten years 1,100 7.60 5.83%
After ten years 1,190 15.87 5.24%
-----------------------------------------------------------
Total states and political subdivisions securities 3,271 9.43 5.40%
Other securities 1,542 N/A 7.34%
-----------------------------------------------------------
Total investment securities $40,596 3.78 6.28%
===========================================================
</TABLE>
Loan and Lease Portfolio
The following table presents the amount of loans and
leases of the Company, by category, at the dates
indicated.
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------
1996 1995
--------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Commercial $ 36,578 $ 23,204
Real estate - mortgage 148,715 115,640
Real estate - construction 35,737 34,924
Consumer and other 13,238 10,091
Leases 16,658 -
--------------------------------------------
Total loans and leases $250,926 $183,859
--------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The following table presents the aggregate maturities of loans and leases in
each major category of the Company's loan and lease portfolio at December 31,
1996. Actual maturities may differ from the contractual maturities shown as a
result of renewals and prepayments.
<TABLE>
<CAPTION>
As of December 31, 1996
Less than One to five Over five
one year years years Total
--------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed-rate loans and leases:
Commercial $5,582 $7,223 $42 $12,847
Real estate 4,491 13,466 271 18,228
Consumer 4,418 4,959 - 9,377
Leases 2,773 13,885 - 16,658
--------------------------------------------------------
Total fixed-rate loans and leases 17,264 39,533 313 57,110
Variable-rate loans:
Commercial 23,153 578 - 23,731
Real estate 156,510 9,714 - 166,224
Consumer 2,395 1,466 - 3,861
--------------------------------------------------------
Total variable-rate loans 182,058 11,758 - 193,816
--------------------------------------------------------
Total loans and leases $199,322 $51,291 $313 $250,926
========================================================
</TABLE>
Nonperforming Assets
Nonperforming assets consist of loans and leases past due 90 days or more,
nonaccrual loans and leases, restructured loans and leases and other real estate
owned. The following table sets forth information with respect to these assets
at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------
1996 1995
---------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Loans and leases past due 90 days or more $689 $289
Nonaccrual loans and leases 946 1,808
Restructured loans and leases - 172
---------------------------------------------
Total nonperforming loans and leases 1,635 2,269
Other real estate owned 1,323 678
---------------------------------------------
Total nonperforming assets $2,958 $2,947
=============================================
Allowance for loan and lease losses $2,510 $1,851
=============================================
Ratio of total nonperforming assets to total assets 0.91% 1.16%
Ratio of total nonperforming loans and leases to total loans and leases 0.65% 1.23%
Ratio of allowance for loan and lease losses to total nonperforming loans
and leases 153.52% 81.58%
</TABLE>
Management is not aware of any loans or leases in addition to those disclosed
above, which based upon known information, cause management to have serious
doubts as to the ability of such borrowers to comply with present loan repayment
terms.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Analysis of the Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management's recognition of
the risks of extending credit and its evaluation of the quality of the loan and
lease portfolios. The allowance is maintained at a level considered adequate to
provide for anticipated loan and lease losses based on management's assessment
of various factors affecting the loan and lease portfolios, including a review
of problem loans and leases, business conditions and loss experience and an
overall evaluation of the quality of the underlying collateral, holding and
disposing costs and costs of capital. The allowance is increased by provisions
charged to operations and reduced by loans and leases charged off, net of
recoveries.
The following table sets forth information regarding changes in the allowance
for loan and lease losses of the Company for the periods indicated.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------
1996 1995
-------------------------------------
(Dollars in thousands)
<S> <C> <C>
Allowance for loan and lease losses, beginning of period $1,851 $1,468
Charge-offs:
Commercial and other 438 98
Real estate loans 70 162
Consumer loans 246 85
-------------------------------------
Total charge-offs 754 345
-------------------------------------
Recoveries:
Commercial and other 13 197
Real estate loans 40 85
Consumer loans 129 28
-------------------------------------
Total recoveries 182 310
-------------------------------------
Net charge-offs 572 35
Provision for loan and lease losses 1,231 418
-------------------------------------
Allowance for loan and lease losses, end of period $2,510 $1,851
=====================================
Average total loans and leases $218,776 $164,172
Total loans and leases at end of period $250,926 $183,859
As a percentage of average total loans and leases:
Net charge-offs 0.26% 0.02%
Provision for loan and lease losses 0.56% 0.25%
Allowance for loan and lease losses 1.15% 1.13%
As a percentage of total loans and leases at year-end:
Allowance for loan and lease losses 1.00% 1.01%
As a multiple of net charge-offs:
Allowance for loan and lease losses 4.39 52.89
Income before income taxes and provision for loan and lease losses 7.71 81.61
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Specific reserves are provided for individual loans and leases where ultimate
collection is considered questionable by management after reviewing the current
status of loans and leases that are contractually past due and considering the
net realizable value of the security and of the loan and lease guarantees, if
applicable. The following table sets forth the allowance for loan and lease
losses by category, based upon management's assessment of the risk associated
with these categories, at the dates indicated and summarizes the percentage of
gross loans and leases in each category as a percentage of total loans and
leases.
<TABLE>
<CAPTION>
As of December 31, 1996 As of December 31, 1995
----------------------- -----------------------
Loans and Loans and
leases in leases in
category as a category as a
percentage of percentage of
total gross total gross
Amount of loans and Amount of loans and
allowance leases allowance leases
---------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and unallocated portion $600 14.57% $402 12.62%
Real estate 1,560 73.82 1,269 81.89
Leases 150 5.27 - -
Consumer 200 6.34 180 5.49
---------------------------------------------------------------
Total allowance for loan and lease losses $2,510 100.00% $1,851 100.00%
===============================================================
</TABLE>
Deposits
The following table presents the average balances outstanding for each major
category of the Company's deposits and weighted average interest rate paid for
interest-bearing deposits for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1996 1995
----------------------------------------------------------
Weighted Weighted
Average average Average average
balance interest rate balance interest rate
----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing demand accounts $46,737 2.35% $45,752 2.68%
Certificates of deposit 102,078 5.66 72,681 5.52
Money market savings accounts 31,210 3.28 23,375 3.24
Regular savings accounts 16,174 2.96 14,544 2.87
Noninterest-bearing demand accounts 46,167 N/A 38,727 N/A
----------------------------------------------------------
Total $242,366 4.27% $195,079 4.10%
==========================================================
</TABLE>
The following table shows the amount and maturity of certificates of deposit
that had balances of $100,000 or more and the percentage of the total for each
maturity.
<TABLE>
<CAPTION>
As of December 31, 1996
(Dollars in thousands)
-----------------------------------
<S> <C> <C>
Three months or less $11,654 22.54%
Three through twelve months 34,764 66.60
Over twelve months 6,333 10.86
-----------------------------------
Totals $52,751 100.00%
===================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Securities sold under agreement to repurchase
Securities sold under agreement to repurchase totaled $13,928,515 and $8,913,474
at December 31, 1996 and 1995, respectively. The weighted average interest rate
on securities sold under agreement to repurchase was 5.34% and 5.25% at December
31, 1996 and 1995, respectively.
Return on Equity and Assets
The following table shows the return on average assets, return on average
equity, dividend payout ratio and ratio of average equity to average assets, for
the periods indicated.
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Return on average assets 0.72% 0.73% 1.28%
Return on average equity 11.25 9.96 16.24
Dividend payout ratio 19.81 18.06 5.25
Average equity to average assets 6.41 7.33 7.88
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Overview. The Company's net income increased to $2,061,137 from $1,675,201 in
1995 and decreased from $2,391,061 in 1994. Net interest income increased to
$16,064,678 in 1996, compared to $13,307,297 in 1995 and $10,957,059 in 1994.
This increase was offset by noninterest expenses that increased to $14,590,763
in 1996, compared to $10,926,003 in 1995 and $9,614,469 in 1994. Income tax
expense increased to $1,115,892 in 1996, from $763,230 in 1995 and $240,000 in
1994. Income tax expense in 1994 was reduced by utilization of net operating
loss carry-forwards.
Interest Income. Interest income increased to $25,681,296 in 1996, from
$20,692,748 in 1995 and $15,623,539 in 1994. This increase is due to an
increase in average interest-earning assets. Average interest-earning assets
were $257,157,000 in 1996, compared to $205,139,000 in 1995 and $169,738,000 in
1994. Average yield on interest-earning assets decreased to 9.99%, from 10.09%
in 1995 and increased from 9.20% in 1994. The increase in average balance
occurred primarily in loans and leases. The average balance in loans and leases
increased to $218,776,000, from $164,172,000 in 1995 and $133,685,000 in 1994.
The average yield on loans and leases decreased to 10.66% in 1996, from 11.12%
in 1995 and increased from 10.24% in 1994.
Interest Expense. Interest expense increased to $9,616,618 in 1996, from
$7,385,451 in 1995 and $4,666,480 in 1994. This increase is due to an increase
in average interest-bearing liabilities and the average cost of interest-bearing
liabilities. Average interest-bearing liabilities increased to $218,991,000 in
1996, from $172,246,000 in 1995 and $138,489,000 in 1994. The average cost
increased to 4.39% in 1996, from 4.29% in 1995 and 3.37% in 1994. These
increases were due primarily to increases in deposits and short-term borrowings.
The average balance in deposits increased to $196,199,000 in 1996 from
$156,352,000 in 1995, and $127,957,000 in 1994. The average cost of deposits
increased to 4.27% in 1996, from 4.10% in 1995 and 3.14% in 1994.
Net Interest Income. Net interest income increased to $16,064,678 in 1996, from
$13,307,297 in 1995 and $10,957,059 in 1994. This increase is due to the
increases in average loans and leases. Net interest margin decreased to 6.25%
in 1996, from 6.49% in 1995 and 6.46% in 1994, as a result of decreased average
yields on loans and leases and increased cost of deposits.
Provision for Loan and Lease Losses. Provision for loan and lease losses
increased to $1,231,403 in 1996, from $418,000 in 1995 and $247,680 in 1994.
This increase was necessitated by the increase in loans and leases outstanding
and increased charge-offs. Charge-offs net of recoveries of loans and leases
were $572,000 in 1996, $35,000 in 1995, and $221,000 in 1994.
Noninterest Income. Noninterest income was $2,934,517 in 1996, compared to
$1,683,137 in 1995 and $1,704,629 in 1994. The increase for 1996 from 1995 is
due to rental income from operating leases and credit card merchant fees.
Rental income from operating leases was $253,656 in 1996. Credit card merchant
income was $749,425 in 1996, $179,054 in 1995 and $82,529 in 1994.
Noninterest Expense. Noninterest expense increased to $14,590,763 in 1996, from
$10,926,003 in 1995 and $9,614,469 in 1994. This increase was due largely to
increases in salaries and employee benefits, occupancy, equipment, and marketing
expense as a result of the Company's branch expansions in 1996, 1995 and 1994,
the addition of the leasing division in 1996 and the expansion of the credit
card merchant program. Salaries and employee benefits increased to $6,388,350
in 1996, from $4,898,453 in 1995 and $4,001,356 in 1994. Occupancy expense
increased to $1,854,447 in 1996, from $1,352,888 in 1995 and $1,186,773 in 1994.
Equipment expense increased to $1,261,835, from $811,482 in 1995 and $564,642 in
1994. Marketing expense increased to $636,704 in 1996, compared to $568,964 in
1995 and $377,247 in 1994.
Income Tax Expense. Income tax expense increased to $1,115,892 in 1996, from
$763,230 in 1995 and $240,000 in 1994. Income tax expense in 1994 was reduced
by the utilization of net operating loss carry-forwards and reductions in the
deferred tax asset valuation allowance.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
LIQUIDITY AND SOURCES OF FUNDS
The Company's primary sources of funds are customer deposits, and loan and lease
repayments. These funds are used to make loans and leases, acquire investment
securities and other assets and fund continuing operations. Scheduled loan and
lease repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan and lease prepayments, which are influenced by general
interest rate levels, interest rates available on other investments,
competition, economic conditions and other factors, are not. Deposits of the
Company increased to $277,353,323 at December 31, 1996, from $218,846,868 at
December 31, 1995. Growth in deposits has occurred primarily due to growth in
the economy of the Company's trade area and branch expansions.
Net loans of the Company increased to $248,415,868 at December 31, 1996, from
$182,009,165 as of December 31, 1995. Real estate-mortgage loans increased
$33,075,000 during 1996. Commercial loans increased by $13,374,000, consumer
loans increased by $3,147,000 and commercial leases increased to $16,658,000 as
a result of the opening of the commercial leasing division in 1996.
Management anticipates that the Company will continue to rely primarily on
customer deposits, and loan and lease repayments, as well as retained earnings,
to provide liquidity and will use funds so provided primarily to make loans and
leases and to purchase securities. The Company believes that its customer
deposits provide a strong source of liquidity because of the high percentage of
core deposits, many of which are a part of long-standing banking relationships.
Borrowings are used to compensate for reductions in other sources of funds.
Borrowings may also be used on a longer-term basis to support expanded lending
activities and to match the maturity or repricing intervals of assets. The
sources of such borrowings are federal funds sold, securities sold under
agreements to repurchase and borrowings from the Federal Home Loan Bank
("FHLB").
As of January 1, 1997, the Company's subsidiary bank had $3,500,000 in retained
earnings which were available for the payment of dividends to the Company,
subject to regulatory capital requirements. This represents an additional
source of liquidity for the Company, if needed.
As of December 31, 1996, the Company, subject to prior approval of the Federal
Reserve Board, could have incurred approximately $17,263,000 in additional
"funded indebtedness" under the indenture governing its Convertible Exchangeable
Redeemable Subordinated Debentures ("Convertible Debentures").
CAPITAL RESOURCES
The Company's total shareholders' equity increased to $21,050,512 at December
31, 1996, from $17,425,908 at December 31, 1995. Of the $3,624,604 increase,
$2,061,137 was produced by earnings and $1,888,224 was produced by the
conversion of the Company's convertible subordinated debentures. This increase
was offset by the change in unrealized investment security gains and by
dividend payments of $408,489. Management currently intends to continue to
retain a major portion of the Company's earnings to support anticipated growth.
As of December 31, 1996, the Company and its subsidiary bank met the fully
phased-in regulatory capital requirements.
The Company's Convertible Debentures have been structured to allow the Company
to respond to a need for regulatory capital by requiring the holders of
Convertible Debentures to exchange their debt instruments for Convertible
Preferred Stock, if necessary, to enable the Company to meet regulatory capital
guidelines, in connection with an acquisition, or otherwise, after November 1,
1995. The Convertible Preferred Stock would be "perpetual preferred stock,"
which constitutes Tier 1 capital under applicable regulations. However, because
the Convertible Preferred Stock would be cumulative, the amount that can be
included in Tier 1 capital is limited to 25% of the Company's total Tier 1
capital. Although the exchange right is intended to support the Company's
ability to grow through acquisitions, its exercise is not so limited and is
available to address any capital needs of the Company. Due to the growth of the
Company's trade area and its branch expansion plans, additional capital may be
required to support the resulting increase in the asset base of the Company.
Management estimates that it will require between $400,000 and $1,000,000 for
branch expansions in 1997, depending on the number of branches constructed.
These funds will come from the Company's primary sources of funds: customer
deposits, and loan and lease repayments.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First State Bancorporation:
We have audited the accompanying consolidated balance sheets of First State
Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentations.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First State
Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1(b) to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1994.
KPMG PEAT MARWICK LLP
Albuquerque, New Mexico
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
As of December 31,
ASSETS 1996 1995
---------------------------
<S> <C> <C>
Cash and due from banks (note 2) $ 15,711,932 $ 14,787,266
Federal funds sold - -
--------------------------
Total cash and cash equivalents 15,711,932 14,787,266
Investment securities (note 3):
Available for sale (at market,
amortized cost of $20,979,000 and
$17,329,000 at December 31, 1996
and 1995) 21,048,140 17,504,265
Held to maturity (at amortized cost,
market of $19,597,000 and
$21,345,000 at December 31, 1996
and 1995) 19,547,433 21,171,746
--------------------------
Total Investment Securities 40,595,573 38,676,011
Loans and leases net of unearned
interest (note 4) 250,926,023 183,859,770
Less allowance for loan and lease
losses 2,510,155 1,850,605
--------------------------
Net loans and leases 248,415,868 182,009,165
Premises and equipment, net (note 5) 13,558,835 11,652,018
Accrued interest receivable 2,001,678 1,959,569
Other real estate owned 1,362,494 678,373
Goodwill, less accumulated amortization
of $713,926 and $609,719 at December 881,881 986,088
31, 1996 and 1995
Other assets 2,440,184 2,232,070
--------------------------
Total assets $324,968,445 $252,980,560
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6):
Noninterest-bearing $ 52,038,847 $ 42,026,645
Interest-bearing 225,314,476 176,820,223
--------------------------
Total deposits 277,353,323 218,846,868
Securities sold under repurchase
agreements (note 7) 13,928,515 8,913,474
Federal Home Loan Bank advances
(note 7) 4,970,000 -
Federal funds purchased 1,500,000 -
Other liabilities 2,159,976 1,808,207
Long-term debt (note 7) 4,006,119 5,986,103
--------------------------
Total liabilities 303,917,933 235,554,652
Stockholders' equity (note 10):
Preferred stock, no par value,
1,000,000 shares authorized,
none issued or outstanding - -
Common stock, no par value,
4,000,000 shares authorized,
2,172,357 and 1,962,067 issued and
outstanding at December 31, 1996 and
1995, respectively 11,906,581 9,864,598
Retained earnings 9,097,986 7,445,338
Unrealized gains on investment
securities available for sale,
net of deferred income taxes
(notes 1, 3 and 9) 45,945 115,972
--------------------------
Total stockholders' equity 21,050,512 17,425,908
Commitments and contingencies (note 12) - -
--------------------------
Total liabilities and
stockholders' equity $324,968,445 $252,980,560
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and
leases $23,322,817 $18,261,973 $13,686,844
Interest on marketable securities:
Taxable 2,015,497 1,908,463 1,704,436
Nontaxable 197,736 135,693 79,172
Federal funds sold 145,246 386,619 153,087
--------------------------------------
Total interest income 25,681,296 20,692,748 15,623,539
Interest expense:
Deposits 8,375,055 6,415,153 4,021,900
Short- term borrowings 855,443 533,903 155,018
Long-term debt and capital leases 386,120 436,395 489,562
--------------------------------------
Total interest expense 9,616,618 7,385,451 4,666,480
--------------------------------------
Net interest income 16,064,678 13,307,297 10,957,059
Provision for loan and lease losses
(note 4) 1,231,403 418,000 247,680
--------------------------------------
Net interest income after
provision for loan and lease
losses 14,833,275 12,889,297 10,709,379
--------------------------------------
Other income (loss):
Service charges on deposit accounts 1,138,239 961,287 951,928
Other banking service fees 926,864 319,968 200,085
Loss from credit card processing
operation (note 15) - (1,208,000) (158,000)
Gain (loss) on call or sale of
investment securities, net 10,156 (19,454) (3,753)
Other 859,258 421,336 556,369
--------------------------------------
Total other income 2,934,517 475,137 1,546,629
----------------------------------------
Other expenses:
Salaries and employee benefits 6,388,350 4,898,453 4,001,356
Occupancy 1,854,447 1,352,888 1,186,773
Data Processing 698,228 202,965 199,338
Credit Card Interchange 504,179 - -
Equipment 1,261,835 811,482 564,642
Legal, accounting and consulting 454,090 403,634 434,308
Marketing 636,704 568,964 377,247
Other real estate owned expenses 65,496 97,689 337,208
FDIC insurance premiums 2,000 199,169 359,220
Amortization of intangibles 185,286 182,836 222,942
Other 2,540,148 2,207,923 1,931,435
--------------------------------------
Total other expenses 14,590,763 10,926,003 9,614,469
--------------------------------------
Income before income taxes and minority
interest 3,177,029 2,438,431 2,641,539
Income tax expense (note 9) 1,115,892 763,230 240,000
---------------------------------------
Income before minority interest 2,061,137 1,675,201 2,401,539
Minority interest in earnings of
consolidated subsidiaries - - (10,478)
----------------------------------------
Net income $ 2,061,137 $ 1,675,201 $ 2,391,061
========================================
Earnings per share (note 1):
Earnings per common and common
equivalent share $0.96 $0.82 $1.18
========================================
Earnings per common share -
assuming full dilution $0.88 $0.77 $1.06
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
------------------------------------------------------------------------------------
Unrealized Gains
(Losses) on Total
Common Stock Common Stock Retained Securities Available Stockholders'
Shares Amount Earnings for Sale, Net Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 1,962,067 $ 9,864,598 $3,807,193 - $13,671,791
Net income - - 2,391,061 - 2,391,061
Dividends ($.064 per share) - - (125,572) - (125,572)
Net unrealized losses - - - (163,544) (163,544)
------------------------------------------------------------------------------------
Balance at December 31, 1994 1,962,067 9,864,598 6,072,682 (163,544) 15,773,736
Net income - - 1,675,201 - 1,675,201
Dividends ($0.154 per share) - - (302,545) - (302,545)
Net change in market value - - - 279,516 279,516
--------------------------------------------------------------------------------
Balance at December 31, 1995 1,962,067 9,864,598 7,445,338 115,972 17,425,908
Net Income - - 2,061,137 - 2,061,137
Dividends ($0.20) per share - - (408,489) - (408,489)
Common shares issued from
exercise of options (note 10) 19,600 98,196 - - 98,196
Common shares issued
pursuant to conversion of
subordinated debentures
(note 7) 186,838 1,888,224 - - 1,888,224
Common shares issued in
employee benefit plan 3,852 55,563 - - 55,563
Net change in market value - - - (70,027) (70,027)
---------------------------------------------------------------------------------
Balance at December 31, 1996 2,172,357 $11,906,581 $9,097,986 $ 45,945 $21,050,512
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,061,137 $ 1,675,201 $ 2,391,061
-------------------------------------------
Adjustments to reconcile net income
to cash provided by operating activities:
Provision for loan and lease losses 1,231,403 418,000 247,680
Provision for decline in value of
other real estate owned 12,500 30,000 137,753
Depreciation and amortization 1,595,687 1,063,791 775,103
Net (gain) loss on call or sales of investment securities (10,156) 19,454 3,753
Gain on sale of loans - - (69,498)
Net loss on sale of premises and equipment - - 15,619
Loss from credit card processing operation - 1,208,000 158,000
Net (gain) loss on sales of other real estate owned 20,294 (45,403) 7,143
Minority interest in net income - - (80,531)
Increase in accrued interest receivable (557,115) (515,006) (370,641)
(Increase) decrease in other assets, net 62,334 (1,723,658) (491,767)
Increase in other liabilities, net 366,191 534,637 49,279
-------------------------------------------
Total adjustments 2,721,138 989,815 381,893
-------------------------------------------
Net cash provided by operating activities 4,782,275 2,665,016 2,772,954
-------------------------------------------
Cash flows from investing activities:
Net increase in loans (68,626,889) (33,537,346) (31,242,718)
Sales of loans - - 3,102,622
Purchases of investment securities carried at amortized cost (14,877,176) (20,049,734) (6,949,100)
Maturities of investment securities carried at amortized cost 10,750,000 16,252,962 6,705,000
Purchases of investment securities carried at market (6,243,339) (9,461,536) (3,461,561)
Maturities of investment securities carried at market 7,890,000 3,026,790 638,166
Sales of investment securities available for sale 500,156 4,095,844 1,278,145
Purchases of premises and equipment (5,803,732) (7,324,833) (3,660,522)
Sales of premises and equipment 2,537,649 - -
Additions to other real estate owned (245,312) (244,770) (592,303)
Payments received on loans classified as other real estate owned 1,518 265,082 333,663
Proceeds from sale of other real estate owned 555,156 237,556 592,540
--------------------------------------------
Net cash used in investing activities (73,561,969) (46,739,985) (33,256,068)
--------------------------------------------
Cash flows from financing activities:
Net increase in interest-bearing deposits 48,494,253 40,561,347 6,315,984
Net increase in noninterest-bearing deposits 10,012,202 4,837,675 17,121,157
Net increase (decrease) in securities sold under repurchase
agreements 5,015,042 (551,583) 7,577,321
Common stock issued 153,759 - -
Proceeds from Federal Home Loan Bank borrowings 8,970,000 5,000,000 -
Payments on Federal Home Loan Bank borrowings (4,000,000) (5,000,000) -
Dividends paid (408,489) (302,545) (125,572)
Proceeds from long-term debt - 250,000 -
Payments on long-term debt (32,407) (126,896) (109,837)
Federal funds purchased, net 1,500,000 - -
-------------------------------------------
Net cash provided by financing activities 69,704,360 44,667,998 30,779,053
-------------------------------------------
Increase in cash and cash equivalents 924,666 593,029 295,939
Cash and cash equivalents at beginning of year 14,787,266 14,194,237 13,898,298
-------------------------------------------
Cash and cash equivalents at end of year $ 15,711,932 $ 14,787,266 $ 14,194,237
===========================================
</TABLE>
(continued)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Supplemental disclosure of additional noncash
Investing and financing activities:
Additions to other real estate owned in settlement of loans $ 988,783 $ 203,420 $ 251,238
Additions to loans in settlement of other real estate owned - $ 425,219 $ 247,500
Issuance of common stock pursuant to conversion of
subordinated debentures, net (note 7) $1,888,224 - -
==================================
Supplemental disclosure of cash flow information:
Cash paid for interest $9,426,618 $6,928,861 $4,524,416
==================================
Cash paid for income taxes $1,010,000 $ 925,000 $ 660,000
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First State Bancorporation ("FSBC") is a New Mexico-based holding company that
is focused on New Mexico markets. In 1988, FSBC acquired First State Bank of
Taos ("FSBT"), a state chartered bank with locations in Taos, Albuquerque, Santa
Fe, Rio Rancho, Los Lunas, Bernalillo, Placitas, and Questa, New Mexico. In
December 1993, FSBC acquired First State Bank of Santa Fe ("the Santa Fe Bank"),
a state chartered bank located in Santa Fe, New Mexico. On June 5, 1994, the
Santa Fe Bank was merged into FSBT. As a result of the merger, FSBC purchased
the interest of the minority stockholders of the Santa Fe Bank. First State
Bancorporation and its wholly owned subsidiary FSBT are collectively referred to
as the Company.
In November 1993, the Company completed a common stock and convertible debenture
offering. The proceeds received by the Company from the sale of the common
stock and the convertible debentures were principally used to purchase the
shares of the principal shareholders, Livingston & Company Southwest, L.P.
All significant intercompany accounts and transactions have been eliminated in
the consolidated financial statements.
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 significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan and lease
losses and the valuation of real estate acquired in satisfaction of loans. In
connection with the determination of the allowances for loan and lease losses
and real estate owned, management obtains independent appraisals for significant
properties.
Management believes that the estimates and assumptions it uses to prepare the
financial statements, particularly as they relate to the allowances for losses
on loans and leases and real estate owned, are adequate. However, future
additions to these allowances may be necessary based on changes in economic
conditions. Further, regulatory agencies, as an integral part of their
examination process, periodically review the allowances for losses on loans and
leases and real estate owned and may require the Company to recognize additions
to these allowances based on their judgments about information available to them
at the time of their examinations.
The Company's results of operations depend on its net interest income. The
components of net interest income, interest income and interest expense, are
affected by general economic conditions and by competition in the marketplace.
Interest rate risk arises from volatile interest rates and changes in the
balance sheet mix. The Company maintains an asset/liability management policy
that provides guidelines for controlling exposure to interest rate risk. The
Company's policy is to control the exposure of its earnings to changing interest
rates by generally maintaining a position within a narrow range around an
"earnings neutral position," which is defined as the mix of assets and
liabilities that generate a net interest margin that is least affected by
interest rate changes.
(B) INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" (FAS 115). FAS 115 requires that investment securities be
classified in one of three categories and accounted for as follows: (i) debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and carried at amortized cost; (ii)
debt and equity securities that are bought and held primarily for the purpose of
selling them in the near term are classified as trading securities and carried
at fair value, with unrealized gains and losses included in earnings; and (iii)
debt and equity securities not classified as either held to maturity securities
or
<PAGE>
trading securities are classified as available for sale securities. These are
securities which the Company will hold for an indefinite period of time and may
be used as a part of the Company's asset/liability management strategy and may
be sold in response to changes in interest rates, prepayments, or similar
factors. Available for sale securities are carried at estimated market value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of related deferred income
taxes. Upon purchase of investment securities, management designates securities
as either held to maturity or available for sale. The Company does not maintain
a trading portfolio.
On November 15, 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities ("the Guide")." The Guide allowed the Company to perform
a one-time reassessment to determine the appropriateness of the categories in
which securities were designated.
On December 31, 1995, pursuant to the Guide, the Company reclassified securities
with an amortized cost of approximately $3,483,000, and an approximate market
value of $3,594,000 from held to maturity to available for sale. In accordance
with FAS 115, the unrealized appreciation, net of deferred income taxes, was
recorded as unrealized gains on investment securities as a separate component of
stockholders' equity. Sales of available for sale securities are recognized
using the specific identification method.
(C) LOANS, LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Interest on loans is recognized as income based upon the daily principal amount
outstanding. Interest on nonaccrual loans is recognized as income when payments
are received. When a loan is placed on nonaccrual, any uncollected interest
accrued in the current year is charged against income, with prior years'
accruals charged to the allowance for loan and lease losses. Interest accrued
on loans is, in most instances, discontinued when a loan becomes 90 days past
due and/or management believes the borrower's financial condition is such that
collection of future principal and interest payments is doubtful. Loans are
removed from nonaccrual status when they become current as to both principal and
interest and concern no longer exists as to the collectibility of principal or
interest.
Leases which meet the criteria to be classified as direct financing leases are
carried at the gross investment in the lease less unearned income. Unearned
income is recognized in a manner to produce a constant periodic rate of return.
The gross investment in the lease includes the minimum lease payment due under
the term of the lease, plus initial direct costs and the estimated residual
value of the collateral underlying the lease. Initial direct costs are
amortized using the level yield method. The value of unguaranteed residuals
are reviewed periodically and any necessary adjustments are charged against
operations. For leases which meet the operating lease criteria, income is
recognized as rental payments are earned. The equipment leased under operating
leases is carried as property and equipment at cost less accumulated
depreciation. Depreciation expense is calculated using the straight-line method
over the estimated useful life of the equipment, generally five years.
The allowance for loan and lease losses is that amount which, in management's
judgment, is considered adequate to provide for potential losses in the loan and
lease portfolios. Management's determination of the allowance for loan and
lease losses is made with consideration of such factors as delinquencies,
changing collateral values, previous charge-off experience, local and national
economic conditions and other factors which, in management's opinion, deserve
current recognition in the allowance.
First State Bank's loan portfolio is concentrated in Albuquerque, Santa Fe, Los
Lunas, Rio Rancho and Taos, New Mexico. A significant portion of the loan
portfolio is secured by real estate in those communities. Accordingly, the
ultimate collectibility of First State Bank's loan portfolio is dependent upon
real estate values in those markets.
Loan origination fees and certain direct loan origination costs are deferred and
amortized to income over the contractual life of the loan using a method that
approximates the interest method. Any unamortized balance of the deferred fees
is recognized as income if the loans are sold, participated or repaid prior to
maturity.
The Company adopted Statement of Financial Accounting Standards No. 114 and 118,
"Accounting by Creditors for Impairment of a Loan" (FAS 114 and 118) as of
January 1, 1995. The adoption of the standards did not have
<PAGE>
a significant impact on the Company.
(D) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by the straight-line
method over the estimated useful lives of the related assets.
(E) INTANGIBLE ASSETS
The excess of cost over the fair value of the net assets of acquired banks is
recorded as goodwill, which is amortized on a straight-line basis over a period
of 15 years. Core deposit intangibles are amortized over a 10-year period using
the straight-line method. At December 31, 1996 and 1995, unamortized core
deposit intangibles included in other assets in the accompanying financial
statements totaled $60,461 and $92,007, respectively.
The Company assesses the recoverability of goodwill and core-deposit intangibles
by determining whether the amortization of the intangibles over their remaining
lives can be recovered through projected undiscounted future results of
operations.
(F) OTHER REAL ESTATE OWNED
Other real estate owned consists of loan-related properties acquired through
foreclosure and by deed-in-lieu of foreclosure.
Other real estate owned is carried at the lower of the investment in the related
loan or fair value of the assets received. Fair value of such assets is
determined based on independent appraisals minus estimated costs of disposition.
Declines in value subsequent to acquisition are accounted for within the
allowance for other real estate owned. Provisions for losses subsequent to
acquisition, operating expenses, and gain or losses from sales of other real
estate owned are charged or credited to other operating costs.
(G) INCOME TAXES
The Company files a consolidated tax return with its wholly owned subsidiary.
The Company uses the asset and liability method prescribed in the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS
109). Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(H) STATEMENT OF CASH FLOWS
For the purpose of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold.
(I) EARNINGS PER COMMON SHARE
Earnings per common and common equivalent share are computed by dividing net
income applicable to common stock by the total of the weighted average number of
common shares and the additional dilutive effect of stock options and warrants
outstanding during the period. The dilutive effect of outstanding stock options
and warrants is computed using the greater of the closing price or the average
market price of the Company's common stock for the period. Earnings per common
share, assuming full dilution, also include the dilution which would result if
the convertible debentures outstanding during the period had been converted at
the date of issuance in November 1993.
On November 20, 1995, the Company effected a 5-for-4 split of its common stock.
All references to number of
<PAGE>
shares and per-share computations in the consolidated financial statements and
notes have been retroactively restated to reflect the common stock split.
The number of shares used in the earnings per share computation are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Primary
Average common shares outstanding 2,026,428 1,962,067 1,962,067
Average common share equivalents 109,498 89,438 57,254
-------------------------------
2,135,926 2,051,505 2,019,321
===============================
Fully diluted
Average common shares outstanding 2,026,428 1,962,067 1,962,067
Average common share equivalents:
Common stock options and warrants 136,351 97,752 57,254
Convertible debentures 503,574 547,619 547,619
-------------------------------
2,666,353 2,607,438 2,566,940
===============================
</TABLE>
(J) STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
NO. 25, "Accounting for Stock Issued to Employees, and related interpretations."
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," (FAS 123), which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, FAS 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in FAS 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25. Had compensation cost for the
Company's stock-based compensation plans been determined consistent with FAS
123, the Company's net income and net income per share for the year ended
December 31, 1996, would have been substantially the same as reported.
(K) RECLASSIFICATIONS
Certain 1995 balances have been reclassified to conform to the 1996
presentation.
(L) ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management does not expect that adoption
of FAS 125 will have a material impact on the company's financial position,
results of operations, or liquidity.
2. CASH AND DUE FROM BANKS
First State Bank is required to maintain certain daily reserve balances on hand
in accordance with Federal Reserve Board requirements. The consolidated reserve
balances maintained in accordance with such requirements were approximately
$5,357,000 and $4,649,000 at December 31, 1996 and 1995, respectively.
<PAGE>
3. INVESTMENT SECURITIES
Following is a summary of amortized costs and approximate market values of
investment securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
As of December 31, 1996 Cost gains losses market value
-----------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of the U.S. Treasury:
Available for sale $ 6,972,191 $ 39,662 $ 3,093 $ 7,008,760
Held to maturity 2,780,724 21,876 - 2,802,600
Obligations of U.S. government agencies:
Available for sale 12,463,885 60,400 27,355 12,496,930
Held to maturity 13,497,297 36,000 47,625 13,485,672
Obligations of states and political subdivisions -
Held to maturity 3,269,412 39,810 547 3,308,675
Federal Home Loan Bank stock 1,231,500 - - 1,231,500
Federal Reserve Bank stock 310,950 - - 310,950
-----------------------------------------------------
$40,525,959 $197,748 $78,620 $40,645,087
=====================================================
As of December 31, 1995 _____________________________________________________
Obligations of the U.S. Treasury:
Available for sale $ 1,980,023 $ 16,910 $ 2,868 $ 1,994,065
Held to maturity 3,673,297 34,676 - 3,707,973
Obligations of U.S. government agencies:
Available for sale 14,461,975 168,375 6,700 14,623,650
Held to maturity 13,494,429 101,107 28,976 13,566,560
Obligations of states and political subdivisions -
Held to maturity 4,004,020 68,871 2,429 4,070,462
Federal Home Loan Bank stock 613,100 - - 613,100
Federal Reserve Bank stock 273,450 - - 273,450
-----------------------------------------------------
$38,500,294 $389,939 $40,973 $38,849,260
=====================================================
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
-----------------------------------------------------
<S> <C> <C>
Within one year:
Available for sale - -
Held to maturity $ 2,199,647 $ 2,200,596
One through five years:
Available for sale 16,444,672 16,531,625
Held to maturity 15,058,414 15,079,550
Five through ten years:
Available for sale 1,994,254 1,989,065
Held to maturity 1,099,372 1,121,782
After ten years:
Available for sale 997,150 985,000
Held to maturity 1,190,000 1,195,019
Federal Reserve stock 310,950 310,950
Federal Home Loan Bank stock 1,231,500 1,231,500
-----------------------------------------------------
Total $40,525,959 $40,645,087
=====================================================
</TABLE>
Marketable securities with an amortized cost of approximately $34,685,000 and
$24,390,000 were pledged to collateralize deposits as required by law and for
other purposes at December 31, 1996 and 1995, respectively.
Proceeds from sales of investments in debt securities for the years ended
December 31, were $500,156 in 1996, $4,095,844 in 1995 and $1,278,146 in 1994.
Gross losses realized were zero in 1996, $26,997 in 1995 and $3,753 in 1994.
Gross gains realized were $156 in 1996, $7,543 in 1995 and zero in 1994.
<PAGE>
4. LOANS AND LEASES
Following is a summary of loans and leases by major categories:
<TABLE>
<CAPTION>
As of December 31, 1996 1995
---------------------------------
<S> <C> <C>
Commercial $ 36,578,045 $23,204,781
Consumer and other 13,238,944 10,091,600
Lease financing 16,658,963 -
Real estate - mortgage 148,712,636 115,640,653
Real estate - construction 35,737,435 34,922,736
---------------------------------
$250,926,023 $183,859,770
=================================
</TABLE>
Future minimum lease receivable under noncancellable leasing arrangements as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Direct Financing Operating
Leases Leases
------------------------------------
<S> <C> <C>
Years ending December 31:
1997 $ 4,706,704 $ 911,387
1998 4,601,372 861,244
1999 3,883,109 790,927
2000 3,096,316 730,475
2001 1,640,355 584,894
Thereafter 704,408 -
------------------------------------
Net minimum future lease receipts $ 18,632,264 $3,878,927
===================
Less unearned income (3,595,644)
Unamortized initial indirect costs 184,395
Estimated residual value 1,437,948
-----------------
Net investment in direct financing leases $ 16,658,963
=================
</TABLE>
Following is a summary of changes to the allowance for loan and lease losses:
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,850,605 $ 1,467,954 $1,441,437
Provision charged to operations 1,231,403 418,000 247,680
Loans charged off (753,512) (345,459) (437,378)
Recoveries 181,659 310,110 216,215
-----------------------------------------------
Balance at end of year $2,510,155 $ 1,850,605 $1,467,954
===============================================
</TABLE>
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures," effective January 1, 1995. Prior periods
have not been restated. All loans have been evaluated for collectibility under
the provisions of these statements.
The recorded investment in loans for which an impairment has been recognized
were $1,057,802 at December 31, 1996 and $1,730,483 at December 31, 1995. The
average investment in loans for which impairment has been recognized was
$1,294,000 in 1996. The allowance for loan losses related to these loans were
zero at December 31, 1996 and $135,583 at December 31, 1995.
The allowance for impaired loans is included in the allowance for loan and lease
losses. Interest income of $18,293 was recognized on impaired loans during
1996. No interest income was recognized on impaired loans during 1995.
Loans on which the accrual of interest has been discontinued amounted to
$946,408, $1,807,601 and $64,828 at December 31, 1996, 1995 and 1994,
respectively. If interest on such loans had been accrued, such income would
have been approximately $12,000 in 1996, $98,000 in 1995 and $800 in 1994.
Actual interest income on those loans, which is recorded only when received,
amounted to zero in 1996, 1995 and 1994.
<PAGE>
Activity during 1996 and 1995 regarding outstanding loans to certain related-
party loan customers of the subsidiary bank's (executive officers, directors and
principal shareholders of First State Bank including their families and
companies in which they are principal owners) was as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Balance at beginning of year $ 1,495,355 $ 2,779,317
Advances 858,845 3,133,028
Loans to parties no longer related - (1,833,955)
Repayments (408,081) (2,583,035)
----------------------------------
Balance at December 31 $ 1,946,119 $ 1,495,355
==================================
</TABLE>
5. PREMISES AND EQUIPMENT
Following is a summary of premises and equipment, at cost:
<TABLE>
<CAPTION>
Estimated Useful
As of December 31, life (years) 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C>
Land - $ 1,389,490 $ 2,432,185
Building and leasehold improvements 15-30 7,267,468 8,706,747
Equipment 5 5,060,522 3,474,327
Equipment subject to operating lease
financing 3-5 4,017,468 -
Assets under capital leases 5 78,781 78,781
------------------------------------------
17,813,729 14,692,040
Less accumulated depreciation and
amortization (4,254,894) (3,040,022)
------------------------------------------
$13,558,835 $11,652,018
==========================================
</TABLE>
Depreciation and amortization expense on premises and equipment in 1996, 1995
and 1994 was $1,331,147, $822,344 and $670,897, respectively.
During 1996, the Company entered into two agreements for the sale and lease back
of two bank branch facilities totaling $2,563,500. The leases are classified as
operating leases in accordance with Statement of Financial Accounting Standards
No. 13 as amended. The net book value of the premises was removed from the
consolidated balance sheet and a gain of approximately $13,000 was deferred and
is being recognized as an adjustment to rent expense over the term of the lease.
The two leases have a lease term of fifteen years. The minimum lease payments
total $255,000 in 1997, $255,000 in 1998, $255,000 in 1999, $255,000 in 2000,
$255,000 in 2001 and $2,420,000 thereafter. Rent expense under these leases was
$130,400 in 1996.
6. DEPOSITS
Following is a summary of interest-bearing deposits:
<TABLE>
<CAPTION>
As of December 31, 1996 1995
---------------------------------
<S> <C> <C>
Interest-bearing checking accounts $ 49,245,938 $ 49,289,474
Money market savings 32,811,455 24,257,612
Regular savings 16,081,190 15,352,403
Time:
Denominations $100,000 and over 52,751,491 28,732,839
Denominations under $100,000 74,424,402 59,187,895
---------------------------------
$225,314,476 $176,820,223
=================================
</TABLE>
<PAGE>
7. BORROWINGS
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Securities sold under agreements to repurchase are comprised of customer deposit
agreements with overnight maturities. The obligations are not federally insured
but are collateralized by a security interest in U.S. Treasury or U.S.
government agency securities. These securities are segregated and safekept by
third-party banks. These securities had a market value of $15,916,000 and
$10,731,000, at December 31, 1996 and 1995, respectively.
Securities sold under agreement to repurchase are summarized as follows:
Years ended December 31,
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Balance $13,928,515 $8,913,474
Weighted average interest rate 5.34% 5.25%
Maximum amount outstanding at any month end 13,928,516 9,622,511
Average balance outstanding during the period 11,843,000 8,375,000
Weighted average interest rate during the period 4.74% 5.20%
</TABLE>
SUBORDINATED DEBENTURES
The convertible debentures issued November 10, 1993, had an outstanding balance
of $3,788,000 and $5,750,000 at December 31, 1996 and 1995, respectively.
Interest on the convertible debentures accrues from the date of issuance and is
payable semiannually on May 1 and November 1 of each year at a rate of 7.00
percent per annum. The convertible debentures mature on November 10, 2003,
subject to prior redemption or exchange. The convertible debentures are
subordinated to all present and future senior indebtedness. Only capital stock
of the Company (common or preferred) is junior to the convertible debentures.
The convertible debentures may be redeemed at the option of the Company, in
whole or in part, at a redemption value of 101 percent of the outstanding
principal amount plus accrued interest. The redemption value decreases one
percent each succeeding November 1 until reaching 100 percent in 1997.
If necessary to meet regulatory capital requirements, the Company may require
the holders of the convertible debentures to exchange all of the convertible
debentures for convertible preferred stock at a rate of one share of convertible
preferred stock for each $25 in principal amount of convertible debentures.
The holders of the convertible debentures are entitled at any time up to and
including November 1, 2003, subject to prior redemption or exchange, to convert
the principal amount into shares of common stock at a conversion price of $10.50
per share subject to adjustment in certain events, including (i) the issuance of
capital stock of the Company as a dividend or distribution on the common stock;
(ii) subdivisions, combinations or reclassifications of the common stock; (iii)
the issuance to all holders of common stock of certain rights or warrants
entitling them to subscribe for common stock at a price per share less than the
then current market price; or (iv) the distribution to all holders of common
stock of assets or debt securities of the Company or rights or warrants to
purchase securities of the Company. In 1996, debentures totaling $1,962,000
were converted into 186,838 shares of common stock.
FEDERAL HOME LOAN BANK ADVANCES
First State Bank has a note payable to the Federal Home Loan Bank of Dallas
included in long-term debt, dated January 30, 1995, with an outstanding balance
of $218,119 and $236,103 at December 31, 1996, and 1995, respectively. The note
is payable in monthly installments of principal and interest at 8.26% through
February 1, 2005.
First State Bank has a Federal Home Loan Bank advance with a balance of
$4,000,000 at December 31, 1996. The advance has a final maturity of April 23,
2003, but is prepayable, in whole or in part monthly. The advance bears interest
based on the one month LIBOR index plus 0.21%, 5.86% at December 31, 1996.
<PAGE>
First State Bank has a Federal Home Loan Bank advance with a balance of $970,000
at December 31,1996, secured by a U.S. Treasury security with an estimated
market value of $977,000. The advance has an eight-day term maturing January 7,
1997, and bears interest at 5.61%.
The maximum amount of Federal Home Loan Bank advances outstanding during 1996
was $8,000,000 and the weighted average interest rate paid for these advances
was 5.74% , with an average outstanding balance of $4,283,000.
8. LEASES
First State Bank leases certain of its premises and equipment under
noncancelable operating leases from unrelated parties. Rent expense for the
years ended December 31, 1996, 1995 and 1994 totaled approximately $829,000,
$529,000 and $417,000, respectively. Minimum future payments under these leases
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $1,026,609
1998 1,021,932
1999 715,226
2000 676,750
2001 638,049
2002 and beyond 5,797,999
------------------
$9,876,565
==================
</TABLE>
9. INCOME TAXES
Federal income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Current $1,124,780 $1,013,725 $ 508,100
Deferred (8,888) (250,495) (268,100)
----------------------------------------------------
Total expense $1,115,892 $ 763,230 $ 240,000
====================================================
</TABLE>
Actual income tax expense from continuing operations differs from the "expected"
tax expense for 1996, 1995 and 1994 (computed by applying the U.S. federal
corporate tax rate of 34 percent to income from continuing operations before
income taxes) as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $1,080,000 $ 829,000 $ 898,000
Increase (reduction) in income taxes resulting from:
Tax-exempt interest (76,000) (62,000) (57,000)
Amortization of intangibles 92,000 96,000 75,800
Utilization of operating loss carryforwards and credits - - (377,000)
Change in valuation allowance for deferred tax assets (120,000) (132,466) (341,534)
Other 139,582 32,696 41,734
-------------------------------------------
Total income tax expense $1,115,892 $ 763,230 $ 240,000
===========================================
</TABLE>
<PAGE>
Elements of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
As of December 31, 1996 1995
-----------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $592,424 $ 368,230
Write-down of other real estate owned 37,267 32,167
Depreciation 92,323 79,523
Accrued expenses 17,000 17,000
Deferred compensation expense 31,618 20,244
Alternative minimum tax credit carryforwards - 61,747
Loss from abandonment of credit card operation - 316,200
Other 14,838 23,000
-----------------------------
Total gross deferred tax assets 785,470 918,111
Less valuation allowance - (120,000)
-----------------------------
785,470 798,111
Deferred tax liabilities:
Deferred gains on sale of other real estate owned 17,987 39,516
Tax effect of unrealized gains on investment securities 23,669 59,743
-----------------------------
Total gross deferred tax liabilities 41,656 99,259
-----------------------------
Net deferred tax asset $743,814 $ 698,852
=============================
</TABLE>
In order to fully realize the deferred tax asset on the Company's balance sheet
at December 31, 1996, of $785,470, the Company will need to generate future
taxable income of approximately $2,310,000. Based on the Company's historical
and current pre-tax income, management believes it is more likely than not that
the Company will realize the benefit of the temporary differences prior to the
expiration of the carry-forward period and further believes that the existing
net deductible temporary differences will reverse during periods in which the
Company generates net taxable income. There can be no assurance, however, that
the Company will generate taxable income or any specific level of continuing
taxable income.
10. STOCKHOLDERS' EQUITY
At December 31, 1996, under terms of a stock option agreement, an officer of
First State Bank has an outstanding option to purchase 50,113 common shares of
the Company at a price of $5.01 per share. The options may be exercised at any
time and expire on October 12, 2003. During 1996, the officer exercised 19,600
options for a total of $98,196.
Effective October 5, 1993, the Company adopted the First State Bancorporation
1993 Stock Option Plan, which provides for the granting of options to purchase
up to 225,000 shares of the Company common stock. Exercise dates and prices for
the options are set by a committee of the Board of Directors. The plan also
provides that options other than those qualifying as incentive stock options may
be granted. On November 2, 1993, three officers and one consultant, who is also
a director of the Company, were granted 150,000 options at a price of $8.40 per
share. On December 12, 1994, eleven officers were granted 13,750 options at a
price of $8.40 per share. On December 29, 1995, twenty officers were granted
35,000 options at a price of $8.40 per share. Compensation expense of $33,453
and $59,542 was recognized pursuant to the grant of options in 1996 and 1995,
respectively. Vesting of these options is 20 percent at the date of grant and 20
percent per year thereafter until fully vested. At December 31, 1996, the vested
portion of these options totaled 142,250 shares.
On October 25, 1996, the Board of Directors approved a shareholder protection
rights agreement to protect the shareholders of the Company from abusive or
unfair take-over practices. The terms of the agreement provide one right for
each share of common stock held. The rights become exercisable only if a person
or a group accumulates ten percent or more of the Company's common shares. The
Company would be entitled to redeem the rights for $0.01 per right until the
tenth day following a public announcement of an acquisition of 10% of its common
shares. The rights expire on October 25, 2006.
<PAGE>
On October 25, 1996, the Board of Directors approved a dividend reinvestment
plan. The plan allows any shareholder of record of 300 shares of common stock
to reinvest dividends on those shares in common shares issued by the Company
pursuant to the plan. Holders of 300 or more shares may also acquire shares
from the Company through the plan in an amount not to exceed $30,000 quarterly.
In connection with the common stock and convertible debenture offering, the
Company sold to the underwriter for $100 a five-year warrant to purchase 48,125
shares of common stock. The warrant is exercisable at $10.50 per share of
common stock of the Company. The warrants expire November 1, 1998.
Bank regulations specify the level of dividends that can be paid by First State
Bank. As of January 1, 1997, First State Bank had approximately $3,500,000 in
retained earnings which was available for the payment of dividends to the
Company subject to regulatory capital requirements. Future dividend payments
will be dependent upon the level of earnings generated by First State Bank
and/or regulatory restrictions, if any.
Payment of dividends, subsequent to January 1, 1993, to the Company's
stockholders is limited by the convertible debenture indenture to amounts not to
exceed the sum of: (a) 75 percent of the Company's net income, plus (b) 75
percent of the net proceeds received by the Company from equity securities
issued, excluding the November 1993 offering.
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly discretionary--actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and Tier I
capital (as defined in regulations) to risk-weighted assets, and of Tier I
capital, and of Tier I capital to total assets. Management believes, as of
December 31, 1996, that the Company meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Bank of Kansas City categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
<TABLE>
<CAPTION>
For capital adequacy To be considered well
Actual purposes capitalized
As of December 31, 1996 -------------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Total capital to risk weighted assets:
Consolidated $22,418 8.3% $21,530 8.0% $26,912 10.0%
Bank subsidiary 24,975 9.3% 21,483 8.0% 26,841 10.0%
Tier I capital to risk weighted assets:
Consolidated 19,941 7.4% 10,764 4.0% 16,146 6.0%
Bank subsidiary 22,498 8.4% 10,739 4.0% 16,108 6.0%
Tier I capital to total assets:
Consolidated 19,941 6.1% 12,990 4.0% 16,238 5.0%
Bank subsidiary 22,498 6.9% 12,911 4.0% 16,139 5.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For capital adequacy To be considered well
Actual purposes capitalized
-------------------- ---------------------- --------------------
As of December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Total capital to risk weighted assets:
Consolidated $17,871 8.7% $16,433 8.0% $20,541 10.0%
Bank subsidiary 20,502 10.0% 16,401 8.0% 20,502 10.0%
Tier I capital to risk weighted assets:
Consolidated 16,020 7.8% 8,215 4.0% 12,323 6.0%
Bank subsidiary 18,651 9.0% 8,198 4.0% 12,297 6.0%
Tier I capital to total assets:
Consolidated 16,020 6.8% 9,423 4.0% 11,779 5.0%
Bank subsidiary 18,651 7.4% 10,081 4.0% 12,602 5.0%
</TABLE>
11. EMPLOYEE BENEFIT PLANS
Effective January 1, 1991, First State Bank adopted an employee tax-sheltered
savings plan for substantially all full-time employees which provides a
mandatory 50% matching by First State Bank of employee contributions up to a
maximum of 6 percent of gross annual wages. Full vesting occurs after three
years. Contributions to the plan totaled $105,788 in 1996, $70,391 in 1995 and
$53,178 in 1994.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as standby letters of credit and commitments to extend
credit. These financial instruments with off balance-sheet risk are not
reflected in the financial statements. Financial instruments with off balance-
sheet risk involve elements of credit risk, interest rate risk, liquidity risk
and market risk. Management does not anticipate any significant losses as a
result of these transactions.
The following table summarizes these financial instruments:
<TABLE>
<CAPTION>
As of December 31, 1996 1995
---------------------------
<S> <C> <C>
Commitments to extend credit $46,883,000 $41,570,000
Standby letters of credit 1,417,000 1,405,000
</TABLE>
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Bank controls the credit risk of these transactions through
credit approvals, limits, and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are written conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
The Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and income-producing commercial properties.
<PAGE>
In the normal course of business, the Company is involved in various legal
matters. After consultation with legal counsel, management does not believe the
outcome of these legal matters will have an adverse impact on the Company's
financial position.
13. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The assets of the Company, as parent company, consist primarily of the
investment in its subsidiary bank and the parent company's marketable securities
portfolio. The primary sources of the parent company's cash revenues are
dividends from its subsidiary bank along with interest received from the
marketable securities portfolio. This cash revenue is the source of funds for
payment of interest on the convertible debentures issued by the parent company.
Following are condensed financial statements of the parent company for December
31:
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
As of December 31, 1996 1995
-----------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 1,180 $ 1,078
Securities available for sale - 2,000
Investment in subsidiary 23,104 19,263
Goodwill 384 416
Deferred tax asset 32 343
Other assets 279 398
-----------------------
Total assets $24,979 $23,498
=======================
LIABILITIES AND EQUITY CAPITAL:
Liabilities - accounts payable and accrued expenses $ 141 $ 124
Estimated liabilities for credit card processing operation - 198
Convertible debentures 3,788 5,750
Equity capital 21,050 17,426
-----------------------
Total liabilities and equity capital $24,979 $23,498
=======================
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
Years ended December 31, 1996 1995 1994
----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Income:
Cash dividends from subsidiaries $ - $ - $ -
Loss from credit card processing operation - (1,208) (158)
Other income 67 176 203
----------------------------------
Total income (loss) 67 (1,032) 45
----------------------------------
Expenses:
Interest expense 362 405 408
Amortization 158 176 176
Legal 57 56 78
Consulting 65 62 54
Other 173 255 28
----------------------------------
Total expense 815 954 744
----------------------------------
Loss before income taxes and undistributed income of bank
subsidiary (748) (1,986) (699)
Income tax benefit 148 596 228
Undistributed income of bank subsidiary 2,661 3,065 2,862
----------------------------------
Net Income $ 2,061 $ 1,675 $ 2,391
==================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Years ended December 31, (Dollars in thousands)
Cash flows from operating activities:
Net income $ 2,061 $ 1,675 $ 2,391
---------------------------------------------------
Adjustments to reconcile net income to cash used by
operations:
Amortization of goodwill 32 32 33
Undistributed income of bank subsidiaries (2,661) (3,064) (3,020)
Loss from investment in credit card operation - 1,208 158
(Increase) decrease in other assets 356 (255) 186
Increase (decrease) in other liabilities, net (181) 121 35
---------------------------------------------------
Total adjustments (2,454) (1,958) (2,608)
---------------------------------------------------
Net cash used by operating activities (393) (283) (217)
Cash flows from investing activities:
Sale of investment securities - 3,998 496
Maturity of investment securities 2,000 1,000 500
Purchase of investment securities - (2,494) (483)
---------------------------------------------------
Net cash provided by investing activities 2,000 2,504 513
---------------------------------------------------
Cash flows from financing activities:
Common stock issued 154 - -
Capital contributions to subsidiary bank (1,250) (500) (500)
Contributions and loans to credit card processing - (523) (650)
operation
Dividends paid (409) (303) (126)
---------------------------------------------------
Net cash used by financing activities (1,505) (1,326) (1,276)
---------------------------------------------------
Increase in cash and due from banks 102 895 (980)
Cash and due from banks at beginning of year 1,078 183 1,163
---------------------------------------------------
Cash and due from banks at end of year $ 1,180 $ 1,078 $ 183
===================================================
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (FAS 107), requires disclosure of current fair
value of all financial instruments, both assets and liabilities recognized and
not recognized in the balance sheet, for which it is practicable to estimate
fair value. FAS 107 defines fair value as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties
other than in a forced or liquidation sale.
Financial instruments are defined as cash, evidence of ownership in an entity,
or a contract that both imposes on one entity a contractual obligation: (1) to
deliver cash or another financial instrument to a second entity, or (2) to
exchange other financial instruments on potentially unfavorable terms with a
second entity and conveys to the second entity a contractual right: (a) to
receive cash or another financial instrument from the first entity, or (b) to
exchange other financial instruments on potentially favorable terms with the
first entity.
Fair value estimates are made at a specific point in time based on available
relevant market information about the financial instrument. However, a
significant portion of the Company's financial instruments, such as commercial
real estate loans, do not currently have an active marketplace in which they can
be readily sold or purchased to determine fair value. Consequently, fair value
estimates for those financial instruments are based on assumptions made by
management regarding the financial instrument's credit risk characteristics,
prevailing interest rates, future estimated cash flows, expected loss
experience, current and future economic conditions and other factors which
affect fair value. As a result, these fair value estimates are subjective in
nature and involve uncertainties and matters of significant judgment, and
therefore, cannot be determined with precision. Accordingly, changes in
management's assumptions could cause the fair value estimates to deviate
substantially. Further, these estimates do not reflect any additional premium
or discount that could result from offering for sale, at one time, the Company's
entire holdings of a particular financial instrument or any estimated
transaction costs. Lastly, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered in the estimates.
<PAGE>
The carrying values and estimated fair values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------
Carrying Carrying
amount Fair value amount Fair value
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 15,712 $ 15,712 $ 14,787 $ 14,787
Marketable securities available for sale 21,048 21,048 17,504 17,504
Marketable securities held to maturity 19,547 19,597 21,172 21,345
Loans, net 250,926 250,503 182,009 182,898
Accrued interest receivable 2,002 2,002 1,960 1,960
Financial liabilities:
Deposits 277,353 278,000 218,846 219,705
Securities sold under repurchase agreements 13,929 13,929 8,913 8,913
Long-term debt 4,006 4,043 5,986 6,101
Federal Home Loan Bank advances 4,970 4,970 - -
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and due from banks
Carrying value approximates fair value since these instruments are payable on
demand and do not present credit concerns.
Federal funds sold and interest-bearing deposits with banks
Carrying value approximates fair value since these instruments have short-term
maturities and do not present credit concerns.
Marketable securities available for sale and held to maturity
The estimated fair value of securities available for sale and held to maturity
is based on independent dealer quotations or published market price bid quotes.
Loans, net
The estimated fair value of the loan portfolio is calculated by discounting
scheduled cash flows over the estimated maturity of loans using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities or repricing terms. Credit risk
is accounted for through a reduction of contractual cash flows by loss estimates
of classified loans and as a component of the discount rate.
Accrued interest receivable
Carrying value of interest receivable approximates fair value, since these
instruments have short-term maturities.
Deposits
The estimated fair value of deposits with no stated maturity, such as demand
deposits, savings accounts and money market deposits, approximates the amounts
payable on demand at December 31, 1996 and 1995. The fair value of fixed
maturity certificates of deposit is estimated by discounting the future
contractual cash flows using the rates currently offered for deposits of similar
remaining maturities.
Securities sold under repurchase agreements
The estimated fair value of securities sold under repurchase agreements, which
reset frequently to market interest rates, approximate fair value.
Long-term debt
Long-term debt consists primarily of subordinated debentures which are callable
at the Company's option; their fair value is therefore considered to be their
call price.
<PAGE>
Federal Home Loan Bank Advances
Federal Home Loan Bank advances reprice at least monthly; accordingly their
carrying value is considered to approximate their fair value.
Off Balance-Sheet Items
The estimated fair values of the Company's off balance-sheet items are not
material to the fair value of financial instruments included in the statement of
financial condition. Rates currently available to the Company and subsidiary
for debt with similar terms and remaining maturities are used to estimate fair
value of existing debt.
15. CREDIT CARD PROCESSING OPERATION As of December 31, 1995, the Company
decided to abandon its 48% limited partnership investment in Credit Card
Services, Ltd. (CCS), effective April 1, 1996. CCS is a credit card processing
operation located in Henderson, Nevada. The Company's initial investment in CCS
was made in June 1994. The loss from abandonment includes the Company's limited
partnership investment, loans to the partnership and commitments for advances to
the partnership. The following is a summary of the loss from CCS:
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
---------------------------------------
<S> <C> <C>
Equity in losses from operations $ 278,000 $158,000
Loss from abandonment of limited partnership interest $ 930,000 -
---------------------------------------
$1,208,000 $158,000
=======================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,711,932
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,048,140
<INVESTMENTS-CARRYING> 19,547,433
<INVESTMENTS-MARKET> 19,597,000
<LOANS> 250,926,023
<ALLOWANCE> 2,510,155
<TOTAL-ASSETS> 324,968,445
<DEPOSITS> 277,353,323
<SHORT-TERM> 20,398,515
<LIABILITIES-OTHER> 2,159,976
<LONG-TERM> 4,006,119
0
0
<COMMON> 21,004,567
<OTHER-SE> 49,945
<TOTAL-LIABILITIES-AND-EQUITY> 324,968,445
<INTEREST-LOAN> 23,322,817
<INTEREST-INVEST> 2,358,479
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,681,296
<INTEREST-DEPOSIT> 8,375,055
<INTEREST-EXPENSE> 9,616,618
<INTEREST-INCOME-NET> 16,064,678
<LOAN-LOSSES> 1,231,403
<SECURITIES-GAINS> 10,156
<EXPENSE-OTHER> 14,590,763
<INCOME-PRETAX> 3,177,029
<INCOME-PRE-EXTRAORDINARY> 2,061,137
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,061,137
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 5.51
<LOANS-NON> 946,000
<LOANS-PAST> 689,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,635,000
<ALLOWANCE-OPEN> 1,851,000
<CHARGE-OFFS> 754,000
<RECOVERIES> 182,000
<ALLOWANCE-CLOSE> 2,510,000
<ALLOWANCE-DOMESTIC> 2,510,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,510,000
</TABLE>
