<PAGE>
Filed pursuant to Rule 424(B)(1)
SEC File No. 333-24417
PROSPECTUS
$12,000,000
FIRST STATE BANCORPORATION
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2017
The $12,000,000 aggregate principal amount of 7 1/2% Convertible
Subordinated Debentures due 2017 (the "Debentures") are convertible at any
time before maturity, unless previously redeemed, into shares of common stock,
no par value per share (the "Common Stock"), of First State Bancorporation
(the "Company") at a conversion price of $16.75 per share (equivalent to a
conversion rate of 59.70 shares per $1,000 principal amount of Debentures),
subject to adjustment in certain events. On April 28, 1997, the last reported
sale price of the Common Stock on The Nasdaq Stock Market's National Market
(symbol: FSNM) was $13.50 per share. See "Market for Common Stock and
Dividends."Before this offering, there has been no public market for the
Debentures. The Debentures have been approved for quotation on The Nasdaq
SmallCap Market under the symbol "FSNMG."
Interest on the Debentures is payable semiannually in arrears on each April
30 and October 30, commencing on October 30, 1997. The Debentures are
redeemable, in whole or in part, at any time and from time to time on or after
May 1, 2001, at the option of the Company at fixed redemption prices as set
forth herein, together with accrued interest to the redemption date; provided
that the Debentures may be redeemed at the option of the Company, in whole or
in part, at any time before May 1, 2001, without any premium if the closing
sale price of the Common Stock for at least 30 consecutive trading days equals
or exceeds 140% of the conversion price then in effect. The Debentures are not
subject to any sinking fund.
The Debentures will be unsecured general obligations of the Company
subordinate in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company. See "Risk Factors--Subordination." The
Company currently has no Senior Indebtedness. Payment of principal of the
Debentures may be accelerated only in certain events involving the bankruptcy,
insolvency or reorganization of the Company. There is no right of acceleration
of payment of the Debentures in the case of a default in the performance of
any covenant of the Company, including payment of principal or interest. See
"Description of the Debentures--Events of Default and Default."
The Debentures will be issued in the form of a global debenture or
debentures (the "Global Debentures") registered in the name of the nominee of
The Depository Trust Company ("DTC"), which will act as depositary. Beneficial
interests in the Global Debenture will be shown on, and transfers thereof will
be effected only through, records maintained by DTC and its direct and
indirect participants. Except as described herein, Debentures in definitive
form will not be issued. The Debentures will be issued in registered form in
denominations of $1,000 and integral multiples thereof. See "Description of
the Debentures--Book-Entry."
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR
ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Debenture........................... 100% 6% 94%
- --------------------------------------------------------------------------------
Total(4)................................ $12,000,000 $720,000 $11,280,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from May 2, 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $151,812.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
$1,800,000 principal amount of additional Debentures, on the same terms
and conditions as set forth above, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be approximately
$13,800,000, $828,000, and $12,972,000, respectively. See "Underwriting."
---------------
The Debentures are offered by the Underwriters, subject to prior sale, when,
as and if issued to and accepted by the Underwriters, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that the
Debentures will be ready for delivery in book-entry form only through the
facilities of DTC in New York, New York, on or about May 2, 1997 against
payment therefor in immediately available funds.
KEEFE, BRUYETTE & WOODS, INC.
The date of this Prospectus is April 28, 1997.
<PAGE>
[LOGO]
BANKING LOCATIONS
[PASTE UP CRC MAP @ 80%]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES
OFFERED HEREBY AND THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING
THE MARKET PRICE OF THE DEBENTURES OR THE COMMON STOCK OR BOTH, THE PURCHASE
OF DEBENTURES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in its
entirety by reference to the more detailed information and financial statements
and notes thereto appearing elsewhere, or incorporated by reference, in this
Prospectus. Unless otherwise indicated, all share and per share information for
periods prior to November 20, 1995, has been adjusted to give effect to a 5-
for-4 split of the Common Stock effected on November 20, 1995. Unless otherwise
indicated, all information in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised.
THE COMPANY
First State Bancorporation 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 of Taos ("First State
Bank" which, together with First State Bancorporation, is referred to herein as
the "Company" unless the context indicates otherwise). 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. First State Bank, the largest bank in Taos County, has operated in the
county since 1922. See "The Company--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 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 larger out-of-state institutions. See
"The Company--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 acquisitions. See "The
Company--Growth Strategy."
The Company's executive offices are located at 111 Lomas, Albuquerque, New
Mexico 87102, and its telephone number is (505) 241-7500.
3
<PAGE>
THE OFFERING
Securities Offered........ $12,000,000 in principal amount of 7 1/2% Convert-
ible Subordinated Debentures due April 30, 2017.
Interest Payment Dates.... April 30 and October 30, commencing on October 30,
1997.
Convertible into Common Stock at any time before
Convertibility............ maturity or redemption at $16.75 per share, subject
to adjustment in certain events.
Mandatory Redemption...... None.
The Debentures are redeemable, in whole or in part,
Optional Redemption....... at any time and from time to time, on or after May
1, 2001, at the option of the Company on not less
than 30 days notice, at fixed redemption prices as
set forth herein, together with accrued interest to
the redemption date; provided that the Debentures
may be redeemed at the option of the Company, in
whole or in part, at any time before May 1, 2001,
without any premium if the closing sale price of
the Common Stock for at least 30 consecutive trad-
ing days equals or exceeds 140% of the conversion
price then in effect. See "Description of the De-
bentures."
Subordination............. The payment of principal and premium, if any, and
interest on the Debentures is subordinated to all
existing and future Senior Indebtedness (as defined
herein). The Company currently has no Senior In-
debtedness. The Indenture (as defined herein) does
not limit the incurrence of indebtedness, including
Senior Indebtedness, by the Company. See "Descrip-
tion of the Debentures--Subordination."
Events of Default......... The Indenture defines an Event of Default with re-
spect to the Debentures as being certain events in-
volving the bankruptcy, insolvency or reorganiza-
tion of the Company. The Indenture does not provide
for any right of acceleration of the payment of
principal or interest or in the performance of any
covenant or agreement in the Debentures or in the
Indenture. See "Description of the Debentures--
Events of Default and Defaults."
Use of Proceeds........... A portion of the net proceeds will be contributed
to the capital of First State Bank and the remain-
ing net proceeds will be used for general corporate
purposes. In addition, the Company may use a por-
tion of such proceeds to pay any costs incurred in
connection with the redemption of the Company's
currently outstanding 7% Convertible Exchangeable
Redeemable Subordinated Debentures Due 2003 (the
"7% Debentures"). See "Use of Proceeds."
Nasdaq SmallCap Market FSNMG
Symbol...................
The Common Stock is quoted on The Nasdaq Stock Mar-
Common Stock.............. ket's National Market under the symbol "FSNM." At
March 31, 1997, 2,227,332 shares of Common Stock
were outstanding.
RISK FACTORS
Before making an investment decision, prospective investors should consider
all of the information in this Prospectus. In particular, prospective investors
should evaluate the factors discussed under "Risk Factors."
RECENT DEVELOPMENTS
Net income for the three months ended March 31, 1997 was $710,000 or $0.28
per fully diluted share, compared to $505,000 or $0.22 per fully diluted share
for the same period of 1996, an increase of 40.6% and 27.3% in net income and
earnings per fully diluted share, respectively. Total assets were $351 million
at March 31, 1997, an increase of 33.0% from $264 million at March 31, 1996.
Loans and leases increased $60.7 million and total deposits increased $78.1
million over March 31, 1996 levels. Return on average assets and return on
average equity for the first quarter of 1997 were 0.85% and 13.06%,
respectively, compared to 0.78% and 11.56%, respectively, for the same period
in 1996. See "Recent Developments."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company is derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993(1) 1992(1)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income......... $ 16,064 $ 13,307 $ 10,957 $ 7,581 $ 6,401
Provision for loan and lease
losses..................... 1,231 418 248 267 198
-------- -------- -------- -------- --------
Net interest income after
provision for loan and
lease losses.............. 14,833 12,889 10,709 7,314 6,203
Noninterest income.......... 2,934 1,683 1,705 1,204 1,347
Loss from credit card
processing operations...... -- (1,208) (158) -- --
Noninterest expense......... 14,590 10,926 9,625 6,724 6,137
-------- -------- -------- -------- --------
Income before taxes........ 3,177 2,438 2,631 1,794 1,413
Income tax expense
(benefit)................. 1,116 763 240 (17) 67
-------- -------- -------- -------- --------
Net income available to
common stockholders........ $ 2,061 $ 1,675 $ 2,391 $ 1,811 $ 1,346
======== ======== ======== ======== ========
PER SHARE DATA:
Net income(2)............... $ 0.88 $ 0.77 $ 1.06 $ 1.21 $ 0.98
Book value.................. 9.69 8.88 8.04 6.97 5.83
Dividends paid.............. 0.200 0.154 0.064 -- 0.433
Average fully diluted common
shares outstanding (in
thousands)................. 2,136 2,052 2,019 1,442 1,363
AVERAGE BALANCE SHEET DATA:
Total assets................ $285,628 $229,382 $186,886 $140,083 $126,150
Investment securities....... 35,611 34,250 32,211 21,642 25,959
Loans and leases............ 218,776 164,172 133,685 102,974 85,058
Deposits.................... 242,366 195,079 160,226 126,989 114,446
Stockholders' equity........ 18,313 16,817 14,723 9,031 7,396
PERFORMANCE RATIOS:
Return on average assets.... 0.72% 0.73% 1.28% 1.29% 1.07%
Return on average common
equity..................... 11.25 9.96 16.24 20.05 18.20
Net interest margin......... 6.25 6.49 6.46 5.89 5.60
Efficiency ratio(3)......... 76.84 72.80 76.00 76.64 80.67
ASSET QUALITY RATIOS(4):
Nonperforming assets to
total loans, leases and
other real estate owned.... 1.17% 1.60% 1.17% 1.99% 3.75%
Net charge-offs to average
loans and leases........... 0.26 0.02 0.17 0.25 0.27
Allowance for loan and lease
losses to total loans...... 1.00 1.01 0.98 1.18 1.21
Allowance for loan and lease
losses to nonperforming
loans(5)................... 153.52 81.58 290.12 201.26 134.45
CAPITAL RATIOS(4):
Leverage ratio.............. 6.17% 6.55% 7.06% 7.21% 5.18%
Average stockholders' equity
to average total assets.... 6.41 7.33 7.88 6.45 5.86
Tier 1 risk-based capital
ratio...................... 7.40 7.80 9.04 9.83 7.36
Total risk-based capital
ratio...................... 8.30 8.70 9.90 10.96 8.54
</TABLE>
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(1) Except for December 1993, does not reflect the operations of the Santa Fe
Bank, which was acquired by the Company on December 1, 1993. This
acquisition was accounted for as a purchase.
(2) Net income per share is based upon the weighted average number of shares of
Common Stock, Common Stock equivalents, Common Stock options, Common Stock
warrants and 7% Debentures outstanding during the period.
(3) Calculated by dividing total noninterest expense, excluding securities
gains and losses, by net interest income plus noninterest income.
(4) At period end, except net charge-offs to average loans and average
stockholders' equity to average total assets.
(5) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
5
<PAGE>
RISK FACTORS
An investment in the Debentures offered hereby involves certain risks. In
addition to the other information contained or incorporated by reference
herein, the following factors should be considered carefully in evaluating the
Company before purchasing the Debentures offered hereby. Information contained
in this Prospectus contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "will," "should," "projected," "contemplates" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology. No
assurance can be given that the matters covered by the forward-looking
statements will be achieved. The following factors could cause actual
experience to vary materially from the matters covered in such forward-looking
statements. Other factors, such as the general state of the economy, could
also cause actual experience to vary materially from the matters covered in
such forward-looking statements.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of Michael R. Stanford,
President of the Company and First State Bank, H. Patrick Dee, Secretary and
Treasurer of the Company and Executive Vice President and Chief Operating
Officer of First State Bank, and other members of management who have
relationships with customers of First State Bank. The loss of these officers
could have an adverse affect on the Company's growth and profitability.
Certain of these officers are participating in the Executive Income Protection
Plan. See "Management--Executive Income Protection Plan."
GROWTH STRATEGY AND POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company intends to pursue an aggressive growth strategy. This strategy
is focused primarily upon the ability of the Company to develop new account
relationships, establish de novo branches, complete acquisitions and generate
loans and deposits at acceptable risk levels and on acceptable terms. While
the Company believes that its existing capital level and anticipated earnings
will be sufficient to support the Company's operations and anticipated
expansion within its existing markets during at least the next 12 months and
to meet all regulatory requirements, other factors such as faster than
anticipated growth, reduced earnings levels and changes in regulatory
requirements may require the Company to seek additional capital. There can be
no assurance that the Company will be successful in implementing, or will have
the necessary regulatory capital to implement, its growth strategy or that it
would be able to raise additional capital if necessary. See "Business--Growth
Strategy," "--Competition" and "--Regulatory Oversight."
SOURCES OF PAYMENTS TO HOLDERS OF DEBENTURES; ABILITY TO PAY DIVIDENDS;
POSSIBLE ISSUANCE OF ADDITIONAL SECURITIES
Although the Company holds all of the outstanding capital stock of First
State Bank, the Company is a legal entity separate and distinct from First
State Bank. Except with respect to any proceeds of this offering retained by
the Company, the ability of the Company to pay the interest on and principal
of the Debentures and to pay dividends on the Common Stock will depend
primarily on the ability of First State Bank to pay dividends to the Company
in amounts sufficient to service the Company's obligations, including its
obligation to make any payments with respect to securities issued by the
Company in the future which are pari passu or have a preference over the
Debentures or the Common Stock, as applicable, with respect to the payment of
principal, interest, or dividends. See "Regulation and Supervision."
First State Bank's ability to pay dividends, make other capital
distributions, or pay management fees to the Company is governed by federal
and state law. Under regulations issued by the Board of Governors of the
Federal Reserve System (the "FRB" or "Federal Reserve Board"), First State
Bank is permitted to pay dividends during a calendar year of up to the lesser
of (i) its undivided profits then on hand, less its losses and bad debts, or
(ii) the total of the bank's net profits for that year combined with its
retained net profits of the preceding two calendar years, less any required
transfers to surplus or to a fund for the retirement of any preferred stock.
(Undivided profits may include, if approved by First State Bank's Board of
Directors and the
6
<PAGE>
FRB, part or all of any capital surplus that exceeds capital surplus required
by state law.) Any additional capital distributions would require prior
regulatory approval. In addition, First State Bank is prohibited under federal
law from paying any dividend that would cause it to become undercapitalized.
As of December 31, 1996, First State Bank met the capital requirements of an
adequately capitalized institution under applicable FRB regulations.
Additionally, the FRB has the right to object to a distribution on safety and
soundness grounds. There is no assurance that First State Bank will remain
adequately capitalized or that it will be in a position to make capital
distributions to the Company in an amount sufficient for the Company to
service the Debentures, or to pay dividends on the Common Stock issuable upon
conversion of the Debentures. See "Regulation and Supervision."
It is the policy of the Federal Reserve Board that bank holding companies
should pay cash dividends on common stock only out of income available over
the past year and only if prospective earnings retention is consistent with
the organization's expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividends that undermines the bank holding company's ability to serve as a
source of strength to its banking subsidiaries. Principal sources of revenues
for the Company are expected to be dividends received from First State Bank
and earnings on the proceeds of this offering that are retained by the
Company.
In addition, the federal regulatory agencies are authorized to prohibit a
banking institution or bank holding company from engaging in an unsafe or
unsound banking practice. Depending upon the circumstances, the agencies could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.
There is no restriction in the Indenture on the ability of the Company to
issue securities which are pari passu or have a preference over the Debentures
or the Common Stock, nor is there any restriction on the ability to issue
additional capital stock or incur additional indebtedness.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Debentures
will, to the extent set forth in the Indenture, be subordinated and subject in
right of payment to the prior payment in full of all Senior Indebtedness. In
certain events of insolvency, the payment of the principal of, premium if any,
and interest on the Debentures will, to the extent set forth in the Indenture,
also be effectively subordinated in right of payment to the prior payment in
full of all Other Financial Obligations (as defined herein). See "Description
of the Debentures--Subordination of Debentures." Only the capital stock of the
Company is currently junior in right of payment to the Debentures. As of March
26, 1997, the Company had no Senior Indebtedness and had outstanding $3.4
million in principal amount of 7% Debentures. The Company has called for
redemption the 7% Debentures effective April 30, 1997. The Indenture does not
limit the incurrence of additional indebtedness by the Company, including
Senior Indebtedness, or by First State Bank.
The Debentures will be obligations of the Company only, are not obligations
of or deposits in First State Bank, and are not insured by any government
agency. Because the Company is a bank holding company, its rights and the
rights of its creditors, including the holders of the Debentures, to
participate in any distribution of the assets of First State Bank (either as a
shareholder or as a creditor), upon a liquidation, reorganization, or
insolvency of First State Bank (and the consequent right of the holders of the
Debentures to participate in those assets) will be subject to the claims of
the creditors of First State Bank (including depositors in First State Bank).
If the Company is a creditor of First State Bank, the claims of the Company
would be subject to any prior security interest in the assets of First State
Bank and any indebtedness of First State Bank senior to that of the Company.
LIMITED COVENANTS
The covenants in the Indenture are limited and do not protect holders of
Debentures in the event of a material adverse change in the Company's
financial condition or results of operations. Additionally, as more fully
described in "Description of the Debentures," payments of principal of the
Debentures can be accelerated only
7
<PAGE>
upon certain events of bankruptcy, insolvency, or reorganization of the
Company. There is no right of acceleration of payment of the Debentures in the
case of a default in the performance of any covenant of the Company, including
payment of principal or interest. Neither the Debentures nor the Indenture
contains any provisions which will restrict the Company from incurring,
assuming or becoming liable with respect to any indebtedness or other
obligations, whether secured or unsecured, including indebtedness which will
rank senior to the Debentures. Neither the Debentures nor the Indenture
contains any financial ratios or specified levels of liquidity to which the
Company must adhere. In addition, neither the Debentures nor the Indenture
contains any provision which requires the Company to repurchase, redeem or
modify the terms of the Debentures upon a change in control or other events
involving the Company which may adversely affect the creditworthiness of the
Debentures. Therefore, neither the covenants nor the other provisions of the
Indenture should be a significant factor in evaluating whether the Company
will be able to comply or will comply with its obligations under the
Debentures. See "Description of the Debentures."
ABSENCE OF PUBLIC MARKET FOR DEBENTURES
Before this offering, there has been no public market for the Debentures.
Keefe, Bruyette & Woods, Inc. has advised the Company that it intends to make
a market in the Debentures and the Common Stock but is not obligated to do so
and may discontinue market making at any time without notice. No assurance can
be given that an active trading market for the Debentures will develop, or, if
any market develops, that it will be sustained. Accordingly, holders of
Debentures may experience difficulty in reselling or may be unable to sell the
Debentures. Additionally, since the prices of securities generally fluctuate,
there can be no assurance that purchasers in this offering will be able to
sell the Debentures at or above the purchase price.
LIMITED TRADING MARKET FOR COMMON STOCK
The Debentures are convertible at any time before maturity, unless
previously redeemed, into shares of Common Stock of the Company. There is no
assurance that an active trading market for the Common Stock will be developed
or sustained or that a holder of Common Stock will have the ability to dispose
of his shares in a liquid market. The Common Stock was first issued by the
Company and commenced trading on The Nasdaq Stock Market's National Market on
November 3, 1993. As of March 31, 1997, there were outstanding 2,227,332
shares of Common Stock. See "Market for Common Stock and Dividends."
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation (the "Articles") contain certain
provisions that could delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include (i) a Board of
Directors classified into three classes with the directors of each class
having staggered, three-year terms, (ii) a requirement that the holders of at
least two-thirds of the outstanding Common Stock approve the removal of a
director without cause and (iii) a provision establishing certain advance
notice procedures for nomination of candidates for election as directors and
for stockholder proposals to be considered at meetings of stockholders. The
Articles authorize the Board of Directors of the Company to issue shares of
preferred stock without stockholder approval and upon such terms as the Board
of Directors may determine. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions, financings and
other corporate purposes, could also have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, a controlling interest in the Company. The Company has a
Shareholder Protection Rights Agreement (the "Rights Agreement") in effect to
ensure that all stockholders receive fair and equal treatment in the event of
any proposal to acquire control of the Company. Under the Rights Agreement,
each stockholder holds one right for each share of Common Stock held of
record. Upon the occurrence of certain triggering events set forth in the
Rights Agreement, holders of the rights, other than the "acquiring person" or
any affiliate or transferree of such acquiring person, may be entitled to
purchase Common Stock or, in the event of a merger or other business
combination in which the Common Stock interests of the Company's stockholders
8
<PAGE>
are changed, stock of the "acquiring person," at half the market value of such
stock. The Board of Directors may, at its option, exchange all of the rights
(other than rights held by the "acquiring person") for Common Stock of the
Company on a one-for-one basis. The Company will be entitled to redeem the
rights for $0.01 per right until the tenth day following a public announcement
of the acquisition of ten percent of the Common Stock. The rights expire on
October 25, 2006, unless earlier redeemed or exchanged by the Company. See
"Description of Capital Stock--Common Stock " and "--Certain Anti-Takeover
Provisions."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Bylaws provide for the indemnification of its officers and
directors and in certain circumstances, exculpate its officers and directors
from liability for breaches of their fiduciary duties to the Company. See
"Management--Indemnification."
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent to a significant extent upon general
economic conditions in the Albuquerque metropolitan area and Santa Fe and Taos
counties. The banking industry in First State Bank's trade area is affected by
general economic conditions such as inflation, recession, unemployment and
other factors beyond the Company's control. Economic recession over a
prolonged period of time in the area could cause significant increases in
nonperforming assets, thereby causing operating losses, impairing liquidity
and eroding capital. There can be no assurance that future adverse changes in
the national and/or local economies would not have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
INTEREST RATE RISK
The Company's earnings depend to a substantial extent on "rate
differentials," i.e., the difference between the income the Company receives
from loans, securities and other earning assets, and the interest it pays to
obtain deposits and other liabilities. These rates are highly sensitive to
many factors which are beyond the Company's control, including general
economic conditions and the policies of various governmental and regulatory
authorities. Increases in the discount rate by the FRB usually lead to rising
interest rates, which affect the Company's interest income, interest expense
and securities portfolio. From time to time, maturities of assets and
liabilities are not balanced, and a rapid increase or decrease in interest
rates could have an adverse effect on the net interest margin and results of
operations of the Company. The nature, timing and effect of any future changes
in federal monetary and fiscal policies on the Company and its results of
operations are not predictable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset/Liability Management."
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally upon the Company's ability to compete in its trade
areas. In addition to competing with other commercial and savings banks and
savings and loan associations, the Company competes with credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms, asset-based non-bank lenders and governmental organizations
that may offer subsidized financing at lower rates than those offered by the
Company. Many of such competitors have significantly greater financial and
other resources than the Company. Although the Company has been able to
compete effectively in the past, no assurance can be given that the Company
will continue to be able to compete effectively in the future. Various
legislative acts in recent years have led to increased competition among
financial institutions. There can be no assurance that the United States
Congress will not enact legislation that may further increase competitive
pressures on the Company. Competition from both financial and non-financial
institutions is expected to continue.
REGULATORY OVERSIGHT
Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by federal and state
regulatory agencies. The Company is subject to the Bank Holding Company Act of
1956, as amended (the "BHCA"), and to regulation and supervision by the FRB.
The Bank, as a state member bank, is subject to regulation and supervision by
the FRB and the New Mexico Financial
9
<PAGE>
Institutions Division of the Regulation and Licensing Department and, as a
result of the insurance of its deposits, the Federal Deposit Insurance
Corporation (the "FDIC"). These regulations are intended primarily for the
protection of depositors, rather than for the benefit of investors. The
Company and First State Bank are subject to changes in federal and state law,
as well as changes in regulation and governmental policies, income tax law and
accounting principles. The effects of any potential changes cannot be
predicted but could adversely affect the business and operations of the
Company and First State Bank in the future.
FRB policy requires a bank holding company such as the Company to serve as a
source of financial strength to its banking subsidiaries and commit resources
to their support. The FRB has required bank holding companies to contribute
cash to their troubled bank subsidiaries based upon this "source of strength"
doctrine, which could have the effect of decreasing funds available for the
payment of principal and interest on the Debentures or for distributions to
stockholders. In addition, a bank holding company in certain circumstances
could be required to guarantee the capital plan of an undercapitalized banking
subsidiary. See "Regulation and Supervision."
REGULATION OF CONTROL
Individuals or entities, alone or acting in concert with others, who acquire
10% or more of any class of voting securities of the Company may be presumed
to have acquired "control" of the Company under the Change in Bank Control
Act, which requires the prior approval of the FRB for any such acquisition.
Persons other than individuals, alone or acting in concert, seeking to acquire
25% or more (5% or more in the case of an acquiror that is a bank holding
company) of any class of voting securities of, or otherwise seeking to
control, the Company are also required to seek the prior approval of the FRB
under the BHCA. For purposes of these approval requirements, the FRB, in
general, considers securities convertible into voting securities to be voting
securities.
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 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 larger 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.
10
<PAGE>
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
acquisitions. 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.
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 NBA was merged into First
State Bank.
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 236,925 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
11
<PAGE>
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. In
addition, management estimates that these new branches have generated
approximately $64,000,000 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.
During 1996, First State Bank completed a conversion of its banking
application software. Management believes that the new software will enhance
the 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
12
<PAGE>
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.
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 larger 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. 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
13
<PAGE>
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 BANKING OFFICES
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 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>
TOTAL
NUMBER OF TOTAL LOANS AND
LOCATION FACILITIES DEPOSITS LEASES
-------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
First State Bank:
Taos County..................................... 4 $ 75,471 $ 47,512
Santa Fe........................................ 2 48,490 35,804
Albuquerque..................................... 5 112,951 124,471
Los Lunas....................................... 1 15,767 23,235
Rio Rancho...................................... 3 25,854 19,904
--- -------- --------
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.
14
<PAGE>
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."
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.
FACILITIES
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. 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 BUILDING AREA
APPROXIMATE LAND APPROXIMATE SQUARE NOW UTILIZED FOR BANKING
AREA FOOTAGE BUILDING AREA SERVICES YEAR CONSTRUCTED OR
(SQ. FT.) (SQ. FT.) (SQ. FT.) LAST RENOVATED:
---------------- --------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
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.............. 807 807 807 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>
15
<PAGE>
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.
RECENT DEVELOPMENTS
OVERVIEW
Net income for the three months ended March 31, 1997 was $710,000 or $0.28
per fully diluted share, compared to $505,000 or $0.22 per fully diluted share
for the same period of 1996, an increase of 40.6% and 27.3% in net income and
earnings per fully diluted share, respectively. The growth in net income was
primarily due to a $60.7 million increase in the loan and lease portfolio and
a $15.9 million increase in the investment portfolio.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1997 1996
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Income Statement Data:
Net income available to common
stockholders............................... $ 710 $ 505
Net income per share(1)..................... 0.28 0.22
Fully diluted average shares outstanding.... 2,676,993 2,623,574
Balance Sheet Data(2):
Total assets................................ $ 350,741 $ 264,369
Loans and leases, net....................... 259,490 199,535
Total deposits ............................. 307,046 228,897
Total stockholders' equity.................. 21,928 17,796
Book value per share........................ 9.82 8.98
Performance Ratios
Return on average assets.................... 0.85% 0.78%
Return on average common equity............. 13.06 11.56
Asset Quality Ratios(2):
Nonperforming assets to total assets(3) .... 0.94% 1.16%
Allowance for loan and lease losses to total
loans...................................... 1.04 1.00
</TABLE>
- --------
(1) Net income per share is based upon the weighted average number of shares
of Common Stock, Common Stock equivalents, Common Stock options, Common
Stock warrants and 7% Debentures outstanding during the period.
(2) At period end.
(3) Nonperforming assets consist of accruing loans 90 days past due, non-
accrual loans, restructured loans and other real estate owned.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Debentures offered hereby are estimated to be approximately $12,000,000 after
deduction of the underwriting discount and estimated expenses. Initially, the
Company intends to contribute to the capital of First State Bank such portion
of the net proceeds of this offering as is required for First State Bank to
constitute a "well capitalized" institution. See "Regulation and Supervision."
First State Bank will use such funds for general corporate purposes, including
working capital, and for financing possible future acquisitions. Any net
proceeds retained by the Company will be used for general corporate purposes
and may be used to pay any costs incurred in connection with the redemption of
the 7% Debentures. In addition, from time to time the Company may contribute
additional amounts to the capital of First State Bank if necessary for First
State Bank to maintain "well capitalized" status under applicable regulatory
capital guidelines. Approximately $3.4 million principal amount of the 7%
Debentures was outstanding on March 31, 1997.
Pending utilization as described above, the Company intends to invest the
proceeds from this offering in short-term income producing obligations,
including U.S. Treasury securities, federal agency securities, money market
accounts and certificates of deposit.
MARKET FOR COMMON STOCK AND DIVIDENDS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on The Nasdaq Stock Market's National
Market under the symbol "FSNM." The following table sets forth, for the
periods indicated, the high and low bid prices on The Nasdaq Stock Market's
National Market as reported by Nasdaq, and the dividends paid per share for
the periods indicated. 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>
DIVIDENDS
HIGH LOW PAID
------ ------ ---------
<S> <C> <C> <C>
1995
First Quarter.................................... $11.20 $ 9.00 $0.032
Second Quarter................................... 11.20 11.20 0.032
Third Quarter.................................... 11.60 11.00 0.032
Fourth Quarter................................... 12.60 11.25 0.050
1996
First Quarter.................................... $12.00 $11.00 $0.050
Second Quarter................................... 12.50 10.88 0.050
Third Quarter.................................... 13.25 12.25 0.050
Fourth Quarter................................... 14.75 13.25 0.050
1997
First Quarter.................................... $15.63 $14.50 $0.050
Second Quarter (through April 14, 1997).......... 15.00 13.63 --
</TABLE>
The last reported sale price of the Company's Common Stock on April 28,
1997, was $13.50 per share. As of March 31, 1997, there were approximately 83
holders of record of Common Stock. The Company estimates that, as of March 31,
1997, there were approximately 1,500 beneficial holders of Common Stock.
DIVIDEND POLICY
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 and capital. See
"Regulation and Supervision" and Note 10 of Notes to Consolidated Financial
Statements of the Company.
17
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1996, and as adjusted to reflect (i) the sale of the
Debentures and (ii) the conversion of the outstanding 7% Debentures into
shares of Common Stock. The information below should be read in conjunction
with the detailed information and financial statements and notes thereto
appearing elsewhere, or incorporated by reference, in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt:
7% Subordinated Convertible Debentures due 2003.... $ 3,788 $ 0
Long-term advance from FHLB........................ 218 218
7 1/2% Subordinated Convertible Debentures due
2017.............................................. 0 12,000
----------- -----------
Total long-term debt............................. $ 4,006 $ 12,218
=========== ===========
Stockholders' equity:
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 shares issued and
outstanding(1)(2)................................. $ 11,907 $ 15,576
Retained earnings.................................. 9,098 9,098
Net unrealized appreciation on investment
securities available for sale--net of deferred
income taxes...................................... 46 46
----------- -----------
Total stockholders' equity....................... $ 21,051 $ 24,720
=========== ===========
</TABLE>
- --------
(1) Does not include 248,863 shares of Common Stock issuable upon exercise of
stock options outstanding at December 31, 1996, of which 192,363 were
exercisable as of December 31, 1996.
(2) Adjustment reflects the issuance of Common Stock in respect of the
conversion of the 7% Debentures, less unamortized offering costs incurred
in connection with the issuance of the 7% Debentures. The Company called
the 7% Debentures for redemption effective April 30, 1997. Although the
Company expects substantially all of the 7% Debentures to be converted
into Common Stock, there can be no assurance that any of the 7% Debentures
will be converted. If none of the outstanding 7% Debentures is converted,
Common Stock would be $11,907, retained earnings would be $8,979 and total
stockholders' equity would be $20,932.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company is derived
from and is qualified in its entirety by reference to the Consolidated
Financial Statements of the Company, and the notes thereto, appearing
elsewhere, or incorporated by reference, in this Prospectus, and should be
read in conjunction with such financial statements (and notes thereto) and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." See "Index to Consolidated Financial
Statements." No tax equivalent adjustments were made and all average balances
are daily average balances.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993(1) 1992(1)
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income......... $ 25,681 $ 20,692 $ 15,623 $ 10,922 $ 10,397
Interest expense........ 9,617 7,385 4,666 3,341 3,996
---------- ---------- ---------- --------- ---------
Net interest income..... 16,064 13,307 10,957 7,581 6,401
Provision for loan and
lease losses........... 1,231 418 248 267 198
---------- ---------- ---------- --------- ---------
Net interest income
after provision for
loan and lease losses.. 14,833 12,889 10,709 7,314 6,203
Net gain (loss) on sale
of securities.......... 10 (19) (3) 12 140
Other noninterest
income................. 2,924 1,702 1,708 1,192 1,207
Loss from credit card
processing operation... -- (1,208) (158) -- --
Noninterest expense..... 14,590 10,926 9,615 6,723 6,137
---------- ---------- ---------- --------- ---------
Income before income
taxes and minority
interest............... 3,177 2,438 2,641 1,795 1,413
Income tax expense
(benefit).............. 1,116 763 240 (17) 67
---------- ---------- ---------- --------- ---------
Income before minority
interest............... 2,061 1,675 2,401 1,812 1,346
Minority interest....... -- -- (10) (1) 0
---------- ---------- ---------- --------- ---------
Net income.............. $ 2,061 $ 1,675 $ 2,391 $ 1,811 $ 1,346
========== ========== ========== ========= =========
PER SHARE DATA:
Net income(2) .......... $ 0.88 $ 0.77 $ 1.06 $ 1.21 $ 0.98
Book value ............. 9.69 8.88 8.04 6.97 5.83
Tangible book value .... 9.26 8.27 7.50 6.27 5.08
Dividends paid.......... 0.200 0.154 0.064 -- 0.433
Average fully diluted
common shares
outstanding............ 2,666,353 2,607,438 2,566,940 1,537,573 1,363,463
========== ========== ========== ========= =========
AVERAGE BALANCE SHEET
DATA:
Total assets............ $ 285,628 $ 229,382 $ 186,886 $ 140,083 $ 126,150
Loans and leases ....... 218,776 164,172 133,685 102,974 85,058
Investment securities... 35,611 34,250 32,211 21,642 25,959
Federal funds sold...... 2,770 6,717 3,842 3,954 2,939
Deposits................ 242,366 195,079 160,226 126,989 114,446
Stockholders' equity.... 18,313 16,817 14,723 9,031 7,396
PERFORMANCE RATIOS:
Return on average
assets................. 0.72% 0.73% 1.28% 1.29% 1.07%
Return on average common
equity................. 11.25 9.96 16.24 20.05 18.20
Net interest margin..... 6.25 6.49 6.46 5.89 5.60
Efficiency ratio(3)..... 76.84 72.80 76.00 76.64 80.67
Earnings to fixed
charges(4):
Including interest on
deposits.............. 1.33x 1.49x 1.60x 1.54x 1.35x
Excluding interest on
deposits.............. 3.56 4.76 5.34 11.20 8.44
ASSET QUALITY RATIOS(5):
Nonperforming assets to
total loans, leases and
other real estate
owned.................. 1.17% 1.60% 1.17% 1.99% 3.75%
Net charge-offs to
average loans and
leases................. 0.26 0.02 0.17 0.25 0.27
Allowance for loan and
lease losses to total
loans ................. 1.00 1.01 0.98 1.18 1.21
Allowance for loan and
lease losses to
nonperforming
loans(6)............... 153.52 81.58 290.12 201.26 166.15
CAPITAL RATIOS(5):
Leverage ratio.......... 6.17% 6.55% 7.06% 7.21% 5.18%
Average stockholders'
equity to average total
assets................. 6.41 7.33 7.88 6.45 5.86
Tier 1 risk-based
capital ratio.......... 7.40 7.80 9.04 9.83 7.36
Total risk-based capital
ratio.................. 8.30 8.70 9.90 10.96 8.54
</TABLE>
- --------
(1) Except for December 1993, does not reflect the operations of the Santa Fe
Bank, which was acquired by the Company on December 1, 1993. This
acquisition was accounted for as a purchase.
(2) Net income per share is based upon the weighted average number of shares
of Common Stock, Common Stock equivalents, Common Stock options, Common
Stock warrants and 7% Debentures outstanding during the period.
(3) Calculated by dividing total noninterest expense, excluding securities
gains and losses, by net interest income plus noninterest income.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
represent income before income taxes and minority interest plus fixed
charges, and fixed charges represent interest expense.
(5) At period end, except net charge-offs to average loans and average
stockholders' equity to average total assets.
(6) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GENERAL
The Company's net income increased in 1996 from 1995 primarily due to
increased net interest income which was the result of an increase in average
loans of approximately $54.6 million. The increase in net interest income was
partially offset by an increase in the provision for loan losses of $813,000,
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 $257.2 million, $205.1 million and $169.7 million, 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. No tax equivalent adjustments were made and all average balances
are daily average balances. Nonaccruing loans have been included in the table
as loans carrying a zero yield.
20
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE COST
-------- --------- -------- -------- --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and leases:
Commercial............. $ 31,164 $ 3,152 10.11% $ 18,503 $ 1,885 10.19% $ 28,405 $ 2,566 9.03%
Real estate--mortgage.. 130,347 13,500 10.36 99,566 10,552 10.60 56,622 5,261 9.29
Real estate--
construction.......... 36,320 4,533 12.48 37,235 4,918 13.21 36,635 4,786 13.06
Consumer............... 12,017 1,413 11.76 8,535 907 10.63 11,774 1,074 9.12
Leases................. 8,607 725 8.42 -- -- -- -- -- --
Other.................. 321 -- -- 333 -- -- 249 -- --
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans and
leases................ 218,776 23,323 10.66 164,172 18,262 11.12 133,685 13,687 10.24%
Allowance for loan and
lease losses........... (2,181) (1,636) (1,628)
Securities:
U.S. government........ 30,656 1,916 6.25 30,925 1,850 5.98 30,240 1,659 5.49
State and political
subdivisions:
Nontaxable............. 3,607 198 5.49 2,293 136 5.93 1,182 79 6.68
Taxable................ 35 3 8.57 145 13 8.97 115 12 10.43
Other.................. 1,313 96 7.31 887 45 5.07 674 34 5.04
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total securities...... 35,611 2,213 6.21 34,250 2,044 5.97 32,211 1,784 5.54
Federal funds sold...... 2,770 145 5.23 6,717 387 5.76 3,842 153 3.98%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning
assets............... 257,157 25,681 9.99% 205,139 20,693 10.09% 169,736 15,624 9.20%
======= ======= =======
Noninterest-earning
assets:
Cash and due from
banks................. 13,158 12,004 9,349
Other.................. 17,494 13,875 9,427
-------- -------- --------
Total noninterest-
earning assets........ 30,652 25,879 18,776
-------- -------- --------
Total assets.......... $285,628 $229,382 $186,886
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing demand
accounts.............. $ 46,737 $ 1,097 2.35% $ 45,752 $ 1,224 2.68% $ 40,291 $ 942 2.34%
Certificates of
deposit............... 102,078 5,777 5.66 72,681 4,015 5.52 52,797 2,156 4.08
Money market savings
accounts.............. 31,210 1,023 3.28 23,375 758 3.24 21,502 582 2.71
Regular savings
accounts.............. 16,174 478 2.96 14,544 418 2.87 13,367 341 2.55
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
deposits.............. 196,199 8,375 4.27 156,352 6,415 4.10 127,957 4,021 3.14
Short-term borrowings... 17,006 855 5.03 9,804 536 5.47 4,549 199 4.37
Note payable............ 226 19 8.41 240 18 7.5 -- -- --
Convertible subordinated
debt................... 5,500 362 6.58 5,750 405 7.04 5,750 408 7.10
Capital leases.......... 60 5 8.33 100 12 12.00 233 38 16.31
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities........... 218,991 9,616 4.39% 172,246 7,386 4.29% 138,489 4,666 3.37%
Noninterest-bearing
demand accounts........ 46,167 38,727 32,309
Other noninterest-
bearing liabilities.... 2,157 1,592 1,365
-------- -------- --------
Total liabilities...... 267,315 212,565 172,163
Stockholders' equity.... 18,313 16,817 14,723
-------- -------- --------
Total liabilities and
stockholders' equity... $285,628 $229,382 $186,886
======== ------- ======== ------- ======== -------
Net interest income..... $16,065 $13,307 $10,958
======= ======= =======
Net interest spread .... 5.60% 5.80% 5.83%
Net interest margin .... 6.25 6.49 6.46
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 117.43 119.10 122.56
</TABLE>
Loan fees of $1.9 million, $1.7 million and $1.9 million, are included in
interest income for the years ended December 31, 1996, 1995 and 1994,
respectively.
21
<PAGE>
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>
YEAR 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 subdivi-
sions:
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 as-
sets....................... 5,373 (385) 4,988 3,118 1,951 5,069
------ ----- ------ ------ ------ ------
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand ac-
counts....................... 26 (153) (127) 128 153 281
Certificates of deposit....... 1,624 139 1,763 812 1,048 1,860
Money market savings ac-
counts....................... 254 11 265 51 125 176
Regular savings accounts...... 47 13 60 30 47 77
------ ----- ------ ------ ------ ------
Total interest-bearing de-
posits..................... 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 lia-
bilities................... 2,321 (90) 2,231 1,247 1,472 2,719
------ ----- ------ ------ ------ ------
Total increase (decrease) in
net interest income........ $3,052 $(295) $2,757 $1,871 $ 479 $2,350
====== ===== ====== ====== ====== ======
</TABLE>
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
22
<PAGE>
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 $16.8 million and for the period up to one year was a
negative $24.0 million. 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 ONE TO FIVE OVER FIVE
MONTHS YEAR YEARS YEARS TOTAL
--------- ------------- ----------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securi-
ties................. $ 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 liabil-
ities:
Savings and NOW ac-
counts............... 98,138 -- -- -- 98,138
Certificates of depos-
its 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 deben-
tures................ -- -- -- 3,788 3,788
Other interest-bearing
liabilities.......... 20,670 -- -- -- 20,670
-------- -------- ------- ------- --------
Total interest-
bearing liabili-
ties............. $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>
23
<PAGE>
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, 1995 and 1994,
the market value of the Company's investment portfolio exceeded the carrying
value by approximately $50,000, $174,000 and $285,000, respectively.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities............................ $ 9,789 $ 5,667 $ 9,348
U.S. government agency securities................... 25,994 28,118 19,973
Obligations of states and political subdivisions.... 3,271 4,004 1,889
Other securities.................................... 1,542 887 886
------- ------- -------
Total investment securities....................... $40,596 $38,676 $32,096
======= ======= =======
</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 MATURITY AVERAGE
VALUE (YEARS) 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 se-
curities................................... 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 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 36,578 14.6% $ 23,204 12.6% $ 21,711 14.5% $ 27,878 22.9% $18,213 19.7%
Real estate--mortgage... 148,715 59.3 115,640 62.9 80,293 53.5 50,102 41.1 45,848 49.6
Real estate--
construction........... 35,737 14.2 34,924 19.0 39,372 26.3 29,833 24.5 14,454 15.6
Consumer and other...... 13,238 5.3 10,091 5.5 8,632 5.7 14,210 11.5 13,947 15.1
Leases.................. 16,658 6.6 -- -- -- -- -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
Total loans and
leases............... $250,926 100% $183,859 100% $150,008 100% $122,023 100% $92,462 100%
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
24
<PAGE>
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,
----------------------------------------
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 Company generally places a loan on nonaccrual status and
ceases accruing interest when loan payment performance is deemed
unsatisfactory. All loans past due 90 days, however, are placed on nonaccrual
status, unless the loan is both well collateralized and in the process of
collection. Cash payments received while a loan is classified as nonaccrual
are recorded as a reduction of principal as long as doubt exists as to
collection. The following table sets forth information with respect to these
assets at the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans and leases past due 90 days or
more................................. $ 689 $ 289 $ 190 $ 64 $ 44
Nonaccrual loans and leases........... 946 1,808 64 -- 438
Restructured loans and leases......... -- 172 252 652 351
------ ------ ------ ------ ------
Total nonperforming loans and
leases............................. 1,635 2,269 506 716 833
Other real estate owned............... 1,362 678 1,271 1,746 2,733
------ ------ ------ ------ ------
Total nonperforming assets.......... $2,997 $2,947 $1,777 $2,462 $3,566
====== ====== ====== ====== ======
Allowance for loan and lease losses... $2,510 $1,851 $1,468 $1,441 $1,120
====== ====== ====== ====== ======
Ratio of total nonperforming assets to
total assets......................... 0.92% 1.16% 0.87% 1.42% 2.67%
Ratio of total nonperforming loans and
leases to total loans and leases..... 0.65 1.23 0.35 0.59 0.90
Ratio of allowance for loan and lease
losses to total nonperforming loans
and leases........................... 153.52 81.58 290.12 201.26 134.45
</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.
25
<PAGE>
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 1994 1993 1992
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses,
beginning of period................. $1,851 $1,468 $1,441 $1,120 $ 1,149
Charge incident to an acquisition.... -- -- -- 308 --
Charge-offs:
Commercial and other............... 438 98 388 339 191
Real estate loans.................. 70 162 30 15 165
Consumer loans..................... 246 85 19 31 75
------ ------ ------ ------ -------
Total charge-offs................ 754 345 437 385 431
------ ------ ------ ------ -------
Recoveries:
Commercial and other............... 13 197 135 73 144
Real estate loans.................. 40 85 43 22 17
Consumer loans..................... 129 28 38 34 43
------ ------ ------ ------ -------
Total recoveries................. 182 310 216 129 204
------ ------ ------ ------ -------
Net charge-offs...................... 572 35 221 254 227
Provision for loan and lease losses.. 1,231 418 248 267 198
------ ------ ------ ------ -------
Allowance for loan and lease losses,
end of period....................... $2,510 $1,851 $1,468 $1,441 $ 1,120
====== ====== ====== ====== =======
As a percentage of average total
loans and leases:
Net charge-offs.................... 0.26% 0.02% 0.17% 0.25% 0.27 %
Provision for loan and lease loss-
es................................ 0.56 0.25 0.19 0.26 0.23
Allowance for loan and lease loss-
es................................ 1.15 1.13 1.10 1.40 1.32
As a percentage of total loans and
leases at year-end:
Allowance for loan and lease loss-
es................................ 1.00 1.01 0.98 1.18 1.21
As a multiple of net charge-offs:
Allowance for loan and lease loss-
es................................ 4.39 52.89 6.64 5.67 4.93
Income before income taxes and pro-
vision for loan and lease losses.. 7.71 81.61 13.07 8.12 7.10
</TABLE>
26
<PAGE>
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 1995 1994 1993 1992
--------------------- --------------------- --------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS AND LOANS AND LOANS AND LOANS AND LOANS AND
LEASES TO LEASES TO LEASES TO LEASES TO LEASES TO
AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS
ALLOWANCE AND LEASES ALLOWANCE AND LEASES ALLOWANCE AND LEASES ALLOWANCE AND LEASES ALLOWANCE AND LEASES
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
unallocated por-
tion............ $ 600 14.57% $ 402 12.62% $1,027 14.48% $1,009 22.85% $ 784 28.53%
Real estate...... 1,560 73.51 1,269 81.89 294 79.77 288 65.50 224 65.21
Leases........... 150 6.64 -- -- -- -- -- -- -- --
Consumer......... 200 5.28 180 5.49 147 5.75 144 11.65 112 6.26
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance
for loan and
lease losses.. $2,510 100% $1,851 100% $1,468 100% $1,441 100% $1,120 100%
====== === ====== === ====== === ====== === ====== ===
</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 1994
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ------------- -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
accounts............... $ 46,737 2.35% $ 45,752 2.68% $ 40,291 2.34%
Certificates of depos-
it..................... 102,078 5.66 72,681 5.52 52,797 4.08
Money market savings ac-
counts................. 31,210 3.28 23,375 3.24 21,502 2.71
Regular savings ac-
counts................. 16,174 2.96 14,544 2.87 13,367 2.55
Noninterest-bearing
demand accounts........ 46,167 -- 38,727 -- 32,309 --
-------- ---- -------- ---- -------- ----
Total................. $242,366 4.27% $195,079 4.10% $160,266 3.14%
======== ==== ======== ==== ======== ====
</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 1995 1994
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Three months or less........... $11,654 22.09% $ 8,153 28.37% $ 7,937 41.79%
Three through twelve months.... 34,764 65.90 15,651 54.48 8,912 46.91
Over twelve months............. 6,333 12.01 4,929 17.15 2,147 11.30
------- ------ ------- ------ ------- ------
Totals....................... $52,751 100.00% $28,733 100.00% $18,996 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
27
<PAGE>
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Securities sold under agreement to repurchase totaled $14.0 million, $9.0
million and $9.5 million at December 31, 1996, 1995 and 1994, respectively.
The weighted average interest rate on securities sold under agreement to
repurchase was 5.34%, 5.25% and 4.90% at December 31, 1996, 1995 and 1994,
respectively.
Securities sold under agreement to repurchase are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Balance.................................. $13,928,515 $8,913,474 $9,465,000
Weighted average interest rate........... 5.34% 5.25% 4.90%
Maximum amount outstanding at any month
end..................................... 13,928,516 9,622,511 9,465,000
Average balance outstanding during the
period.................................. 11,843,000 8,375,000 3,395,000
Weighted average interest rate during the
period.................................. 4.74% 5.20% 4.42%
</TABLE>
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>
RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Overview. The Company's net income increased to $2.1 million from $1.7
million in 1995 and decreased from $2.4 million in 1994. Net interest income
increased to $16.1 million in 1996, compared to $13.3 million in 1995 and
$11.0 million in 1994. This increase was offset by noninterest expenses that
increased to $14.6 million in 1996, compared to $11.0 million in 1995 and $9.6
million in 1994. Income tax expense increased to $1.1 million in 1996 from
$763,000 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 $25.7 million in 1996, from
$20.7 million in 1995 and $15.6 million in 1994. This increase was due to an
increase in average interest-earning assets. Average interest-earning assets
were $257.2 million in 1996, compared to $205.1 million in 1995 and $169.7
million 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
interest-earning assets occurred primarily in loans and leases. The average
balance in loans and leases increased to $218.8 million, from $164.2 million
in 1995 and $133.7 million 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 $9.6 million in 1996, from
$7.4 million in 1995 and $4.7 million in 1994. This increase was due to an
increase in average interest-bearing liabilities and the average cost of
interest-bearing liabilities. Average interest-bearing liabilities increased
to $219.0 million in 1996 from $172.2 million in 1995 and $138.5 million in
1994. These increases were due primarily to increases in deposits and short-
term borrowings. The average cost increased to 4.39% in 1996 from 4.29% in
1995 and 3.37% in 1994. The average balance in deposits increased to $196.2
million in 1996 from $156.4 million in 1995 and $128.0 million in 1994. The
average cost of deposits increased to 4.27% in 1996 from 4.10% in 1995 and
3.14% in 1994.
28
<PAGE>
Net Interest Income. Net interest income increased to $16.1 million in 1996,
from $13.3 million in 1995 and $11.0 million in 1994. This increase was due to
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. The provision for loan and lease losses
increased to $1.2 million in 1996 from $418,000 in 1995 and $248,000 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 $2.9 million in 1996, compared to
$1.7 million in 1995 and $1.7 million in 1994. The increase for 1996 from 1995
was due to rental income from operating leases and credit card merchant fees.
Rental income from operating leases was $254,000 in 1996. The Company's
commercial leasing division commenced operations during 1996. Credit card
merchant income was $749,000 in 1996, $179,000 in 1995 and $84,000 in 1994.
Noninterest Expense. Noninterest expense increased to $14.6 million in 1996
from $10.9 million in 1995 and $9.6 million 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 commercial leasing division in 1996 and the
expansion of the credit card merchant program. Salaries and employee benefits
increased to $6.4 million in 1996 from $4.9 million in 1995 and $4.0 million
in 1994. Occupancy expense increased to $1.9 million in 1996 from $1.4 million
in 1995 and $1.2 million in 1994. Equipment expense increased to $1.3 million
from $811,000 in 1995 and $565,000 in 1994. Marketing expense increased to
$637,000 in 1996, compared to $569,000 in 1995 and $377,000 in 1994.
Credit Card Processing Operation. As of December 31, 1995, the Company
decided to abandon its 48% limited partnership interest in Credit Card
Services, Ltd., effective April 1, 1996. The Company incurred losses from
operations of $278,000 and $158,000 in 1995 and 1994, respectively. In
addition, the Company incurred a loss of $930,000 in 1995 resulting from its
abandonment of the limited partnership interest.
Income Tax Expense. Income tax expense increased to $1.1 million in 1996,
from $763,000 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.
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 a
relatively stable source of funds. Deposits of the Company increased to $277.4
million at December 31, 1996, from $218.8 million at December 31, 1995. Growth
in deposits has occurred primarily due to growth in the economy of the
Company's trade area, market dislocations caused by the acquisition of local
competitors and branch expansions.
Net loans of the Company increased to $248.4 million at December 31, 1996,
from $182.0 million as of December 31, 1995. Real estate-mortgage loans
increased by $33.1 million during 1996. Commercial loans increased by $13.4
million, consumer loans increased by $3.1 million and commercial leases
increased to $16.7 million 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
29
<PAGE>
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").
The Company's liquidity needs arise primarily from its need to service the
7% Debentures. The primary source of funds for the Company include interest on
money market accounts maintained by the Company and payments in lieu of taxes
from First State Bank. Management expects that in the future, a significant
source of funds for the Company will consist of dividends from First State
Bank. As of January 1, 1997, First State Bank had $3.5 million in retained
earnings which were available for the payment of dividends to the Company,
subject to regulatory capital requirements.
CAPITAL RESOURCES
The Company's total stockholders' equity increased to $21.1 million at
December 31, 1996, from $17.4 million at December 31, 1995. Of the $3.6
million increase, $2.1 million was produced by earnings and $1.9 million was
produced by the conversion of the 7% Debentures. This increase was offset by
the change in unrealized investment security gains and by dividend payments of
$408,000. 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 First State Bank met the fully phased-in regulatory
capital requirements.
IMPACT OF INFLATION
The financial statements and related financial data and notes presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects
of general price levels.
REGULATION AND SUPERVISION
The Company and First State Bank are extensively regulated under federal and
New Mexico law. These laws and regulations are primarily intended to protect
depositors and the deposit insurance funds of the FDIC, not security holders
of the Company. The following information summarizes material statutory and
regulatory provisions affecting the Company. The information is qualified in
its entirety by reference to the particular statutory and regulatory
provisions. Any change in applicable laws, regulations or regulatory policies
may have a material effect on the business, operations and prospects of the
Company and First State Bank. The Company is unable to predict the nature or
the extent of the effects on its business and earnings that changes in fiscal
or monetary policies, economic control or new federal or state legislation may
have in the future.
THE COMPANY
General. The Company is a bank holding company registered under the BHCA,
and is subject to supervision and regulation by the Federal Reserve Board.
Federal laws subject bank holding companies to particular restrictions on the
types of activities in which they may engage, and to a range of supervisory
requirements, including regulatory enforcement actions for violations of laws
and policies.
Acquisitions and Permissible Activities. As a bank holding company, the
Company is required to obtain the prior approval of the FRB before acquiring
direct or indirect ownership or control of more than 5% of the
30
<PAGE>
voting shares of a bank or bank holding company. The FRB will not approve any
acquisition, merger or consolidation that would have a substantial
anticompetitive result, unless the anticompetitive effects of the proposed
transaction are outweighed by a greater public interest in meeting the needs
and convenience of the public. The FRB also considers managerial, capital and
other financial factors in acting on acquisition or merger applications.
A bank holding company may not engage in, or acquire direct or indirect
control of more than 5% of the voting shares of any company engaged in a
nonbanking activity, unless such activity has been determined by the FRB to be
closely related to banking or managing banks. The FRB has identified by
regulation various nonbanking activities in which a bank holding company may
engage with notice to, or prior approval by, the FRB.
Regulatory Restrictions on Dividends. It is the policy of the Federal
Reserve Board that bank holding companies should pay cash dividends on common
stock only out of income available over the past year and only if prospective
earnings retention is consistent with the organization's expected future needs
and financial condition. The policy provides that bank holding companies
should not maintain a level of cash dividends that undermines the bank holding
company's ability to serve as a source of strength to its banking
subsidiaries. In the future, dividends from First State Bank are expected to
be a significant source of funds for the Company.
In addition, the federal regulatory agencies are authorized to prohibit a
banking institution or bank holding company from engaging in an unsafe or
unsound banking practice. Depending upon the circumstances, the agencies could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.
Holding Company Obligations and Status. Under Federal Reserve Board policy,
a bank holding company is expected to act as a source of financial strength to
each of its banking subsidiaries and commit resources to their support. Such
support may be required at times when, absent this Federal Reserve Board
policy, a holding company may not be inclined to provide it. As discussed
below under "Prompt Corrective Action," a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of the First State Bank, the claims of
depositors and other general or subordinated creditors of the First State Bank
are entitled to a priority of payment over the claims of holders of any
obligation of the institution to its stockholders, including any depository
institution holding company (such as the Company) or any stockholder or
creditor thereof.
Capital Adequacy. The FRB monitors the capital adequacy of bank holding
companies and has adopted risk-based capital adequacy guidelines to evaluate
bank holding companies on a consolidated basis. The guidelines require a ratio
of "Tier 1" or core capital (generally, common stockholders' equity, perpetual
preferred stock and minority interests in consolidated subsidiaries, less
goodwill, other disallowed intangibles and disallowed deferred tax assets,
among other items) to total risk-weighted assets of at least 4% and a ratio of
total capital to risk-weighted assets of at least 8%. At December 31, 1996,
the Company's ratio of total capital to risk-weighted assets was 8.30% and its
risk-based Tier 1 capital ratio was 7.40%.
The FRB also uses a leverage ratio to evaluate the capital adequacy of bank
holding companies. The leverage ratio applicable to the Company requires a
ratio of Tier 1 capital to adjusted total assets of not less than
31
<PAGE>
3%, although most organizations are expected to maintain leverage ratios that
are 100 to 200 basis points above this minimum ratio. The Company's leverage
ratio at December 31, 1996, was 6.17%.
The following table sets forth the capital ratios for the Company as of
December 31, 1996 and the minimum capital ratios required:
<TABLE>
<CAPTION>
ACTUAL MINIMUM
RATIO REQUIRED
------ -------- ---
<S> <C> <C> <C>
Tier 1 capital to total assets........................... 6.1% 3.0%
Tier 1 capital to risk-weighted assets................... 7.4 4.0
Total capital to risk-weighted assets.................... 8.3 8.0
</TABLE>
The Company expects that a portion of the net proceeds of this offering will
qualify as "Tier 2" capital under the Federal Reserve Board's risk-based
capital adequacy guidelines. Tier 2 capital is generally defined to include
allowance for loan and lease losses, perpetual preferred stock (to the extent
not included in Tier 1 capital), certain hybrid capital instruments, perpetual
debt, mandatory convertible debt securities, term subordinated debt and
intermediate-term preferred stock. Total capital is the sum of Tier 1 capital
and Tier 2 capital.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to
operate with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances
warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. In
addition, the regulations of the Federal Reserve Board provide that
concentration of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, are
important factors to be taken into account by regulatory agencies in assessing
an organization's overall capital adequacy.
The Federal Reserve Board and the other federal banking agencies recently
adopted amendments to their risk-based capital regulations to provide for the
consideration of interest rate risk in the agencies' determination of a
banking institution's capital adequacy. The amendments require such
institutions to effectively measure and monitor their interest rate risk and
to maintain capital adequate for that risk.
As discussed below under "Enforcement Powers of the Federal and State
Banking Agencies," failure to meet the minimum regulatory capital requirements
could subject a banking organization to a variety of enforcement remedies
available to federal regulatory authorities, including, in the most severe
cases, the termination of deposit insurance by the FDIC and the placement of
the institution into conservatorship or receivership.
FIRST STATE BANK
Overview. First State Bank is a state bank chartered under the laws of New
Mexico, subject to comprehensive regulation and periodic examination by the
New Mexico Financial Institutions Division of the Regulation and Licensing
Department (the "Division") and the deposits are insured by the FDIC. First
State Bank is also a member of the Federal Reserve System and is subject to
comprehensive regulation by the FRB and periodic examination by the Federal
Reserve Bank of Kansas City.
The affairs of state-chartered banks in New Mexico are regulated under the
New Mexico Banking Act (the "Banking Act") by the Division. The Director of
the Division and his staff exercise various supervisory powers provided in the
Banking Act and conduct examinations of state banks.
32
<PAGE>
Restrictions on Dividends. First State Bank is limited under federal and
state law in the amount of dividends it may declare. Under regulations issued
by the Federal Reserve Board, First State Bank is permitted to pay dividends
during a calendar year of up to the lesser of (i) its undivided profits then
on hand, less its losses and bad debts, or (ii) the total of the bank's net
profits for that year combined with its retained net profits of the preceding
two calendar years, less any required transfers to surplus or to a fund for
the retirement of any preferred stock. (Undivided profits may include, if
approved by First State Bank's Board of Directors and the FRB, part or all of
any capital surplus that exceeds capital surplus required by state law.) Any
additional capital distributions would require prior regulatory approval. In
addition, the FRB and FDIC are authorized to prohibit First State Bank from
engaging in any unsafe and unsound practice in conducting business, and under
some circumstances payment of a dividend could be deemed an unsafe and unsound
practice. In addition, under federal law, a bank cannot pay a dividend that
will cause such bank to be "undercapitalized." Under state law, First State
Bank may pay dividends out of undivided profits, maintained in accordance with
state law, provided that any reserve against deposits required by state law
will not be impaired by the payment of such dividends. The Division also has
the authority to prohibit unsafe and unsound practices. The payment of
dividends by First State Bank may also be affected by other factors, such as
the need to maintain adequate capital or to meet loan demands.
At December 31, 1996, First State Bank could have paid total dividends to
the Company of approximately $3,500,000 without prior regulatory approval.
Restrictions on Transactions with Affiliates. First State Bank is subject to
Sections 23A and 23B of the Federal Reserve Act, which govern certain
transactions, such as loans, extensions of credit, investments and purchases
of assets between member banks and their affiliates, including their parent
holding companies. These restrictions limit the transfer of funds to the
Company, as defined in the statute, in the form of loans, extensions of
credit, investments or purchases of assets, and they require that First State
Bank's transactions with the Company be on terms no less favorable than
comparable transactions between First State Bank and unrelated third parties.
Transfers by First State Bank to the Company are limited in amount to 10% of
First State Bank's capital and surplus, and transfers to all affiliates are
limited in the aggregate to 20% of First State Bank's capital and surplus.
Furthermore, such loans and extensions of credit are also subject to various
collateral requirements.
Cross-Guarantee. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the
FDIC can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured institution in danger of
default. "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the
absence of regulatory assistance. This provision would become applicable to
the Company and First State Bank in the event that the Company acquired an
additional depository institution subsidiary.
Capital Adequacy Standards. Regulations of the Federal Reserve Board
establish minimum requirements for the capital adequacy of depository
institutions that are substantially similar to the ratios described above for
the Company.
The following table sets forth the capital ratios for First State Bank as of
December 31, 1996, and the capital ratios required to be considered
"adequately capitalized" and "well capitalized":
<TABLE>
<CAPTION>
ACTUAL TO BE CONSIDERED TO BE CONSIDERED
RATIO "ADEQUATELY CAPITALIZED" "WELL CAPITALIZED"
------ ------------------------ ------------------
<S> <C> <C> <C>
Tier 1 capital to total
assets................. 6.9% 4.0% 5.0%
Tier 1 capital to risk-
weighted assets........ 8.4 4.0 6.0
Total capital to risk-
weighted assets........ 9.3 8.0 10.0
</TABLE>
Prompt Corrective Action. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the federal banking agencies must take
prompt supervisory and regulatory actions against
33
<PAGE>
undercapitalized depository institutions. Depository institutions are assigned
one of five capital categories: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized," and are subjected to differential regulation corresponding
to the capital category within which the institutions fall. An institution is
critically undercapitalized if it has a tangible equity to total assets ratio
that is equal to or less than 2%. An institution is well capitalized if it has
a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive
or prompt corrective action directive to meet and maintain a specific capital
level for any capital measure. Under the regulations, First State Bank
currently is adequately capitalized.
Corrective Measures for Capital Deficiencies. FDICIA requires the federal
banking regulators to take "prompt corrective action" with respect to capital-
deficient institutions. FDICIA contains broad restrictions on certain
activities of undercapitalized institutions, including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
Depending on the level of an institution's capital, the agency's corrective
powers also include, among other things: prohibiting the payment of principal
and interest on subordinated debt and prohibiting the holding company from
making distributions without prior regulatory approval. Under certain
circumstances, a well capitalized, adequately capitalized or undercapitalized
institution may be treated as if the institution were in the next lower
capital category. Adequately capitalized institutions cannot accept, renew or
roll over brokered deposits except with a waiver from the FDIC, and are
subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll over
brokered deposits.
A banking institution that is undercapitalized is required to submit a
capital restoration plan, and such a plan will not be accepted unless, among
other things, the banking institution's holding company guarantees the plan up
to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy. The Company's maximum liability under any such guarantee would be
the lesser of 5% of the undercapitalized bank's total assets at the time it
became undercapitalized or the amount necessary to bring the bank into
compliance with the capital plan.
As an institution's capital decreases, the powers of the federal regulators
become greater. A significantly undercapitalized institution is subject to
mandated capital-raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions.
The regulators have very limited discretion in dealing with a critically
undercapitalized institution and are required to appoint a receiver or
conservator if the capital deficiency is not corrected promptly.
Examinations and Safety and Soundness. The FRB periodically examines and
evaluates state-chartered member banks, such as First State Bank. Based upon
such an evaluation, the FRB may revalue the assets of an insured institution
and require that it establish specific reserves to compensate for the
difference between the value determined by the regulator and the book value of
such assets. The cost of conducting the examinations is assessed to the bank.
The Division also conducts examinations of New Mexico state banks. The
Division may accept the results of a federal examination in lieu of conducting
independent examination.
The federal regulators have adopted regulations and examination procedures
promoting the safety and soundness of individual institutions by specifically
addressing, among other things: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate exposure; (v) asset growth; (vi) ratio of classified assets
to capital; (vii) minimum earnings and (viii) compensation and benefits
standards for management officials.
34
<PAGE>
The federal regulators have adopted uniform standards for evaluations of
loans secured by real estate or made to finance improvements to real estate.
First State Bank is required to establish and maintain written internal real
estate lending policies consistent with safe and sound banking practices and
appropriate to the size of the institution and the nature and scope of its
operations.
Deposit Insurance Premiums. The deposits of First State Bank are insured by
the FDIC through the Bank Insurance Fund (the "BIF") to the extent provided by
law. Under the FDIC's risk-based insurance system, BIF-insured institutions
are currently assessed premiums of between zero and twenty seven cents per
$100 of eligible deposits, depending upon the institution's capital position
and other supervisory factors. Congress recently enacted legislation that,
among other things, provides for assessments against BIF-insured institutions
that will be used to pay certain Financing Corporation ("FICO") obligations.
In addition to any BIF insurance assessments, BIF-insured banks are expected
to make payments for the FICO obligations equal to an estimated $0.0129 per
$100 of eligible deposits each year during 1997 through 1999 and an estimated
$0.024 per $100 of eligible deposits thereafter.
Brokered Deposit Restrictions. The FDIC has issued rules which prohibit
undercapitalized institutions from soliciting or accepting brokered deposits.
Adequately capitalized institutions may not solicit, accept or renew such
deposits, unless a waiver is obtained from the FDIC.
Community Reinvestment Act. The federal Community Reinvestment Act of 1977
("CRA") has become increasingly important to financial institutions. Among
other things, the CRA allows regulators to withhold approval of an acquisition
or the establishment of a branch unless the applicant has performed
satisfactorily under the CRA. Satisfactory performance means adequately
meeting the credit needs of the communities the applicant serves, including
low and moderate income areas. The applicable federal regulators now regularly
conduct CRA examinations to assess the performance of financial institutions.
First State Bank has received "satisfactory" ratings in its most recent CRA
examination.
Branching Acquisitions. Under New Mexico law, banks are permitted to conduct
business through branches, after application to and approval of the Director
of the Division, and after the Director makes certain findings regarding the
financial history and condition of the bank, as well as the appropriateness of
the branch in the community to be served.
In addition the acquisition of New Mexico banks and bank holding companies
by out-of-state banks, holding companies and other financial institutions is
permitted under the New Mexico Interstate Bank Acquisition Act, under the
conditions and upon receipt of the approvals set forth in the Act.
Changing Regulatory Structure. The laws and regulations affecting banks and
bank holding companies are continually being reviewed and revised. The rules
and the regulatory agencies in this area have changed significantly over
recent years and there is reason to expect that similar changes will continue
in the future. It is difficult to predict the outcome of these changes.
Enforcement Powers of the Federal and State Banking Agencies. The Federal
Reserve Board and the other federal banking agencies have broad enforcement
powers, including the power to terminate deposit insurance, impose substantial
fines and other civil and criminal penalties and appoint a conservator or
receiver. Failure to comply with applicable laws, regulations and supervisory
agreements could subject the Company or its banking subsidiaries, as well as
officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. In addition to the grounds discussed under "Prompt Corrective
Action," the appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is under capitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required
to do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan. In
addition, the Division possesses
35
<PAGE>
certain enumerated enforcement powers to address violations of the New Mexico
Banking Act by state-chartered banks and to preserve safety and soundness,
including, in the most severe cases, the authority to take possession of a
state bank.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of the
FRB, have a significant effect on the operating results of bank holding
companies and their subsidiaries. Among the means available to the FRB to
affect the money supply are open market operations in U.S. Government
securities, changes in the discount rate on member bank borrowings and changes
in reserve requirements against member bank deposits. These means are used in
varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may affect interest rates
charged on loans or paid for deposits.
FRB monetary policies have materially affected the operating results of
commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of the Company cannot be predicted.
36
<PAGE>
MANAGEMENT
The table below states the names and ages of the directors and executive
officers of the Company as well as the positions and offices they hold. A
summary of the background and experience of each is given after the table. The
Company's Board of Directors consists of nine directors divided into three
classes of three directors each. The directors are elected by the stockholders
of the Company for staggered three-year terms and hold office until their
successors are elected and qualified. One class of directors is elected each
year.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<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 First State Bank in 1987, Mr. Stanford spent five years with New
Mexico Banquest Corporation as Senior 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 First State 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 First State Bank in September 1994. Prior to
joining First State 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, Mr. Jeantete has accumulated a long list of civic achievements and
community involvement, culminating with his election in 1990 as Mayor of Taos,
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
37
<PAGE>
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 1993, is the
President of Technology Ventures Corporation, a wholly owned subsidiary of
Lockheed Martin, and has over 15 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. 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, from 1980 to 1993.
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. All of the members of the Audit
Committee and Compensation Committee are outside directors.
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<PAGE>
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 First State Bank who
received in excess of $100,000 in cash compensation.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND --------------------------------- STOCK OPTIONS
RINCIPAL POSITIONP YEAR SALARY ($) BONUS ($) OTHER ($)(1) 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 $44,483 0
H. Patrick Dee............ 1996 $130,000 $16,000 $42,836 0
Secretary and 1995 $116,250 $30,000 $39,369 0
Treasurer 1994 $ 92,083 $22,500 $36,580 0
W. Gary Millhollon(2)..... 1996 $ 86,575 $20,830 $ 6,000 0
Senior Vice President
First State Bank
</TABLE>
- --------
(1) Represents insurance premiums paid by the Company on behalf of Messrs.
Stanford and Dee in the amount of $35,000 and $30,000, respectively, per
year, amounts contributed by the Company to Messrs. Stanford and Dee's
Section 401(k) plan, and auto allowance and dues.
(2) Mr. Millhollon was hired by First State Bank effective December 1995.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 12/31/96 (#) 12/31/96 ($)(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Michael R. Stanford..... 19,600 $124,754 100,113(2)(3) $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.
(3) Includes the option to purchase 28,613 shares of Common Stock described
under "--Stock Option Agreement" below.
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. 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 is able to name the beneficiary. Under
the provisions of the term life policies the amount of term insurance under
each policy is gradually decreased over 10 years. However, First State Bank's
premium payments are kept level during the entire ten-year period with the
excess premiums from the term life policies being applied to the whole life
policies. As a result of the increasing portion of the premiums which are
allocated to the whole life policies, at the end of the ten-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 before the tenth year of the policy. The annual premium
which will be paid for the whole life policies will constitute compensation to
such individuals.
39
<PAGE>
STOCK OPTION AGREEMENT
Under the terms of a stock option agreement, Mr. 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 percent 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 (as defined in the Plan). Following a Control Change, 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; or (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% 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 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 were not stockholders of the Company on April 19, 1996 (the
effective date of the Plan), and who are 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; (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
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
40
<PAGE>
"Code") Sections 401(k) and/or 125; and (iii) the product of the average
percentage 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 a 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; or
(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 indemnification to the extent permitted under applicable New
Mexico or federal law and under the Company's Bylaws and the Articles.
As of the date of this Prospectus, the aggregate cost to the Company
(including the cost of early vesting under employee plans) under the Plan
would not exceed $2.4 million in the event of a Control Change.
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 18 years of age and
have completed three months 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.
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 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
41
<PAGE>
the persons to whom awards are granted, the type of awards 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 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
the Stock Option 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.
INDEMNIFICATION
The Company's Bylaws provide that the Company will indemnify all directors,
officers and employees of the Company to the fullest extent now permitted by
the New Mexico Business Corporation Act (the "NMBCA"). Under these provisions
any director, officer or employee who is made a party to any suit or
proceeding will be indemnified if (i) such person acted in good faith and in a
manner he reasonably believed to be in the best interests of the Company, (ii)
with respect to any criminal proceeding, had no reasonable cause to believe
his conduct was unlawful and (iii) in all other cases, that his conduct was at
least not opposed to the best interests of the Company. The NMBCA further
provides that such indemnification is not exclusive of any other rights to
which such individuals may be entitled under the Articles of Incorporation,
the Bylaws, an agreement, a resolution of stockholders or directors or
otherwise that are not inconsistent with the NMBCA. Pursuant to the Bylaws and
the NMBCA, the Company cannot indemnify a director in connection with a
proceeding by or in the right of the Company in which the director was
adjudged liable to the Company, or in connection with any other proceeding
charging improper personal benefit to the director, whether or not involving
action in his official capacity, in which he is adjudged liable on the basis
that personal benefit was improperly received by him.
In addition, the Company's Articles provide that to the fullest extent now
or hereafter permitted by New Mexico law, the Company's directors will not be
liable to the Company or its stockholders for monetary damages for breach of
their fiduciary duties as directors unless any such director has breached or
failed to perform the duties of the director's office in compliance with
Subsection 43-11-35(B) of the NMBCA (duty of care) and the breach or failure
to perform constitutes negligence, willful misconduct or recklessness in the
case of a director who has either an ownership interest in the Company or
receives compensation of more than $2,000 from the Company in any calendar
year, or willful misconduct or recklessness in the case of a director who does
not have an ownership interest in the Company and does not receive
compensation of more than $2,000 in any calendar year. Each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Company and its stockholders, for acts or omissions not
undertaken in good faith or involving intentional misconduct or knowing
violations of law, for liability arising under Section 53-11-46 of the NMBCA
(relating to the unlawful payment of distributions, and purchase or redemption
of the Company's stock) or for any transaction from which the director derived
an improper personal benefit. This provision also does not affect a
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<PAGE>
director's responsibilities under any other laws, such as federal securities
laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought. The Company is not aware of any other threatened litigation that may
result in claims for indemnification by any director, officer, employee or
other agent.
The Company maintains directors and officers liability insurance.
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 March 31, 1997, by (i) each
stockholder 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
stockholders 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>
NUMBER OF PERCENTAGE OF
NAME SHARES OWNED (1) SHARES OWNED
- ---- ---------------- -------------
<S> <C> <C>
Richard L. Duchossois........................ 112,500 5.12%
845 Larch Avenue
Elmhurst, IL 60126
John Hancock Advisors, Inc................... 170,125 7.74%
101 Humington Avenue
Boston, MA 02199
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 7% 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.
(3) Includes 28,613 shares which may be acquired within 60 days pursuant to
outstanding stock options at an exercise price of $5.01 per share and
50,000 shares which may be acquired within 60 days pursuant to outstanding
stock options at an exercise price of $8.40 per share.
(4) Includes 35,000 shares which may be acquired within 60 days pursuant to
outstanding stock options at an exercise price of $8.40 per share.
(5) Includes 10,000 shares which may be acquired within 60 days pursuant to
outstanding stock options at an exercise price of $8.40 per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Credit Transactions. The executive officers, directors and principal
stockholders of the Company and First State Bank, and members of their
immediate families and businesses in which these individuals hold controlling
interests, are customers of First State Bank and it is anticipated that such
parties will continue to be customers of
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First State Bank in the future. Credit transactions with these parties are
subject to review by First State Bank's Board of Directors. All outstanding
loans and extensions of credit by First State 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 First
State Bank's loans and advances under existing lines of credit to these
parties was approximately $1.9 million, or 0.78% of First State 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 $146,000, $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
(beginning December 1995) 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.
DESCRIPTION OF THE DEBENTURES
The Debentures are to be issued under an Indenture, dated as of May 2, 1997
(the "Indenture"), between the Company and First Trust National Association,
as Trustee (the "Trustee"), a copy of which is filed as an exhibit to the
Registration Statement. The following summaries of certain provisions of the
Indenture do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all the provisions of the Indenture,
including the definitions therein of certain terms. Wherever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are incorporated herein by reference.
GENERAL
The Debentures will be unsecured subordinated obligations of the Company,
will be limited to an aggregate principal amount of $13,800,000 (including
$1,800,000 subject to the Underwriters' over-allotment option) and will mature
on April 30, 2017. The Debentures will bear interest at the rate per annum
shown on the front cover of this Prospectus from May 2, 1997 or from the most
recent Interest Payment Date on which interest has been paid or provided for,
payable semi-annually on April 30 and October 30 of each year, commencing
October 30, 1997, to the Person in whose name such Debenture (or any
predecessor Debenture) is registered at the close of business on the Regular
Record Date for such interest payment, which shall be the April 15 or October
15 (whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. (Sections 301 and 307) Principal of and premium, if
any, and interest on the Debentures will be payable, and the transfer of
Debentures will be registrable, and the Debentures may be presented for
exchange or conversion at the offices of the Trustee in the City of St. Paul,
Minnesota, or at such other office designated by the Company. (Sections 301,
305 and 1002)
The Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof. (Section
302) No service charge will be made for any registration of transfer or
exchange of Debentures, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. (Section 305)
Because the Company is a holding company, its rights and the rights of its
creditors, including the Holders of the Debentures, to participate in the
assets of any Subsidiary upon the latter's liquidation or recapitalization
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<PAGE>
will be subject to the prior claims of the Subsidiary's creditors (including,
in the case of the Bank, its depositors), except to the extent that the
Company may itself be a creditor with recognized claims against the
Subsidiary. See also "The Company" and "Regulation and Supervision."
The Indenture does not contain any provisions that would provide protection
to Holders of the Debentures against a sudden and dramatic decline in credit
quality of the Company resulting from any takeover, recapitalization or
similar restructuring.
A holder of 25% or more of the outstanding Common Stock (5% or more if such
holder otherwise exercises a "controlling influence" over the Company) may be
subject to regulation as a "bank holding company" in accordance with the BHCA.
In addition, (i) any bank holding company or foreign bank with a U.S. presence
may be required to obtain the approval of the FRB under the BHCA to acquire or
retain 5% or more of the outstanding Common Stock and (ii) any person other
than a bank holding company may be required to obtain the approval of the FRB
under the Change in Bank Control Act to acquire or retain 10% or more of the
outstanding Common Stock. For purposes of the BHCA, Holders of the Debentures
may be deemed to be holders of the underlying shares of Common Stock.
SUBORDINATION OF DEBENTURES
The payment of the principal of and premium, if any, and interest on the
Debentures will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness (as
defined in the Indenture). In certain events of insolvency, the payment of the
principal of and premium and interest on the Debentures will, to the extent
set forth in the Indenture, also be effectively subordinated in right of
payment to the prior payment in full of all Other Financial Obligations. Upon
any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceedings of the Company, the holders of all Senior Indebtedness will first
be entitled to receive payment in full of all amounts due or to become due
thereon before the Holders of the Debentures will be entitled to receive any
payment in respect of the principal of or premium or interest on the
Debentures. If upon any such payment or distribution of assets to creditors,
there remain, after giving effect to such subordination provisions in favor of
the holders of Senior Indebtedness, any amounts of cash, property or
securities available for payment or distribution in respect of the Debentures
(as defined in the Indenture, "Excess Proceeds") and if, at such time, any
Entitled Persons in respect of Other Financial Obligations have not received
payment in full in respect of all amounts due or to become due on or in
respect of such Other Financial Obligations, then such Excess Proceeds first
shall be applied to pay or provide for the payment in full of such Other
Financial Obligations before any payment or distribution may be made in
respect of the Debentures. In the event of the acceleration of the maturity of
the Debentures, the holders of all Senior Indebtedness first will be entitled
to receive payment in full of all amounts due thereon before the Holders of
the Debentures will be entitled to receive any payment upon the principal of
or premium or interest on the Debentures. No payments on account of principal
of or interest on the Debentures or on account of the purchase or acquisition
of the Debentures may be made if there shall have occurred and be continuing a
default in any payment with respect to Senior Indebtedness or if any judicial
proceeding shall be pending with respect to any such default. (Article Twelve)
By reason of such subordination in favor of the holders of Senior
Indebtedness, in the event of insolvency, creditors of the Company who are not
holders of Senior Indebtedness or of the Debentures may recover less, ratably,
than holders of Senior Indebtedness and may recover more, ratably, than the
Holders of the Debentures.
The Company's obligations under the Debentures shall rank pari passu in
right of payment with each other.
The Indenture does not limit or prohibit the incurrence of additional Senior
Indebtedness, which may include indebtedness that is senior to the Debentures,
but subordinate to other obligations of the Company, including obligations of
the Company in respect of Other Financial Obligations.
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<PAGE>
CONVERSION RIGHTS
The Debentures will be convertible, at the option of the Holder, into Common
Stock of the Company at any time prior to the maturity date (subject to prior
redemption by the Company on not less than 30 days' notice and not more than
60 days' notice), initially at the conversion price stated on the cover page
hereof. The right to convert Debentures called for redemption will terminate
at the close of business on the Redemption Date and will be lost if not
exercised prior to that time. (Section 1301) For information as to notices of
redemption, see "Optional Redemption" below.
The conversion price will be subject to adjustment in certain events,
including (i) dividends (and other distributions) payable in Common Stock on
any class of capital stock of the Company, (ii) the issuance to all holders of
Common Stock of rights or warrants entitling them to subscribe for or purchase
Common Stock at less than the current market price (as defined), (iii)
subdivisions, combinations and reclassifications of Common Stock, (iv)
distributions to all holders of Common Stock of evidences of indebtedness of
the Company or assets (including securities, but excluding those dividends,
rights, warrants and distributions referred to above and any dividend or
distribution paid exclusively in cash), (v) distributions consisting
exclusively of cash (excluding any cash distributions referred to in (iv)
above) to all holders of Common Stock in aggregate amount that, together with
(A) other all-cash distributions made within the preceding 12 months and (B)
any cash and the fair market value of other consideration payable in respect
of any tender offer by the Company or a Subsidiary for the Company's Common
Stock concluded within the preceding 12 months, exceeds 12.5% of the Company's
market capitalization (being the product of the current market price (as
defined) of the Common Stock times the number of shares of Common Stock then
outstanding) on the date fixed for determination of stockholders entitled to
receive such distribution and (vi) the successful completion of a tender offer
made by the Company or any Subsidiary for the Company's Common Stock which
involves an aggregate consideration that, together with (A) any cash and other
consideration payable in respect of any tender offer by the Company or a
Subsidiary for the Company's Common Stock expiring within the 12 months
preceding the expiration of such tender offer and (B) the aggregate amount of
any all-cash distributions to all holders of the Company's Common Stock within
the 12 months preceding the expiration of such tender offer, exceeds 12.5% of
the Company's market capitalization on the expiration of such tender offer.
Generally no adjustments to the conversion price will be required to be made
until cumulative adjustments amount to 1% or more of the conversion price as
last adjusted. (Section 1304)
In the event that the Company shall distribute rights or warrants (other
than those referred to in (ii) in the preceding paragraph) pro rata to holders
of Common Stock, the Holder of any Debenture surrendered for conversion will
be entitled to receive upon such conversion in addition to the shares of
Common Stock issuable upon such conversion (the "Conversion Shares"), a number
of rights or warrants to be determined as follows: (i) if such conversion
occurs on or prior to the date for the distribution to the holders of rights
or warrants of separate certificates evidencing such rights or warrants (the
"Distribution Date"), the same number of rights or warrants to which a holder
of a number of shares of Common Stock equal to the number of Conversion Shares
is entitled at the time of such conversion in accordance with the terms and
provisions of and applicable to the rights or warrants, and (ii) if such
conversion occurs after such Distribution Date, the same number of rights or
warrants to which a holder of the number of shares of Common Stock into which
such Debenture was convertible immediately prior to such Distribution Date
would have been entitled on such Distribution Date in accordance with the
terms and provisions of and applicable to the rights or warrants. (Section
1304)
In addition to the foregoing adjustments, the Company will be permitted to
make such reductions in the conversion price as it considers to be advisable
in order that any event treated for Federal income tax purposes as a dividend
of stock or stock rights will not be taxable to the holders of the Common
Stock. (Section 1304) In case of certain consolidations or mergers to which
the Company is a party or the transfer of substantially all of the assets of
the Company, each Debenture then outstanding would, without the consent of any
Holders of Debentures, become convertible only into the kind and amount of
securities, cash and other property receivable upon the consolidation, merger
or transfer by a holder of the number of shares of Common Stock into which
such Debenture might have been converted immediately prior to such
consolidation, merger or transfer (assuming
46
<PAGE>
such holder of Common Stock failed to exercise any rights of election and
received per share the kind and amount received per share by a plurality of
non-electing shares). (Section 1311)
Fractional shares of Common Stock are not to be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the market
price of the Common Stock. (Section 1303) Debentures surrendered for
conversion during the period from the close of business on any Regular Record
Date next preceding any Interest Payment Date to the opening of business on
such Interest Payment Date (except Debentures called for redemption on a
Redemption Date within such period) must be accompanied by payment of an
amount equal to the interest thereon which the registered Holder is to
receive. In the case of any Debenture which has been converted after any
Regular Record Date but on or before the next Interest Payment Date (except
Debentures called for redemption on a Redemption Date within such period),
interest whose Stated Maturity is on such Interest Payment Date shall be
payable on such Interest Payment Date notwithstanding such conversion, and
such interest shall be paid to the Holder of such Debenture on such Regular
Record Date. Except as described above, no interest on converted Debentures
will be payable by the Company on any Interest Payment Date subsequent to the
date of conversion. No other payment or adjustment for interest or dividends
is to be made upon conversion. (Sections 307 and 1302)
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
Federal income tax purposes (e.g., distributions of evidences of indebtedness
or assets of the Company, but generally not stock dividends or rights to
subscribe for Common Stock) and, pursuant to the antidilution provisions of
the Indenture, the conversion price of the Debentures is reduced, such
reduction may be deemed to be the payment of a taxable dividend to Holders of
Debentures. Holders of Debentures could, therefore, have taxable income as a
result of an event pursuant to which they received no cash or property that
could be used to pay the related income tax.
OPTIONAL REDEMPTION
The Debentures are to be redeemable at the election of the Company, in whole
or in part, from time to time, upon not less than 30 nor more than 60 days'
notice mailed to each Holder of Debentures to be redeemed at his address
appearing in the Security Register, on any date on or after May 1, 2001, and
prior to maturity at the following Redemption Prices (expressed as percentages
of principal amount) plus accrued interest to the Redemption Date (subject to
the right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date): If redeemed during the 12-month period beginning May 1,
<TABLE>
<CAPTION>
REDEMPTION REDEMPTION
--------------------------- ------------------------------------------------
YEAR PRICE YEAR PRICE
---- ------- ---- -------
<S> <C> <C> <C>
2001 105.250% 2004 102.625%
2002 104.375 2005 101.750
2003 103.500 2006 100.875
</TABLE>
and thereafter at 100% of principal amount. (Sections 203, 1101, 1105, and
1107)
Notwithstanding the foregoing, the Debentures may be redeemed at the option
of the Company, in whole or in part, at any time before May 1, 2001, without
any premium if the closing sale price of the Common Stock for at least 30
consecutive trading days equals or exceeds 140% of the conversion price then
in effect.
No sinking fund is provided for the Debentures.
EVENTS OF DEFAULT AND DEFAULTS
The Indenture defines an Event of Default with respect to the Debentures as
being certain events involving the bankruptcy, insolvency or reorganization of
the Company. (Section 501) If any Event of Default with respect to the
Debentures at the time Outstanding occurs and is continuing, either the
Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Debentures may declare the principal amount of the Debentures to
be due and payable immediately (provided that no such declaration is required
upon certain events of
47
<PAGE>
bankruptcy), but upon certain conditions such declaration may be annulled and
past defaults (except, unless theretofore cured, a default in payment of
principal of (or premium, if any), or interest on the Debentures and certain
other specified defaults) may be waived by the Holders of a majority in
principal amount of the Outstanding Debentures on behalf of the Holders of all
Debentures. (Sections 502 and 513)
The Indenture does not provide for any right of acceleration of the payment
of principal of the Debentures upon a default in the payment of principal or
interest or in the performance of any covenant or agreement in the Debentures
or in the Indenture. The Indenture defines a Default with respect to the
Debentures as any one of the following events: (A) an Event of Default; (B)
default for 30 days in payment of interest on any Debenture; (C) default in
payment of principal of (or premium, if any), on any Debenture at Maturity;
(D) failure by the Company for 60 days after due notice in performance or the
breach of any covenant or warranty in the Indenture or any Debenture; and (E)
(i) failure by the Company or the Bank to pay indebtedness for money borrowed
(including the Debentures) in an aggregate principal amount exceeding $500,000
at the later of final maturity or upon the expiration of any applicable period
of grace with respect to such principal amount; (ii) acceleration of the
maturity of any indebtedness of the Company or the Bank for borrowed money in
excess of $500,000, if such failure to pay or acceleration results from a
default under the instrument giving rise to, or securing, such indebtedness
and is not annulled within 30 days after due notice, unless such default is
contested in good faith by appropriate proceedings. In case a Default shall
occur and be continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders by appropriate judicial
proceeding as the Trustee deems most effectual. (Section 503)
The Indenture provides that the Trustee will, within 90 days after the
occurrence of a default with respect to the Debentures at the time
Outstanding, give to the Holders of the Outstanding Debentures notice of such
default known to it if uncured or not waived, provided that, except in the
case of default in the payment of principal of (or premium, if any), or
interest on any Debenture, the Trustee will be protected in withholding such
notice if the Trustee in good faith determines that the withholding of such
notice is in the interest of the Holders of the Outstanding Debentures; and,
provided further, that such notice shall not be given until 60 days after the
occurrence of a default with respect to the Debentures in the performance or
breach of a covenant in the Indenture other than for the payment of the
principal of (or premium, if any), or interest on any Debentures of such
series. The term "default" with respect to the Debentures for the purpose only
of the provision described in this paragraph means the happening of any of the
Events of Default or Defaults. (Section 602)
The Indenture provides that, subject to the duty of the Trustee during
default to act with the required standard of care, the Trustee will not be
under an obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such
Holders shall have offered to the Trustee reasonable security or indemnity.
(Sections 601 and 603) The Indenture provides that the Holders of a majority
in principal amount of Outstanding Debentures may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or other power conferred on the Trustee, provided that
the Trustee may decline to act if such direction is contrary to law or the
Indenture and may take any other action deemed proper which is not
inconsistent with such directions. (Section 512)
The Indenture includes a covenant that the Company will file annually with
the Trustee a certificate of no default, or specifying any default that
exists. (Section 1004)
MODIFICATION OF THE INDENTURE
Modifications to and amendments of the Indenture may be made by the Company
and the Trustee, only with the consent of the Holders of 66 2/3% in aggregate
principal amount of the Outstanding Debentures, by executing supplemental
indentures adding any provisions to or changing or eliminating any of the
provisions of the Indenture or modifying the rights of the Holders of
Debentures, except that no such supplemental indenture may, (a) change the
Stated Maturity of the principal of, or any installment of interest on, any
Debenture; (b) reduce the principal amount of, or any premium or the rate of
interest on, any Debenture; (c) change the place or currency of payment of
principal of (or premium, if any) or interest on, any Debenture; (d) impair
the
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<PAGE>
right to institute suit for the enforcement of any payment on or with respect
to any Debenture; (e) reduce the percentage in principal amount of Debentures,
the consent of the Holders of which is required for modification or amendment
of the Indenture, for waiver of compliance with certain provisions of the
Indenture or for waiver of certain covenant defaults; (f) modify the
provisions of the Indenture relating to modification and amendment of the
Indenture; (g) adversely affect the right to convert Debentures or (h) modify
the subordination provisions in a manner adverse to the Holders of Debentures.
The Indenture provides, however, that each of the amendments and modifications
listed in clauses (a) through (h) above may be made with the consent of the
Holder of each Outstanding Debenture affected thereby. (Sections 901, 902 and
907)
The Holders of 66 2/3% in aggregate principal amount of the Outstanding
Debentures may waive compliance by the Company with certain restrictive
provisions of the Indenture. (Section 1007) The Holders of a majority in
aggregate principal amount of the Outstanding Debentures may waive any past
default under the Indenture, except a default in the payment of principal,
premium or interest. (Section 513)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of the Holders of any of the Debentures,
may consolidate with or merge into any other Person or convey, transfer or
lease its assets substantially as an entirety to any Person, or permit any
Person to consolidate with or merge into the Company or convey, transfer or
lease the properties substantially as an entirety to the Company, provided
that, (i) if applicable, the successor is a Person, organized under the laws
of any domestic jurisdiction; (ii) the successor Person, if other than the
Company, assumes the Company's obligations on the Debentures and under the
Indenture; (iii) after giving effect to the transaction no Event of Default or
Default, and no event which, after notice or lapse of time, would become an
Event of Default or Default shall have occurred and be continuing; and (iv)
certain other conditions are met. (Section 801) Upon any consolidation or
merger into any other Person or any conveyance, transfer or lease of the
Company's assets substantially as an entirety to any Person, the successor
Person shall succeed to, and be substituted for, the Company under the
Indenture, and the Company, except in the case of a lease, shall be relieved
of all obligations and covenants under the Indenture and the Debentures to the
extent it was the predecessor Person.
OUTSTANDING DEBENTURES
The Indenture provides that, in determining whether the Holders of the
requisite principal amount of Outstanding Debentures have given any request,
demand, authorization, direction, notice, consent or waiver under the
Indenture. Debentures owned by the Company or any of its Affiliates shall not
be deemed to be Outstanding. (Section 101)
CONCERNING THE TRUSTEE
In the ordinary course of business, the Company may maintain deposits with,
and from time to time may borrow from, the Trustee.
REPORTS TO HOLDERS
The Company intends to furnish to Holders of Debentures all quarterly and
annual reports which it sends to holders of its Common Stock.
BOOK-ENTRY
The Debentures will be issued in the form of the Global Debenture deposited
with, or on behalf of, DTC and registered in the name of Cede & Co. as DTC's
partnership nominee. Owners of beneficial interests in the Debentures
represented by the Global Debenture will hold such interests pursuant to the
procedures and practices of DTC and must exercise any rights in respect of
their interests (including any right to convert) in accordance with those
procedures and practices. Such beneficial owners will not be Holders, and will
not be entitled to any
49
<PAGE>
rights under the Global Debenture or the Indenture, with respect to the Global
Debenture, and the Company and the Trustee, and any of their respective
agents, may treat DTC as the sole Holder and owner of the Global Debenture.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in the Debentures represented by
a Global Debenture.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock
Exchange, the American Stock Exchange and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its participants are on file with the Commission.
Purchases of Debentures under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Debentures on DTC's
records. The ownership interest of each actual purchaser of Debentures
("Beneficial Owner") is in turn to be recorded on the Direct or Indirect
Participant's records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners entered into the transaction.
Transfers of ownership interests in the Debentures are to be accomplished by
entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners will not receive certificates representing their
ownership interests in the Debentures, except in the event that the use of the
book-entry system for the Debentures is discontinued.
To facilitate subsequent transfers, all Debentures deposited by Participants
with DTC are registered in the name of DTC's partnership nominee, Cede & Co.
The deposit of Debentures with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual Beneficial Owners of the Debentures; DTC's records reflect only the
identity of the Direct Participants to whose accounts such Debentures are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices with respect to the Debentures shall be sent to Cede &
Co. If less than all of the Debentures are being redeemed, DTC's practice is
to determine by lot the amount of the interest of each Direct Participant in
such securities to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Debentures. Under its usual procedures, DTC mails an "Omnibus Proxy" to the
Company as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Debentures are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
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Principal, premium, if any, and interest payments on the Debentures will be
made to DTC. DTC's practice is to credit Direct Participants' accounts on the
relevant payment date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payments on such payable date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the account of customers in bearer form or
registered in "street name," and will be the responsibility of such
Participant and not of DTC or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and interest to DTC is the responsibility of the
Company, disbursement of such payments to Direct Participants is the
responsibility of DTC and disbursement of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
A Beneficial Owner shall give notice to elect to have its Debentures
purchased or tendered, through its Participant, to the Trustee, and shall
effect delivery of such Debentures by causing the Direct Participant to
transfer the Participant's interest in the Global Debenture representing such
Debentures, on DTC's records, to the Trustee. The requirement for physical
delivery of tender or a mandatory purchase will be deemed satisfied when the
Debentures in connection with a demand for repayment, an optional ownership
rights in the Global Debenture representing such Debentures are transferred by
Direct Participants on DTC's records and followed by a book-entry credit of
tendered Debentures to the Trustee's account.
Except as provided herein, a Beneficial Owner in a Global Debenture will not
be entitled to receive physical delivery of Debentures. Accordingly, each
Beneficial Owner must rely on the procedures of DTC to exercise any rights
under the Debentures.
DTC may discontinue providing its services as securities depositary with
respect to the Debentures at any time by giving reasonable notice to the
Company. Under such circumstances, in the event that a successor securities
depositary is not obtained, certificates representing the Debentures will be
printed and delivered. If the Company decides to discontinue use of the system
of book-entry transfers through DTC (or a successor depositary), certificates
representing the Debentures will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. The term "control" when
used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which (i) national banking associations in the State of
Minnesota or (ii) banking institutions in Albuquerque, New Mexico are
authorized or obligated by law or executive order to close.
"Holder" means a Person in whose name a Debenture is registered in the
Security Register.
"Interest Payment Date" means the Stated Maturity of an instalment of
interest on the Debentures.
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"Maturity," when used with respect to any Debenture, means the date on which
the principal of such Debenture becomes due and payable as provided in such
Debenture or in the Indenture, whether at the Stated Maturity or by
declaration of acceleration, call for redemption or otherwise.
"Other Financial Obligations" means all obligations of the Company to make
payments pursuant to the terms of financial instruments, such as (i)
securities contracts and foreign currency exchange contracts, (ii) derivative
instruments, such as swap agreements (including interest rate and foreign
exchange rate swap agreements), cap agreements, floor agreements, collar
agreements, interest rate agreements, foreign exchange rate agreements,
options, commodity futures contracts, commodity options contracts and (iii) in
the case of both (i) and (ii) above, similar financial instruments, other than
(A) obligations on account of Senior Indebtedness and (B) obligations on
account of indebtedness for money borrowed ranking pari passu with or
subordinate to the Debentures. "Entitled Persons" means any person who is
entitled to payment pursuant to the terms of Other Financial Obligations.
"Outstanding," when used with respect to Debentures, means, as of the date
of determination, all Debentures theretofore authenticated and delivered under
the Indenture, except:
(i) Debentures theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Debentures for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the
Holders of such Debentures; provided that, if such Debentures are to be
redeemed, notice of such redemption has been duly given pursuant to the
Indenture or provision therefor satisfactory to the Trustee has been made;
and
(iii) Debentures which have been paid pursuant to Section 306 of the
Indenture or in exchange for or in lieu of which other Debentures have been
authenticated and delivered pursuant to the Indenture, other than any such
Debentures in respect of which there shall have been presented to the
Trustee proof satisfactory to it that such Debentures are held by a bona
fide purchaser in whose hands such Debentures are valid obligations of the
Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Debentures have given any request, demand,
authorization, direction, notice, consent or waiver under the Indenture,
Debentures owned by the Company or any other obligor upon the Debentures or
any Affiliate of the Company or of such other obligor shall be disregarded and
deemed not to be Outstanding, except that, in determining whether the Trustee
shall be protected in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Debentures which the Trustee knows
to be so owned shall be so disregarded. Debentures so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Debentures and that the pledgee is not the Company or any
other obligor upon the Debentures or any Affiliate of the Company or of such
other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Debentures on behalf of
the Company.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Redemption Date," when used with respect to any Debenture to be redeemed,
means the date fixed for such redemption by or pursuant to the Indenture.
"Regular Record Date" for the interest payable on any Interest Payment Date
means the April 15 or October 15 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Security Register" means the register provided by the Company pursuant to
Section 305 of the Indenture for the registration of Debentures and of
transfers of Debentures.
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"Senior Indebtedness" is defined in the Indenture as (a) the principal of
(and premium, if any), and interest on all indebtedness of the Company for
money borrowed, whether outstanding on the date of execution of the Indenture
or thereafter created, assumed or incurred, except (i) such indebtedness as is
by its terms expressly stated to be junior in right of payment to the
Debentures and (ii) such indebtedness as is by its terms expressly stated to
rank pari passu with the Debentures and (b) any deferrals, renewals or
extensions of any such Senior Indebtedness. (Section 101) The term
"indebtedness for money borrowed" when used with respect to the Company is
defined to mean any obligation of, or any obligation guaranteed by, the
Company for the repayment of borrowed money, whether or not evidenced by
bonds, debentures, notes or other written instruments, and any deferred
obligation of, or any such obligation guaranteed by, the Company for the
payment of the purchase price of property or assets. (Section 101)
"Stated Maturity," when used with respect to any Debenture or any instalment
of interest thereon, means the date specified in such Debenture as the fixed
date on which the principal of such Debenture or such instalment of interest
is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
The term "voting stock" means stock which ordinarily has voting power for the
election of directors, whether at all times or only so long as no senior class
of stock has such voting power by reason of any contingency.
DESCRIPTION OF CAPITAL STOCK
The following summary description of the Company's capital stock does not
purport to be complete and is subject to the more detailed provisions of the
Company's Articles and Bylaws and is qualified in its entirety by reference
thereto.
The authorized capital stock of the Company consists of 4,000,000 shares of
Common Stock, no par value, and 1,000,000 shares of preferred stock (the
"Preferred Stock"). As of March 31, 1997, the Company had 2,227,332 shares of
Common Stock issued and outstanding, and no shares of Preferred Stock were
outstanding. At the Company's 1997 Annual Meeting of Shareholders the
stockholders will be presented with a proposal to increase the number of
authorized shares of Common Stock to 20,000,000.
COMMON STOCK
Voting. The holders of Common Stock currently possess exclusive voting
rights in the Company. Shares of Preferred Stock issued in the future may be
granted voting rights at the discretion of the Board of Directors. On matters
submitted to the stockholders of the Company, the holders of the Common Stock
will be entitled to one vote for each share held. No shares have cumulative
voting rights.
Dividends. Holders of shares of Common Stock are entitled to receive any
dividends declared by the Board of Directors out of funds legally available
therefor. The ability of the Company to pay cash dividends is subject to the
ability of First State Bank to pay dividends or make other distributions to
the Company, which in turn is subject to limitations imposed by law and
regulation. See "Regulation and Supervision."
Liquidation Rights. In the event of any liquidation or dissolution of the
Company, all assets of the Company legally available for distribution after
payment or provision for payment of (i) all debts and liabilities of the
Company, (ii) any accrued dividend claims and (iii) liquidation preferences of
any outstanding Preferred Stock, and will be distributed ratably, in cash or
in kind, among the holders of Common Stock.
Common Stock Purchase Rights. On October 25, 1996, the Board of Directors
declared a dividend paid on December 18, 1996, of one right (a "Right") for
each outstanding share of Common Stock of the Company held of record at the
close of business on November 20, 1996 (the "Record Date"), or issued
thereafter and
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before the Separation Time (as hereinafter defined) and thereafter pursuant to
options and convertible securities outstanding at the Separation Time. The
Rights were issued pursuant to a Shareholder Protection Rights Agreement,
dated as of October 25, 1996 (the "Rights Agreement"), between the Company and
American Securities Transfer & Trust, Inc., as Rights Agent. Each Right
entitles its registered holder to purchase from the Company, after the
Separation Time, one share of Common Stock for $45 (the "Exercise Price"),
subject to adjustment.
The Rights will be evidenced by the Common Stock certificates until the
close of business on the earlier of either (the "Separation Time"):
(1) the tenth business day after any Person (as defined in the Rights
Agreement) commences a tender or an exchange offer which, if consummated,
would result in such Person's becoming an Acquiring Person, as defined
below (or a later date as the Board of Directors of the Company may fix by
resolution adopted before the Separation Time that would otherwise have
occurred); or
(2) the tenth business day after the first date (the "Flip-in Date") of a
public announcement by the Company or any Person that such Person has
become an Acquiring Person, other than as a result of a Flip-over
Transaction or Event, as defined below (or such earlier or later date, not
beyond the thirtieth day after such acquisition, as the Board of Directors
of the Company may fix by resolution adopted before the Flip-in Date that
would otherwise have occurred);
provided, that if a tender or an exchange offer referred to in clause (1) is
canceled, terminated or otherwise withdrawn before the Separation Time without
the purchase of any shares of Common Stock pursuant thereto, such offer shall
be deemed never to have been made.
For purposes of the Rights Agreement, an Acquiring Person is any Person
having Beneficial Ownership (as defined in the Rights Agreement) of 10% or
more of the outstanding shares of Common Stock, other than:
(1) the Company, any wholly owned subsidiary of the Company or any
employee stock ownership or other employee benefit plan of the Company;
(2) any Person who becomes the Beneficial Owner of 10% or more of the
outstanding Common Stock solely through the Company's acquisition of Common
Stock, until the Person becomes the Beneficial Owner (other than through a
dividend or stock split) of any additional shares of Common Stock;
(3) any Person who becomes the Beneficial Owner of 10% or more of the
outstanding Common Stock without any plan or intent to seek or affect
control of the Company if the Person promptly enters into an irrevocable
commitment promptly to divest, and thereafter promptly divests, sufficient
securities so that such 10% or greater of Beneficial Ownership ceases; or
(4) any Person who Beneficially owns shares of Common Stock consisting
solely of (A) shares acquired pursuant to the grant or exercise of an
option granted by the Company in connection with an agreement to merge
with, or acquire, the Company entered into before a Flip-in Date; (B)
shares owned by the Person and its affiliates and associates at the time of
such grant; (C) shares, amounting to less than 1% of the outstanding Common
Stock, acquired by affiliates and associates of the Person after such
grant; and (D) shares held by the Person in trust accounts, managed
accounts and the like or otherwise held in a fiduciary capacity, that are
beneficially owned by third persons who are not affiliates or associates of
the Person or acting together with the Person to hold such shares, or which
are held by the Person in respect of a debt previously contracted.
The Rights Agreement provides that, until the Separation Time, the Rights
will be transferred only with the Common Stock. Common Stock certificates
issued after the Record Date but before the Separation Time shall evidence one
Right for each share of Common Stock represented thereby and shall contain a
legend incorporating by reference the terms of the Rights Agreement (as
amended from time to time). Notwithstanding the absence of the legend,
certificates evidencing shares of Common Stock outstanding at the Record Date
shall also evidence one Right for each share of Common Stock evidenced
thereby. Promptly following the Separation Time, separate
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certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of Common Stock at the Separation Time.
The Rights will be exercisable on the first Business Day (as defined in the
Rights Agreement) following the Separation Time. The Rights will expire on the
earliest of (1) the Exchange Time (as defined below); (2) the close of
business on October 25, 2006; (3) the date on which the Rights are redeemed as
described below; or (4) upon the merger of the Company into another
corporation pursuant to an agreement entered into before the Flip-in Date (in
any such case, the "Expiration Time").
The Exercise Price and the number of Rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the Rights, are
subject to adjustment from time to time to prevent dilution in the event of a
Common Stock dividend on, or a division or a combination into a smaller number
of shares of, Common Stock, or the issuance or distribution of any securities
or assets in respect of, in lieu of, or in exchange for Common Stock.
If before the Expiration Time a Flip-in Date occurs, the Company shall take
any necessary action to ensure and provide that each Right (other than Rights
beneficially owned by the Acquiring Person or any affiliate or associate
thereof or any transferee of any of the foregoing, which Rights shall become
void) shall constitute the right to purchase from the Company, upon the
exercise thereof in accordance with the Rights Agreement, that number of
shares of Common Stock having an aggregate Market Price (as defined in the
Rights Agreement), on the date of the public announcement of an Acquiring
Person's becoming such (the "Stock Acquisition Date") that gave rise to the
Flip-in Date, equal to twice the Exercise Price for an amount in cash equal to
the then-current Exercise Price. In addition, the Board of Directors of the
Company may, at its option, at any time on and after a Flip-in Date and before
an Acquiring Person becomes the Beneficial Owner of more than 50% of the
outstanding shares of Common Stock, elect to exchange all (but not less than
all) of the then-outstanding Rights (other than Rights beneficially owned by
the Acquiring Person or any affiliate or associate thereof, which Rights
become void) for shares of Common Stock at an exchange ratio of one share of
Common Stock per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the Separation Time (the
"Exchange Ratio"). Immediately upon such action by the Board of Directors (the
"Exchange Time"), the right to exercise the Rights will terminate, and each
Right will thereafter represent only the right to receive a number of shares
of Common Stock equal to the Exchange Ratio.
Before the Expiration Time, the Company may not enter into, consummate or
permit to occur a transaction or series of transactions after a Flip-in Date
(each, a "Flip-over Transaction or Event") in which, directly or indirectly:
(1) the Company consolidates or merges or participates in a binding share
exchange with any other Person if, at the time of the consolidation, merger
or share exchange or when the Company enters into an agreement with respect
to such consolidation, merger or share exchange, the Acquiring Person
controls the Board of Directors of the Company and either (a) any term of
or arrangement concerning the treatment of shares of capital stock in such
merger, consolidation or share exchange relating to the Acquiring Person is
not identical to the terms and arrangements relating to other holders of
Common Stock or (b) the person with whom the transaction or series of
transactions occurs is the Acquiring Person or an affiliate or associate of
the Acquiring Person, or
(2) the Company sells or otherwise transfers (or one or more of its
subsidiaries sells or otherwise transfers) assets (a) aggregating more than
50% of the assets (measured by either book value or fair market value) or
(b) generating more than 50% of the operating income or cash flow of the
Company and its subsidiaries (taken as a whole) to any other Person (other
than the Company or one or more of its wholly owned subsidiaries) or to two
or more such Persons which are affiliated or otherwise acting in concert,
if, at the time of the sale or transfer of assets or when the Company (or
any subsidiary) enters into an agreement with respect to the sale or
transfer, the Acquiring Person controls the Board of Directors of the
Company;
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in each case until it has entered into a supplemental agreement with the
Person engaging in the Flip-over Transaction or Event or the parent
corporation thereof (the "Flip-over Entity"), for the benefit of the holders
of the Rights, providing that upon consummation or occurrence of the Flip-over
Transaction or Event (i) each Right shall thereafter constitute the right to
purchase from the Flip-over Entity, upon exercise thereof in accordance with
the Rights Agreement, that number of shares of common stock of the Flip-over
Entity having an aggregate Market Price on the date of consummation or
occurrence of such Flip-over Transaction or Event equal to twice the Exercise
Price for an amount in cash equal to the then-current Exercise Price and (ii)
the Flip-over Entity shall thereafter be liable for, and shall assume, by
virtue of the Flip-over Transaction or Event and the supplemental agreement,
all obligations and duties of the Company pursuant to the Rights Agreement. An
Acquiring Person shall be deemed to control the Company's Board of Directors
when, following a Flip-in Date, the persons who were directors of the Company
before the Flip-in Date cease to constitute a majority of the Company's Board
of Directors. For purposes of the foregoing description, the term "Acquiring
Person" shall include any Acquiring Person and its affiliates and associates
counted together as a single Person.
The Board of Directors of the Company may, at its option, at any time before
the close of business on the Flip-in Date, redeem all (but not less than all)
of the then-outstanding Rights at $0.01 per Right (the "Redemption Price"), as
provided in the Rights Agreement. Immediately upon the action of the Board of
Directors of the Company electing to redeem the Rights, without any further
action and without any notice, the right to exercise the Rights will
terminate, and each Right will thereafter represent only the right to receive
the Redemption Price in cash or securities, as determined by the Board of
Directors of the Company.
The holders of Rights will, solely by reason of their ownership of Rights,
have no rights as stockholders of the Company, including, without limitation,
the right to vote or to receive dividends.
The Rights Agreement is designed to protect stockholders in the event of an
unsolicited attempt to acquire the Company for an inadequate price and to
protect against abusive practices that do not treat all stockholders equally,
such as, among others, partial and two-tier tender offers, coercive offers and
creeping stock accumulation programs. These practices can pressure
stockholders into tendering their Common Stock before realizing the full value
or total potential of the investments. The Rights Agreement is intended to
make the cost of abusive practices prohibitive and create an incentive for a
potential acquirer to negotiate in good faith with the Company's Board of
Directors. The Rights Agreement is not intended to, and will not, prevent all
unsolicited offers to acquire the Company. If an unsolicited offer is made,
and the Board of Directors determines that it is fair and in the best interest
of the Company and its stockholders, then, pursuant to the Rights Agreement,
the Board of Directors has the authority to redeem the Rights and permit the
offer to proceed. Essentially, the Rights Agreement will allow the Board of
Directors to evaluate the fairness of any unsolicited offer and the
credibility of the bidder, and will therefore enable the Board of Directors to
represent the interests of all stockholders more effectively. Of course, in
deciding whether to redeem the Rights in connection with any unsolicited
offer, the Board of Directors will be bound by its fiduciary obligations to
act in the best interests of the Company and its stockholders.
Other Characteristics. The Common Stock is not entitled to any preemptive
right to subscribe for or receive any shares of any class of stock of the
Company (or any securities convertible into shares of stock of the Company)
issued in the future.
PREFERRED STOCK
In supplementary sections to the Articles, the Company may provide for one
or more classes of Preferred Stock, which must be separately identified. The
shares of any such class may be divided into and issued in series, with each
series separately designated to distinguish the shares thereof from the shares
of all other series and classes. The terms of each series shall be stated in a
supplementary section to the Company's Articles and may provide for, among
other things, board representation, voting rights and dividend and liquidation
preferences. All shares of the same class must be identical except as to
certain relative rights and preferences specified in the Articles, as to which
there may be variations between different series. The Preferred Stock could be
deemed to
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have an antitakeover effect in that, if a hostile takeover situation should
arise, shares of Preferred Stock could be issued to purchasers sympathetic
with the Company's management or others in such a way as to render more
difficult or to discourage a merger, tender offer, proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management.
The effects of the issuance of the Preferred Stock on the holders of Common
Stock could include, among other things, (i) reduction of the amount otherwise
available for payments of dividends on Common Stock if dividends are payable
on the series of Preferred Stock; (ii) restrictions on dividends on Common
Stock if dividends on the series of Preferred Stock are in arrears; (iii)
dilution of the voting power of Common Stock if the series of Preferred Stock
has voting rights, including a possible "veto" power if the series of
Preferred Stock has class voting rights; (iv) dilution of the equity interest
of holders of Common Stock if the series of Preferred Stock is convertible,
and is converted, into Common Stock and (v) restrictions on the rights of
holders of Common Stock to share in the Company's assets upon liquidation
until satisfaction of any liquidation preference granted to the holders of the
series of Preferred Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Rights Agreement and certain provisions of the Company's
Articles could make more difficult the acquisition of the Company by means of
a tender offer, a proxy contest or otherwise and the removal of incumbent
officers and directors. These are intended to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to negotiate first with the
Company.
The following discussion is a summary of certain material provisions of the
Company's Articles, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part, which could have anti-takeover
effects.
Classified Board of Directors. Under the Articles, the Board of Directors is
classified into three classes, with the directors being elected for staggered,
three-year terms. The classification of the Company's Board of Directors will
have the effect of making it more difficult to change the composition of the
Board of Directors, because at least two annual meetings of the stockholders
would be required to change the control of the Board of Directors rather than
one. In addition, the Articles provide for the affirmative vote of two-thirds
of the outstanding Common Stock to remove directors without cause. The NMBCA
currently provides for a simple majority vote to remove directors, with or
without cause. This helps achieve the benefits of the classification since
stockholders holding a simple majority of Common Stock could not remove
without cause the two classes of directors not standing for election in a
particular year.
Advance Notice of Stockholder Proposals and Nominations. The Company's
Articles establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or bring other business
before a meeting of stockholders of the Company (the "Stockholder Notice
Procedure"). The Shareholder Notice Procedure provides that only persons who
are nominated by, or at the direction of, the Board, or by a stockholder who
has given timely written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company and that, at an annual meeting, only such business
may be conducted as has been brought before the meeting by, or at the
direction of, the Board of Directors or by a stockholder who has given timely
written notice to the secretary of the Company of such stockholder's intention
to bring such business before such meeting.
Notice will be timely if the Secretary of the Company receives it not less
than 35 nor more than 50 days before the meeting, unless the Company has given
less than 45 days prior notice or public disclosure of the meeting, in which
case the stockholder will have until the 10th day after the Company gave
notice or made public disclosure of the meeting to give notice. In the case of
nominations for directors, the Articles further require that the stockholder's
notice set forth certain information concerning the stockholder and the
nominee. In the case of proposed business, the stockholder's notice shall
briefly describe the business and the reasons for considering it,
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state the stockholder's name and address, represent that the stockholder is
entitled to vote at the meeting and intends to appear in person or by proxy at
the meeting, and state any material interest of the stockholder in the
proposed business. The chairman of the meeting will have the power to receive
a notice relating to a stockholder nomination or a proposal for business and
will not accept nominations and proposals not made in accordance with these
procedures. This provision requires notices in addition to those currently
required by law to permit stockholders to make proposals at any meetings of
stockholders.
The advance notice requirements allow the Board of Directors to consider the
qualifications of the proposed nominees for the reasons for the proposed
business and, to the extent deemed necessary or desirable by the Board of
Directors, to inform stockholders about those qualifications or reasons.
Although these provisions do not give the Board of Directors any power to
approve or disapprove stockholder nominations for election of directors or
proposals for other business, they may have the effect of precluding a contest
for the election of directors or proposals for other business if the
procedures set forth in the Articles are not followed and may discourage or
deter a third party from conducting a solicitation of proxies to elect its own
slate of directors or to propose other business, without regard to whether
this might be harmful or beneficial to the Company and its stockholders.
Super-Majority Vote. The Articles require the affirmative vote of 66.6% of
the outstanding shares of the Company entitled to vote on the merger,
consolidation, sale, lease or exchange of all or substantially all of the
assets of the Company if the offeror or any affiliate of the offeror owns of
record, or owns beneficially, directly or indirectly, more than 10% of any
class of equity security of the Company.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, for whom Keefe, Bruyette & Woods, Inc. is acting as
representative (the "Representative"), and each Underwriter has severally
agreed to purchase from the Company, the principal amount of Debentures set
forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER
OF DEBENTURES PRINCIPAL AMOUNT
------------- ----------------
<S> <C>
Keefe, Bruyette & Woods, Inc.................................. $12,000,000
-----------
Total..................................................... $12,000,000
===========
</TABLE>
The Purchase Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent. The Underwriters are obligated to
take and pay for all of the Debentures offered hereby (other than those
covered by the over-allotment option described below) if any are taken.
The Company has been advised by the Representative that the Underwriters
propose to offer the Debentures to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of 3.60% of the principal amount of the
Debentures. The Underwriters may allow and dealers may re-allow a concession
not in excess of 0.60% of the principal amount of the Debentures to certain
other dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Underwriters.
Pursuant to the Purchase Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days after the date of this
Prospectus, to purchase up to an additional $1,800,000 in aggregate principal
amount of Debentures at the public offering price, less the underwriting
discount set forth on the cover page of this Prospectus, solely to cover over-
allotments, if any.
The Company and each of its directors and executive officers have agreed not
to sell, offer to sell, grant an option for the sale of, or otherwise dispose
of, (i) any debt securities similar to the Debentures or (ii) any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, for a
58
<PAGE>
period of 180 days after the date of this Prospectus without the prior written
consent of the Representative, subject to certain limited exceptions set forth
in the Purchase Agreement.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute
to payments the Underwriters may be required to make in respect thereof. The
Company has agreed to reimburse the Representative for certain expenses and
legal fees related to the sale of the Debentures.
Until the distribution of the Debentures is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Debentures and the Common Stock. As an
exception to these rules, the Representative is permitted to engage in certain
transactions that stabilize the price of the Debentures and the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Debentures and the Common Stock.
If the Underwriters create a short position in the Debentures in connection
with the offering, i.e., if they sell a greater aggregate principal amount of
Debentures than is set forth on the cover page of this Prospectus, the
Representative may reduce that short position by purchasing Debentures in the
open market. The Representative may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Representative may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases
Debentures in the open market to reduce the Underwriters' short position or to
stabilize the price of the Debentures, it may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those Debentures as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Debentures or the
Common Stock. In addition, neither the Company nor any of the Underwriters
makes any representation that the Representative will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% of its average daily trading volume
in the Common Stock during a specified two month prior period, or 200 shares,
whichever is greater. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the Common
Stock and, consequently, the Debentures, above independent market levels.
Underwriters and dealers are not required to engage in passive market making
and may end passive market making activities at any time.
The Debentures are a new issue of securities with no established trading
market. No assurance can be given as to the liquidity of the trading market
for the Debentures.
The Debentures have been approved for quotation on The Nasdaq SmallCap
Market under the symbol "FSNMG".
59
<PAGE>
LEGAL MATTERS
The validity of the Debentures and Common Stock offered hereby will be
passed upon by Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., 1700 Bank One
Center, Amarillo, Texas 79101, counsel to the Company. Certain legal matters
with respect to the Debentures have been passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Underwriters.
EXPERTS
The consolidated financial statements of First State Bancorporation as of
December 31, 1996, and 1995, and for each of the years in the three year
period ended December 31, 1996 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report
of KPMG Peat Marwick LLP covering the December 31, 1996 financial statements
refers to a change in the method of accounting for investment securities.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Suite
1400, 500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C 20549, at prescribed rates. The Company's Common
Stock is traded on The Nasdaq Stock Market's National Market. Reports and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities covered by this Prospectus. This Prospectus does not contain all
the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. In addition, certain documents filed by the Company with the
Commission have been incorporated in this Prospectus by reference. See
"Incorporation of Certain Documents by Reference." For further information
with respect to the Company and the Debentures, reference is made to the
Registration Statement, including the exhibits thereto and the documents
incorporated herein by reference. The Registration Statement may be inspected
without charge at the principal office of the Commission in Washington, D.C.,
and copies of all or part of it may be obtained from the Commission upon
payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-KSB for the year ended December 31,
1996, previously filed with the Commission (File No. 22-25144), is hereby
incorporated in this Prospectus by reference and made a part hereof.
Financial and other information included in the reports incorporated by
reference herein does not reflect stock splits or dividends declared after the
respective dates of the reports, except as indicated in such reports.
60
<PAGE>
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Prospectus except as so modified, and any statement
so superseded shall not be deemed to constitute part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, on his or her written or oral request, a copy of any
or all of the documents incorporated or deemed to be incorporated herein by
reference, other than certain exhibits to such documents. Written requests
should be directed to First State Bancorporation, 111 Lomas Avenue, N.W.,
Albuquerque, New Mexico 87102, Attention: Secretary; telephone (505) 241-7500.
61
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1996, and 1995............ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995, and 1994.................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994.................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<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
F-2
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
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 31, 1996 and 1995.......... 881,881 986,088
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......... 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.
F-3
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
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 consoli-
dated 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.
F-4
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
--------------------------------------------------------------
UNREALIZED
GAINS (LOSSES)
COMMON COMMON ON SECURITIES TOTAL
STOCK STOCK RETAINED AVAILABLE FOR STOCKHOLDERS'
SHARES AMOUNT EARNINGS 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.
F-5
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
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 sale 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
============ ============ ============
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.
F-6
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
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
F-7
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-8
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-9
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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 this 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 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.
F-10
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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 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 these requirements were
approximately $5,357,000 and $4,649,000 at December 31, 1996 and 1995,
respectively.
3. INVESTMENT SECURITIES
Following is a summary of amortized costs and approximate market values of
investment securities:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
As of December 31, 1996
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>
F-11
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
ESTIMATED
AMORTIZED MARKET
COST 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.
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>
F-12
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-13
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 AS OF DECEMBER 31,
USEFUL ------------------------
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>
F-14
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
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.
F-15
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
noncancellable 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>
F-16
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 ENDING 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>
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.
F-17
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 quantitative measures of the Company's assets,
liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The
F-18
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
AS OF DECEMBER 31, 1996
----------------------------------------------------
FOR CAPITAL TO BE CONSIDERED
ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED
------------- ------------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ---------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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%
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------------------------------
FOR CAPITAL TO BE CONSIDERED
ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED
------------- ------------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ---------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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% 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.
F-19
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
F-20
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<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>
F-21
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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 operation.......................... -- (523) (650)
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
F-22
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The carrying values and estimated fair values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT 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 5,985 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.
F-23
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE IN THIS PROSPEC-
TUS, AND, IF GIVEN OR MADE, THE INFORMATION AND REPRESENTATIONS MUST BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME AFTER THE DATE HEREOF. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Summary Consolidated Financial Data........................................ 5
Risk Factors............................................................... 6
The Company................................................................ 10
Recent Developments........................................................ 16
Use of Proceeds............................................................ 17
Market for Common Stock and Dividends...................................... 17
Capitalization............................................................. 18
Selected Consolidated Financial Data....................................... 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations For the Years Ended
December 31, 1996, 1995 and 1994.......................................... 20
Regulation and Supervision................................................. 30
Management................................................................. 37
Description of the Debentures.............................................. 44
Description of Capital Stock............................................... 53
Underwriting............................................................... 58
Legal Matters.............................................................. 60
Experts.................................................................... 60
Available Information...................................................... 60
Incorporation of Certain Documents by Reference............................ 60
Index to Consolidated Financial Statements................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$12,000,000
FIRST STATE BANCORPORATION
7 1/2% SUBORDINATED DEBENTURES
DUE 2017
---------------
PROSPECTUS
---------------
KEEFE, BRUYETTE & WOODS, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
