<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q. -QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________________________________ to
__________________________________________
COMMISSION FILE NUMBER 22-25144
FIRST STATE BANCORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW MEXICO 85-0366665
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7900 JEFFERSON NE
ALBUQUERQUE, NEW MEXICO 87109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(505) 241-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 3,416,875 shares of common
stock, no par value, outstanding as of November 3, 1998.
<PAGE>
FIRST STATE BANCORPORATION
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities and Use of Proceeds None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 18,020,080 $ 20,999,596
Federal funds sold 16,400,000 11,000,000
---------------------------------------------
Total cash and cash equivalents 34,420,080 31,999,596
Investment securities:
Held to maturity (at amortized cost, market value of $39,087,965 at
September 30, 1998 and $15,291,473 at December 31, 1997) 39,045,520 15,235,174
Available for sale (at market, amortized cost of $40,793,990 at
September 30, 1998, and $46,212,050 at December 31, 1997) 41,015,184 46,274,195
---------------------------------------------
Total Investments 80,060,704 61,509,369
---------------------------------------------
Loans and leases net of unearned interest 317,268,683 288,368,847
Less allowance for loan and lease losses 3,773,155 3,279,457
---------------------------------------------
Net loans and leases 313,495,528 285,089,390
Premises and equipment 14,938,132 14,056,096
Accrued interest receivable 2,388,411 2,278,376
Other real estate owned 1,006,257 1,327,192
Goodwill, net 699,520 777,675
Other assets 3,368,931 4,006,630
---------------------------------------------
Total assets $450,377,563 $401,044,324
=============================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest-bearing $ 81,407,522 $ 72,773,120
Interest-bearing 294,976,644 272,817,577
---------------------------------------------
Total deposits 376,384,166 345,590,697
Securities sold under agreements to repurchase 26,893,218 10,105,190
Other liabilities 2,660,577 2,597,599
Long-term debt 1,206,634 15,036,463
---------------------------------------------
Total liabilities 407,144,595 373,329,949
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized, none issued
or outstanding -- --
Common stock, no par value, 20,000,000 shares authorized, issued
and outstanding 3,416,875 at September 30, 1998 and 2,583,867
at December 31, 1997 29,071,943 16,075,878
Retained earnings 14,015,037 11,597,484
Unrealized gains on investment securities available for sale 145,988 41,013
---------------------------------------------
Total stockholders' equity 43,232,968 27,714,375
---------------------------------------------
Total liabilities and stockholders' equity $450,377,563 $401,044,324
=============================================
Book value per share $12.65 $10.73
=============================================
Tangible book value per share $12.40 $10.40
=============================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Statements of Operations
For the three and nine months ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------------------------------------------------
Interest Income:
<S> <C> <C> <C> <C>
Interest and fees on loans and leases $8,103,280 $7,384,925 $23,616,439 $20,882,596
Interest on investment securities:
Taxable 1,117,677 720,140 2,789,999 2,098,892
Nontaxable 39,241 42,727 115,775 129,600
Federal funds sold 127,451 67,194 326,355 143,088
----------------------------------------------------------
Total interest income 9,387,649 8,214,986 26,848,568 23,254,176
----------------------------------------------------------
Interest expense:
Deposits 2,964,510 2,719,857 8,655,147 7,891,355
Short-term borrowings 299,365 165,112 640,246 580,061
Long-term debt and capital lease 28,520 259,894 482,265 511,063
----------------------------------------------------------
Total interest expense 3,292,395 3,144,863 9,777,658 8,982,479
----------------------------------------------------------
Net interest income before provision for
loan and lease losses 6,095,254 5,070,123 17,070,910 14,271,697
Provision for loan and lease losses 642,000 427,500 1,752,000 1,087,500
----------------------------------------------------------
Net interest income after provision for
loan and lease losses 5,453,254 4,642,623 15,318,910 13,184,197
----------------------------------------------------------
Other Income:
Service charges on deposit accounts 434,690 367,925 1,295,761 1,023,947
Other banking service fees 87,996 52,986 260,209 145,262
Credit card transaction fees 384,599 330,017 933,954 850,728
Operating lease income 203,850 266,649 638,395 759,913
Other 253,558 172,833 606,348 427,505
----------------------------------------------------------
Total other income 1,364,693 1,190,410 3,734,667 3,207,355
----------------------------------------------------------
Other expenses:
Salaries and employee benefits 2,254,677 1,926,563 6,530,694 5,452,013
Occupancy 585,050 528,886 1,683,646 1,574,833
Data Processing 198,985 160,036 549,281 442,794
Credit card interchange 229,212 196,598 528,590 508,903
Equipment 417,119 322,851 1,130,163 935,373
Leased equipment depreciation 129,673 172,722 416,909 494,567
Legal, accounting and consulting 147,100 90,268 398,203 286,625
Marketing 260,586 256,000 627,196 657,877
Other real estate owned expenses 15,987 58,862 70,333 182,361
Amortization of goodwill 26,163 46,176 78,265 143,580
Other 846,993 823,365 2,443,083 2,231,239
----------------------------------------------------------
Total other expenses 5,111,545 4,582,327 14,456,363 12,910,165
----------------------------------------------------------
Income before income taxes 1,706,402 1,250,706 4,597,214 3,481,387
Income tax expense 609,779 384,313 1,628,614 1,134,894
Net income $1,096,623 $ 866,393 $ 2,968,600 $ 2,346,493
==========================================================
Earnings per common and common equivalent share $0.32 $0.34 $0.99 $0.97
==========================================================
Earnings per common share assuming full dilution $0.31 $0.30 $0.92 $0.87
==========================================================
Dividends per common share $0.06 $0.05 $0.18 $0.15
==========================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
For the three and nine months ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net Income $ 1,096,623 $ 866,393 $ 2,968,600 $ 2,346,493
Adjustments to reconcile net income to cash provide by operations:
Provisions for loan and lease losses 642,000 427,500 1,752,000 1,087,500
Provision for decline in value of other real estate owned -- 33,693 22,550 75,000
Depreciation and amortization 455,589 706,409 1,594,883 1,634,155
(Increase) decrease in accrued interest receivable 223,991 75,159 (110,035) (359,099)
(Increase) decrease in other assets, net (357,133) (97,269) (465,554) (1,573,895)
Increase (decrease) in other liabilities, net (28,503) 336,148 62,978 570,767
-----------------------------------------------------------
Total adjustments 935,944 1,481,640 2,856,822 1,434,428
-----------------------------------------------------------
Net cash provided by operating activities 2,032,567 2,348,033 5,825,422 3,780,921
-----------------------------------------------------------
Cash flows from investing activities:
Net increase in loans (9,178,692) (12,357,361) (30,083,282) (36,027,114)
Purchases of investment securities available for sale (13,055,409) (9,542,600) (28,114,809) (24,360,968)
Maturities of investment securities available for sale 8,940,000 10,200,000 33,613,500 11,650,000
Purchases of investment securities held to maturity (76,372,753) (1,000,000) (215,155,753) (1,000,000)
Maturities of investment securities held to maturity 72,050,000 3,550,000 191,548,000 7,270,000
Purchases of premises and equipment, net 417,244 (480,231) (2,577,048) (1,593,333)
Sales of other real estate owned -- -- 252,358 622,863
Additions to other real estate owned, net (193) -- (28,829) --
-----------------------------------------------------------
Net cash used in investing activities (17,199,803) (9,630,192) (50,545,863) (43,438,552)
-----------------------------------------------------------
Cash flows from financing activities:
Net increase in interest bearing deposits 15,282,024 13,434,487 22,159,067 35,910,824
Net increase in noninterest bearing deposits 616,682 1,396,886 8,634,402 13,792,750
Net increase (decrease) in securities sold under repurchase
agreements 3,702,408 731,317 16,788,028 (1,854,384)
Payments on Federal Home Loan Bank borrowings -- -- -- (4,970,000)
Issuance of subordinated debentures -- -- -- 13,800,000
Payments on long-term debt (9,536) (13,900) (29,829) (36,223)
Federal funds purchased, net -- -- -- (1,500,000)
Common stock issued 25,034 28,979 140,305 273,145
Dividends paid (204,993) (129,080) (551,048) (367,855)
Exercise of put warrants -- -- -- (308,000)
-----------------------------------------------------------
Net Cash provided by financing activities 19,411,619 15,448,689 47,140,925 54,740,257
-----------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,244,383 8,166,530 2,420,484 15,082,626
Cash and cash equivalents at beginning of period 30,175,697 22,628,028 31,999,596 15,711,932
-----------------------------------------------------------
Cash and cash equivalents at end of period $ 34,420,080 $ 30,794,558 $ 34,420,080 $ 30,794,558
Supplemental disclosure of noncash investing and financing activities:
Additions to other real estate owned in settlement of loans -- $ 413,479 -- $ 507,057
===========================================================
Issuance of common stock upon conversion of subordinated debentures -- -- $ 12,855,761 $ 3,711,460
===========================================================
Issuance of long term debt for purchase of premises and equipment -- -- -- $ 1,050,000
===========================================================
See accompanying notes to consolidated condensed financial statements.
</TABLE>
3
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(Unaudited)
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements are unaudited and
include the accounts of First State Bancorporation (the "Company") and its
subsidiary, First State Bank of Taos (100% owned).
All significant intercompany accounts and transactions have been eliminated.
Information contained in the consolidated condensed financial statements and
notes thereto of the Company should be read in conjunction with the Company's
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
The consolidated condensed financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normally recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
2. EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS
128 requires the computation of basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing income available to
common stockholders (the numerator) by the weighted-average number of common
shares outstanding during the period (the denominator). Diluted earnings per
share is calculated by increasing the basic earning per share denominator by
the number of additional common shares that would have been outstanding if
dilutive potential common shares for options, warrants, and convertible
securities had been issued, and increasing the basic earnings per share
numerator by the after tax amount of interest and amortization associated with
the convertible debentures. SFAS 128 is effective for years ended after
December 15, 1997, and is required to be applied retroactively upon adoption.
All previous periods have been restated to conform to the requirements of SFAS
128. The following is a reconciliation of the numerators and denominators of
basic and diluted earnings per share.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS -
Net income available to
common stockholders $1,096,623 3,416,510 $0.32 $ 866,393 2,581,024 $0.34
===== =====
Effect of dilutive securities:
Options -- 95,128 75,867
Convertible debentures -- -- 178,969 823,881
---------- --------- ---------- ---------
Diluted EPS -
Net income available to
common stockholders plus
interest and amortization
on convertible debentures $1,096,623 3,511,638 $0.31 $1,045,362 3,480,772 $0.30
========== ========= ===== ========== ========= =====
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS -
Net income available to
common stockholders $2,968,600 2,987,298 $0.99 $2,346,493 2,425,298 $0.97
===== =====
Effect of dilutive securities:
Options -- 99,556 75,701
Warrants -- -- 11,004
Convertible debentures 276,436 426,035 360,748 595,894
---------- --------- ---------- ---------
Diluted EPS -
Net income available to
common stockholders plus
interest and amortization
on convertible debentures $3,245,036 3,512,889 $0.92 $2,707,241 3,107,897 $0.87
========== ========= ===== ========== ========= =====
</TABLE>
3. CONVERTIBLE SUBORDINATED DEBENTURES
On April 28, 1998, the Company notified the holders of its 7.5% Convertible
Subordinated Debentures due 2017 that the Debentures would be called for
redemption at 100% of the original principal plus accrued interest on May 29,
1998. The Indenture allowed management to redeem the Debentures at par when the
Company's common stock closed at 140% of the exercise price ($16.75) for 30
consecutive trading days. As of April 24, 1998 this condition was met. All of
the debenture holders exercised the conversion privilege resulting in 823,869
shares of common stock being issued and $12.8 million being added to common
equity.
4. REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS No. 130 requires disclosure in the financial statements of
comprehensive income that encompasses earnings and those items currently
required to be reported directly in the equity section of the balance sheet,
such as unrealized gains and losses on available-for-sale securities.
Management has adopted the provisions of SFAS 130 effective January 1, 1998.
The following table shows comprehensive income for the three and nine months
ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $1,096,623 $866,393 $2,968,600 $2,346,493
Unrealized gains on securities,
net of tax arising during the
period 141,091 40,949 104,975 833
-----------------------------------------------------------------------
Comprehensive income $1,237,714 $907,342 $3,073,575 $2,347,326
=======================================================================
</TABLE>
5. ACCOUNTING STANDARD ISSUED NOT YET IMPLEMENTED
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 requires disclosures about segments of an enterprise and related
information about the different types of business activities in which an
enterprise engages and the different economic environments in which it operates.
SFAS 131 is effective for the Company's financial statements beginning December
31, 1998. The impact of SFAS 131 is not expected to be material in relation to
the consolidated financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June, 1998, the FASB issued Statement of Financial Accounting Standards
No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instuments embeded in the contracts
and for hedging activities. This Statement is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The impact of SFAS 133 is
not expected to be material in relation to the consolidated financial
statements.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED CONDENSED BALANCE SHEETS
The Company's total assets increased by $49.4 million from $401.0 million as of
December 31, 1997, to $450.4 million as of September 30, 1998, due to the
company increasing market share in its trade areas. The Company's strategy is
to increase market share by differentiating itself from large institutions
headquartered out side New Mexico through its approach to customer service and
marketing. For the first nine months of 1998, net loans increased by $28.4
million from $285.1 million to $313.5 million, while investment securities
increased by $18.6 million from $61.5 million to $80.1 million. For the first
nine months of 1998, premises and equipment increased $800,000 from $14.1
million to $14.9 million and other assets decreased $600,000 from $4.0 million
to $3.4 million. The decrease in other assets resulted from $1.0 million in
unamortized offering costs being neted against common stock as a result of the
debenture conversion.
The increase in loans and leases is due largely to the Company's efforts to
increase its market share and increased economic activity and demand for loans
and leases in the Company's market area. The following table presents the amount
of loans and leases by category, at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
----------------------- -------------------------- ------------------------
(in thousands)
Amount % Amount % Amount %
------------ --------- --------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial 48,344 15.2% 45,480 15.8% 45,083 15.8%
Real Estate-Mortgage 159,164 50.2% 153,550 53.3% 155,055 54.2%
Real Estate-Construction 49,579 15.6% 41,943 14.5% 42,732 15.0%
Consumer and Other 17,084 5.4% 16,809 5.8% 15,760 5.5%
Leases 43,098 13.6% 30,587 10.6% 27,242 9.5%
-----------------------------------------------------------------------------
317,269 100.0% 288,369 100.0% 285,872 100.0%
=============================================================================
</TABLE>
Investment securities increased by $18.6 million as a result of an increase in
deposits and securities sold under agreement to repurchase.
Deposits, which are the Company's main source of funds for loans, investments
and federal funds sold, increased by $30.8 million from $345.6 million as of
December 31, 1997, to $376.4 million as of September 30, 1998, as a result of
the company executing its market share strategy. Non-interest-bearing deposits
increased by $8.6 million and interest-bearing deposits increased by $22.2
million. For the first nine months of 1998, long-term debt decreased by $13.8
million due to the conversion of 7.5% Convertible Subordinated Debentures (the
"Debentures") into Common Stock of $12.8 million net of $1.0 million of
unamortized offering costs. Securities sold under agreements to repurchase
increased $16.8 million from $10.1 million to $26.9 million as a result of the
company's efforts to attract customers with large short-term cash balances which
the company invests in like termed securities at a positive interest rate
spread.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998.
Net income for the Company for the three months ended September 30, 1998, was
$1.10 million, an increase of $234,000 or 27% from $866,000 for the same period
of 1997. The Company's annualized return on average assets was 1.00% for the
third quarter of 1998, compared to 0.93% for the same period of 1997.
The provision for loan losses increased by $214,500 to $642,000 for the three
months ended September 30, 1998, from $427,500 for the three months ended
September 30, 1997. The increase was due to loan growth and increased non-
accrual loans.
Net interest income before provision for loan losses increased $1.0 million to
$6.1 million for the three months ended September 30, 1998, from $5.1 million
for the three months ended September 30, 1997, primarily due to increased loan
and investment security volume. The Company's net interest margin increased to
6.15% at September 30, 1998, from 6.13% at September 30, 1997. Management
believes that the recent Federal Reserve Board's interest rate cuts will
compress the net interest margin in future quarters, because a large portion of
the company's loans are prime based with floating rates.
6
<PAGE>
Total non-interest income increased by $200,000 to $1.4 million for the three
months ended September 30, 1998, compared to $1.2 million for the same period of
1997, primarily due to an increase in service charges on deposit accounts and
other banking and service fees as a result of increased deposits.
Total non-interest expense increased by $500,000 to $5.1 million for the third
quarter of 1998, from $4.6 million for the same period of 1997. Salaries and
employee benefits increased by $328,000 as a result of additions to personnel
due to growth, annual salary increases, and a $75,000 charge relating to
compensation expense for employee stock options.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
Net income for the Company for the nine months ended September 30, 1998, was
$2.97 million, an increase of $620,000 or 26% from $2.35 million for the same
period of 1997. The Company's annualized return on average assets was 0.95% for
the first nine months of 1998, compared to 0.89% for the same period of 1997.
The provision for loan losses increased by $660,000 to $1.75 million for the
nine months ended September 30, 1998, from $1.09 million for the nine months
ended September 30, 1997. The increase was due to loan growth and increased
non-accrual loans.
Net interest income before provision for loan losses increased $2.8 million to
$17.1 million for the nine months ended September 30, 1998, from $14.3 million
for the nine months ended September 30, 1997, primarily due to increased loan
and investment security volume. The Company's net interest margin increased to
6.06% at September 30, 1998, from 6.02% at September 30, 1997.
Total non-interest income increased by $500,000 to $3.7 million for the nine
months ended September 30, 1998, compared to $3.2 million for the same period of
1997, primarily due to an increase in service charges on deposit accounts and
other banking and service fees as a result of increased deposits.
Total non-interest expense increased by $1.6 million to $14.5 million for the
first nine months of 1998, from $12.9 million for the same period of 1997.
Salaries and employee benefits increased by $1.1 million as a result of
additions to personnel due to growth, annual salary increases, and a $225,000
charge relating to compensation expense for employee stock options.
ALLOWANCE FOR LOAN AND LEASE LOSSES AND NON-PERFORMING ASSETS
The following tables set forth the Allowance for Loan and Lease Losses and Non-
Performing assets.
<TABLE>
<CAPTION>
(Dollars in thousands)
ALLOWANCE FOR LOAN AND LEASE LOSSES: September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
<S> <C> <C> <C>
Balance beginning of period $3,279 $2,510 $2,510
Provision for loan and lease losses 1,752 1,537 1,088
Net charge-offs 1,258 768 574
--------------------------------------------------------------
Balance end of period $3,773 $3,279 $3,024
==============================================================
Allowance for loan and lease losses to
non-performing loans and leases 1.19% 1.14% 1.06%
Allowance for loan and lease losses to
non-performing loans and leases 57% 102% 78%
<CAPTION>
NON-PERFORMING ASSETS: September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
Accruing loans - 90 days past due $ 97 $ 107 $ 190
Non-accrual loans 6,526 3,123 3,707
--------------------------------------------------------------
Total non-performing loans 6,623 3,230 3,897
Other real estate owned 1,006 1,327 1,133
--------------------------------------------------------------
Total non-performing assets $7,629 $4,557 $5,030
==============================================================
Potential problem loans and leases $1,600 $3,873 --
Total non-performing assets to total 1.69% 1.14% 1.31%
assets
</TABLE>
7
<PAGE>
Loans secured by real estate and other real estate owned comprise approximately
$6.7 million of the non-performing assets as of September 30, 1998. Based
primarily on the appraised values of the underlying properties, specific
reserves of $122,000, within the Allowances for Loan and Lease Losses and other
real estate owned, have been established for these loans and properties.
LIQUIDITY AND CAPITAL EXPENDITURES
The Company's primary sources of funds are customer deposits, loan repayments,
and maturities of investment securities. The Company has additional sources of
liquidity in the form of borrowings. Borrowings include federal funds
purchased, securities sold under repurchase agreements and borrowings from the
Federal Home Loan Bank.
On April 28, 1998, the Company notified the holders of its 7.5% Debentures that
the Debentures would be called for redemption at 100% of the original principal
plus accrued interest on May 29, 1998. The Indenture allowed management to
redeem the Debentures at par when the Company's common stock closed at 140% of
the exercise price ($16.75) for 30 consecutive trading days. As of April 24,
1998 this condition was met. All of the Debenture holders exercised the
conversion priviledge resulting in 823,869 shares of common stock being issued
and $12.8 million being added to common equity.
YEAR 2000
The Company began it's Year 2000 planning and evaluation process in 1997. Early
on, the awareness stage was completed by management and the Board of Directors.
The various systems (hardware and software) of the Company have been assigned
into the various categories of critical, essential and moderate importance. The
assessment stage is essentially complete for the critical and essential systems
and substantially complete for the systems of moderate importance.
All of the Company's systems are provided by reputable third party vendors, with
only very minor programming changes made internally. Sixteen systems have been
identified as critical to the Company's daily processing. Of those, thirteen
have been certified by the provider to be Year 2000 compliant, while one has
been certified by the provider to be not date sensitive. The other two critical
systems have been determined by Company personnel to be not date sensitive.
Twenty-eight systems have been identified as essential to the Company's daily
operations. Twenty-two of the essential systems have been certified by the
provider as being Year 2000 compliant. The providers for five of the essential
systems have indicated that those systems will be compliant by December 31,
1998. One essential system has been determined by Company personnel to be not
date sensitive.
The Company's Year 2000 testing began in the second quarter of 1998 and is
progressing on schedule to be complete by March 31, 1999, with most critical
system testing scheduled to be complete by December 31, 1998. To date, no
significant problems have been encountered in the testing process.
Many of the Company's larger loan and deposit customers have been contacted
regarding their readiness for the Year 2000, to determine if the Company has
significant credit risk or exposure to declining liquidity, due to potential
problems of customers related to Year 2000 issues. Information is being
gathered on most of these larger customers and determinations made regarding the
relative risk to these customers. To date, significant loss or liquidity
exposure has not been identified among the Company's customer base, but
additional evaluation is being performed on an ongoing basis.
The direct costs to date of the Company's Year 2000 effort have totaled
approximately $45,000. These include direct salary cost of approximately
$30,000 and equipment costs of $15,000. There are indirect costs related to
significant amounts of time being spent by existing Company personnel, for
development of test plans, test scripts, and for actual testing. Most of this
time is spent as part of their normal job responsibilities, with no additional
direct cost incurred.
The major risks of the Company's Year 2000 issues are its ability to provide
consistent daily processing of customer information and the soundness of the
Company's loan portfolio. The Company is managing this risk by performing
extensive analysis and testing to identify potential problem areas for its
systems and throughout its customer base. The possible impacts on the Company
would include a substantial loss of customers and the related revenue on those
customers' relationships, as well as possible loan losses resulting from the
inability of the Company's customers to repay their loans on a timely basis.
The Company's contingency plans consist primarily of identifying alternative
systems or other methods of processing, in the event that the existing systems
are not able to properly operate through the effected time frames. Some
contingency actions also include manual processing of information or the
possible abandonment of certain systems.
8
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements which are forward-looking are not historical facts, and involve risks
and uncertainties that could cause the Company's results to differ materially
from those in any forward-looking statements. These risks include the possible
loss of key personnel, need for additional capital should the Company experience
faster than anticipated growth, changes in economic conditions, interest rate
risk, factors which could affect the Company's ability to compete in its trade
areas, changes in regulations and governmental policies, and the risks described
in the Company's Securities and Exchange Commission filings. Forward-looking
statements with respect to the Year 2000 may differ materially if commitments or
representations from third parties are not fulfilled.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 27 FINANCIAL DATA SCHEDULE
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST STATE BANCORPORATION
Date: November 4, 1998 By: Michael R. Stanford
---------------- --------------------------------------------------------
Michael R. Stanford, President & Chief Executive Officer
Date: November 4, 1998 By: H. Patrick Dee
---------------- --------------------------------------------------------
H. Patrick Dee, Executive Vice President & Chief
Operating Officer
Date: November 4, 1998 By: Brian C. Reinhardt
---------------- --------------------------------------------------------
Brian C. Reinhardt, Senior Vice President & Chief
Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,020,080
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,015,184
<INVESTMENTS-CARRYING> 39,045,520
<INVESTMENTS-MARKET> 39,087,965
<LOANS> 317,268,683
<ALLOWANCE> 3,773,155
<TOTAL-ASSETS> 450,377,563
<DEPOSITS> 376,384,166
<SHORT-TERM> 26,893,218
<LIABILITIES-OTHER> 2,660,577
<LONG-TERM> 1,206,634
0
0
<COMMON> 43,086,980
<OTHER-SE> 145,988
<TOTAL-LIABILITIES-AND-EQUITY> 450,377,563
<INTEREST-LOAN> 23,616,439
<INTEREST-INVEST> 3,232,129
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,848,568
<INTEREST-DEPOSIT> 8,655,147
<INTEREST-EXPENSE> 9,777,658
<INTEREST-INCOME-NET> 17,070,910
<LOAN-LOSSES> 1,752,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,456,363
<INCOME-PRETAX> 4,597,214
<INCOME-PRE-EXTRAORDINARY> 2,968,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,968,600
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.92
<YIELD-ACTUAL> 5.50
<LOANS-NON> 6,526,000
<LOANS-PAST> 97,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,600,000
<ALLOWANCE-OPEN> 3,279,000
<CHARGE-OFFS> 1,395,000
<RECOVERIES> 137,000
<ALLOWANCE-CLOSE> 3,773,000
<ALLOWANCE-DOMESTIC> 3,773,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
