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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM SECURITIES EXCHANGE _____TO_____.
Commission file number: 22-25144
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FIRST STATE BANCORPORATION
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(Name of small business issuer in its charter)
New Mexico 85-0366665
- ------------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7900 Jefferson NE, Albuquerque, New Mexico 87109
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(Address of principal executive offices) (Zip Code)
Securities registered under Section 12(b) of the Act:
None
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Securities registered under Section 12(g) of the Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check disclosure of delinquent filers in response to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Revenues for most recent fiscal year: $36,240,000
Aggregate market value of the voting stock held by non-affiliates: $53,008,000
as of March 11, 1998.
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,585,751 shares of Common Stock as of
March 11, 1998.
Documents incorporated by reference: None
Transitional Small Business Format. Yes No X
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TABLE OF CONTENTS
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PART I Page
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Item 1: Description of Business 3
Item 2: Description of Property 8
Item 3: Legal Proceedings 8
Item 4: Submission of Matters to a Vote of Securities Holders 9
PART II
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Item 5: Market for Common Equity and Related Stockholders' Matters 9
Item 6: Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7: Financial Statements 10
Item 8: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
PART III
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Item 9: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 10
Item 10: Executive Compensation 12
Item 11: Security Ownership of Certain Beneficial Owners and Management 16
Item 12: Certain Relationships and Related Transactions 16
Item 13: Exhibits and Reports on Form 8-K 18
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.
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
THE COMPANY
The Company is a New Mexico-based bank holding company that provides commercial
banking services to small and medium-sized businesses through its subsidiary
bank, First State Bank. The Company operates three offices in Taos, five
offices in Albuquerque, two offices in Santa Fe, and one office each in Rio
Rancho, Los Lunas, Bernalillo, Questa, Placitas, and Moriarty, New Mexico.
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 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, 1997, the Company had total assets, total deposits, and total stockholders'
equity of $401.0 million, $345.6 million, and $27.7 million, respectively.
Management's strategy is to provide a business culture in which customers are
provided individualized customer service. As part of its operating and growth
strategies, the Company is working to (i) place greater emphasis on attracting
core deposits from, and providing financial services to, small and medium-sized
businesses; (ii) expand operations in the Albuquerque metropolitan area, which
consists of Albuquerque, Rio Ranchos, and Los Lunas; Santa Fe, and other
strategic areas in New Mexico; (iii) improve asset quality through reductions in
nonperforming assets and strict adherence to credit administration standards;
(iv) manage interest rate risk; (v) continue to improve internal operating
systems; and (vi) manage noninterest expenses.
Management believes that the Company is well qualified to pursue an aggressive
growth strategy throughout New Mexico due to its responsive customer service,
its streamlined management structure, the strong community involvement of the
Company's management and employees, and recent trends in the New Mexico banking
environment. Changes in banking laws have allowed out-of-state bank holding
companies to acquire New Mexico banking institutions. As a result, several
competing banks have been acquired by large out-of-state institutions. See
"--Growth Strategy." Management believes that, in many 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 intends 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 metropolitan area, and Santa Fe 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
targets that complement the Company's existing operations and provide economies
of scale when combined with its existing locations. See "--Growth Strategy."
At December 31, 1997, First State Bank was "well capitalized" under regulatory
capital guidelines.
The Company's executive offices are located at 7900 Jefferson N.E., Albuquerque,
New Mexico 87109, and its telephone number is (505) 241-7500.
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HISTORY
The Company and an affiliated company, New Mexico Bank Corporation, were formed
in 1988 to acquire banking institutions in New Mexico. In December 1988, the
Company acquired First State Bank, and New Mexico Bank Corporation acquired
National Bank of Albuquerque ("NBA"). After a change in New Mexico banking laws
in 1991, the Company and New Mexico Bank Corporation merged, and the operations
of NBA were merged into First State Bank in December 1991.
At the time of its acquisition, First State Bank had high levels of noninterest
expense and 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, (ii)
pursuing an aggressive policy of foreclosing upon nonperforming loans and
selling the underlying collateral, and (iii) 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 purchased 94.5 percent of the outstanding
shares of common stock of the Santa Fe Bank. These selling shareholders
included members of the current management and directors of the Company, and two
officers of First State 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 eight new branches which have contributed $116.1 million in deposits and
$82.5 million 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 leases and equipment subject to
operating leases of approximately $30.5 million and $3.0 million, respectively,
as of December 31, 1997.
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.
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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 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, Boys and Girls Clubs, 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
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 few years. These investments will 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
earning neutral position, with a substantial amount of these assets and
liabilities adjustable in 90 days or less. See "Management's Discussion and
Analysis--Asset/Liability Management."
GROWTH STRATEGY
The Company expects to pursue an aggressive growth strategy through a
combination of internal growth, de novo branching, and select acquisitions.
Several banks that compete with the Company have been acquired by large
out-of-state financial institutions since 1993. Management believes that these
changes in the competitive environment have caused the acquired banks to
significantly alter their operating procedures and their approach to customer
service, affording the Company an opportunity to gain profitable new account
relationships and to expand existing relationships.
In addition, management believes that there may be attractive opportunities to
open new branches and acquire branches of existing or merged institutions in New
Mexico. Consolidation in the banking industry and increased regulatory burdens
on existing institutions provide a favorable environment for such openings and
acquisitions. Management considers a variety of criteria when evaluating
potential branch expansion, including (i) the short- and long-term growth
prospects for the location, (ii) the management and other resources required to
integrate the operations, if desirable, (iii) the degree to which the branch
would enhance the geographic diversification of
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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. A
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
$600.0 million to $1.0 billion. Management believes that a financial
institution of this size is large enough to meet the needs of most customers,
yet small enough to deliver personal, high-quality service. To accommodate the
Company's anticipated growth, management intends to further develop the existing
middle management of the Company and further develop its management information
systems and other appropriate internal management systems. There can be no
assurance, however, that the Company will achieve its growth objectives.
MARKET AREAS AND BANKS
Markets. First State Bank serves three distinct market areas within New Mexico:
Taos County; the Albuquerque metropolitan area, 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 metropolitan area is 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, Sumitomo, General Mills, America On Line and Victoria's Secret, 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, 1997.
<TABLE>
<S> <C> <C> <C>
Number of Total Total Loans
Location facilities Deposits and Leases
- ------------------------------------------ ---------- -------- -----------
First State Bank:
Taos................................. 4 $ 80,749 $ 47,322
Santa Fe............................. 2 77,813 40,637
Albuquerque.......................... 5 139,485 148,249
Los Lunas............................ 2 19,980 27,208
Rio Rancho........................... 3 36,280 24,953
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Total.......................... 16 $354,307 $288,369
========== ======== ===========
</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, and credit cards.
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The Taos locations provide conventional commercial and SBA loans to established
commercial businesses and businesses that support the tourism and skiing
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 metropolitan area 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
Albuquerque metropolitan 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.
The following is a summary of the company's percentage of its deposits to total
deposits of FDIC insured institutions in the counties in which it does business
as of June 30, 1997:
<TABLE>
<S> <C>
Taos........ 37.01%
Bernalillo.. 2.83%
Santa Fe.... 5.98%
Sandoval.... 12.01%
Valencia.... 5.53%
</TABLE>
Management believes that its greatest opportunity for growth is in Bernalillo,
Santa Fe, Valencia, and Sandoval counties. First State is the largest bank in
Taos County, and growth in that market is expected to come from economic growth
and not as a result of increased market share.
COMPETITION
First State Bank competes for loans, leases, and deposits with other commercial
banks, savings banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
firms, asset-based non-bank lenders, governmental organizations, and other
institutions with respect to the scope and type of services offered, interest
rates paid on deposits, and pricing of loans, among other things. Many of these
competitors have significantly greater financial and other resources than the
Company. First State Bank also faces significant competition for investors'
funds from sellers of short-term money market securities and other corporate and
government securities.
First State Bank competes for loans and leases principally through the range
and quality of its services, interest rates, and loan fees. First State Bank
believes its personal-service philosophy enables it to compete favorably with
other financial institutions in its focus market of small and medium-sized
businesses. First State Bank actively solicits deposit-related clients and
competes for deposits by offering customers personal attention and professional
service.
EMPLOYEES
As of December 31, 1997, the Company had 203 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 with the Company, and
management believes that its relationship with its employees is good.
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OTHER
For a discussion of asset/liability management, the investment portfolio, loan
portfolio, nonperforming assets, allowance for loan losses and deposits see Item
6: "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
ITEM 2: DESCRIPTION OF PROPERTY
With the exception of its Main and Southside facilities 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. See Item 12:
"Certain Relationships and Related Transactions." The following table shows the
size and age of each of the banking facilities owned or leased by the Company:
<TABLE>
<CAPTION>
Approximate
square footage
Approximate building area now
Approximate square footage utilized for
land area building area banking services Year constructed
(sq. ft.) (sq. ft.) (sq. ft.) or last renovated
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<S> <C> <C> <C> <C>
Facilities:
Taos
Main 19,800 8,940 8,940 Renovated 6-93
Northside 45,215 2,239 2,239 Renovated 9-95
Questa 17,947 1,050 1,050 Renovated 8-93
Southside 36,590 5,550 5,550 Renovated 9-92
Santa Fe
San Mateo 62,334 6,955 6,955 Renovated 11-95
Downtown 5,100 2,116 2,116 Constructed 12-95
Albuquerque
Lomas 9,199 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 11-93
Sycamore 45,834 5,164 5,164 Constructed 9-94
Journal Center 88,427 13,200 13,200 Constructed 9-95
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
Los Lunas 57,243 4,327 4,327 Constructed 8-95
Moriarty 1,700 1,700 1,700 Constructed 12-97
</TABLE>
ITEM 3: LEGAL PROCEEDINGS
Periodically and in the ordinary course of business, various claims and
lawsuits are brought against the Company, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the Company's business. In the opinion of the
Company's management, the ultimate liability, if any, resulting
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from such claims or lawsuits will not have a material adverse effect on the
financial position or results of operations of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1997.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on The Nasdaq Stock Market's National
Market under the symbol "FSNM." The following table sets forth, for the
periods indicated, the high and low closing sale prices on The Nasdaq Stock
Market's National Market as reported by Nasdaq. The Company's Common Stock
commenced trading on November 3, 1993. The quotations in the over-the-counter
market reflect inter-dealer prices, without retail markup, markdown, or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
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1997
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<S> <C> <C>
First Quarter $16.13 $14.50
Second Quarter 17.50 12.88
Third Quarter 20.50 16.50
Fourth Quarter 21.63 17.00
1996
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First Quarter 12.75 11.25
Second Quarter 13.00 10.88
Third Quarter 14.00 12.25
Fourth Quarter 15.25 13.25
1995
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First Quarter 11.80 9.20
Second Quarter 11.80 11.20
Third Quarter 12.20 10.67
Fourth Quarter 13.00 11.40
</TABLE>
The last reported sale price of the Company's Common Stock on March 11, 1998,
was $23.50 per share. As of March 11, 1998, there were approximately 88
shareholders of record, not including shareholders who beneficially own Common
Stock held in nominee or street name.
DIVIDEND POLICY
The Company paid cash dividends of $522,870 or $0.21 per share in 1997,
$408,489 or $0.20 per share in 1996, and $302,545 or $0.154 per share in 1995,
which amounted to 15.70% , 19.82%, and 18.06% of net income in 1997, 1996, and
1995, respectively. 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.
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ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations are filed as part of this report and appear immediately following the
signature page.
ITEM 7: FINANCIAL STATEMENTS.
The Company's financial statements are filed as a part of this report and appear
immediately following the Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth information concerning the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Company
---- --- -------
<S> <C> <C>
Michael R. Stanford (1) 45 President, Chief Executive Officer, and Director
H. Patrick Dee 43 Executive Vice President, Chief Operating Officer,
Secretary, Treasurer, and Director
Brian C. Reinhardt 39 Senior Vice President and Chief Financial Officer
Eloy A. Jeantete (1) 70 Chairman of the Board and Director
Leonard J. DeLayo, Jr. (3) 49 Director
Bradford M. Johnson (1)(2) 47 Director
Douglas M. Smith, M.D.(1)(2) 64 Director
Herman N. Wisenteiner (1)(3) 67 Director
Marshall G. Martin 59 Director
Kevin L. Reid 37 Director
</TABLE>
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(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Each officer of the Company serves at the discretion of the Board of Directors.
There are no family relationships among any of the directors, officers, or key
employees of the Company. The current authorized number of directors of the
Company is ten.
Michael R. Stanford, a Director of the Company since its organization in 1988,
is President and Chief Executive Officer of the Company and First State Bank.
Mr. Stanford's entire career has been in the banking industry. Prior to joining
the Bank in 1987, Mr. Stanford spent five years with New Mexico Banquest
Corporation as Senior Vice President in charge of loan administration. Mr.
Stanford is a past director of the New Mexico Bankers Association. In
addition, Mr. Stanford is involved in a variety of civic organizations.
H. Patrick Dee has been a Director of the Company since 1991 and presently
serves as Executive Vice President, Chief Operating Officer, and
Secretary/Treasurer of the Company, and Executive Vice President and Chief
Operating Officer of the Bank, a position he has held since December 1991. Prior
to joining the Company,
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Mr. Dee spent four years with New Mexico Banquest Corporation and, after its
acquisition by Livingston & Co. Southwest L.P. in 1988, with NBA. In 1989, Mr.
Dee became Senior Vice President and Chief Financial Officer of Livingston & Co.
Southwest, L.P. Mr. Dee is a certified public accountant.
Brian C. Reinhardt, a Senior Vice President and Chief Financial Officer of the
Company since 1995, joined the Bank in September 1994. Prior to joining the
Bank, Mr. Reinhardt was a Senior Manager with KPMG Peat Marwick LLP. Mr.
Reinhardt joined KPMG Peat Marwick LLP in 1984.
Eloy A. Jeantete, a Director of the Company since August 1993 and Chairman of
the Board since January 1994, joined the Bank 50 years ago as a bookkeeper and
has spent his entire working career with the Bank rising to his present position
of Chairman of the Board of the Company. As a lifetime resident of Taos, N.M.,
Mr. Jeantete has accumulated a long list of civic achievements and community
involvement, culminating with his election in 1990 as Mayor of Taos, New Mexico,
a position he held until March 1994.
Leonard J. DeLayo, Jr., a Director of the Company since November 1993, served as
a director of First State Bank from 1988 to January 1992. Mr. DeLayo has been
engaged in a general corporate and commercial law practice in New Mexico since
1974 and is the President and sole shareholder of Leonard J. DeLayo, Jr., P.C.,
which currently provides legal services to the Company and the Bank as outside
counsel. Mr. DeLayo is President of the Albuquerque Board of Education. See
"Certain Business Relationships--Legal Services."
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 of Paris-
Sorbonne from 1987 to 1991.
Douglas M. Smith, M.D., a Director of the Company since November 1993, is a
Board Certified radiologist and the owner/general partner of The Historic Taos
Inn, Taos, New Mexico. Dr. Smith is the co-founder and former President of
Palm Beach Imaging, Inc., West Palm Beach, Florida, and a former member of the
Board of Directors of the PIE Medical Insurance Co., a physician-owned medical
malpractice insurance company headquartered in Cleveland, Ohio.
Herman N. Wisenteiner, a Director of the Company since November 1993, is
President and Chief Executive Officer of Horn Distributing Company, a real
estate holding company which he founded in 1971 in Santa Fe, New Mexico. In
addition to his many civic activities in northern New Mexico, from 1984 to 1993
Mr. Wisenteiner was also Chairman and Chief Executive Officer of CLX Exploration
Inc., a publicly traded oil and natural gas exploration and production company
headquartered in Denver, Colorado and served as a Director of First Interstate
Bank, Santa Fe, New Mexico from 1980 to 1993. See "Certain Business
Relationships--Santa Fe Branch Location."
Marshall G. Martin, a Director of the Company since June 1997, is a senior
partner with the law firm of Hinkle, Cox, Eaton, Coffield & Hensley L.L.P., a
position he has held since June 1997, and prior to January of 1997. For the
period from January 1997 through June 1997 Mr. Martin was Vice President-General
Counsel of Solv-Ex Corporation (On August 1, 1997, Solv-Ex Corporation filed a
Chapter 11 petition in bankruptcy). Hinkle, Cox, Eaton, Coffield & Hensley
L.L.P., is the Company's corporate counsel. See "Certain Business
Relationships--Legal Services." Mr. Martin is involved in a variety of civic
organizations.
Kevin L. Reid, was appointed by the Board of Directors to fill a vacancy created
by the resignation of Manuel Lujan, Jr. Mr. Reid will complete the term created
by that resignation which runs until the 1999 annual meeting. Mr. Reid is
President and Owner of Reid & Associates, a design/build construction company,
a position he has held since 1997, when he assumed the presidency of Reid &
Elliott and changed the name of the Company to Reid & Associates. Mr. Reid co-
founded Reid and Elliott in 1991.
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Committees. The Board of Directors has an Executive Committee, an Audit
Committee and a Compensation Committee. The members of the Audit Committee and
Compensation Committee are outside directors.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors, and persons who own more than 10% of a registered class of
the Company's equity securities and certain other affiliated persons to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. Officers,
directors, and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no other forms were required, the Company believes
that during the fiscal year ended December 31, 1997, all Section 16(a) filing
requirements applicable to its officers, directors, and greater than 10%
beneficial owners were complied with.
ITEM 10: EXECUTIVE COMPENSATION.
The following tables set forth the compensation paid by the Company to the two
executive officers of the Company and one officer of the bank subsidiary who
received in excess of $100,000 in cash compensation.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Stock
Name and -----------------------------------------
Principal Position Year Salary ($) Bonus ($) Other ($)(1) Options Granted (#)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael R. Stanford 1997 $220,833 -- $50,405 20,000
President and Chief 1996 $183,333 $ 24,000 $41,621 0
Executive Officer 1995 $175,000 $ 45,000 $42,636 0
H. Patrick Dee 1997 $154,583 -- $46,097 10,000
Secretary and 1996 $130,000 $ 16,000 $42,836 0
Treasurer 1995 $116,250 $ 30,000 $39,369 0
W. Gary Millhollon
Senior Vice President
Bank Subsidiary 1997 $ 70,000 $126,874 $ 8,100 0
Leasing division 1996 $ 86,575 $ 20,830 $ 6,000 0
- -----------------------------
</TABLE>
(1) Represents insurance premiums paid by the Company on behalf of the
employee, amounts contributed by the Company to the employee's Section
401(k) plan, auto allowance, and dues.
Aggregated Option Exercises in Fiscal Year
------------------------------------------
and Fiscal Year-End Options Value
---------------------------------
<TABLE>
<CAPTION>
Number of
Unexercised Options Value of In-the-Money
Shares Value at 12/31/97 (#) Options at 12/31/97
Acquired on Realized Exercisable/ ($) (1) Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael R. Stanford 43,500 $470,253 73,112 $935,643
16,000 $ 66,000
H. Patrick Dee -- -- 45,750 $575,906
8,000 $ 33,000
- ---------------------
</TABLE>
(1) The closing price of the Company's Common Stock on December 31, 1997, was
$21.375 per share.
12
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
[Individual Grants]
- -------------------------------------------------------------------------------------
Percent of total
Number of options/SARs
securities granted to
underlying employees in Exercise or
Name options/SARs fiscal year base Expiration
granted (#)(1) price ($/Sh) date
- ------------------- -------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Michael R. Stanford 20,000 17.48% $17.25 7/25/2007
H. Patrick Dee 10,000 8.74% $17.25 7/25/2007
</TABLE>
- ------------
(1) The closing market price for the Company's Common Stock on July 25, 1997,
the date the Board granted the stock options, approximately 80% of which are
subject to stockholder ratification, was $17.25 per share. Since that date, the
market price of the Company's Common Stock underlying the options has increased.
On December 31, 1997, the closing price for the Company's Common Stock was
$21.38.
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
$695,662 of term life insurance on Mr. Stanford and $428,545 of term life
insurance on Mr. Dee (the "Term Life Policies"). In addition, First State Bank
also pays the premiums on $804,338 of additional whole life insurance for Mr.
Stanford and $771,455 for Mr. Dee under which each of these individuals is able
to name the beneficiary (the "Whole Life Policies"). Under the provisions of the
Term Life Policies the amount of term insurance under each policy is gradually
decreased over a period of 10 years. However, First State Bank's premium
payments are kept level during the entire 10 year period with the excess
premiums from the Term Life Policies being applied to the Whole Life Policies.
As a result of the increasing portion of the premiums which are allocated to the
Whole Life Policies, at the end of the 10 year period the Whole Life Policies
are fully paid. Upon termination of employment, the Whole Life Policies would be
transferable to Messrs. Stanford or Dee, as the case may be, who could elect to
continue making the premium payment if such termination occurred prior to the
tenth year of the policy. The annual premium which will be paid for the Whole
Life Policies will constitute compensation to such individuals.
STOCK OPTION AGREEMENT
Under the terms of a stock option agreement, Michael R. Stanford can exercise an
option to purchase 6,612 shares of Common Stock at a price of $5.01 per share.
As originally granted, the option allowed Mr. Stanford to purchase up to 10% of
the common stock of New Mexico Bank Corporation ("NMBC"), the parent holding
company of NBA, at the book value of the NMBC common stock as of November 19,
1990. In December 1991, the option was converted to an option to purchase the
Company's Common Stock when NMBC was merged into the Company. The option may be
exercised at any time by Mr. Stanford and will expire on October 12, 2003.
EXECUTIVE INCOME PROTECTION PLAN
The Company has an Executive Income Protection Plan (the "Plan") with the
following participants: Patrick G. Cahalan, H. Patrick Dee, Brian C.
Reinhardt, and Michael R. Stanford, which provides for benefits upon a Control
Change. Following a Control Change (as defined in the Plan), the Plan provides
for a three-year employment term and specifies the employee's position, salary,
bonus, and benefits payable during that period. If the employee (i) resigns;
(ii) is discharged for any reason other than cause, death, or disability; (iii)
experiences a Reduction in Position (as defined in the Plan) within a three-year
period beginning on the date of the Control Change, then the employee shall have
income protection benefits consisting of (a) a compensation benefit, payable in
a single sum, equal to three times his Compensation (as defined in the Plan) in
the case of Messrs. Dee and Stanford and two times his Compensation in the case
of Messrs. Cahalan 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
13
<PAGE>
the last valuation date under such plans, if the employee is not fully vested
under the terms of such plans; (d) up to a maximum of 30 percent of his
Compensation for out-placement services for the employee; and (e) a lump sum
payment at the same time as the compensation payment described in (a) above, if
the Company has purchased a split-dollar life insurance policy on the life of an
employee.
"Control Change" is defined in the Plan as (i) a sale or sales (including an
exchange) of shares of the Company, other than pursuant to a public offering, at
one or more times by the Company, a stockholder or stockholders of the Company,
or by any combination of the foregoing, which in the aggregate results in the
beneficial ownership of more than 50% of the combined voting power of the
Company's outstanding securities after the sale or sales by one or more
stockholders who were not stockholders of the Company on April 19, 1996 (the
effective date of the Plan), and who were not controlled after the sale or
sales, directly or indirectly, by one or more of the stockholders of the Company
on April 19, 1996; (ii) a sale or sales by the Company of all or substantially
all of its assets to one or more persons or entities who were not stockholders
of the Company on April 19, 1996, and who are not controlled after the sale or
sales, directly or indirectly, by one or more of such stockholders; or (iii) a
merger or other combination in which the Company is either the surviving or
disappearing corporation, which results in the beneficial ownership of more than
50% of the combined voting power of the outstanding securities of the surviving
corporation by one or more persons or entities which were not stockholders of
the Company on April 19, 1996, and which are not controlled after such merger or
other combination, directly or indirectly, by one or more of such stockholders;
(iv) the approval by the stockholders of the Company of any plan or proposal to
liquidate or dissolve the Company; or (v) during any period of two consecutive
years, individuals who at the beginning of the period constitute the entire
Board of Directors of the Company cease for any reason to constitute a majority
thereof, unless the election or the nomination for election by the Company's
stockholders of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
"Compensation" means the sum of; (i) the employee's average taxable compensation
from the Company; (ii) the employee's average elective salary reduction
contributions to plans under Internal Revenue Code (the "Code") Sections 401(k)
and/or 125; and (iii) the product of the average 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; (vi)
experiences a material adverse change in his terms and conditions of employment.
The Plan provides that the employees will be entitled to a gross-up payment if
it is determined that any payment would be subject to the excise tax imposed by
Section 4999 of the Code. The Plan also provides for the Company to pay the
employee's legal fees incurred in any contest relating to the Plan and certain
other indemnifications to the extent permitted under applicable New Mexico or
federal law and under the Company's Bylaws and Articles of Incorporation.
The aggregate cost to the Company of the requirements for payments to employees
covered under the Plan (including the cost of early vesting under employee
plans) would not exceed $2.5 million.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company (the "Outside Directors")
is paid an annual fee of $3,000 and a per meeting fee of $500 and will be
reimbursed for expenses incurred in attending meetings of the Board of Directors
and the committee meetings of the Board of Directors.
14
<PAGE>
SECTION 401(k) PLAN
In 1991 the Company adopted a tax-qualified profit sharing 401(k) plan (the
"Saving Plan") covering all employees who have attained 21 years of age and have
completed one year of service with the Company. Each participant in the Saving
Plan may reduce his or her salary by as much as the lesser of 20% of his or her
compensation or $9,500, in 1997. 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 1997, 1996, and
1995, First State Bank made contributions to the Saving Plan of $125,000,
$106,000, and $70,000, 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
Effective October 5, 1993, the Company adopted the First State Bancorporation
1993 Stock Option Plan (the "Stock Option Plan"), which provides for the
granting of options to purchase up to 225,000 shares of the Company's common
stock. Exercise dates and prices for the options are set by a committee of the
Board of Directors. The Stock Option Plan also provides that options other than
those qualifying as incentive stock options may be granted. On July 25, 1997,
the Board of Directors approved increasing the number of options available for
grant by 175,000. This action must be approved by a vote of the common
stockholders before grant of those options becomes effective. On July 25, 1997,
the Board of Directors granted 113,400 options at a price of $17.25 per share;
90,720 of these options are subject to stockholder approval of the increase in
number of options available for grant. Vesting of these options is 20 percent at
the date of grant and 20 percent per year thereafter until fully vested.
The Stock Option Plan is administered by a committee composed of disinterested
members of the Board of Directors (the "Committee"). Subject to the terms of
the Stock Option Plan, the Committee determines the persons to whom awards are
granted, the type of award granted, the number of shares granted, the vesting
schedule, the type of consideration to be paid to the Company upon exercise of
options, and the term of each option (not to exceed ten years).
Under the Stock Option Plan, the Company may grant both incentive stock options
("incentive stock options") intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and options which are
not qualified as incentive stock options ("nonqualified stock options").
Incentive stock options must be granted at an exercise price equal to or greater
than the fair market value of the Common Stock on the date of grant. The
exercise price of nonqualified stock options granted under the Stock Option Plan
will be determined by the Committee on the date of grant. The exercise price of
incentive stock options granted to holders of more than 10% of the Common Stock
must be at least 110% of the fair market value of the Common Stock on the date
of grant, and the term of these options may not exceed five years.
The Stock Option Plan provides that the total number of shares covered by the
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.
15
<PAGE>
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.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 11, 1998, by (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director of the Company, and (iii) all
directors and executive officers as a group. Unless otherwise indicated, based
on information furnished by such owners, the Company believes that the
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, 7900 Jefferson N.E., Albuquerque, New Mexico 87109.
<TABLE>
<CAPTION>
Name Number of Shares Owned (1) Percentage of Shares Owned
- --------------------------------------------------------------------------------------
<S> <C> <C>
Financial Stocks, Inc.
507 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202 174,134 6.73%
John Hancock Advisors, Inc.
101 Humington Avenue
Boston, MA 02199 190,125 7.35%
First Union Corporation
One First Union Center
Charlottee, NC 28288-0137 144,261 5.58%
Michael R. Stanford 100,522(2) 3.79%
H. Patrick Dee 59,801(3) 2.26%
Eloy A. Jeantete 1,000 *
Leonard J. DeLayo, Jr. 86,893(4) 3.34%
Bradford M. Johnson 164,008 6.34%
Douglas M. Smith, M.D. 23,750 *
Herman N. Wisenteiner 9,562 *
Marshall G. Martin 350 *
Kevin L. Reid -- --
All executive officers and
directors as a group (12 494,314 17.97%
persons)
- -----------------------------
</TABLE>
* Less than 1%
(1) Includes shares of Common Stock issuable on conversion of 7.5% Convertible
Debentures.
(2) Includes 6,612 shares that are subject to an option exercisable at $5.01
per share, 62,500 shares that are subject to an option which is exercisable
at $8.40 per share, and 4,000 shares that are subject to an option
exercisable at $17.25 per share.
(3) Includes 43,750 shares that are subject to an option which is exercisable
at $8.40 per share, and 2,000 shares that are subject to an option
exercisable at $17.25 per share.
(4) Includes 12,500 shares that are subject to an option which is exercisable
at $8.40 per share.
16
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CREDIT TRANSACTIONS
The executive officers, directors and principal stockholders of the Company and
the Bank, and members of their immediate families and businesses in which these
individuals hold controlling interests, are customers of the Bank and it is
anticipated that such parties will continue to be customers of the Bank in the
future. Credit transactions with these parties are subject to review by the
Bank's Board of Directors. All outstanding loans and extensions of credit by
the Bank to these parties were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and in
the opinion of management did not involve more than the normal risk of
collectability or present other unfavorable features. At December 31, 1997, the
aggregate balance of the Bank's loans and advances under existing lines of
credit to these parties was $1,180,868, or 0.41% of the Bank's total loans. All
payments of principal and interest on these loans are current. These loans
represented 4.26% of the Company's equity as of December 31, 1997.
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 $205,000,
$146,000, and $187,000 for its services in 1997, 1996 and 1995.
Marshall G. Martin was elected to the Board as a director in June 1997. Mr
Martin is a partner in the firm of Hinkle, Cox, Eaton, Coffield & Hensley,
L.L.P., which serves as the Company's corporate counsel. The Company paid
Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., approximately $85,000 for its
services in 1997.
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. Lease payments made to Mr.
Wisenteiner were $61,800 for 1997 and $60,000 in 1996, respectively. In the
opinion of management, the lease is on terms similar to other third-party
commercial transactions in the ordinary course of business.
17
<PAGE>
ITEM 13(a): EXHIBITS.
Exhibit
<TABLE>
<CAPTION>
Number Description of Exhibits
- -------- --------------------------
<S> <C>
3.1 Restated Articles of Incorporation of First State Bancorporation (1)
3.2 Articles of Amendment to the Restated Articles of Incorporation of
First State Bancorporation.(5)
3.3 Bylaws of First State Bancorporation. (5)
4.1 Shareholder Protection Rights Agreement dated October 25, 1996. (3)
4.2 Form of Indenture relating to the 7 1/2% Convertible Subordinated
Debentures Due 2017 of First State Bancorporation.
4.3 Specimen Convertible Subordinated Debenture (found at Article II of
the Form of Indenture filed as Exhibit 4.2.)
10.1 Stock Option Plan of the Company (2)
10.2 Stock Option Agreement with Michael R. Stanford (2)
10.3 Executive Income Protection Plan (4)
22 Subsidiaries of the Small Business Issuer (1)
23 Consent of KPMG Peat Marwick L.L.P. (5)
27 Financial Data Schedule (5)
____________________
</TABLE>
(1) Incorporated by reference from the Company's Registration Statement on Form
S-2, Commission File No. 333-24417, declared effective April 25, 1997.
(2) Incorporated by reference from the Company's Registration Statement on Form
SB-2, November 3, 1993. Commission File No. 33-68166, declared effective
(3) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended September 30, 1996.
(4) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended June 30, 1996.
(5) Filed Herewith
ITEM 13(b): REPORTS ON FORM 8-K.
None
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST STATE BANCORPORATION
By: Michael R. Stanford
-------------------------------
Michael R. Stanford, President
In accordance with the Exchange Act, this report has been signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------------------------------------------------------------------------------------
<S> <C> <C>
President and Chief Executive Officer
Michael R. Stanford and a Director (Principal Executive Officer) March 19, 1998
- ------------------------ ----------------
Michael R. Stanford
Eloy A. Jeantete Director March 19, 1998
- ------------------------ ----------------
Eloy A. Jeantete
Leonard J. DeLayo, Jr. Director March 19, 1998
- ------------------------ ----------------
Leonard J. DeLayo, Jr.
Bradford M. Johnson Director March 19, 1998
- ------------------------ ----------------
Bradford M. Johnson
Douglas M. Smith, M.D. Director March 19, 1998
- ------------------------ ----------------
Douglas M. Smith, M.D.
Herman N. Wisenteiner Director March 19, 1998
- ------------------------ ----------------
Herman N. Wisenteiner
H. Patrick Dee Secretary, Treasurer and a Director March 19, 1998
- ------------------------ ----------------
H. Patrick Dee
Brian C. Reinhardt Senior Vice President and CFO March 19, 1998
- ------------------------ ----------------
Brian C. Reinhardt
Marshall G. Martin Director March 19, 1998
- ------------------------ ----------------
Marshall G. Martin
Kevin L. Reid Director March 19, 1998
- ------------------------ ----------------
Kevin L. Reid
</TABLE>
19
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Financial Highlights...................................................... 1
Management's Discussion and Analysis of Financial Condition and Results 2
of Operations............................................................
Independent Auditors' Report.............................................. 13
Consolidated Balance Sheets as of December 31, 1997, and 1996............. 14
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996, and 1995..................................................... 15
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995........................................ 16
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996, and 1995..................................................... 17
Notes to Consolidated Financial Statements................................ 18
<PAGE>
<TABLE>
<CAPTION> FINANCIAL HIGHLIGHTS
Years ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest Income $ 31,765 $ 25,681 $ 20,692 $ 15,623 $ 10,922
Interest expense 12,272 9,617 7,385 4,666 3,341
---------- ---------- ---------- ---------- ----------
Net interest income 19,493 16,064 13,307 10,957 7,581
Provision for loan and lease losses 1,537 1,231 418 248 267
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan and lease
losses 17,956 14,833 12,889 10,709 7,314
Net gain (loss) on call or sale of securities -- 10 (19) (3) 12
Other noninterest income 4,474 2,924 1,702 1,708 1,192
Loss from credit card processing operation -- -- (1,208) (158) --
Noninterest expense 17,426 14,590 10,926 9,615 6,723
---------- ---------- ---------- ---------- ----------
Income before income taxes and minority interest 5,004 3,177 2,438 2,641 1,795
Income tax expense (benefit) 1,674 1,116 763 240 (17)
---------- ---------- ---------- ---------- ----------
Income before minority interest 3,330 2,061 1,675 2,401 1,812
Minority interest -- -- -- (10) (1)
---------- ---------- ---------- ---------- ----------
Net income $ 3,330 $ 2,061 $ 1,675 $ 2,391 $ 1,811
========== ========== ========== ========== ==========
PER SHARE DATA:
Net income per diluted share $ 1.21 $ 0.90 $ 0.78 $ 1.06 $ 1.21
Book Value 10.73 9.69 8.88 8.04 6.97
Tangible book value 10.40 9.26 8.27 7.50 6.27
Dividends paid 0.210 0.200 0.154 0.064 --
Market price end of period 21.375 15.000 12.125 9.600 9.600
Average diluted common shares outstanding 3,203,084 2,605,282 2,570,231 2,569,051 1,537,573
AVERAGE BALANCE SHEET DATA:
Total assets $ 361,970 $ 285,628 $ 229,382 $ 186,886 $ 140,083
Loans and leases 272,816 218,776 164,172 133,685 102,974
Investment securities 48,795 35,611 34,250 32,211 21,642
Federal funds sold 5,500 2,770 6,717 3,842 3,954
Deposits 309,767 242,366 195,079 160,226 126,989
Stockholders' equity 24,683 18,313 16,817 14,723 9,031
PERFORMANCE RATIOS:
Return on average assets 0.92% 0.72% 0.73% 1.28% 1.29%
Return on average common equity 13.49 11.25 9.96 16.24 20.05
Net interest margin 5.96 6.25 6.49 6.46 5.89
Efficiency ratio 72.71 76.84 72.80 76.00 76.64
Earnings to fixed charges:
Including interest on deposits 1.40x 1.33x 1.49x 1.60x 1.54x
Excluding interest on deposits 4.30 3.56 4.76 5.34 11.20
ASSET QUALITY RATIOS:
Nonperforming assets to total loans, leases and other
real estate owned 1.57% 1.17% 1.60% 1.17% 1.99%
Net charge-offs to average loans and leases 0.28 0.26 0.02 0.17 0.25
Allowance for loan and lease losses to total loans 1.14 1.00 1.01 0.98 1.18
Allowance for loan and lease losses to
nonperforming loans 101.52 153.52 81.58 290.12 201.26
CAPITAL RATIOS:
Leverage ratio 6.65% 6.17% 6.55% 7.06% 7.21%
Average stockholders' equity to average total assets 6.82 6.41 7.33 7.88 6.45
Tier 1 risk-based capital ratio 8.30 7.40 7.80 9.04 9.83
Total risk-based capital ratio 13.38 8.30 8.70 9.90 10.96
</TABLE>
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
GENERAL
The Company's net income increased to $3.3 million in 1997, from $2.1 million
in 1996, and $1.7 million in 1995. The increase in net income was primarily due
to an increase in net interest income to $19.5 million in 1997, from $16.1
million in 1996, and $13.3 million in 1995, which was primarily the result of an
increase in average loans to $272.8 million, $218.8 million, and $164.2 million
at December 31, 1997, 1996, and 1995, respectively. The increase in net interest
income was partially offset by increases in non-interest expense to $17.4
million in 1997, from $14.6 million in 1996, and $10.9 million in 1995. The
increases in net interest income and non-interest expense resulted primarily
from the Company's expansion efforts since its initial public offering in 1993.
Total assets have grown to $401.0 million in 1997, from $325.0 million in 1996.
Total deposits have grown to $345.6 million in 1997, from $277.4 million in
1996.
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, 1997, 1996,
and 1995, the Company's average interest-earning assets were $327.1 million,
$257.2 million, and $205.1 million, respectively. For the same periods, the
Company's net interest margins were 5.96%, 6.25%, and 6.49%.
During the years ended December 31, 1997, 1996, and 1995, the Company's net
interest income increased by $3.4 million to $19.5 million or 21.12% in 1997
from 16.1 million in 1996, which was an increase of $2.8 million or 21.05% from
$13.3 million in 1995. These increases were due to a $54.0 million or 24.68%
increase in average loans to $272.8 million in 1997 from $218.8 million in 1996,
a $54.6 million or 33.25% increase from $164.2 million in 1995. This increase
in volume was partially offset by a decrease in the average yield on earning
assets and the increase in investment securities as a percentage of total
assets. The Company's average yield on earning assets decreased to 9.71% in
1997, from 9.99% in 1996, and 10.09% in 1995. The decrease in average yield was
due principally to decreased average rates on both real estate-mortgage and
construction loans, which was due to reduced loan fees resulting from increased
competition for these products in the Company's market area. Management
anticipates that such pressures will continue in 1998.
The following tables set forth, for the periods indicated, information with
respect 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. Non-accruing loans have been included in the table as
loans carrying a zero yield.
2
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------ ------------------------------- --------------------
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
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Loans and leases:
Commercial..................... $ 41,771 4,230 10.13% $ 31,164 $ 3,152 10.11% $ 18,503 $ 1,885 10.19%
Real estate--mortgage.......... 152,387 15,487 10.16 130,347 13,500 10.36 99,566 10,552 10.60
Real estate--construction...... 40,603 4,830 11.90 36,320 4,533 12.48 37,235 4,918 13.21
Consumer....................... 14,789 1,748 11.82 12,017 1,413 11.76 8,535 907 10.63
Leases......................... 22,868 2,133 9.33 8,607 725 8.42 -- -- --
Other.......................... 398 -- -- 321 -- -- 333 -- --
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans and leases........ 272,816 28,428 10.42 218,776 23,323 10.66 164,172 18,262 11.12
Allowance for loan and lease
losses......................... (2,981) (2,181) (1,636)
Securities:
U.S. government................ 43,860 2,758 6.29 30,656 1,916 6.25 30,925 1,850 5.98
State and political
subdivisions:
Nontaxable.................... 3,196 172 5.38 3,607 198 5.49 2,293 136 5.93
Taxable....................... 26 2 7.69 35 3 8.57 145 13 8.97
Other......................... 1,713 105 6.13 1,313 96 7.31 887 45 5.07
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total securities............. 48,795 3,037 6.22 35,611 2,213 6.21 34,250 2,044 5.97
Federal funds sold.............. 5,500 300 5.45 2,770 145 5.23 6,717 387 5.76
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning
assets...................... 327,111 31,765 9.71% 257,157 25,681 9.99% 205,139 20,693 10.09%
Noninterest-earning assets:
Cash and due from banks........ 16,066 13,158 12,004
Other ......................... 21,774 17,494 13,875
-------- -------- --------
Total noninterest-earning 37,840 30,652 25,879
assets........................ -------- -------- --------
Total assets................. $361,970 $285,628 $229,382
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Interest-bearing demand
accounts...................... $ 47,175 1,150 2.44% $ 46,737 $ 1,097 2.35% $ 45,752 $ 1,224 2.68%
Certificates of deposit........ 133,105 7,466 5.61 102,078 5,777 5.66 72,681 4,015 5.52
Money market savings accounts.. 51,881 1,584 3.05 31,210 1,023 3.28 23,375 758 3.24
Regular savings accounts....... 18,902 558 2.95 16,174 478 2.96 14,544 418 2.87
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
deposits..................... 251,063 10,758 4.28 196,199 8,375 4.27 156,352 6,415 4.10
Short-term borrowings........... 13,537 661 4.88 17,006 855 5.03 9,804 536 5.47
Notes payable................... 916 83 9.06 226 19 8.41 240 18 7.50
Convertible subordinated debt... 10,432 766 7.34 5,500 362 6.58 5,750 405 7.04
Capital leases.................. 42 4 9.52 60 5 8.33 100 12 12.00
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities.................. 275,990 12,272 4.45% 218,991 9,616 4.39% 172,246 7,386 4.29%
Noninterest-bearing demand
accounts....................... 58,704 46,167 38,727
Other noninterest-bearing 2,593 2,157 1,592
liabilities.................... -------- -------- --------
Total liabilities............. 337,287 267,315 212,565
Stockholders' equity............ 24,683 18,313 16,817
-------- -------- --------
Total liabilities and
stockholders' equity........... $361,970 $285,628 $229,382
======== ------- ======== ------- ======== -------
Net interest income............. $19,493 $16,065 $13,307
======= ======= =======
Net interest spread............. 5.26% 5.60% 5.80%
Net interest margin............. 5.96 6.25 6.49
Ratio of average
interest-earning assets
to average interest-bearing
liabilities.................... 118.52 117.43 119.10
</TABLE>
Loan fees of $1.9 million, $1.9 million, and $1.7 million, are included in
interest income for the years ended December 31, 1997, 1996, and 1995,
respectively.
3
<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 volume.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 VS. 1996 1996 VS. 1995
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
------------------------ -------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------ ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Loans and leases:
Commercial ....................................... $1,073 $ 5 $1,078 $1,290 $ (23) $1,267
Real estate--mortgage ............................ 2,283 (296) 1,987 3,262 (314) 2,948
Real estate--construction ........................ 535 (238) 297 (121) (264) (385)
Consumer ......................................... 326 9 335 370 136 506
Leases ............................................ 1,201 207 1,408 725 -- 725
------ ----- ------ ------ ----- ------
Total loans and leases ........................ 5,418 (313) 5,105 5,526 (465) 5,061
Securities:
U.S. government .................................. 825 17 842 (16) 82 66
States and political subdivisions:
Nontaxable .................................... (23) (3) (26) 78 (16) 62
Taxable ....................................... (1) -- (1) (10) -- (10)
Other ............................................ 29 (20) 9 22 29 51
------ ----- ------ ------ ----- ------
Total securities .............................. 830 (6) 824 74 95 169
Federal funds sold ............................... 143 12 155 (227) (15) (242)
------ ----- ------ ------ ----- ------
Total interest-earning assets ................. 6,391 (307) 6,084 5,373 (385) 4,988
------ ----- ------ ------ ----- ------
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand accounts ................. 10 43 53 26 (153) (127)
Certificates of deposit .......................... 1,756 (67) 1,689 1,624 139 1,763
Money market savings accounts .................... 678 (117) 561 254 11 265
Regular savings accounts ......................... 81 (1) 80 47 13 60
------ ----- ------ ------ ----- ------
Total interest-bearing deposits ............... 2,525 (142) 2,383 1,951 10 1,961
Short-term borrowings .............................. (174) (20) (194) 394 (75) 319
Notes payable ...................................... 58 6 64 (1) 2 1
Convertible subordinated debt ...................... 325 79 404 (18) (25) (43)
Capital leases ..................................... (1) -- (1) (5) (2) (7)
------ ----- ------ ------ ----- ------
Total interest-bearing liabilities ............ 2,733 (77) 2,656 2,321 (90) 2,231
------ ----- ------ ------ ----- ------
Total increase (decrease) in net interest
income ....................................... $3,658 $(230) $3,428 $3,052 $ (295) $2,757
====== ===== ====== ====== ===== ======
</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 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 generates a net interest margin that is least
affected by interest rate changes.
4
<PAGE>
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, 1997, the
Company's cumulative interest rate gap for the period up to three months was a
positive $24.8 million and for the period up to one year was a positive $3.5
million. Based solely on the Company's interest rate gap of twelve months or
less, net income of the Company could be favorably impacted by an increase in
interest rates or unfavorably 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, 1997. 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
MONTHS TO
LESS THAN LESS THAN
THREE ONE ONE TO FIVE OVER FIVE
MONTHS YEAR YEARS YEARS TOTAL
---------- ---------- ------------ ---------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Investment securities ................................ $ 12,393 $ 7,422 $35,856 $ 5,838 $ 61,509
Fed funds sold ....................................... 11,000 -- -- -- 11,000
Loans and leases:
Commercial ........................................ 32,970 4,774 7,192 544 45,480
Real estate ....................................... 146,267 30,598 15,320 3,308 195,493
Consumer .......................................... 4,290 5,155 7,187 177 16,809
Leases ............................................ 1,139 3,681 25,767 -- 30,587
-------- --------- ------- -------- --------
Total interest-earning assets .................. 208,059 51,630 91,322 9,867 360,878
-------- --------- ------- -------- --------
Interest-bearing liabilities:
Savings and NOW accounts ............................. 138,021 -- -- -- 138,021
Certificates of deposits of $100,000 or more ......... 11,710 33,096 10,960 -- 55,766
Other time accounts .................................. 23,408 39,880 15,695 47 79,030
Subordinated debentures .............................. -- -- -- 15,070 15,070
Other interest-bearing liabilities ................... 10,105 -- -- -- 10,105
-------- --------- ------- -------- --------
Total interest-bearing liabilities ............. 83,244 72,976 26,655 15,117 297,992
-------- --------- ------- -------- --------
Interest rate gap ...................................... $ 24,815 ($21,346) $64,667 ($5,250) $ 62,886
======== ========= ======= ======== ========
Cumulative interest rate gap at December 31, 1997 ...... $ 24,815 $ 3,469 $68,136 $ 62,886
======== ========= ======= ========
Cumulative gap ratio at December 31, 1997 .............. 1.14% 1.01% 1.24% 1.21%
</TABLE>
5
<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, 1997, 1996, and 1995,
the market value of the Company's investment portfolio exceeded the carrying
value by approximately $56,000, $50,000, and $174,000, respectively.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1997 1996 1995
---------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities ............................ $12,986 $ 9,789 $ 5,667
U.S. government agency securities ................... 43,442 25,994 28,118
Obligations of states and political subdivisions .... 3,145 3,271 4,004
Other securities .................................... 1,936 1,542 887
------- ------- -------
Total investment securities ...................... $61,509 $40,596 $38,676
======= ======= =======
</TABLE>
The table below provides the carrying values, maturities and weighted average
yield of the investment portfolio of the Company as of December 31, 1997.
<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 ..................................... $ 7,873 0.46 5.90%
After one through five years ......................... 5,113 1.49 6.13
------- ----- ----
Total U.S. Treasury securities .................... 12,986 0.87 5.99
U.S. government agency securities
One year or less ..................................... 11,942 0.12 5.59
After one through five years ......................... 29,502 3.65 6.38
After five through ten years ......................... 999 7.96 7.06
After ten years ...................................... 999 13.16 7.26
------- ----- ----
Total U.S. government agency securities ........... 43,442 3.00 6.20
Obligations of states and political subdivisions
One year or less ..................................... -- -- --
After one through five years ......................... 1,241 3.00 5.42
After five through ten years ......................... 799 7.47 5.57
After ten years ...................................... 1,105 14.71 5.13
------- ----- ----
Total states and political subdivisions securities.. 3,145 8.25 5.36
Other securities ........................................ 1,936 -- 6.12
------- ----- ----
Total investment securities ....................... $61,509 2.81 6.09%
======= ===== ====
</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,
-----------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ --------
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 ................... $ 45,480 15.8% $ 36,578 14.6% $ 23,204 12.6% $ 21,711 14.5% $ 27,878 22.9%
Real estate--mortgage ........ 153,550 53.3 148,715 59.3 115,640 62.9 80,293 53.5 50,102 41.1
Real estate--construction .... 41,943 14.5 35,737 14.2 34,924 19.0 39,372 26.3 29,833 24.5
Consumer and other ........... 16,809 5.8 13,238 5.3 10,091 5.5 8,632 5.7 14,210 11.5
Leases ....................... 30,587 10.6 16,658 6.6 -- -- -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans and leases........ $288,369 100% $250,926 100% $183,859 100% $150,008 100% $122,023 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
6
<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,
1997. Actual maturities may differ from the contractual maturities shown as a
result of renewals and prepayments.
<TABLE>
<CAPTION> AS OF DECEMBER 31,
-----------------------------------------
ONE TO OVER
LESS THAN FIVE FIVE
ONE YEAR YEARS YEARS TOTAL
--------- ------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-rate loans and leases:
Commercial .............................. $ 8,617 $ 7,189 $ 544 $ 16,350
Real estate ............................. 4,543 12,585 3,255 20,383
Consumer ................................ 5,103 6,376 177 11,656
Leases ................................. 4,820 25,767 -- 30,587
-------- ------- ------ --------
Total fixed-rate loans and leases .... 23,083 51,917 3,976 78,976
Variable-rate loans:
Commercial .............................. 29,127 3 -- 29,130
Real estate ............................. 172,322 2,735 53 175,110
Consumer ................................ 4,342 811 -- 5,153
-------- ------- ------ --------
Total variable-rate loans ............ 205,791 3,549 53 209,393
-------- ------- ------ --------
Total loans and leases ............... $228,874 $55,466 $4,029 $288,369
======== ======= ====== ========
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets consist of loans and leases past due 90 days or more,
non-accrual loans and leases, restructured loans and leases, and other real
estate owned. The Company generally places a loan on non-accrual status and
ceases accruing interest when loan payment performance is deemed unsatisfactory.
All loans past due 90 days, however, are placed on non-accrual status, unless
the loan is both well collateralized and in the process of collection. Cash
payments received while a loan is classified as non-accrual 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,
------------------
1997 1996 1995 1994 1993
-------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans and leases past due 90 days or more .................. $ 107 $ 689 $ 289 $ 190 $ 64
Non-accrual loans and leases ............................... 3,123 946 1,808 64 --
Restructured loans ......................................... -- -- 172 252 652
------- ------- ------ ------- -------
Total nonperforming loans and leases ..................... 3,230 1,635 2,269 506 716
Other real estate owned .................................... 1,327 1,362 678 1,271 1,746
------- ------- ------ ------- -------
Total nonperforming assets ............................... $ 4,557 $ 2,997 $2,947 $ 1,777 $ 2,462
======= ======= ====== ======= =======
Allowance for loan and lease losses ........................ $ 3,279 2,510 $1,851 1,468 $ 1,441
======= ======= ====== ======= =======
Potential problem assets ................................... $ 3,873 $ -- $ -- $ -- $ --
======= ======= ====== ======= =======
Ratio of total nonperforming assets to total assets ........ 1.14% 0.92% 1.16% 0.87% 1.42%
Ratio of total nonperforming loans and leases to total loans
and leases ................................................ 1.12 0.65 1.23 0.35 0.59
Ratio of allowance for loan and lease losses to total
nonperforming loans and leases ............................ 101.52 153.52 81.58 290.12 201.26
</TABLE>
7
<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,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, beginning of period .... $2,510 $1,851 $1,468 $1,441 $1,120
Charge incident to an acquisition ........................... -- -- -- -- 308
Charge-offs:
Commercial and other ...................................... 462 438 98 388 339
Real estate loans ......................................... 72 70 162 30 15
Consumer loans ............................................ 95 246 85 19 30
Credit cards .............................................. 253 -- -- -- --
Leases .................................................... 90 -- -- -- --
------ ------ ------ ------ ------
Total charge-offs ...................................... 972 754 345 437 384
------ ------ ------ ------ ------
Recoveries:
Commercial and other ...................................... 56 13 197 135 73
Real estate loans ......................................... 35 40 85 43 22
Consumer loans ............................................ 76 129 28 38 35
Credit cards .............................................. 4 -- -- -- --
Leases .................................................... 33 -- -- -- --
------ ------ ------ ------ ------
Total recoveries ....................................... 204 182 310 216 130
------ ------ ------ ------ ------
Net charge-offs ............................................. 768 572 35 221 254
Provision for loan and lease losses ......................... 1,537 1,231 418 248 267
------ ------ ------ ------ ------
Allowance for loan and lease losses, end of period .......... $3,279 $2,510 $1,851 $1,468 $1,441
====== ====== ====== ====== ======
As a percentage of average total loans and leases:
Net charge-offs ........................................... 0.28% 0.26% 0.02% 0.17% 0.25%
Provision for loan and lease losses ....................... 0.56 0.56 0.25 0.19 0.26
Allowance for loan and lease losses ....................... 1.20 1.15 1.13 1.10 1.40
As a percentage of total loans and leases at year-end:
Allowance for loan and lease losses ....................... 1.14 1.00 1.01 0.98 1.18
As a multiple of net charge-offs:
Allowance for loan and lease losses ....................... 4.27 4.39 52.89 6.64 5.67
Income before income taxes and provision for loan
and lease losses ........................................ 8.52 7.71 81.61 13.07 8.12
</TABLE>
8
<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,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
LOANS LOANS LOANS LOANS LOANS
AND AND AND AND AND
LEASES LEASES LEASES LEASES LEASES
TO TO TO TO TO
TOTAL TOTAL TOTAL TOTAL TOTAL
LOANS LOANS LOANS LOANS LOANS
AMOUNT OF AND AMOUNT OF AND AMOUNT OF AND AMOUNT OF AND AMOUNT OF AND
ALLOWANCE LEASES ALLOWANCE LEASES ALLOWANCE LEASES ALLOWANCE LEASES ALLOWANCE LEASES
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and unallocated
portion................... $ 829 15.77% $ 600 14.57% $ 402 12.62% $1,027 14.48% $1,009 22.85%
Real estate................ 1,700 67.79 1,560 73.51 1,269 81.89 294 79.77 288 65.50
Leases ................... 150 10.61 150 6.64 -- -- -- -- -- --
Consumer................... 600 5.83 200 5.28 180 5.49 147 5.75 144 11.65
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for loan
and lease losses........ $3,279 100% $2,510 100% $1,851 100% $1,468 100% $1,441 100%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</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,
----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
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.. $ 47,175 2.44% $ 46,737 2.35% $ 45,752 2.68%
Certificates of deposit........... 133,105 5.61 102,078 5.66 72,681 5.52
Money market savings accounts..... 51,881 3.05 31,210 3.28 23,375 3.24
Regular savings accounts.......... 18,902 2.95 16,174 2.96 14,544 2.87
Noninterest-bearing demand
accounts......................... 58,704 -- 46,167 -- 38,727 --
-------- ---- -------- ---- -------- ----
Total........................... $309,767 4.28% $242,366 4.27% $195,079 4.10%
======== ==== ======== ==== ======== ====
</TABLE>
The following table shows the amount and maturity of certificates of deposit
that had balances of $100,000 or more and the percentage of the total for each
maturity.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Three months or less.......... $11,710 21.00% $11,654 22.09% $ 8,153 28.37%
Three through twelve months... 33,096 59.35 34,764 65.90 15,651 54.48
Over twelve months............ 10,960 19.65 6,333 12.01 4,929 17.15
------- ------ ------- ------ ------- ------
Totals...................... $55,766 100.00% $52,751 100.00% $28,733 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
9
<PAGE>
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Securities sold under agreement to repurchase totaled $10.1 million, $14.0
million, and $9.0 million at December 31, 1997, 1996, and 1995, respectively.
The weighted average interest rate on securities sold under agreement to
repurchase was 4.88%, 5.34%, and 5.25% at December 31, 1997, 1996, and 1995,
respectively.
Securities sold under agreement to repurchase are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Balance........................................... $10,105,190 $13,928,515 $8,913,474
Weighted average interest rate.................... 4.88% 5.34% 5.25%
Maximum amount outstanding at any month end....... $12,582,073 $13,928,516 $9,622,511
Average balance outstanding during the period..... $11,213,000 $11,843,000 $8,375,000
Weighted average interest rate during the period.. 4.71% 4.74% 5.20%
</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,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Return on average assets.......... 0.92% 0.72% 0.73%
Return on average equity.......... 13.49 11.25 9.96
Dividend payout ratio............. 15.70 19.81 18.06
Average equity to average assets.. 6.82 6.41 7.33
</TABLE>
RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Overview. The Company's net income increased to $3.3 million from $2.1
million in 1996, and from $1.7 million in 1995. Net interest income increased to
$19.5 million in 1997, compared to $16.1 million in 1996, and $13.3 million in
1995. This increase was offset by noninterest expenses that increased to $17.4
million in 1997, compared to $14.6 million in 1996, and $10.9 million in 1995.
Income tax expense increased to $1.7 million in 1997, from $1.1 million in 1996,
and $763,000 in 1995.
Interest Income. Interest income increased to $31.8 million in 1997, from
$25.7 million in 1996, and $20.7 million in 1995. This increase was due to an
increase in average interest-earning assets. Average interest-earning assets
were $327.1 million in 1997, compared to $257.2 million in 1996, and $205.1
million in 1995. Average yield on interest-earning assets decreased to 9.71% in
1997, from 9.99% in 1996, and from 10.09% in 1995. The increase in average
interest-earning assets occurred primarily in loans and leases and was funded by
an increase in interest-bearing liabilities. The average balance in loans and
leases increased to $272.8 million in 1997, from $218.8 million in 1996, and
$164.2 million in 1995. The average yield on loans and leases decreased to
10.42% in 1997, from 10.66% in 1996, and decreased from 11.12% in 1995. The
decrease in average yield is due to reduced loan fees for real estate-mortgage
and construction loans due to increased competition in the Company's market
area.
Interest Expense. Interest expense increased to $12.3 million in 1997, from
$9.6 million in 1996, and $7.4 million in 1995. This increase was due to
increases in average interest-bearing liabilities and the average cost of
interest-bearing liabilities. Average interest-bearing liabilities increased to
$276.0 million in 1997, from $219.0 million in 1996, and $172.2 million in
1995. The increase in average interest bearing liabilities was due to an
increase in average interest-bearing deposits of $54.9 million, a decrease in
average short term borrowings of $3.5 million, and an increase in average long-
term debt of $5.6 million. The increase in interest bearing deposits is a
result of the Company's branch expansion and success in increasing its market
share. The decrease in average short term borrowings is a result of
repayment of Federal Home Loan Bank advances. The increase in long-term debt is
a result of a 1997 offering of $13.8 million in 7.5% convertible
10
<PAGE>
subordinated debentures, a $1.0 million real estate contract for purchase of a
banking facility, reduced by the conversion of $3.8 million in 7.0% convertible
subordinated debentures into common stock. The average cost of interest-bearing
liabilities increased to 4.45% in 1997, from 4.39% in 1996, and 4.29% in 1995.
The increase in the cost of interest-bearing liabilities was primarily due to
the increase in average long-term debt. The average cost of deposits increased
to 4.28% in 1997, from 4.27% in 1996, and 4.10% in 1995.
Net Interest Income. Net interest income increased to $19.5 million in 1997,
from $16.1 million in 1996, and $13.3 million in 1995. This increase was due to
increases in average loans and leases of $54.0 million and average investment
securities of $13.2 million. Net interest margin decreased to 5.96% in 1997,
from 6.25% in 1996, and 6.49% in 1995, as a result of decreased average yields
on loans and leases, increased cost of interest-bearing liabilities, and the
increase in the ratio of investment securities to loans and leases.
Provision for Loan and Lease Losses. The provision for loan and lease losses
increased to $1.5 million in 1997, from $1.2 million in 1996, and $418,000 in
1995. This increase was necessitated by the increase in loans and leases
outstanding and increased charge-offs. Management anticipates growth in the
provision for loan and lease losses at least proportional to loan and lease
growth. Charge-offs net of recoveries of loans and leases were $768,000 in
1997, $572,000 in 1996, and $35,000 in 1995. The percentage of total charge-
offs to average loans and leases was 0.28% in 1997 and 0.26% in 1996.
Noninterest Income. Noninterest income was $4.5 million in 1997, compared to
$2.9 million in 1996, and $1.7 million in 1995. The increase for 1997 from 1996
was due to increased service charges on deposit accounts, increased rental
income from operating leases, and increased credit card merchant fees. Service
charges on deposit accounts were $1.5 million in 1997, $1.1 million in 1996, and
$961,000 in 1995, as a result of increased deposits. Rental income from
operating leases was $1.0 million in 1997 and $286,000 in 1996. The Company's
commercial leasing division commenced operations during 1996. Credit card
transaction income was $1.2 million in 1997, $797,000 in 1996, and $186,000 in
1995. In 1996, the Company expanded its sales efforts to attract merchant
customers.
Noninterest Expense. Noninterest expense increased to $17.4 million in 1997,
from $14.6 million in 1996, and $10.9 million in 1995. 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 $7.5 million in 1997, from $6.4 million in 1996, and $4.9 million
in 1995. Occupancy expense increased to $2.1 million in 1997, from $1.9 million
in 1996, and $1.4 million in 1995. Equipment expense increased to $1.9 million
in 1997, from $1.3 million in 1996, and $811,000 in 1995. Marketing expense
increased to $760,000 in 1997, compared to $637,000 in 1996, and $569,000 in
1995. The increases in salary and occupancy expense are due to growth in assets
and deposits. The growth in marketing expense is a result of the Company's
efforts to capture market share and capitalize on the opportunity to do so as a
result of acquisitions of banks with New Mexico operations by companies outside
New Mexico.
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 in 1995. 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 $1.7 million in 1997,
from $1.1 million in 1996, and $763,000 in 1995.
LIQUIDITY AND SOURCES OF FUNDS
The Company's primary sources of funds are customer deposits, 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 $345.6 million
11
<PAGE>
at December 31, 1997, from $277.4 million at December 31, 1996. Growth in
deposits has occurred primarily as a result of the Company's efforts to increase
markets share by taking advantage of market dislocations caused by the
acquisition of local competitors, branch expansions, and growth in the economy
of the Company's trade area.
Net loans of the Company increased to $285.1 million at December 31, 1997,
from $248.4 million as of December 31, 1996. Real estate-mortgage loans
increased by $11.1 million during 1997, commercial loans increased by $8.9
million, and consumer loans increased by $3.6 million. The increase in loans is
due to the Company's successful efforts to increase its market share by taking
advantage of market dislocations caused by the acquisition of local competitors
and growth in the economy of the company's market area. Commercial leases
increased by $13.9 million. The commercial leasing division was opened in 1996
and the growth in the lease portfolio is a result of the division's marketing
efforts.
Management anticipates that the Company will continue to rely primarily on
customer deposits and loan and lease repayments, as well as retained earnings,
to provide liquidity and will use funds so provided primarily to make loans and
leases and to purchase securities. The Company believes that its customer
deposits provide a strong source of liquidity because of the high percentage of
core deposits. 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
7.5% 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, 1998, First State Bank had approximately $5.4 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 $27.7 million at
December 31, 1997, from $21.0 million at December 31, 1996. Of the $6.7 million
increase, $3.3 million was produced by earnings and $3.7 million was produced by
the conversion of the 7% debentures. This increase was partially offset by the
change in unrealized investment security gains, by dividend payments of
$523,000, and by redemption of warrants of $308,000. Management currently
intends to continue to retain a major portion of the Company's earnings to
support anticipated growth. As of December 31, 1997, 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.
YEAR 2000
Management has initiated a program to prepare the Company's computer systems
and applications for the year 2000. The Company expects to incur internal staff
costs, consulting and other expenses to test and upgrade its systems and
applications. Management does not expect the cost of testing and upgrading to
exceed $75,000 over the next two years.
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.
12
<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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Albuquerque, New Mexico
February 6, 1998
13
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks (note 2) ............................................ $ 20,999,596 $ 15,711,932
Federal funds sold .......................................................... 11,000,000 --
------------ ------------
Total cash and cash equivalents ...................................... 31,999,596 15,711,932
Investment securities (note 3):
Available for sale (at market, amortized cost of $46,212,050 and
$20,979,000 at December 31, 1997 and 1996) .............................. 46,274,195 21,048,140
Held to maturity (at amortized cost, market of $15,291,473 and
$19,597,000 at December 31, 1997 and 1996) .............................. 15,235,174 19,547,433
------------ ------------
Total investment securities .......................................... 61,509,369 40,595,573
Loans and leases net of unearned interest (note 4) .......................... 288,368,847 250,926,023
Less allowance for loan and lease losses .................................... 3,279,457 2,510,155
------------ ------------
Net loans and leases ................................................. 285,089,390 248,415,868
Premises and equipment, net (note 5) ........................................ 14,056,096 13,558,835
Accrued interest receivable ................................................. 2,278,376 2,001,678
Other real estate owned ..................................................... 1,327,192 1,362,494
Goodwill, less accumulated amortization of $818,129 and $713,926 at
December 31, 1997 and 1996 ................................................. 777,675 881,881
Other assets.................................................................. 4,006,630 2,440,184
------------ ------------
Total assets........................................................... $401,044,324 $324,968,445
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6):
Noninterest-bearing .................................................... $ 72,773,120 $ 52,038,847
Interest-bearing ....................................................... 272,817,577 225,314,476
------------ ------------
Total deposits ....................................................... 345,590,697 277,353,323
Securities sold under agreements to repurchase (note 7) ................... 10,105,190 13,928,515
Federal Home Loan Bank advances (note 7) .................................. -- 4,970,000
Federal funds purchased ................................................... -- 1,500,000
Other liabilities ......................................................... 2,597,599 2,159,976
Long-term debt (note 7) ................................................... 15,036,463 4,006,119
------------ ------------
Total liabilities .................................................... 373,329,949 303,917,933
Stockholders' equity (note 10):
Preferred stock, no par value, 1,000,000 shares authorized, none issued or
outstanding ............................................................. -- --
Common stock, no par value, 20,000,000 shares authorized, 2,583,867 and
2,172,357 issued and outstanding at December 31, 1997 and 1996 .......... 16,075,878 11,906,581
Retained earnings ......................................................... 11,597,484 9,097,986
Unrealized gains on investment securities available for sale, net of
deferred income taxes (notes 1, 3 and 9) ................................ 41,013 45,945
------------ ------------
Total stockholders' equity ........................................... 27,714,375 21,050,512
Commitments and contingencies (note 12) ..................................... -- --
------------ ------------
Total liabilities and stockholders' equity ........................... $401,044,324 $324,968,445
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31.
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and leases....................... $28,428,332 $23,322,817 $18,261,973
Interest on marketable securities:
Taxable.................................................. 2,864,591 2,015,497 1,908,463
Nontaxable............................................... 171,982 197,736 135,693
Federal funds sold.......................................... 300,387 145,246 386,619
----------- ----------- -----------
Total interest income.................................... 31,765,292 25,681,296 20,692,748
Interest expense:
Deposits.................................................... 10,757,772 8,375,055 6,415,153
Short-term borrowings....................................... 660,887 855,443 533,903
Long-term debt and capital leases........................... 853,979 386,120 436,395
----------- ----------- -----------
Total interest expense.................................. 12,272,638 9,616,618 7,385,451
----------- ----------- -----------
Net interest income..................................... 19,492,654 16,064,678 13,307,297
Provision for loan and lease losses (note 4).................. 1,536,597 1,231,403 418,000
----------- ----------- -----------
Net interest income after provision for loan and lease
losses................................................. 17,956,057 14,833,275 12,889,297
----------- ----------- -----------
Other income (loss):
Service charges on deposit accounts......................... 1,451,666 1,138,239 961,287
Other banking service fees.................................. 231,388 129,640 133,609
Credit card transaction fees................................ 1,154,511 797,224 186,359
Operating lease income...................................... 1,018,944 286,090 --
Loss from credit card processing operation (note 15)........ -- -- (1,208,000)
Gain (loss) on call or sale of investment securities, net... -- 10,156 (19,454)
Other....................................................... 618,441 573,168 421,336
----------- ----------- -----------
Total other income..................................... 4,474,950 2,934,517 475,137
----------- ----------- -----------
Other expenses:
Salaries and employee benefits.............................. 7,505,937 6,388,350 4,898,453
Occupancy................................................... 2,106,871 1,854,447 1,352,888
Data processing............................................. 635,276 698,228 202,965
Credit card interchange..................................... 688,986 504,179 --
Equipment................................................... 1,224,517 1,113,365 811,482
Leased equipment depreciation............................... 660,368 148,470 --
Legal, accounting, and consulting........................... 426,510 454,090 403,634
Marketing................................................... 759,830 636,704 568,964
Supplies.................................................... 393,446 356,969 268,207
Other real estate owned..................................... 256,137 65,496 97,689
FDIC insurance premiums..................................... 119,740 2,000 199,169
Amortization of intangibles................................. 190,755 185,286 182,836
Other....................................................... 2,457,919 2,183,179 1,939,716
----------- ----------- -----------
Total other expenses................................... 17,426,292 14,590,763 10,926,003
----------- ----------- -----------
Income before income taxes.................................... 5,004,715 3,177,029 2,438,431
Income tax expense (note 9)................................... 1,674,347 1,115,892 763,230
----------- ----------- -----------
Net income.................................................... $ 3,330,368 $ 2,061,137 $ 1,675,201
=========== =========== ===========
Earnings per share (note 1):
Basic earnings per share.................................... $1.35 $1.02 $0.85
=========== =========== ===========
Diluted earnings per share.................................. $1.21 $0.90 $0.78
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
---------------------------------------------
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, 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
--------- ----------- ----------- ---------- -----------
Net income -- -- 3,330,368 -- 3,330,368
Dividends ($0.21) per share -- -- (522,870) -- (522,870)
Common shares issued from exercise of
options (note 10) 43,000 389,581 -- -- 389,581
Common shares issued pursuant to
conversion of subordinated debentures
(note 7) 359,285 3,675,078 -- -- 3,675,078
Common shares issued in employee
benefit plan 8,146 84,765 -- -- 84,765
Common shares issued pursuant to
dividend reinvestment plan 1,079 19,873 -- -- 19,873
Redemption of warrants (note 10) -- -- (308,000) -- (308,000)
Net change in market value -- -- -- (4,932) (4,932)
--------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 2,583,867 $16,075,878 $11,597,484 $ 41,013 $27,714,375
========= =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income......................................................................... $ 3,330,368 $ 2,061,137 $ 1,675,201
------------ ------------ ------------
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses............................................... 1,536,597 1,231,403 418,000
Provision for decline in value of other real estate owned......................... 85,500 12,500 30,000
Depreciation and amortization..................................................... 2,335,490 1,595,687 1,063,791
Net (gain) loss on call or sale of investment securities.......................... -- (10,156) 19,454
Net gain on sale of premises and equipment........................................ (56,737) -- --
Loss from credit card processing operation........................................ -- -- 1,208,000
Net (gain) loss on sales of other real estate owned............................... 16,327 20,294 (45,403)
Increase in accrued interest receivable........................................... (276,698) (557,115) (515,006)
(Increase) decrease in other assets, net.......................................... (1,765,981) 62,334 (1,723,658)
Increase in other liabilities, net................................................ 437,623 366,191 534,637
------------ ------------ ------------
Total adjustments................................................................ 2,312,121 2,721,138 989,815
------------ ------------ ------------
Net cash provided by operating activities........................................ 5,642,489 4,782,275 2,665,016
------------ ------------ ------------
Cash flows from investing activities:
Net increase in loans.............................................................. (39,591,220) (68,626,889) (33,537,346)
Purchases of investment securities carried at amortized cost....................... (4,500,000) (14,877,176) (20,049,734)
Maturities of investment securities carried at amortized cost...................... 8,825,000 10,750,000 16,252,962
Purchases of investment securities carried at market............................... (40,995,968) (6,243,339) (9,461,536)
Maturities of investment securities carried at market.............................. 15,725,000 7,890,000 3,026,790
Sales of investment securities available for sale.................................. -- 500,156 4,095,844
Purchases of premises and equipment................................................ (2,320,692) (5,803,732) (7,324,833)
Sales of premises and equipment.................................................... 812,737 2,537,649 --
Additions to other real estate owned............................................... -- (245,312) (244,770)
Payments received on loans classified as other real estate owned................... 12,890 1,518 265,082
Proceeds from sale of other real estate owned...................................... 1,301,686 555,156 237,556
------------ ------------ ------------
Net cash used in investing activities............................................ (60,730,567) (73,561,969) (46,739,985)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in interest-bearing deposits.......................................... 47,503,101 48,494,253 40,561,347
Net increase in noninterest-bearing deposits....................................... 20,734,273 10,012,202 4,837,675
Net increase (decrease) in securities sold under repurchase agreements............. (3,823,325) 5,015,042 (551,583)
Common stock issued................................................................ 494,219 153,759 --
Proceeds from Federal Home Loan Bank borrowings.................................... 9,153,500 8,970,000 5,000,000
Payments on Federal Home Loan Bank borrowings...................................... (14,123,500) (4,000,000) (5,000,000)
Dividends paid..................................................................... (522,870) (408,489) (302,545)
Issuance of long-term debt......................................................... 13,800,000 -- 250,000
Payments on long-term debt......................................................... (31,656) (32,407) (126,896)
Federal funds purchased, net....................................................... (1,500,000) 1,500,000 --
Redemption of put warrants......................................................... (308,000) -- --
------------ ------------ ------------
Net cash provided by financing activities........................................ 71,375,742 69,704,360 44,667,998
------------ ------------ ------------
Increase in cash and cash equivalents.............................................. 16,287,664 924,666 593,029
Cash and cash equivalents at beginning of year...................................... 15,711,932 14,787,266 14,194,237
------------ ------------ ------------
Cash and cash equivalents at end of year............................................ $ 31,999,596 $ 15,711,932 $ 14,787,266
============ ============ ============
Supplemental disclosure of additional noncash investing and financing activities:
Additions to other real estate owned in settlement of loans........................ $ 1,381,101 $ 988,783 $ 203,420
Additions to loans in settlement of other real estate owned........................ -- -- $ 425,219
Issuance of long-term debt for purchase of premises and equipment.................. $ 1,050,000 -- --
Issuance of common stock pursuant to conversion of subordinated debentures,
net (note 7)...................................................................... $ 3,675,078 $ 1,888,224 --
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................. $ 12,047,450 $ 9,426,618 $ 6,928,861
============ ============ ============
Cash paid for income taxes......................................................... $ 1,983,000 $ 1,010,000 $ 925,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization, Basis of Presentation and Principles of Consolidation
First State Bancorporation ("FSNM") is a New Mexico-based holding
company that is focused on New Mexico markets. In 1988, FSBC acquired First
State Bank of Taos ("FSBT"). In December 1993, FSBC acquired First State Bank of
Santa Fe ("the Santa Fe Bank"). On June 5, 1994, the Santa Fe Bank was merged
into FSBT. As a result of the merger, FSNM purchased the interest of the
minority stockholders of the Santa Fe Bank. FSBT is a state chartered bank with
locations in Taos, Albuquerque, Santa Fe, Rio Rancho, Los Lunas, Bernalillo,
Placitas, Questa, and Moriarty, New Mexico. 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 generates a net interest margin that is least affected by
interest rate changes.
(b) Investment Securities
The Company accounts for investment securities under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (FAS 115). FAS 115 requires that investment
securities be classified in one of three categories and accounted for as
follows: (i) debt securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and carried at
amortized cost; (ii) debt
18
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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 non-accrual loans is recognized as income when
the loan is returned to accrual status. When a loan is placed on non-accrual,
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
unless in management's opinion the loan is well secured and in the process of
collection. Interest accrued on loans is, discontinued in most instances, 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 non-accrual 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 three to 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.
19
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
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 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 accounts for impaired loans under Statement of Financial
Accounting Standards No. 114 and 118, "Accounting by Creditors for Impairment of
a Loan" (FAS 114 and 118).
(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, 1997 and 1996,
unamortized core deposit intangibles included in other assets in the
accompanying financial statements, totaled $28,916 and $60,461, 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.
20
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
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
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS
128). FAS 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. FAS 128 is effective for years ended after
December 31, 1997, and is required to be applied retroactively upon adoption.
All previous periods have been restated to conform to the requirements of FAS
128. The following is a reconciliation of the numerators and denominators of
basic and diluted earnings per share for the years ended December 31.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------------
PER PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------ ------- ---------- ------------ ------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $3,330,368 2,465,195 $1.35 $2,061,137 2,026,428 $1.02 $1,675,201 1,962,067 $0.85
======= ======= =======
Effect of dilutive
securities:
Options -- 78,429 -- 66,418 -- 55,978
Warrants -- 7,450 -- 8,862 -- 4,567
Convertible debentures 540,258 652,010 295,876 503,574 332,416 547,619
---------- --------- ---------- --------- ---------- ---------
Diluted EPS:
Net income available
to common stockholders
plus interest and
amortization on
convertible debentures $3,870,626 3,203,084 $1.21 $2,357,013 2,605,282 $0.90 $2,007,617 2,570,231 $0.78
========== ========= ======= ========== ========= ======= ========== ========= =======
</TABLE>
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.
(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 was 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.
21
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(k) Reclassifications
Certain 1996 balances have been reclassified to conform to the 1997
presentation.
(l) Accounting Standards Issued but not yet Adopted
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
In December 1996, the FASB issued statement of accounting standards No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB No. 125" (FAS
127). FAS 127 defers for one year the effective date of certain provisions of
FAS No. 125 to allow affected enterprises to modify information systems and
accounting processes to comply with FAS No. 125. The delay applies to the
provisions that deal with secured borrowings and collateral, as well as to
transfers of financial assets for repurchase agreements, dollar rolls, and
securities lending. The impact of FAS 127 is not expected to be material in
relation to the consolidated financial statements.
Reporting Comprehensive Income
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 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. FAS No.
130 is effective for the Company's financial statements beginning in 1998.
Earlier application is permitted. The impact of FAS 130 is not expected to be
material in relation to the consolidated financial statements.
Segments
In June 1997, the FASB issued FAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" (FAS 131). FAS 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. FAS 131 is effective for the
Company's financial statements beginning in 1998. The impact of FAS 131 is not
expected to be material in relation to the consolidated financial statements.
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 $9,415,000 and $5,357,000 at December 31, 1997 and 1996,
respectively.
22
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997
Obligations of the U.S. Treasury:
Available for sale............................... $10,867,133 $ 28,563 $ 458 $10,895,238
Held to maturity................................. 2,090,535 16,121 -- 2,106,656
Obligations of U.S. government agencies:
Available for sale............................... 33,408,867 49,239 15,199 33,442,907
Held to maturity................................. 9,999,106 14,062 36,930 9,976,238
Obligations of states and political subdivisions--
Held to maturity................................. 3,145,533 63,466 420 3,208,579
Federal Home Loan Bank stock........................ 1,475,100 -- -- 1,475,100
Federal Reserve Bank stock.......................... 460,950 -- -- 460,950
----------- -------- ------- -----------
$61,447,224 $171,451 $53,007 $61,565,668
=========== ======== ======= ===========
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
=========== ======== ======= ===========
</TABLE>
23
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated market value of investment securities at
December 31, 1997, 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............. $17,820,588 $17,823,635
Held to maturity............... 1,991,457 1,977,333
One through five years:
Available for sale............. 24,463,150 24,516,066
Held to maturity............... 11,339,651 11,385,758
Five through ten years:
Available for sale............. 994,905 998,750
Held to maturity............... 799,066 823,382
After ten years:
Available for sale............. 997,357 999,694
Held to maturity............... 1,105,000 1,105,000
Federal Reserve Bank stock....... 460,950 460,950
Federal Home Loan Bank stock..... 1,475,100 1,475,100
----------- -----------
Total....................... $61,447,224 $61,565,668
=========== ===========
</TABLE>
Marketable securities with an amortized cost of approximately $56,515,000
and $34,685,000 were pledged to collateralize deposits as required by law and
for other purposes at December 31, 1997 and 1996, respectively.
Proceeds from sales of investments in debt securities for the years ended
December 31, were zero in 1997, $500,156 in 1996, and $4,095,844 in 1995. Gross
losses realized were zero in 1997, zero in 1996, and $26,997 in 1995. Gross
gains realized were zero in 1997, $156 in 1996, and $7,543 in 1995. The Company
calculates gain or loss on sale of securities based on the specific
identification method.
4. LOANS AND LEASES
Following is a summary of loans and leases by major categories:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Commercial................... $ 45,479,576 $ 36,578,045
Consumer and other........... 16,809,338 13,238,944
Lease financing.............. 30,587,116 16,658,963
Real estate--mortgage........ 153,550,262 148,712,636
Real estate--construction.... 41,942,555 35,737,435
------------ ------------
$288,368,847 $250,926,023
============ ============
</TABLE>
24
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's leasing operations consist principally of the leasing of various
types of transportation equipment, construction equipment, industrial and
manufacturing equipment, and data processing equipment. The majority of the
Company's leases are classified as direct financing leases.
Future minimum lease receivables under noncancellable leasing arrangements
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING OPERATING
LEASES LEASES
------------ ----------
<S> <C> <C>
Years ending December 31:
1998....................................... $ 9,290,124 $ 802,144
1999....................................... 8,416,391 732,941
2000....................................... 7,399,741 665,655
2001....................................... 4,989,693 477,969
2002....................................... 2,113,959 28,252
Thereafter................................. 595,416 --
----------- ----------
Net minimum future lease receipts............ $32,805,324 $2,706,961
==========
Less unearned income......................... (6,260,595)
Unamortized initial indirect costs........... 334,737
Estimated residual value..................... 3,707,650
-----------
Net investment in direct financing leases.... $30,587,116
===========
</TABLE>
Following is a summary of changes to the allowance for loan and lease losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year...... $2,510,155 $1,850,605 $1,467,954
Provision charged to operations... 1,536,597 1,231,403 418,000
Loans and leases charged off...... (972,047) (753,512) (345,459)
Recoveries........................ 204,752 181,659 310,110
---------- ---------- ----------
Balance at end of year............ $3,279,457 $2,510,155 $1,850,605
========== ========== ==========
</TABLE>
The recorded investment in loans which are considered impaired under the
provisions of Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by FAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures," was
$3,122,765 at December 31, 1997, $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 $2,090,000 in 1997 and $1,294,000 in 1996. The allowance for
loan losses related to these loans were $395,000 at December 31, 1997, 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 recognized on impaired loans was $6,218 in 1997, $18,293 in 1996, and
zero in 1995.
Loans on which the accrual of interest has been discontinued amounted to
$3,122,765, $946,408, and $1,807,601 at December 31, 1997, 1996, and 1995,
respectively. If interest on such loans had been accrued, such income would have
been approximately $144,978 in 1997, $12,000 in 1996, and $98,000 in 1995.
Actual interest income on those loans, which is recorded only when received,
amounted to $6,218 in 1997, and zero in 1996 and 1995.
25
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity during 1997 and 1996 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>
1997 1996
------------ -----------
<S> <C> <C>
Balance at beginning of year........ $ 1,946,119 $1,495,355
Advances............................ 532,085 858,845
Loans to parties no longer related.. (163,869) --
Repayments.......................... (1,133,467) (408,081)
----------- ----------
Balance at end of year.............. $ 1,180,868 $1,946,119
=========== ==========
</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) 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................. -- $ 1,959,655 $ 1,389,490
Building and leasehold improvements.............. 15-30 8,650,082 7,267,468
Equipment........................................ 5 5,591,891 5,060,522
Equipment subject to operating lease financing:.. 3-5
Transportation................................ 1,600,000 2,500,000
Construction.................................. 1,296,797 745,196
Other......................................... 814,534 772,272
Assets under capital leases...................... 5 78,781 78,781
----------- -----------
19,991,740 17,813,729
Less accumulated depreciation and amortization... (5,935,644) (4,254,894)
----------- -----------
$14,056,096 $13,558,835
=========== ===========
</TABLE>
Depreciation and amortization expense on premises and equipment in 1997,
1996, and 1995 was $1,911,497, $1,331,147, and $822,344, 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 $264,801 in 1998, $264,801 in 1999, $264,801 in
2000, $264,801 in 2001, $264,801 in 2002, and $2,168,785 thereafter. Rent
expense under these leases was $260,522 in 1997.
6. DEPOSITS
Following is a summary of interest-bearing deposits:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Interest-bearing checking accounts.. $ 69,566,283 $ 49,245,938
Money market savings................ 47,223,074 32,811,455
Regular savings..................... 21,231,515 16,081,190
Time:
Denominations $100,000 and over.. 55,766,974 52,751,491
Denominations under $100,000..... 79,029,731 74,424,402
------------ ------------
$272,817,577 $225,314,476
============ ============
</TABLE>
26
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWINGS
Securities sold under agreements 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 $15,535,000 and
$15,916,000, at December 31, 1997 and 1996, respectively.
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Balance........................................... $10,105,190 $13,928,515
Weighted average interest rate.................... 4.88% 5.34%
Maximum amount outstanding at any month end....... 12,582,073 13,928,516
Average balance outstanding during the period..... 11,213,000 11,843,000
Weighted average interest rate during the period.. 4.71% 4.74%
</TABLE>
Subordinated Debentures
On April 30, 1997, the Company called for redemption its 7% convertible
subordinated debentures due November 3, 2003, with a balance of $3,788,000 at
December 31, 1996. Prior to the redemption date, $3,773,000 principal amount of
the debentures were converted into the Company's common stock at a conversion
rate of $10.50 per share or 359,285 shares. The remaining $15,000 were
redeeemed at 101% of the original principal balance plus accrued interest.
On May 2, 1997, the Company completed an offering for $13,800,000 of 7.5%
convertible subordinated debentures due 2017. The debentures pay interest semi-
annually on April 30 and October 30 until maturity, are convertible at any time
subject to adjustments for certain events into the Company's common stock at
$16.75 per share, are callable at the Company's option if the price of its
common stock equals or exceeds 140% of the exercise price for at least 30
consecutive trading days without any premium or at a redemption premium
beginning May 1, 2001, as follows:
<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>
The debentures are subordinated to all present and future senior indebtedness.
Only capital stock of the Company (common or preferred) is junior to the
debentures.
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 $198,594 and $218,119 at December 31, 1997, and 1996, respectively. The note
is payable in monthly installments of principal and interest at 8.26% through
February 1, 2005.
27
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
First State Bank had a prepayable Federal Home Loan Bank advance with a
balance of $4,000,000 at December 31, 1996. The advance had a final maturity of
April 23, 2003, and was repaid in 1997. The advance bore interest based on the
one month LIBOR index plus 0.21%, 5.86% at December 31, 1996.
First State Bank had 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 had an eight-day term maturing
January 7, 1997, and bore interest at 5.61%.
The maximum amount of Federal Home Loan Bank advances outstanding during 1997
was $9,153,000 and the weighted average interest rate paid for these advances
was 5.74%, with an average outstanding balance of $1,832,000.
Note Payable
On April 30, 1997, the company purchased its main banking facility in Taos,
New Mexico subject to a real estate contract with an original balance of
$1,050,000 which bears interest at 9.50% adjustable every five years through
2017, payable $9,787 monthly. The balance at December 31, 1997 was $1,037,869
with principal payments of $19,694 in 1998, $21,648 in 1999, $23,797 in 2000,
$26,159 in 2001, $28,754 in 2002, and $917,817 thereafter.
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, 1997, 1996, and 1995, totaled approximately $949,000,
$829,000 and $529,000, respectively. Minimum future payments under these leases
at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
-------------
<S> <C>
1998............................. $1,134,234
1999............................. 948,836
2000............................. 862,771
2001............................. 822,101
2002............................. 740,394
Thereafter....................... 5,177,942
----------
$9,686,278
==========
</TABLE>
9. INCOME TAXES
Federal income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current.................. $1,905,234 $1,124,780 $1,013,725
Deferred................. (230,887) (8,888) (250,495)
---------- ---------- ----------
Total expense......... .. $1,674,347 $1,115,892 $ 763,230
========== ========== ==========
</TABLE>
28
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Actual income tax expense from continuing operations differs from the
"expected" tax expense for 1997, 1996, and 1995 (computed by applying the U.S.
federal corporate tax rate of 34 percent to income from continuing operations
before income taxes) as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense.......................... $1,702,000 $1,080,000 $ 829,000
Increase (reduction) in income taxes resulting from:
Tax-exempt interest................................... (119,000) (76,000) (62,000)
Amortization of intangibles........................... 48,000 92,000 96,000
Change in valuation allowance for deferred tax assets. -- (120,000) (132,466)
Other................................................. 43,347 139,892 32,696
---------- ---------- ---------
Total income tax expense............................ $1,674,347 $1,115,892 $ 763,230
========== ========== =========
</TABLE>
Components of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
---------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................... $ 854,506 $592,424
Write-down of other real estate owned................... 58,820 37,267
Depreciation............................................ 175,946 92,323
Deferred compensation expense........................... 38,564 31,618
Other................................................... 29,404 31,838
---------- --------
Total gross deferred tax assets....................... 1,157,240 785,470
Deferred tax liabilities:
Deferred gains on sale of other real estate owned....... -- 17,987
Leases.................................................. 158,870 --
Tax effect of unrealized gains on investment securities. 21,127 23,669
---------- --------
Total gross deferred tax liabilities.................. 179,997 41,656
---------- --------
Net deferred tax asset................................ $ 977,243 $743,814
========== ========
</TABLE>
In order to fully realize the deferred tax asset on the Company's balance
sheet at December 31, 1997, of $1,157,240, the Company will need to generate
future taxable income of approximately $3,404,000. 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.
29
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCKHOLDERS' EQUITY
At December 31, 1997, under terms of a stock option agreement, an officer
of First State Bank has an outstanding option to purchase 6,613 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. The officer exercised 43,000 options for a
total of $215,000 in 1997 and 19,600 options for a total of $98,000 in 1996.
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's 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 July 25, 1997, the Board of Directors
approved increasing the number of options available for grant by 175,000. This
action must be approved by a vote of the common stockholders before grant of
those options becomes effective. On July 25, 1997, the Board of Directors
granted 113,400 options at a price of $17.25 per share; 90,720 of these options
are subject to stockholder approval of the increase in number of options
available for grant. Vesting of these options is 20% at the date of grant and
20% per year thereafter until fully vested. A summary of options under this plan
is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 198,753 $ 8.40 198,753 $8.40
Granted 114,400 17.17 -- --
Exercised (1,400) 8.40 -- --
Forfeited (1,625) 8.40 -- --
------- -------------- ------- --------------
Outstanding at year end 310,128 $11.64 198,753 $8.40
======= ============== ======= ==============
Options exercisable at year end 202,692 $ 9.39 142,250 $8.40
======= ============== ======= ==============
</TABLE>
30
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Compensation expense of $20,430, $33,453, and $59,542 was recognized
pursuant to the grant of options in 1997, 1996, and 1995. Had the compensation
costs been determined consistent with the fair value method of FAS 123 at the
grant dates for awards, net income and earnings per common share would have
changed to the pro forma amounts indicated below.
In determining the following pro forma disclosures, the fair value of
options granted were estimated as of the grant date using the Black-Scholes
option-pricing model assuming a risk free interest rate of 5.50% for 1997 and
5.38% for 1995; dividend yield of 0.98% for 1997 and 1.27% for 1995; expected
lives of 5 years for 1997 and 5 years for 1995; and volatility of 40.23% for
1997 and 45.27% for 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $3,330,368 $2,061,137 $1,675,201
Proforma $3,107,656 $2,049,599 $1,654,686
Basic earnings per share:
As reported $ 1.35 $ 1.02 $ 0.85
Proforma $ 1.26 $ 1.01 $ 0.84
Diluted earnings per share:
As reported $ 1.21 $ 0.90 $ 0.78
Proforma $ 1.14 $ 0.90 $ 0.77
</TABLE>
On October 25, 1996, the Board of Directors approved a shareholder
protection rights agreement to protect the stockholders 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 stockholder 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 7% convertible debenture offering,
the Company sold to the underwriter for $100 a five-year warrant with a put
provision to purchase 48,125 shares of common stock. On June 30, 1997, the
underwriter exercised the put provision and the company paid the underwriter
$308,000 for redemption of the warrants which was accounted for as a charge to
retained earnings.
Bank regulations specify the level of dividends that can be paid by First
State Bank. As of December 31, 1997, First State Bank had approximately $5.4
million in retained earnings, which were 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.
31
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 30, 1997, the Company called for redemption its 7% Convertible
Subordinated Debentures due November 3, 2003, with a balance of $3,788,000 at
December 31, 1996. Prior to the redemption date, $3,773,000 principal amount of
the debentures were converted into the Company's common stock at a conversion
rate of $10.50 per share or 359,285 shares. The remaining $15,000 were redeemed
at 101% of the original principal balance plus accrued interest.
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 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, 1997, that the Company meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Bank of Kansas City categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
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, 1997
-----------------------
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........................... $43,336 13.4% $25,893 8.0% $32,367 10.0%
Bank subsidiary........................ 33,971 10.5% 25,784 8.0% 32,230 10.0%
Tier I capital to risk weighted assets:
Consolidated........................... 26,867 8.3% 12,947 4.0% 19,420 6.0%
Bank subsidiary........................ 30,977 9.6% 12,892 4.0% 19,338 6.0%
Tier I capital to total assets:
Consolidated........................... 26,867 6.7% 16,042 4.0% 20,052 5.0%
Bank subsidiary........................ 30,977 7.8% 15,984 4.0% 19,981 5.0%
<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%
</TABLE>
32
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $125,171 in 1997, $105,788 in 1996, and
$70,391 in 1995.
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
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit.......... $62,059,000 $46,883,000
Standby letters of credit............. 2,252,000 1,417,000
</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 a money market savings account held in the
subsidiary bank. The primary sources of the parent company's cash revenues are
dividends from its subsidiary bank along with interest received from the money
market account. 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:
33
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and due from banks............................. $ 8,716 $ 1,180
Investment in subsidiary............................ 31,473 23,104
Offering expenses--debentures....................... 1,024 --
Goodwill............................................ 352 384
Deferred tax asset.................................. 39 32
Other assets........................................ 305 279
------- -------
Total assets..................................... $41,909 $24,979
======= =======
LIABILITIES AND EQUITY CAPITAL:
Liabilities--accounts payable and accrued expenses.. $ 395 $ 141
Convertible debentures.............................. 13,800 3,788
Equity capital...................................... 27,714 21,050
------- -------
Total liabilities and equity capital............. $41,909 $24,979
======= =======
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income:
Cash dividends from subsidiaries.................................... $ -- $ -- $ --
Loss from credit card processing operation.......................... -- -- (1,208)
Other income........................................................ 301 67 176
------ ------ -------
Total income (loss).............................................. 301 67 (1,032)
------ ------ -------
Expenses:
Interest expense.................................................... 766 362 405
Amortization........................................................ 84 158 176
Legal............................................................... 13 57 56
Consulting.......................................................... -- 65 62
Other............................................................... 258 173 255
------ ------ -------
Total expense.................................................... 1,121 815 954
------ ------ -------
Loss before income taxes and undistributed income of bank subsidiary.. (820) (748) (1,986)
Income tax benefit.................................................... 276 148 596
Undistributed income of bank subsidiary............................... 3,874 2,661 3,065
------ ------ -------
Net Income............................................................ $3,330 $2,061 $ 1,675
====== ====== =======
</TABLE>
34
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.................................................... $ 3,330 $ 2,061 $ 1,675
------- ------- -------
Adjustments to reconcile net income to cash used by operations:
Amortization of goodwill................................... 32 32 32
Undistributed income of bank subsidiaries.................. (3,874) (2,661) (3,064)
Loss from investment in credit card operation.............. -- -- 1,208
(Increase) decrease in other assets........................ (1,170) 356 (255)
Increase (decrease) in other liabilities, net.............. 254 (181) 121
------- ------- -------
Total adjustments........................................ (4,758) (2,454) (1,958)
------- ------- -------
Net cash used by operating activities.................... (1,428) (393) (283)
------- ------- -------
Cash flows from investing activities:
Sale of investment securities................................. -- -- 3,998
Maturity of investment securities............................. -- 2,000 1,000
Purchase of investment securities............................. -- -- (2,494)
------- ------- -------
Net cash provided by investing activities................ -- 2,000 2,504
------- ------- -------
Cash flows from financing activities:
Common stock issued........................................... 495 154 --
Issuance of subordinated debentures........................... 13,800 -- --
Capital contributions to subsidiary bank...................... (4,500) (1,250) (500)
Contributions and loans to credit card processing operation... -- -- (523)
Dividends paid................................................ (523) (409) (303)
Redemption of put warrants.................................... (308) -- --
------- ------- -------
Net cash provided (used) by financing activities......... 8,964 (1,505) (1,326)
------- ------- -------
Increase in cash and due from banks................................ 7,536 102 895
Cash and due from banks at beginning of year....................... 1,180 1,078 183
------- ------- -------
Cash and due from banks at end of year............................. $ 8,716 $ 1,180 $ 1,078
======= ======= =======
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (FAS 107), requires disclosure of current
fair value of all financial instruments, both assets and liabilities recognized
and not recognized in the balance sheet, for which it is practicable to estimate
fair value. FAS 107 defines fair value as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties
other than in a forced or liquidation sale.
Financial instruments are defined as cash, evidence of ownership in an
entity, or a contract that both imposes on one entity a contractual obligation:
(1) to deliver cash or another financial instrument to a second entity, or (2)
to exchange other financial instruments on potentially unfavorable terms with a
second entity, and conveys to the second entity a contractual right: (a) to
receive cash or another financial instrument from the first entity, or (b) to
exchange other financial instruments on potentially favorable terms with the
first entity.
Fair value estimates are made at a specific point in time based on
available relevant market information about the financial instrument. However, a
significant portion of the Company's financial instruments, such as commercial
real estate loans, do not currently have an active marketplace in which they can
be readily sold or purchased to determine
35
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks......................... $ 32,000 $ 32,000 $ 15,712 $ 15,712
Fed funds sold.................................. 11,000 11,000 -- --
Marketable securities available for sale........ 46,274 46,274 21,048 21,048
Marketable securities held to maturity.......... 15,235 15,291 19,547 19,597
Loans, net...................................... 288,369 288,459 250,926 250,503
Accrued interest receivable..................... 2,278 2,278 2,002 2,002
Financial liabilities:
Deposits........................................ 345,591 345,913 277,353 278,000
Securities sold under agreements to repurchase.. 10,105 10,105 13,929 13,929
Long-term debt.................................. 15,036 18,900 4,006 4,043
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. 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.
36
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
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, 1997 and 1996. 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 agreements to repurchase. The estimated fair value of
securities sold under agreements to repurchase, which reset frequently to market
interest rates, approximate fair value.
Long-term debt. In 1997, long-term debt consisted of 7.5% convertible
subordinated debentures which are traded on the Nasdaq Small Cap Market and
their fair value is their market price on December 31, 1997. Also included is a
real estate contract for purchase of a banking facility, its fair value is
determined based on future cash out flows at current interest rates. In 1996,
long-term debt consists primarily of 7% convertible subordinated debentures
which were callable at the Company's option; their fair value was 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 statements of financial condition. Rates currently available to
the Company and subsidiary for items 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 was 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 for the year ended December 31, 1995:
<TABLE>
<S> <C>
Equity in loss from operations $ 278,000
Loss from abandonment of limited partnership interest 930,000
----------
$1,208,000
==========
</TABLE>
37
<PAGE>
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
FIRST STATE BANCORPORATION
Pursuant to the provisions of Section 53-13-4 of the New Mexico Business
Corporation Act (Chapter 53, Articles 11 through 18 NMSA 1978), FIRST STATE
BANCORPORATION hereby adopts the following Articles of Amendment to its Articles
of Incorporation:
ARTICLE I.
The name of the corporation is FIRST STATE BANCORPORATION (the "Company").
ARTICLE II.
The following amendment to the Company's articles of incorporation was
adopted by the shareholders of the Company on June 6, 1997, in the manner
prescribed by the New Mexico Business Corporation Act:
Article 4
Section 4.1 Authorized Shares. The total number of shares that the
-----------------
corporation shall have authority to issue is twenty-one million
(21,000,000) shares, of which twenty million (20,000,000) shares shall be
common stock, no par value and one million (1,000,000) shares shall be
preferred shares as determined pursuant to Section 4.3 hereof.
ARTICLE III
The number of shares of the Company's common stock outstanding on June 6,
1997, was 2,553,380 and the number of shares entitled to vote on the amendment
was 2,553,380. No shares of any class were entitled to vote as a class.
<PAGE>
ARTICLE IV.
The number of shares voted for the amendment was 2,070,783. The number of
shares voted against the amendment was 26,894.
DATED: October 2, 1997
FIRST STATE BANCORPORATION
By: /s/ Michael Stanford
-------------------------------
Michael Stanford, President
By: /s/ H. Patrick Dee
-------------------------------
H. Patrick Dee, Secretary
Under the penalty of perjury, the undersigned declares that the foregoing
document executed by the corporations and that the statements contained therein
are true and correct to the best of my knowledge.
/s/ Michael Stanford
-------------------------------
Michael Stanford
<PAGE>
EXHIBIT 3.3
FIRST STATE BANCORPORATION
BYLAWS
ARTICLE I
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of
the Company for the election of directors and for the transaction of any other
business that may be properly brought before the meeting shall be held at the
place, date, and hour as designated by resolution of the Board of Directors.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders for
any purpose or purposes shall be called by the Secretary upon receipt of a
written request from either the Chairman of the Board or the President, a
majority of the directors, or any person or persons authorized by the New Mexico
Business Corporation Act (the "NMBCA") to request such a meeting. Special
meetings of the shareholders shall be held at the place, date, and hour as
designated by either the Chairman of the Board or the President or by resolution
of the Board of Directors.
SECTION 3. PROCEDURE. At each meeting of the shareholders, the
Chairman of the Board or, in his or her absence, the President shall act as
chairman of the meeting. The chairman of the meeting shall determine the order
of business and all other matters of procedure. The chairman of the meeting may
establish rules to maintain order and to conduct the meeting. The chairman of
the meeting shall act in his or her absolute discretion, and his or her rulings
are not subject to appeal.
ARTICLE II
DIRECTORS
SECTION 1. BOARD OF DIRECTORS. The business of the Company shall be
managed by a Board of Directors. The number of directors constituting the Board
of Directors shall be established from time to time by resolution of the Board
of Directors, within the limitations set forth in the Restated Articles of
Incorporation, as amended.
SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at times and places determined by the Board
of Directors.
SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be called by the Secretary upon the receipt of a request from
the Chairman of the Board, the President, or any three directors. Notice of
special meetings shall be given to each director at any time before the special
meeting either personally or by telephone (including by message or recording
device) or telegraph or facsimile not less than two hours before the meeting or
by mail not less than three days before the meeting. Any notice shall be
directed to the address or telephone number of each director as furnished to the
Secretary for that purpose.
<PAGE>
SECTION 4. ADJOURNMENT OF MEETINGS. The directors may adjourn from
time to time any regular or special meeting at which a quorum is present,
without notice other than announcement at the meeting. The adjourned meeting may
be called to order at any time without further notice, and any business may be
transacted which might have been transacted at the original meeting.
SECTION 5. COMPENSATION OF DIRECTORS. The Board of Directors may by
resolution provide for payment of fees for attendance at meetings of the Board
of Directors and the reimbursement of expenses of directors in attending
meetings. The Board of Directors may also by resolution provide for the payment
of other fees or compensation to members of the Board of Directors.
SECTION 6. AUTHORITY TO APPOINT COMMITTEES AND DELEGATE AUTHORITY. The
Board of Directors, by resolution adopted by a majority of the full Board of
Directors, may designate from among its members one or more committees, each of
which, except to the extent limited by law, the Restated Articles of
Incorporation, these Bylaws, and the resolution establishing the committee,
shall have and may exercise all the authority of the Board of Directors, and may
also prescribe rules of operation of the committee. Regular meetings of any
committee may be held without notice at times and places determined by the Board
of Directors or the committee. Special meetings of any committee shall be called
by the Secretary upon the receipt of a request from the Chairman of the Board,
the President, the chairman of the committee, or any two members of the
committee. Notice of special meetings shall be given in the same manner as
provided in Section 3 of this Article II.
ARTICLE III
OFFICERS
SECTION 1. NUMBER. The officers of the Company shall be a Chairman of
the Board, a President, one or more Vice Presidents (one or more of whom may be
designated Executive Vice President or Senior Vice President), a Secretary, and
a Treasurer, and may include a Controller. A chief executive officer, a chief
operating officer, a chief financial officer, and a chief accounting officer may
be designated by the Board of Directors from among the officers.
SECTION 2. ELECTION AND TERM OF OFFICE. Each officer shall be elected
by the Board of Directors and shall hold office until the meeting of the Board
of Directors following the next annual meeting of the shareholders and until his
or her successor has been elected and qualified or until his or her earlier
retirement, resignation, or removal. The Chairman of the Board shall be chosen
from among the directors.
SECTION 3. REMOVAL AND VACANCIES. Any officer may be removed at any
time with or without cause by the Board of Directors. A vacancy in any office
may be filled for the unexpired portion of the term in the same manner as
provided for election to the office.
SECTION 4. ASSISTANT SECTION OFFICERS. The Company may have assistant
officers as the Board of Directors may elect. Each assistant officer shall hold
office at the pleasure
-2-
<PAGE>
of, and may be removed at any time with or without cause
by, the Board of Directors. Assistant officers may include one or more Assistant
Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant
Controllers.
SECTION 5. DUTIES. Each officer shall have the authority and shall
perform the duties as may be assigned by the Board of Directors or the
President, or as shall be conferred or required by law or these Bylaws, or as
shall be incidental to the office.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS
SECTION 1. GENERAL INDEMNIFICATION. Each person who is a party or is
threatened to be made a party, either as plaintiff, defendant, respondent, or
otherwise, to any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an administrative proceeding or
civil action instituted by any federal banking agency) (a "Proceeding") based
upon, arising from, relating to, or by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation or non-profit corporation, cooperative, partnership, joint
venture, trust, or other incorporated or unincorporated enterprise, or any
employee benefit plan or trust (each, a "Company Affiliate"), shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the NMBCA, as the same exists on the date of the adoption of this Bylaw [January
23, 1998] or as may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Company to provide
broader indemnification rights than the NMBCA permitted the Company to provide
prior to such amendment), against any and all expenses, liability, and loss
(including, without limitation, investigation expenses and expert witnesses' and
attorneys' fees and expenses, judgments, penalties, fines, and amounts paid or
to be paid in settlement) actually incurred by such person in connection
therewith; provided, however, that, except as provided in the second paragraph
of this Section 1 of Article IV with respect to Proceedings seeking to enforce
rights under this Bylaw, the Company shall indemnify any such person seeking to
enforce such rights in connection with a Proceeding (or part thereof) initiated
by such person only if such Proceeding (or part thereof) was authorized by a
two-thirds vote of the Board of Directors. The right to indemnification
conferred in this Section 1 of Article IV shall be a contract right and shall
include the right to be paid by the Company for expenses to be incurred in
defending or prosecuting any such Proceeding in advance of its final
disposition.
The right to indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 1 of Article IV shall not be exclusive of any other right to which any
person may be entitled under any statute, provision of the Restated Articles of
Incorporation, or Bylaw, an agreement, a resolution of shareholders or
directors, or otherwise both as to action in such person's official capacity and
as to action in another capacity while holding such office.
-3-
<PAGE>
The Company may purchase and maintain insurance or furnish similar
protection, including, but not limited to, providing a trust fund, letter of
credit, or self-insurance, on behalf of any person who is a director, officer,
employee, or agent of the Company or who, while a director, officer, employee,
or agent of the Company, is serving at the request of the Company as a director,
officer, partner, trustee, employee, or agent of a Company Affiliate, against
any liability asserted against and incurred by such director, officer, employee,
or agent in such capacity or arising out of such director's, officer's,
employee's, or agent's status as such, whether or not the Company would have
the power to indemnify such director, officer, employee, or agent against such
liability under the NMBCA.
The Company may, by action of its Board of Directors, authorize one or
more officers to grant rights to indemnification and advancement of expenses to
employees or agents of the Company on such terms and conditions as such officer
or officers deem appropriate under the circumstances.
For purposes of this Section 1 of Article IV, references to "fines"
shall include any excise taxes assessed on a person with respect to any employee
benefit plan or trust, and a person who acted in good faith and in a manner such
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan or trust shall be deemed to have acted
in a manner "not opposed to the best interests of the Company."
SECTION 2. INDEMNIFICATION IN FEDERAL REGULATORY PROCEEDINGS. Each
person who is a party to any administrative proceeding or civil action
instituted by any federal banking agency (a "Federal Regulatory Proceeding"),
based upon, arising from, relating to, or by reason of the fact that such person
is or was a director or officer of the Company, or is or was serving at the
request of the Company as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation or non-profit corporation,
cooperative, partnership, joint venture, trust, or other incorporated or
unincorporated enterprise, or any employee benefit plan or trust (each, a
"Company Affiliate"), shall be indemnified and held harmless by the Company to
the fullest extent authorized by the NMBCA and allowed by 12 U.S.C. 1828(k) and
regulations thereunder, 12 C.F.R. Part 359, as the same exist on the date of the
adoption of this Bylaw [January 23, 1998] or as they may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than the NMBCA, 12
U.S.C. 1828(k), and the regulations thereunder permitted the Company to provide
prior to such amendment), against any and all legal and other professional fees
and expenses (including, without limitation, investigation expenses and expert
witnesses' and attorneys' fees and expenses) ("Legal Expenses") actually
incurred by such person in connection with a Federal Regulatory Proceeding;
provided, however, that (except for Legal Expenses and restitution covered by
insurance or a fidelity bond as provided in this Section 2 of Article IV) such
person shall not be indemnified against any civil money penalty, judgment, or
other liability or Legal Expenses in connection with any Federal Regulatory
Proceeding that results in a final order or settlement pursuant to which such
person is assessed a civil money penalty, is removed from office, or is required
to cease and desist from or to take any affirmative action described in Section
8(b) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(b). Payment or
reimbursement of Legal Expenses by the Company, including any payment in advance
-4-
<PAGE>
of final disposition of the Federal Regulatory Proceeding, shall be made in
accordance with the procedure set forth in 12 C.F.R. Part 359. The right to
indemnification conferred in this Section 2 of Article IV, subject to the
limitations contained in 12 C.F.R. Part 359, shall be a contract right and shall
include the right to be paid by the Company for expenses to be incurred in
defending any Federal Regulatory Proceeding in advance of its final disposition.
The right to indemnification and the payment of Legal Expenses
incurred in defending a Federal Regulatory Proceeding in advance of its final
disposition conferred in this Article IV shall not be exclusive of any other
right allowed by 12 U.S.C. 1828(k) and regulations thereunder to which any
person may be entitled under any statute, provision of the Restated Articles of
Incorporation, or Bylaw, an agreement, a resolution of shareholders or
directors, or otherwise both as to action in such person's official capacity and
as to action in another capacity while holding such office.
The Company may purchase and maintain insurance or fidelity bond on
behalf of any person who is a director, officer, employee, or agent of the
Company or who, while a director, officer, employee, or agent of the Company, is
serving at the request of the Company as a director, officer, partner, trustee,
employee, or agent of a Company Affiliate, against any liability for Legal
Expenses or for restitution to the Company arising in a Federal Regulatory
Proceeding asserted against and incurred by such director, officer, employee, or
agent in such capacity or arising out of such director's, officer's, employee's,
or agent's status as such, and, regardless of whether such person is liable for
any civil money penalty, judgment, or other liability in the Federal Regulatory
Proceeding, the Company may use the proceeds of such insurance or bond to pay or
reimburse such person for Legal Expenses and the amount of any restitution
payable by such person to the Company.
The Company may, by action of its Board of Directors, authorize one or
more officers to grant rights to indemnification and advancement of expenses as
provided in this Section 2 of Article IV to employees or agents of the Company
on such terms and conditions as such officer or officers deem appropriate under
the circumstances.
SECTION 3. GENERAL. Anything in this Article IV to the contrary
notwithstanding, no elimination of this Bylaw and no amendment of this Bylaw
adversely affecting the right of any person to indemnification or advancement of
expenses hereunder shall be effective until the sixtieth day following notice to
such indemnified person of such action, and no elimination of or amendment to
this Bylaw shall deprive any such person of such person's rights hereunder
arising out of alleged or actual occurrences, acts, or failures to act which had
their origin prior to such sixtieth day.
In case any provision in this Article IV shall be determined at any
time to be unenforceable in any respect, the other provisions shall not in any
way be affected or impaired thereby, and the affected provision shall be given
the fullest possible enforcement in the circumstances, it being the intention of
the Company to afford indemnification and advancement of expenses to the persons
indemnified hereby to the fullest extent permitted by law.
-5-
<PAGE>
The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article IV shall, unless otherwise provided when
authorized, continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
References to "serving at the request of the Company" shall include
any service as a director, officer, employee, or agent of the Company which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan or trust, its participants, or
beneficiaries.
The Company's indemnity of any person who was or is serving at its
request as a director, officer, partner, trustee, employee, or agent of a
Company Affiliate shall be reduced by any amounts such person may collect as
indemnification from such Company Affiliate.
ARTICLE V
SHARE CERTIFICATES AND TRANSFER OF SHARES
SECTION 1. SHARE CERTIFICATES. Shares of stock of the Company may, at
the discretion of the Board of Directors, be represented by certificates or may
be uncertificated. Any share certificates of the Company shall be in the form
and contain the provisions determined by the Board of Directors and required by
the NMBCA.
SECTION 2. TRANSFER RULES. The Board of Directors, the Chairman of the
Board, the President, or the Secretary may from time to time promulgate rules or
regulations as it or such officer may deem advisable concerning the issue,
transfer, registration, or replacement of share certificates of the Company.
SECTION 3. REGISTERED SHAREHOLDERS. The Company shall be entitled to
treat the holder of record of any share or shares as the holder in fact of those
shares. The Company shall not be bound to recognize any equitable or other claim
to or interest in any shares on the part of any other person, regardless of
whether the Company has actual or imputed knowledge of a claim of interest,
except as otherwise required by the laws of New Mexico.
ARTICLE VI
FISCAL YEAR AND SEAL
SECTION 1. FISCAL YEAR. The fiscal year of the Company shall begin on
the first day of January and end on the last day of December each year.
SECTION 2. SEAL. The seal of the Company shall be circular in form.
Around the margin of the seal shall be placed the words "First State
Bancorporation" and in the center the words "Corporate Seal Incorporated 1988
New Mexico."
-6-
<PAGE>
ARTICLE VII
AMENDMENTS
These Bylaws may be altered, amended, or repealed by the affirmative
vote of a majority of the Board of Directors at any regular meeting or, if
notice of intention to amend, alter, or repeal the Bylaws is given in the notice
of the meeting, at any special meeting of the Board of Directors.
-7-
<PAGE>
EXHIBIT 23
The Board of Directors
First State Bancorporation:
We consent to incorporation by reference in the registration statements (No.
333-17727) on Form S-3, and (No. 33-92056 and No. 333-3048) on Forms S-8 of
First State Bancorporation of our report dated February 6, 1998, relating to the
consolidated balance sheets of First State Bancorporation and subsidiaries as of
December 31, 1997 and 1996 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, 1997, which report appears in the December
31, 1997, annual report on Form 10-KSB of First State Bancorporation.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
March 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 20,999,596
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,274,195
<INVESTMENTS-CARRYING> 15,235,174
<INVESTMENTS-MARKET> 15,291,473
<LOANS> 288,368,847
<ALLOWANCE> 3,279,457
<TOTAL-ASSETS> 401,044,324
<DEPOSITS> 345,590,697
<SHORT-TERM> 10,105,190
<LIABILITIES-OTHER> 2,597,599
<LONG-TERM> 15,036,463
0
0
<COMMON> 27,673,362
<OTHER-SE> 41,013
<TOTAL-LIABILITIES-AND-EQUITY> 401,044,324
<INTEREST-LOAN> 28,428,332
<INTEREST-INVEST> 3,336,960
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 31,765,292
<INTEREST-DEPOSIT> 10,757,772
<INTEREST-EXPENSE> 12,272,638
<INTEREST-INCOME-NET> 19,492,654
<LOAN-LOSSES> 1,536,597
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,426,292
<INCOME-PRETAX> 5,004,715
<INCOME-PRE-EXTRAORDINARY> 3,330,368
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,330,368
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 5.40
<LOANS-NON> 3,123,000
<LOANS-PAST> 107,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,873,000
<ALLOWANCE-OPEN> 2,510,000
<CHARGE-OFFS> 972,000
<RECOVERIES> 204,000
<ALLOWANCE-CLOSE> 3,279,000
<ALLOWANCE-DOMESTIC> 3,279,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
