<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the fiscal year ended December 31, 1999
-----------------
or
[ ] Transition Report Pursuant to Section13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
----------- -----------
Commission file number: 22-25144
FIRST STATE BANCORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW MEXICO 85-0366665
- -------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7900 JEFFERSON NE
ALBUQUERQUE, NEW MEXICO 87109
- --------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (505) 241-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
- -------------------------------- --------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of the delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates as of
March 22, 2000 was $53,520,642 based upon a price of $12.25 per share.
As of March 22, 2000, there were 4,872,486 shares of common stock issued and
---------
outstanding.
Documents incorporated by reference - none.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I Page
- ------ ----
<S> <C> <C>
Item 1: Business................................................................ 3
Item 2: Properties.............................................................. 9
Item 3: Legal Proceedings....................................................... 9
Item 4: Submission of Matters to a Vote of Securities Holders................... 9
PART II
- -------
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters... 10
Item 6: Selected Financial Data................................................. 10
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.............. 11
Item 8: Financial Statements and Supplementary Data............................. 11
Item 9: Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 11
PART III
- --------
Item 10: Directors and Executive Officers of the Registrant...................... 11
Item 11: Executive Compensation.................................................. 13
Item 12: Security Ownership of Certain Beneficial Owners and Management.......... 18
Item 13: Certain Relationships and Related Transactions.......................... 19
PART IV
- -------
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 20
</TABLE>
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 other Securities and Exchange Commission filings.
<PAGE>
PART I
Item 1: Business.
The Company
First State Bancorporation 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 of Taos ("First State Bank" which,
together with First State Bancorporation, is referred to herein as the "Company"
unless the content indicates otherwise). The Company operates three offices in
Taos, six 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, 1999, the Company had total assets, total deposits, and total stockholders'
equity of $566.9 million, $463.5 million, and $44.4 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 Rancho, Belen, 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 non-interest 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. Continued consolidation in the banking industry has led to the
acquisition of banks with significant market share in New Mexico 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 selective 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, 1999, First State Bank was "well capitalized" under regulatory
capital guidelines.
The Company's executive offices are located at 7900 Jefferson NE., Albuquerque,
New Mexico 87109, and its telephone number is (505) 241-7500.
3
<PAGE>
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 non-interest
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% 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 ten new branches which have contributed $185,037 million in deposits and
$148,873 million in loans.
During the fourth quarter of 1999, the Company's bank subsidiary opened a
mortgage origination division. Management believes that this fee based division
will allow the bank to generate fee income from its branch network and
construction lending activities as well as attract additional customers.
On December 31, 1999, the Company entered into an agreement providing for the
sale of the assets of its subsidiary bank's commercial leasing division in a
transaction which closed March 1, 2000. This sale resulted in approximately $64
million of leases being sold. At closing the gain on the sale amounted to
approximately $879,000, net of transaction costs. Management intends to use the
proceeds from the sale to purchase investment securities, fund loan demand, and
reduce borrowing.
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
4
<PAGE>
contact with customers, maintaining low employee turnover, and endeavoring to
understand the needs and preferences of its customers, the Company is working to
maintain and further enhance its reputation of providing excellent customer
service, allowing it to achieve its growth and earnings goals.
The Company has developed a streamlined management structure that allows it to
make credit and other banking decisions rapidly. Management believes that this
structure, when compared to other competing institutions, enables the Company to
provide a higher degree of service and increased flexibility to creditworthy
customers.
New account relationships. The Company's strategy is to increase its emphasis
on relationship banking with small- and medium-sized businesses and individual
customers across all product lines. The acquisition of most 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, ACCION New Mexico, 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 and the sale of the leasing division (see -
"History") will allow the Company to grow revenues significantly faster than
expenses over the next few years. Management believes these investments will
allow the Company to expand its asset base without a commensurate increase in
non-interest 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 Item 7: "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Asset/Liability
Management."
Growth Strategy
The Company expects to pursue an aggressive growth strategy through a
combination of internal growth, de novo branching, and selective 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.
5
<PAGE>
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 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. The Company will open one new branch in
2000, in Belen, a community approximately 35 miles south of Albuquerque. During
the fourth quarter of 1999, the Company opened a mortgage origination division
to capitalize on its current customer base and attract additional customers
through an expanded product base.
On December 31, 1999, the Company entered into an agreement providing for the
sale of its bank subsidiary's leasing division which closed March 1, 2000. This
sale will provide additional liquidity, and risk-based capital to accommodate
loan demand created by consolidation in the banking industry. Management
believes that this will allow for continued growth in its core loan customers
more profitably than the growth created by the leasing division.
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 million to $1 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
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 (Bernalillo, Sandoval, and
Valencia counties, 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 industries
of technology. 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 Online 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's operations are divided into five regions: Taos which includes
Taos county; Santa Fe which includes Santa Fe county; Albuquerque which includes
Bernalillo county; Los Lunas which includes Valencia and Torrance counties; and
Rio Rancho which includes Sandoval county.
6
<PAGE>
First State Bank. The following table sets forth certain information concerning
the banking offices of First State Bank as of December 31, 1999:
Total
Number of Total Loans and
Location Facilites Deposits Leases
- ---------------------------- --------- ---------- -------------
(Dollars in the thousands)
First State Bank (by Region):
Taos................... 4 $ 95,084 $ 41,221
Santa Fe............... 2 98,976 55,396
Albuquerque............ 6 181,284 243,523
Los Lunas.............. 2 31,497 47,933
Rio Rancho............. 3 58,470 40,565
--------- ---------- -------------
Total 17 $465,311 $428,638
========= ========== =============
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,
residential mortgage loans, various savings programs, installment and personal
loans, safe deposit services, and credit cards.
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, 1999:
Taos................. 41.32%
Bernalillo........... 3.86%
Santa Fe............. 7.54%
Sandoval............. 20.64%
Valencia............. 7.04%
Torrance............. 4.36%
Management believes that its greatest opportunity for growth is in Bernalillo,
Santa Fe, Valencia, and Sandoval counties. First State Bank 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.
7
<PAGE>
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, 1999, the Company had 248 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 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.
Other
For a discussion of asset/liability management, the investment portfolio, loan
portfolio, nonperforming assets, allowance for loan losses, and deposits see
Item 7: "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
8
<PAGE>
Item 2: Properties.
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 13:
"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
building area now
Approximate Approximate utilized for banking Year constructed
land area building area services or
(sq. ft.) (sq. ft.) (sq. ft.) last renovated
------------ ----------- ---------- -----------------
<S> <C> <C> <C> <C>
Facilities (by Region):
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 4,173 Constructed 9-94
Journal Center..... 158,384 18,390 18,390 Renovated 3-98
Petroglyph......... 26,125 2,134 2,134 Constructed 4-99
Operations Center.. 69,755 27,567 23,118 Constructed 8-99
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........... 1,900 1,900 1,900 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 from known 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 1999.
9
<PAGE>
PART II
Item 5: Market for Registrant's 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.
On November 15, 1999, the Company affected a 3-for-2 split of its common stock.
All references to number of shares and per-share computations and amounts have
been restated to reflect the common stock split.
High Low
----------------
1999
----
First Quarter.............. $13.54 $12.33
Second Quarter............. 13.50 12.04
Third Quarter.............. 17.17 12.96
Fourth Quarter............. 15.33 13.00
1998
----
First Quarter.............. $18.50 $12.50
Second Quarter............. 18.25 15.17
Third Quarter.............. 16.67 11.37
Fourth Quarter............. 14.00 11.00
1997
----
First Quarter.............. $10.75 $ 9.67
Second Quarter............. 11.67 8.57
Third Quarter.............. 13.67 11.00
Fourth Quarter............. 14.42 11.33
The last reported sale price of the Company's Common Stock on March 15, 2000,
was $11.375 per share. As of March 15, 2000, there were approximately 94
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 $1.2 million or $0.23 per share in 1999,
$790,306 or $0.17 per share in 1998, and $522,870 or $0.14 per share in 1997,
which amounted to 22.29% , 18.76%, and 15.70% of net income in 1999, 1998, and
1997, 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.
Item 6: Selected Financial Data.
Selected Financial Data are filed as part of this report and appear immediately
following the signature page.
Item 7: 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
Selected Financial Data.
10
<PAGE>
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and Qualitative Disclosures About Market Risk are filed as part of
this report and appear within Management's Discussion and Analysis of Financial
Condition and Results of Operations under the caption Asset/Liability
Management.
Item 8: Financial Statements and Supplementary Data.
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 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10: Directors and Executive Officers of the Registrant.
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) 47 President, Chief Executive Officer, and Director
H. Patrick Dee 45 Executive Vice President, Chief Operating Officer,
Secretary, Treasurer, and Director
Brian C. Reinhardt 41 Executive Vice President and Chief Financial Officer
Eloy A. Jeantete (1) 72 Chairman of the Board and Director
Leonard J. DeLayo, Jr. (2) 51 Director
Bradford M. Johnson (1)(2) 49 Director
Douglas M. Smith, M.D.(1)(2) 66 Director
Herman N. Wisenteiner (1)(3) 69 Director
Marshall G. Martin (1) 61 Director
Kevin L. Reid (3) 39 Director
- -------------------
</TABLE>
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Each officer of the Company serves at the discretion of the Board of Directors.
There are no family relationships among any of the directors, officers, or key
employees of the Company. The current authorized number of directors of the
Company is ten.
Michael R. Stanford, a Director of the Company since its organization in 1988,
is President and Chief Executive Officer of the Company and First State Bank.
Mr. Stanford's entire career has been in the banking industry. Prior to joining
First State Bank in 1987, Mr. Stanford spent five years with New Mexico Banquest
Corporation as Senior Vice President in charge of loan administration. Mr.
Stanford is President of the New Mexico Bankers Association. In addition, Mr.
Stanford is involved in a variety of civic organizations. See "Certain
Relationships and Related Transactions - Operations Building."
H. Patrick Dee has been a Director of the Company since 1991 and presently
serves as Executive Vice President, Chief Operating Officer, and
Secretary/Treasurer of the Company, and Executive Vice President and Chief
Operating Officer of First State Bank, a position he has held since December
1991. Prior to joining the Company, Mr. Dee spent four years with New Mexico
Banquest Corporation and, after its acquisition by
11
<PAGE>
Livingston & Co. Southwest, LP in 1988, with NBA. In 1989, Mr. Dee became Senior
Vice President and Chief Financial Officer of Livingston & Co. Southwest, LP.
Mr. Dee is a certified public accountant. See "Certain Relationships and Related
Transactions -Operations Building."
Brian C. Reinhardt, an Executive Vice President and Chief Financial Officer of
the Company, joined First State Bank in September 1994. Prior to joining First
State Bank, Mr. Reinhardt was a Senior Manager with KPMG LLP. Mr. Reinhardt
joined KPMG LLP in 1984.
Eloy A. Jeantete, a Director of the Company since August 1993 and Chairman of
the Board since January 1994, joined First State Bank 53 years ago as a
bookkeeper and has spent his entire working career with First State 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 First State Bank as
outside counsel. Mr. DeLayo serves on the Albuquerque Board of Education. See
"Certain Relationships and Related Transactions - 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 and Related Transactions - 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, Hensley, Shanor, & Martin, LLP, 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 which filed for chapter 11 bankruptcy reorganization in
August 1997 and which emerged from bankruptcy in 1998. Hinkle, Hensley, Shanor
& Martin, LLP, is the Company's corporate counsel. See "Certain Business
Relationships and Related Transactions - Legal Services." Mr. Martin is
involved in a variety of civic organizations.
Kevin L. 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. See "Certain
Relationships and Related Transactions - Operations Building."
12
<PAGE>
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, 1999, except as noted below, all
Section 16(a) filing requirements applicable to its officers, directors, and
greater than 10% beneficial owners were complied with. Eloy A. Jeantete and
Kevin L. Reid failed to timely file Form 4 for activity in the Company's common
stock.
Item 11: Executive Compensation.
The following tables set forth the compensation paid by the Company to the three
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 1999 $250,000 -- $47,188 7,500
President and Chief 1998 $250,000 $ 50,000 $50,370 --
Executive Officer 1997 $220,833 -- $50,405 30,000
H. Patrick Dee 1999 $175,000 -- $42,183 5,250
Secretary and 1998 $175,000 $ 35,000 $47,538 --
Treasurer 1997 $154,583 -- $46,097 15,000
W. Gary Millhollon 1999 $ 70,000 $249,712 $ 8,100 --
Senior Vice President 1998 $ 70,000 $157,146 $ 8,100 --
Bank Subsidiary 1997 $ 70,000 $126,874 $ 8,100 --
Leasing division
Brian C. Reinhardt 1999 $111,930 $ 2,502 $ 7,922 21,000
Executive Vice 1998 $106,000 $ 6,000 $ 9,795 --
President and Chief 1997 $ 86,563 $ 3,000 $ 8,540 15,000
Financial Officer
- ---------------------------------
</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.
13
<PAGE>
Aggregated Option Exercises in Fiscal Year
------------------------------------------
and Fiscal Year-End Options Value
---------------------------------
<TABLE>
<CAPTION>
Number of Unexercised Value of In-the-Money
Shares Value Options at 12/31/99 (#) Options at 12/31/99 ($)
Acquired on Realized Exercisable / (1) Exercisable /
Name Exercise (#) ($) Un-exercisable Un-exercisable
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael R. Stanford -- -- 123,168 $919,434
18,000 $ 73,500
H. Patrick Dee 3,000 $31,200 72,675 $538,781
10,200 $ 46,050
Brian C. Reinhardt -- -- 16,950 $ 50,813
27,000 $ 13,500
- ---------------------
</TABLE>
(1) The closing price of the Company's Common Stock on December 31, 1999, was
$13.75 per share.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
[Individual Grants]
- ---------------------------------------------------------------------------------------------------
Number of Percent of total
securities options/SARs
underlying granted to Exercise or Grant Date
options/SARs employees in base price Expiration Present
Name granted (#) fiscal year ($/Sh) date Value(1)
- ------------------- ------------ ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Michael R. Stanford 7,500 7.30% $ 6.00 4/23/2009 $ 63,469
H. Patrick Dee 5,250 5.11% $ 6.00 4/23/2009 $ 44,428
Brian C. Reinhardt 21,000 20.44% $16.08 7/23/2009 $154,560
- ---------------------
</TABLE>
(1) Options were valued using the Black-Scholes option pricing model, which
generates a theoretical value based upon certain factors and assumptions.
Therefore, the value which is calculated is not intended to predict future
prices of the Company's Common Stock. The actual value of a stock option, if
any, is dependent on the future price of the stock, overall stock market
conditions, and continued service with the Corporation. The grant date present
value has not been adjusted for the impact of income tax to the option holder.
There can be no assurance that the values reflected in this table or any other
value will be achieved. In addition to the stock value at the date of grant and
the exercise price, the following assumptions were used to calculate the values
in the table: divided yield of 1.5%; volatility of 58%; risk-free interest rate
of 4.6%; and expected lives of 5 years for Mr. Stanford and Mr. Dee; divided
yield of 1.6% volatility of 36%; risk-free interest rate of 4.74%; and expected
life of 5 years for Mr. Reinhardt.
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 $480,000 of term life insurance on Mr. Stanford and $572,708 of
term life insurance on Mr. Dee (the "Term Life Policies"). In addition, First
State Bank also pays the premiums on $795,553 of additional universal life
insurance for Mr. Stanford and $987,292 of additional whole life insurance for
Mr. Dee under which each of these individuals is able to name the beneficiary
(the "Whole Life Policies"). Under the provisions of the part of Term Life
Policies for Mr. Dee the amount of term insurance under 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 Policy being applied to the Whole Life Policy. As a result of the
increasing portion of the premiums which are
14
<PAGE>
allocated to the Whole Life Policy, at the end of the 10 year period the Whole
Life Policy will be fully paid. Upon termination of employment, the Whole Life
Policy would be transferable to Mr. Dee, 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 Policy will
constitute compensation to Mr. Dee.
Stock Option Agreement
Under the terms of a stock option agreement, Michael R. Stanford can exercise an
option to purchase 9,918 shares of Common Stock at a price of $3.34 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: 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) (b) the same
level of fringe benefits as existed on the date of the Control Change for a
period ending three years after the Control Change including, without
limitation, any plan or arrangement to receive and exercise stock options and/or
stock appreciation rights, restricted stock or grants thereof in which the
employee is participating on the date of the Control Change (or plans or
arrangements providing him with substantially similar benefits); (c) an amount
equal to the employee's non-vested accrued benefit in the Company's retirement
plans, determined as of the last valuation date under such plans, if the
employee is not fully vested under the terms of such plans; (d) up to a maximum
of 30 percent of his Compensation for out-placement services for the employee;
and (e) a lump sum payment at the same time as the compensation payment
described in (a) above, if the Company has purchased a split-dollar life
insurance policy on the life of an employee.
"Control Change" is defined in the Plan as (i) a sale or sales (including an
exchange) of shares of the Company, other than pursuant to a public offering, at
one or more times by the Company, a stockholder or stockholders of the Company,
or by any combination of the foregoing, which in the aggregate results in the
beneficial ownership of more than 50% of the combined voting power of the
Company's outstanding securities after the sale or sales by one or more
stockholders who 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.
15
<PAGE>
"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 in 1999 and $5,000 thereafter, and $500 for board
and committee meetings in 1999 and a per meeting fee of $1,000 for board
meetings, and $500 for committee meetings thereafter, and will be reimbursed for
expenses incurred in attending meetings of the Board of Directors and the
committee meetings of the Board of Directors.
Section 401(k) Plan
In 1991 the Company adopted a tax-qualified profit sharing 401(k) plan (the
"Saving Plan") covering all employees who have attained 21 years of age and have
completed one year of service with the Company. Each participant in the Saving
Plan may reduce his or her salary by as much as the lesser of 20% of his or her
compensation or $10,000, in 1999. 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 1999, 1998, and
1997, First State Bank made contributions to the Saving Plan of approximately
$161,000, $146,000, and $125,000, respectively.
All contributions by a participant are 100% vested and non-forfeitable 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.
16
<PAGE>
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 600,000 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.
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 ("non-qualified 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 non-qualified 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.
Upon a change in control of the Company, stock options outstanding under the
Stock Option Plan immediately become fully vested and exercisable. Also, in the
event of a merger or consolidation in which the Company is not the surviving
corporation, the sale of all or substantially all of the Company's assets,
certain reorganizations or the liquidation of the Company, each option granted
under the Stock Option Plan may, at the election of the holder, become
immediately exercisable.
17
<PAGE>
Item 12: 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 15, 2000, 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 NE., Albuquerque, New Mexico 87109.
<TABLE>
<CAPTION>
Name Number of Shares Owned Percentage of Shares Owned
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hovde Capital, Inc.
1826 Jefferson Place, NW
Washington, DC 20036 471,465 (1) 9.58%
John Hancock Advisors, Inc.
101 Humington Avenue
Boston, MA 02199 262,687 5.34%
Darma Properties, Inc.
14 South Swinton Ave.
Delray Beach, FL 33444 369,450 7.51%
Michael R. Stanford 180,183 (2) 3.57%
H. Patrick Dee 98,125 (3) 1.96%
Eloy A. Jeantete 2,000 *
Leonard J. DeLayo, Jr. 132,803 (4) 2.69%
Bradford M. Johnson 246,012 5.00%
Douglas M. Smith, M.D. 35,625 *
Herman N. Wisenteiner 14,758 *
Marshall G. Martin 1,105 *
Kevin L. Reid 4,500 *
Brian C. Reinhardt 15,686 (5) *
All executive officers and directors as
a group (10 persons) 730,797 14.72%
- -----------------------------------------
</TABLE>
* Less than 1%
(1) Represents the aggregate shares held by Hovde Capital, Inc. and its
affiliates: Financial Institution Partners, LP, Financial Institution
Partners II, LP, Hovde Capital, LLC, and Hovde Acquisition, LLC.
(2) Includes 9,918 shares that are subject to an option exercisable at $3.34 per
share, 93,750 shares that are subject to an option which is exercisable at
$5.60 per share, and 18,000 shares that are subject to an option exercisable
at $11.50 per share, and 1,500 shares exercisable at $6.00 per share.
(3) Includes 62,625 shares that are subject to an option which is exercisable at
$5.60 per share, 9,000 shares that are subject to an option exercisable at
$11.50 per share, and 1,050 shares that are subject to an option exercisable
at $6.00 per share.
(4) Includes 18,750 shares that are subject to an option which is exercisable at
$5.60 per share.
(5) Includes 3,750 shares that are subject to an option which is exercisable at
$5.60 per share, and 9,000 shares that are subject to an option exercisable
at $11.50 per share.
18
<PAGE>
Item 13: 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, 1999, the
aggregate balance of the Bank's loans and advances under existing lines of
credit to these parties was $1,615,458, or 0.38% of the Bank's total loans. All
payments of principal and interest on these loans are current. These loans
represented 3.64% of the Company's equity as of December 31, 1999.
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 $284,000,
$219,000, and $205,000 for its services in 1999, 1998 and 1997.
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, LLP,
which serves as the Company's corporate counsel. The Company paid Hinkle, Cox,
Eaton, Coffield & Hensley, LLP, approximately $33,000, $32,000 and $85,000 for
its services in 1999, 1998 and 1997, respectively.
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 $65,600 for 1999, $63,700 for 1998, and $61,800 in 1997,
respectively. In the opinion of management, the lease is on terms similar to
other third-party commercial transactions in the ordinary course of business.
Operations Building
The Company has sold a property it held for construction of an operations
building to a limited liability company with its managing member a corporation
controlled by Kevin L. Reid with ownership interests by Michael R. Stanford, H.
Patrick Dee and certain officers of First State Bank. This company constructed a
building in which FSBT leases significant space for bank operations under a
lease agreement with a 15 year initial term. Lease payments were $145,060 for
the final three months in 1999. In the opinion of management, this transaction
and the related lease are on terms similar to other third-party transactions in
the ordinary course of business.
19
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Exhibits.
Number Description of Exhibits
- ------ -----------------------
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)
10.1 Stock Option Plan of the Company. (6)
10.2 Stock Option Agreement with Michael R. Stanford. (2)
10.3 Executive Income Protection Plan. (4)
21 Subsidiaries of Registrant (2)
23 Consent of KPMG LLP (7)
27 Financial Data Schedule. (7)
____________________
(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, Commission File No.33-68166, declared effective November 3, 1993.
(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) Incorporated by reference from the Company's 10-KSB for the year ended
December 31, 1997.
(6) Incorporated by reference from the Company's Registration Statement on Form
S-8, Commission File No. 333-92795, declared effective December 15, 1999.
(7) Filed Herewith.
Financial Statement Schedules
Exhibit 27
Reports on Form 8-K.
None
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST STATE BANCORPORATION
By: Michael R. Stanford
---------------------------
Michael R. Stanford, President
Dated: March 27, 2000
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 27, 2000
- ------------------------- ----------------
Michael R. Stanford
Eloy A. Jeantete Director March 27, 2000
- ------------------------- ----------------
Eloy A. Jeantete
Director
- ------------------------- ----------------
Leonard J. DeLayo, Jr.
Director
- ------------------------- ----------------
Bradford M. Johnson
Director
- ------------------------- ----------------
Douglas M. Smith, M.D.
Herman N. Wisenteiner Director March 27, 2000
- ------------------------- ----------------
Herman N. Wisenteiner
Executive Vice President,
H. Patrick Dee Secretary, Treasurer and a Director March 27, 2000
- ------------------------- ----------------
H. Patrick Dee
Executive Vice President, Chief Financial
Brian C. Reinhardt Officer, and Principal Accounting Officer March 27, 2000
- ------------------------- ----------------
Brian C. Reinhardt
Marshall G. Martin Director March 27, 2000
- ------------------------- ----------------
Marshall G. Martin
Kevin L. Reid Director March 27, 2000
- ------------------------- ----------------
Kevin L. Reid
</TABLE>
21
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Highlights.............................................................................. 1
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 3
Independent Auditors' Report...................................................................... 15
Consolidated Balance Sheets as of December 31, 1999, and 1998..................................... 16
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998, and 1997....... 17
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999,
1998, and 1997................................................................................... 18
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998, and 1997.................................................................................... 19
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997....... 20
Notes to Consolidated Financial Statements........................................................ 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Years ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income........................................... $ 43,146 $ 36,542 $ 31,765 $ 25,681 $ 20,692
Interest expense.......................................... 14,686 13,142 12,272 9,617 7,385
---------- ---------- ---------- ---------- ----------
Net interest income....................................... 28,460 23,400 19,493 16,064 13,307
Provision for loan and lease losses....................... 3,075 2,322 1,537 1,231 418
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan and lease
losses................................................... 25,385 21,078 17,956 14,833 12,889
Net gain (loss) on call or sale of securities............. -- -- -- 10 (19)
Other non-interest income................................. 5,874 5,053 4,474 2,924 1,702
Loss from credit card processing operation................ -- -- -- -- (1,208)
Non-interest expense...................................... 23,208 19,674 17,426 14,590 10,926
---------- ---------- ---------- ---------- ----------
Income before income taxes and minority interest.......... 8,051 6,457 5,004 3,177 2,438
Income tax expense........................................ 2,845 2,245 1,674 1,116 763
---------- ---------- ---------- ---------- ----------
Income before minority interest........................... 5,206 4,212 3,330 2,061 1,675
Minority interest......................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income................................................ $ 5,206 $ 4,212 $ 3,330 $ 2,061 $ 1,675
========== ========== ========== ========== ==========
Per Share Data:
Net income per diluted share.............................. $ 1.01 $ 0.85 $ 0.81 $ 0.60 $ 0.52
Book value................................................ 9.03 8.61 7.15 6.46 5.92
Tangible book value....................................... 9.18 8.47 6.93 6.17 5.51
Dividends paid............................................ 0.23 0.17 0.14 0.13 0.10
Market price end of period................................ 13.750 13.833 14.250 10.000 8.084
Average diluted common shares outstanding................. 5,142,543 5,264,638 4,804,627 3,907,923 3,855,347
Average Balance Sheet Data:
Total assets.............................................. $ 534,770 $ 431,358 $ 361,970 $ 285,628 $ 229,382
Loans and leases.......................................... 387,878 308,338 272,816 218,776 164,172
Investment securities..................................... 102,281 74,857 48,795 35,611 34,250
Federal funds sold........................................ 3,455 8,724 5,500 2,770 6,717
Deposits.................................................. 431,392 363,294 309,767 242,366 195,079
Stockholders' equity...................................... 44,446 37,315 24,683 18,313 16,817
Performance Ratios:
Return on average assets.................................. 0.97% 0.98% 0.92% 0.72% 0.73%
Return on average common equity........................... 11.71 11.29 13.49 11.25 9.96
Net interest margin....................................... 5.77 5.97 5.96 6.25 6.49
Efficiency ratio.......................................... 67.59 69.15 72.71 76.84 72.80
Earnings to fixed charges:
Including interest on deposits....................... 1.55x 1.49x 1.40x 1.33x 1.49x
Excluding interest on deposits....................... 4.54x 5.41x 4.30x 3.56x 4.76x
Asset Quality Ratios:
Nonperforming assets to total loans, leases and other
real estate owned........................................ 1.10% 2.19% 1.57% 1.17% 1.60%
Net charge-offs to average loans and leases............... 0.40 0.56 0.28 0.26 0.02
Allowance for loan and lease losses to total loans........ 1.26 1.16 1.14 1.00 1.01
Allowance for loan and lease losses to nonperforming
loans.................................................... 192.00 58.00 101.52 153.52 81.58
Capital Ratios:
Leverage ratio............................................ 7.86% 8.75% 6.65% 6.17% 6.55%
Average stockholders' equity to average total assets...... 8.31 8.65 6.82 6.41 7.33
Tier 1 risk-based capital ratio........................... 9.53 11.41 8.30 7.40 7.80
Total risk-based capital ratio............................ 10.55 12.43 13.38 8.30 8.70
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
1999
-------------------------------------------------
Fourth Qtr Third Qtr Second Qtr First Qtr
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Income Statement Data:
Interest income......................................... $ 11,658 $ 11,304 $ 10,363 $ 9,821
Interest expense........................................ 4,084 3,814 3,474 3,315
---------- ---------- ---------- ----------
Net interest income..................................... 7,574 7,490 6,889 6,506
Provision for loan and lease losses..................... 739 903 688 744
---------- ---------- ---------- ----------
Net interest income after provision for loan............ 6,835 6,587 6,201 5,762
and lease losses
---------- ---------- ---------- ----------
Other non-interest income............................... 1,676 1,599 1,292 1,308
Non-interest expense.................................... 6,216 6,024 5,624 5,345
Income tax expense...................................... 840 735 642 628
---------- ---------- ---------- ----------
Net income.............................................. $ 1,455 $ 1,427 $ 1,227 $ 1,097
========== ========== ========== ==========
Net interest margin..................................... 5.84% 5.91% 5.72% 5.75%
========== ========== ========== ==========
Per Share Data:
Net income per diluted share............................ $ 0.29 $ 0.28 $ 0.24 $ 0.21
Book value.............................................. 9.03 8.81 8.58 8.73
Tangible book value..................................... 9.18 8.89 8.63 8.65
Dividends paid.......................................... 0.06 0.06 0.06 0.05
Average diluted common shares outstanding............... 5,063,689 5,065,101 5,184,414 5,255,339
1998
-------------------------------------------------
Fourth Qtr Third Qtr Second Qtr First Qtr
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Income Statement Data:
Interest income......................................... $ 9,693 $ 9,388 $ 8,999 $ 8,462
Interest expense........................................ 3,364 3,292 3,240 3,245
---------- ---------- ---------- ----------
Net interest income..................................... 6,329 6,096 5,759 5,217
Provision for loan and lease losses..................... 570 642 555 555
---------- ---------- ---------- ----------
Net interest income after provision for loan............ 5,759 5,454 5,204 4,662
and lease losses
---------- ---------- ---------- ----------
Other non-interest income............................... 1,318 1,365 1,254 1,116
Non-interest expense.................................... 5,218 5,112 4,865 4,480
Income tax expense...................................... 616 610 560 459
---------- ---------- ---------- ----------
Net income.............................................. $ 1,243 $ 1,097 $ 1,033 $ 839
========== ========== ========== ==========
Net interest margin..................................... 5.81% 6.15% 6.19% 5.92%
========== ========== ========== ==========
Per Share Data:
Net income per diluted share............................ $ 0.24 $ 0.21 $ 0.21 $ 0.19
Book value.............................................. 8.61 8.43 8.23 7.34
Tangible book value..................................... 8.47 8.27 8.09 7.13
Dividends paid.......................................... 0.05 0.04 0.04 0.04
Average diluted common shares outstanding............... 5,246,471 5,267,457 5,279,265 5,262,782
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
General
The Company's net income increased to $5.2 million in 1999, from $4.2
million in 1998, and $3.3 million in 1997. The increase in net income was
primarily due to an increase in net interest income to $28.5 million in 1999,
from $23.4 million in 1998, and $19.5 million in 1997. The increase in net
interest income was due to increases in loans and leases, and increases in
investment securities. The increase in net interest income was partially offset
by increases in non-interest expense to $23.2 million in 1999, from $19.7
million in 1998, and $17.4 million in 1997. The increases in net interest income
and non-interest expense resulted from the Company's expansion strategy which is
to increase market share by capitalizing on the dislocation of customers caused
by continued consolidation in the banking industry. Total assets have grown to
$566.9 million in 1999, from $493.7 million in 1998. Total deposits have grown
to $463.5 million in 1999, from $409.0 million in 1998.
On December 31, 1999, the Company entered into an agreement providing for
the sale of the assets of its subsidiary bank's commercial leasing division in a
transaction which closed March 1, 2000. This sale resulted in approximately $64
million of leases being sold. At closing the gain on the sale amounted to
approximately $879,000, net of transaction costs. Management intends to use the
proceeds from the sale to purchase investment securities, fund loan demand, and
reduce borrowings.
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, 1999, 1998,
and 1997, the Company's average interest-earning assets were $493.6 million,
$392.0 million, and $327.1 million, respectively. For the same periods, the
Company's net interest margins were 5.77%, 5.97%, and 5.96%.
During the years ended December 31, the Company's net interest income
increased by $5.1 million to $28.5 million or 21.62% in 1999 from $23.4 million
in 1998, which was an increase of $3.9 million or 20.05% from $19.5 million in
1997. These increases were due to a $79.6 million or 25.82% increase in average
loans to $387.9 million in 1999, from $308.3 million in 1998, a $35.5 million or
13.0% increase from $272.8 million in 1997. 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 8.74% in 1999, from 9.32%
in 1998, and 9.71% in 1997. The decrease in average yields on commercial and
real estate loans is due to increased competition, and the decrease in prime
rate precipitated by the Federal Reserve Bank's interest rate reductions in the
fourth quarter of 1998. Net interest margin for the fourth quarter of 1999 was
5.84% compared to 5.91% for the previous quarter.
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.
3
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ------------------------------ ------------------------------
Interest Average Interest Average Interest Average
Average Income or Yield Average Income or Yield Average Income or Yield
Balance Expense or Cost Balance Expense or Cost Balance Expense or Cost
-------- ------- ------- -------- ------- ------- -------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans and leases:
Commercial.................. $ 58,454 $ 5,479 9.37% $ 48,275 $ 4,840 10.03% $ 41,771 $ 4,230 10.13%
Real estate--mortgage....... 193,897 18,278 9.43 158,832 16,084 10.13 152,387 15,487 10.16
Real estate--construction... 58,468 6,496 11.11 46,863 5,306 11.32 40,603 4,830 11.90
Consumer.................... 18,624 2,165 11.62 16,668 1,992 11.95 14,789 1,748 11.82
Leases...................... 58,017 4,885 8.42 37,231 3,514 9.44 22,868 2,133 9.33
Other....................... 418 -- -- 469 -- -- 398 -- --
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans and leases..... 387,878 37,303 9.62% 308,338 31,736 10.29% 272,816 28,428 10.42%
Allowance for loan and lease
losses...................... (4,685) (3,654) (2,981)
Securities:
U.S. government............. 95,425 5,328 5.58 69,604 4,066 5.84 43,860 2,758 6.29
State and political
subdivisions:
Nontaxable................. 4,907 227 4.63 3,380 168 4.97 3,196 172 5.38
Taxable.................... -- -- -- -- -- -- 26 2 7.69
Other...................... 1,949 120 6.11 1,873 109 5.77 1,713 105 6.13
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total securities.......... 102,281 5,675 5.55 74,857 4,343 5.80 48,795 3,037 6.22
Federal funds sold........... 3,455 168 4.86 8,724 463 5.31 5,500 300 5.45
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning
assets................... 493,614 43,146 8.74% 391,919 36,542 9.32% 327,111 31,765 9.71%
Non-interest-earning assets:
Cash and due from banks..... 22,029 20,198 16,066
Other ...................... 23,812 22,895 21,774
---------- ----------- -----------
Total non-interest-earning
assets..................... 45,841 43,093 37,840
---------- ----------- -----------
Total assets.............. $534,770 $431,358 $361,970
========== =========== ===========
Liabilities and
Stockholders' Equity
Deposits:
Interest-bearing demand
accounts................... $ 92,526 $ 1,670 1.80% $ 72,839 $ 1,573 2.16% $ 47,175 $ 1,150 2.44%
Certificates of deposit..... 166,576 8,479 5.09 139,272 7,609 5.46 133,105 7,466 5.61
Money market savings
accounts................... 49,209 1,442 2.93 51,087 1,730 3.39 51,881 1,584 3.05
Regular savings accounts.... 32,697 818 2.50 25,915 766 2.95 18,902 558 2.95
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
deposits.................. 341,008 12,409 3.64 289,113 11,678 4.04 251,063 10,758 4.28
Short-term borrowings........ 48,780 1,831 3.75 21,093 954 4.52 13,537 661 4.88
Long-term debt............... 7,145 446 6.24 1,216 113 9.29 916 83 9.06
Convertible subordinated debt -- -- -- 5,595 397 7.10 10,432 766 7.34
Capital leases............... -- -- -- -- -- -- 42 4 9.52
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities............... 396,933 14,686 3.70% 317,017 13,142 4.15% 275,990 12,272 4.45%
Non-interest-bearing demand
accounts.................... 90,384 74,181 58,704
Other non-interest-bearing
liabilities................. 3,007 2,845 2,593
---------- ----------- -----------
Total liabilities.......... 490,324 394,043 337,287
Stockholders' equity......... 44,446 37,315 24,683
---------- ----------- -----------
Total liabilities and
stockholders'
equity...................... $534,770 $431,358 $361,970
========== ---------- =========== ---------- =========== ---------
Net interest income.......... $28,460 $23,400 $19,493
========== ========== =========
Net interest spread ........ 5.04% 5.18% 5.26%
Net interest margin.......... 5.77 5.97 5.96
Ratio of average
interest-earning assets
to average interest-bearing
liabilities................. 124.36 123.63 118.52
</TABLE>
4
<PAGE>
Loan fees of $2.6 million, $2.3 million, and $1.9 million are included in
interest income for the years ended December 31, 1999, 1998, and 1997,
respectively.
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,
--------------------------------------------------
1999 vs. 1998 1998 vs. 1997
increase (decrease) increase (decrease)
due to changes in due to changes in
--------------------------------------------------
Volume Rate Total Volume Rate Total
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans and leases:
Commercial........................................... $1,021 ($382) $ 639 $ 659 ($ 49) $ 610
Real estate--mortgage................................ 3,550 (1,356) 2,194 655 (58) 597
Real estate--construction............................ 1,314 (124) 1,190 745 (269) 476
Consumer............................................. 234 (61) 173 222 22 244
Leases............................................... 1,962 (591) 1,371 1,340 41 1,381
------ ------ ------ ------ ------ ------
Total loans and leases............................ 8,081 (2,514) 5,567 3,621 (313) 3,308
Securities:
U.S. government...................................... 1,508 (246) 1,262 1,619 (311) 1,308
States and political subdivisions:
Nontaxable........................................ 76 (17) 59 10 (14) (4)
Taxable........................................... -- -- -- (2) -- (2)
Other................................................ 4 7 11 10 (7) 3
------ ------ ------ ------ ------ ------
Total securities.................................. 1,588 (256) 1,332 1,637 (332) 1,305
Federal funds sold................................... (280) (15) (295) 176 (13) 163
------ ------ ------ ------ ------ ------
Total interest-earning assets..................... 9,389 (2,785) 6,604 5,434 (658) 4,776
------ ------ ------ ------ ------ ------
Interest-bearing liabilities
Deposits:
Interest-bearing demand accounts..................... 425 (328) 97 626 (203) 423
Certificates of deposit.............................. 1,492 (622) 870 346 (203) 143
Money market savings accounts........................ (64) (224) (288) (24) 170 146
Regular savings accounts............................. 200 (147) 53 207 -- 207
------ ------ ------ ------ ------ ------
Total interest-bearing deposits................... 2,053 (1,321) 732 1,155 (236) 919
Short-term borrowings.................................. 1,252 (375) 877 369 (76) 293
Notes payable.......................................... 551 (218) 333 27 3 30
Convertible subordinated debt.......................... (397) -- (397) (355) (14) (369)
Capital leases......................................... -- -- -- (4) -- (4)
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities................ 3,459 (1,914) 1,545 1,192 (323) 869
------ ------ ------ ------ ------ ------
Total increase (decrease) in net interest income $5,930 ($871) $5,059 $4,242 ($335) $3,907
====== ====== ====== ====== ====== ======
</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.
5
<PAGE>
To effectively measure and manage interest rate risk, the Company uses gap
analysis and simulation analysis to determine the impact on net interest income
under various interest rate scenarios, balance sheet trends, and strategies.
From these analyses, interest rate risk is quantified and appropriate strategies
are developed and implemented. Additionally, duration and market value
sensitivity measures are utilized when they provide added value to the overall
interest rate risk management process. The overall interest rate risk position
and strategies are reviewed by management and the Bank's Board of Directors on
an ongoing basis.
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, 1999,
the Company's cumulative interest rate gap for the period up to three months was
a positive $48.3 million and for the period up to one year was a positive $52.6
million. Based solely on the Company's interest rate gap of twelve months or
less, net income of the Company could be unfavorably impacted by an increase in
interest rates or favorably impacted by a decrease in interest rates.
The following table sets forth the estimated maturity or repricing,
and the resulting interest rate gap of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1999. The amounts are based upon
regulatory reporting formats and, therefore, may not be consistent with
financial information appearing elsewhere in this report that has been prepared
in accordance with generally accepted accounting principles. The amounts could
be significantly affected by external factors such as changes in prepayment
assumptions, early withdrawals of deposits, and competition.
<TABLE>
<CAPTION>
Three
Less months
than to less One to Over
three than one five five
months year years years Total
-------- -------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities................................... $ 17,450 $ 5,557 $ 63,723 $ 8,071 $ 94,801
Federal funds sold..................................... -- -- -- -- --
Loans and leases:
Commercial........................................... 42,104 11,104 11,270 1,223 65,701
Real estate.......................................... 134,486 70,276 60,118 16,804 281,684
Consumer............................................. 4,475 5,712 9,583 433 20,203
Leases............................................... 2,282 11,547 42,194 5,027 61,050
-------- -------- -------- --------- --------
Total interest-earning assets..................... 200,797 104,196 186,888 31,558 523,439
-------- -------- -------- --------- --------
Interest-bearing liabilities:
Savings and NOW accounts................................ 53,475 -- -- 131,765 185,240
Certificates of deposit of $100,000 or more............. 19,291 49,619 25,293 520 94,723
Other time accounts..................................... 25,863 50,367 17,991 48 94,269
Other interest-bearing liabilities...................... 53,828 -- -- -- 53,828
-------- -------- -------- --------- --------
Total interest-bearing liabilities................ 152,457 99,986 43,284 132,333 428,060
-------- -------- -------- --------- --------
Interest rate gap......................................... $ 48,340 $ 4,210 $143,604 ($100,775) $ 95,379
-------- -------- -------- --------- --------
Cumulative interest rate gap at December 31, 1999......... $ 48,340 $ 52,550 $196,154 $ 95,379
======== ======== ======== ========-
Cumulative gap ratio at December 31, 1999................. 1.32 1.21 1.66 1.22
======== ======== ======== =========
</TABLE>
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income and market value of portfolio equity (market value
of assets, less the market value of liabilities). The interest rate scenarios
presented in the table include interest rates at December 31, 1999, and as
adjusted by instantaneous parallel rate changes upward and downward of up to 200
basis points. Each rate scenario reflects unique prepayment and repricing
assumptions.
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, this analysis is not intended to
be a forecast of the actual effect of a change in market interest rates on the
Company. This analysis is based on the Company's assets and liabilities, at
December 31, 1999.
<TABLE>
<CAPTION>
Change in Interest Rates Net Interest Income Market Value of Portfolio Equity
------------------------ ------------------- ---------------------------------
<S> <C> <C>
+200 -3% -9%
+100 -2% -5%
0 0 0
-100 +2% +5%
-200 +2% +11%
</TABLE>
6
<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, 1999 and 1998, the
carrying value exceeded the market value by approximately $99,000 and $25,000,
respectively. At December 31, 1997, the market value exceeded the carrying
value by approximately $56,000.
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1999 1998 1997
------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury securities................................ 547 $ 5,669 $12,986
U.S. government agency securities....................... 87,569 109,753 43,442
Obligations of states and political subdivisions........ 4,593 4,982 3,145
Other securities........................................ 2,092 1,700 1,936
------- -------- -------
Total investment securities.......................... $94,801 $122,104 $61,509
======= ======== =======
</TABLE>
The table below provides the carrying values, maturities and weighted
average yield of the investment portfolio of the Company as of December 31,
1999.
<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..................................... $ 547 0.85 4.60%
------- -------- -------
Total U.S. Treasury securities.................... 547 0.85 4.60
U.S. government agency securities
One year or less..................................... 21,910 0.21 5.83
After one through five years......................... 62,853 3.08 6.14
After five through ten years......................... 1,921 5.36 6.60
After ten years............................ 885 13.78 6.52
------- -------- -------
Total U.S. government agency securities........... 87,569 2.52 6.07
Obligations of states and political subdivisions
One year or less..................................... 550 0.56 4.56
After one through five years......................... 870 2.59 4.81
After five through ten years......................... 2,173 6.39 4.27
After ten years...................................... 1,000 12.68 5.13
------- -------- -------
Total states and political subdivisions
securities...................................... 4,593 6.34 4.59
Other securities........................................ 2,092 -- 5.69
------- -------- -------
Total investment securities....................... $94,801 2.70 5.99%
======= ======== =======
</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,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ----------------- ------------------ ------------------ ------------------
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................... $ 65,702 15.3% $ 53,942 16.1% $ 45,480 15.8% $ 36,578 14.6% $ 23,204 12.6%
Real estate--mortgage........ 215,839 50.4 167,980 50.1 153,550 53.3 148,715 59.3 115,640 62.9
Real estate--construction.... 65,844 15.4 47,357 14.1 41,943 14.5 35,737 14.2 34,924 19.0
Consumer and other........... 20,203 4.7 18,089 5.5 16,809 5.8 13,238 5.3 10,091 5.5
Leases....................... 61,050 14.2 47,651 14.2 30,587 10.6 16,658 6.6 -- --
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans and
leases.................... $428,638 100.0% $335,019 100.0% $288,369 100.0% $250,926 100.0% $183,859 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
On December 31, 1999, the Company entered into an agreement providing
for the sale of the assets of its subsidiary bank's commercial leasing division
in a transaction which closed March 1, 2000. This sale resulted in
approximately $64 million of leases being sold. At closing the gain on the sale
amounted to approximately $879,000, net of transaction costs. Management
intends to use the proceeds from the sale to purchase investment securities,
fund loan demand, and reduce borrowings.
7
<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,
1999. 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................................... $ 8,122 $ 8,628 $ 1,193 $ 17,943
Real estate.................................. 12,437 14,185 13,225 39,847
Consumer..................................... 6,710 8,639 433 15,782
Leases....................................... 13,829 42,194 5,027 61,050
-------- -------- ------- --------
Total fixed-rate loans and leases......... 41,098 73,646 19,878 134,622
-------- -------- ------- --------
Variable-rate loans:
Commercial................................... 45,086 2,642 30 47,758
Real estate.................................. 192,325 45,933 3,579 241,837
Consumer..................................... 3,477 944 -- 4,421
-------- -------- ------- --------
Total variable-rate loans................. 240,888 49,519 3,609 294,016
-------- -------- ------- --------
Total loans and leases.................... $281,986 $123,165 $23,487 $428,638
======== ======== ======= ========
</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,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans and leases past due 90 days or more............ $ 84 $ 79 $ 107 $ 689 $ 289
Non-accrual loans and leases......................... 2,725 6,566 3,123 946 1,808
Restructured loans................................... -- -- -- -- 172
-------- -------- -------- -------- --------
Total nonperforming loans and leases............... 2,809 6,645 3,230 1,635 2,269
Other real estate owned.............................. 1,917 697 1,327 1,362 678
-------- -------- -------- -------- --------
Total nonperforming assets......................... $4,726 $7,342 $4,557 $2,997 $2,947
======== ======== ======== ======== ========
Allowance for loan and lease losses.................. $5,387 $3,875 $3,279 $2,510 $1,851
======== ======== ======== ======== ========
Potential problem assets............................. $5,133 $3,289 $3,873 -- --
======== ======== ======== ======== ========
Ratio of total nonperforming assets to total
assets............................................. 0.83% 1.49% 1.14% 0.92% 1.16%
Ratio of total nonperforming loans and leases to
total loans and leases............................. 0.66 1.98 1.12 0.65 1.23
Ratio of allowance for loan and lease losses to
total nonperforming loans and leases............... 191.76 58.31 101.52 153.52 81.58
</TABLE>
8
<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,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, beginning of period..... $3,875 $3,280 $2,510 $1,851 $1,468
Charge-offs:
Commercial and other....................................... 1,315 1,083 462 438 98
Real estate loans.......................................... 256 389 72 70 162
Consumer loans............................................. 101 98 95 246 85
Credit cards............................................... 129 171 253 -- --
Leases..................................................... 191 180 90 -- --
------ ------ ------ ------ ------
Total charge-offs....................................... 1,992 1,921 972 754 345
------ ------ ------ ------ ------
Recoveries:
Commercial and other....................................... 255 109 56 13 197
Real estate loans.......................................... 50 3 35 40 85
Consumer loans............................................. 55 68 76 129 28
Credit cards............................................... 31 14 4 -- --
Leases..................................................... 38 -- 34 -- --
------ ------ ------ ------ ------
Total recoveries........................................ 429 194 205 182 310
------ ------ ------ ------ ------
Net charge-offs.............................................. 1,563 1,727 767 572 35
Provision for loan and lease losses.......................... 3,075 2,322 1,537 1,231 418
------ ------ ------ ------ ------
Allowance for loan and lease losses, end of period........... $5,387 $3,875 $3,280 $2,510 $1,851
====== ====== ====== ====== ======
As a percentage of average total loans and leases:
Net charge-offs............................................ 0.40% 0.56% 0.28% 0.26% 0.02%
Provision for loan and lease losses........................ 0.79 0.75 0.56 0.56 0.25
Allowance for loan and lease losses........................ 1.39 1.26 1.20 1.15 1.13
As a percentage of total loans and leases at year-end:
Allowance for loan and lease losses........................ 1.26 1.16 1.14 1.00 1.01
As a multiple of net charge-offs:
Allowance for loan and lease losses........................ 3.45 2.24 4.27 4.39 52.89
Income before income taxes and provision for loan
and lease losses......................................... 7.12 5.08 8.52 7.71 81.61
</TABLE>
9
<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,
--------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
(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
Amount loans Amount loans Amount loans Amount loans Amount loans
of and of and of and of and 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............... $3,876 15.30% $2,187 16.10% $ 829 15.77% $ 600 14.57% $ 402 12.62%
Real estate............ 710 65.80 867 64.28 1,700 67.79 1,560 73.51 1,269 81.89
Leases................. 305 14.20 404 14.22 150 10.61 150 6.64 -- --
Consumer............... 496 4.70 417 5.40 600 5.83 200 5.28 180 5.49
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Total
allowance
for loan
and lease
losses............ $5,387 100.00% $3,875 100.00% $3,279 100.00% $2,510 100.00% $1,851 100.00%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
Deposits
The following table presents the average balances outstanding for each
major category of the Company's deposits and weighted average interest rate paid
for interest-bearing deposits for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- ------------------------
(Dollars in thousands)
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand accounts....... $ 92,526 1.80% $ 72,839 2.16% $ 47,175 2.44%
Certificates of deposit................ 166,576 5.09 139,272 5.46 133,105 5.61
Money market savings accounts.......... 49,209 2.93 51,087 3.39 51,881 3.05
Regular savings accounts............... 32,697 2.50 25,915 2.95 18,902 2.95
Non-interest-bearing demand
accounts.............................. 90,384 -- 74,181 -- 58,704 --
-------- ------------- -------- ------------- -------- -------------
Totals............................... $431,392 3.64% $363,294 4.04% $309,767 4.28%
======== ============= ======== ============= ======== =============
</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,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- ------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months or less................... $19,291 20.37% $10,518 17.71% $11,710 21.00%
Three through twelve months............ 49,619 52.38 42,663 71.84 33,096 59.35
Over twelve months..................... 25,813 27.25 6,204 10.45 10,960 19.65
-------- ------------- -------- ------------- -------- -------------
Totals............................... $94,723 100.00% $59,385 100.00% $55,766 100.00%
======== ============= ======== ============= ======== =============
</TABLE>
10
<PAGE>
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase totaled $38.9 million, $36.7
million, and $10.1 million at December 31, 1999, 1998, and 1997, respectively.
The weighted average interest rate on securities sold under agreements to
repurchase was 3.73%, 4.07%, and 4.88% at December 31, 1999, 1998, and 1997,
respectively.
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance................................................... $38,927,736 $36,692,999 $10,105,190
Weighted average interest rate............................ 3.73% 4.07% 4.88%
Maximum amount outstanding at any month end............... $48,948,930 $36,692,999 $12,582,073
Average balance outstanding during the period............. $45,325,000 $20,978,000 $11,213,000
Weighted average interest rate during the period.......... 3.59% 4.53% 4.71%
</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,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Return on average assets............................. 0.97% 0.98% 0.92%
Return on average equity............................. 11.71 11.29 13.49
Dividend payout ratio................................ 22.28 18.76 15.70
Average equity to average assets..................... 8.31 8.65 6.82
</TABLE>
Results of Operations--Years Ended December 31, 1999, 1998, and 1997
Overview. The Company's net income increased to $5.2 million from $4.2
million in 1998, and from $3.3 million in 1997. Net interest income increased to
$28.5 million in 1999, compared to $23.4 million in 1998, and $19.5 million in
1997. This increase was offset by non-interest expenses that increased to $23.2
million in 1999, compared to $19.7 million in 1998, and $17.4 million in 1997.
Income tax expense increased to $2.8 million in 1999, from $2.2 million in 1998,
and $1.7 million in 1997.
Interest Income. Interest income increased to $43.1 million in 1999, from
$36.5 million in 1998, and $31.8 million in 1997. This increase was due to an
increase in average interest-earning assets. Average interest-earning assets
were $493.6 million in 1999, compared to $391.9 million in 1998, and $327.1
million in 1997. Average yield on interest-earning assets decreased to 8.74% in
1999, from 9.32% in 1998, and from 9.71% in 1997. The increase in average
interest-earning assets occurred in loans and leases, and investment securities,
and was funded by an increase in interest-bearing liabilities. The average
balance in investment securities increased to $102.3 million in 1999, from $74.9
million in 1998, and $48.8 million in 1997. The average balance in loans and
leases increased to $387.9 million in 1999, from $308.3 million in 1998, and
$272.8 million in 1997. The average yield on loans and leases decreased to 9.62%
in 1999, from 10.29% in 1998, and from 10.42% in 1997. The decrease in average
yields on loans is due to increased competition and the decrease in the prime
rate precipitated by the Federal Reserve Bank's interest rate reductions in the
fourth quarter of 1998. Management believes that the Federal Reserve Bank's
interest rate increases in the fourth quarter of 1999 will have a positive
effect on the average yield on loans and investment securities, but increased
competition will partially mitigate the increase in loan yields.
11
<PAGE>
Interest Expense. Interest expense increased to $14.7 million in 1999, from
$13.1 million in 1998, and $12.3 million in 1997. This increase was due to
increases in average interest-bearing liabilities. Average interest-bearing
liabilities increased to $396.9 million in 1999, from $317.0 million in 1998,
and $276.0 million in 1997. The increase in average interest-bearing liabilities
was due to an increase in average interest-bearing deposits of $51.9 million, an
increase in average short-term borrowings of $27.7 million, and an increase in
average long-term debt of $5.9 million. The increase in interest-bearing
deposits is a result of the Company's success in increasing its market share.
The increase in short-term borrowings is the result of an increase in securities
sold under agreements to repurchase and Federal funds purchased. These are
agreements with customers with high dollar short-term balances which the Company
invests in like-termed securities. The average cost of interest-bearing
liabilities decreased to 3.70% in 1999, from 4.15% in 1998, and 4.45% in 1997.
The decrease in the average cost of interest-bearing liabilities was the result
of decreased rates paid on interest-bearing deposits due to the general decline
in interest rates and the Federal Reserve Bank's rate reductions in the fourth
quarter of 1998. The average cost of deposits decreased to 3.64% in 1999, from
4.04% in 1998, and 4.28% in 1997. Management expects the Federal Reserve Bank's
increase in interest rates in the fourth quarter of 1999 to cause upward
pressure on deposit and borrowing rates.
Net Interest Income. Net interest income increased to $28.5 million in
1999, from $23.4 million in 1998, and $19.5 million in 1997. This increase was
due to increases in average loans and leases of $79.5 million and average
investment securities of $27.4 million. Net interest margin decreased to 5.77%
in 1999, from 5.97% in 1998. The average yield on interest earning assets
decreased to 8.74% in 1999, from 9.32% in 1998, and the cost of interest-bearing
liabilities decreased to 3.70% in 1998, from 4.15% in 1998, as a result of
general decrease in interest rates and the Federal Reserve Bank Board's interest
rate reductions in the fourth quarter of 1998. Management expects the Federal
Reserve Bank's increase in rates during the fourth quarter of 1999 to increase
the yield on total interest-earning assets mitigated by increasing competition,
and increase the cost of interest-bearing liabilities. The Company's net
interest margin for the fourth quarter of 1999 was 5.84% compared to 5.81% for
the fourth quarter of 1998.
Provision for Loan and Lease Losses. The provision for loan and lease
losses increased to $3.1 million in 1999, from $2.3 million in 1998, and $1.5
million in 1997. This increase was necessitated by the increase in loans and
leases outstanding. Charge-offs net of recoveries of loans and leases were $1.6
million in 1999, $1.7 million in 1998, and $768,000 in 1997. The percentage of
total charge-offs to average loans and leases was 0.40% in 1999 and 0.56% in
1998.
Non-interest Income. Non-interest income was $5.9 million in 1999, compared
to $5.1 million in 1998, and $4.5 million in 1997. The increase for 1999 from
1998 and 1997 was due to increased service charges on deposit accounts,
resulting from increased deposits, and increased credit card merchant fees, off-
set by a reduction in operating lease income. Service charges on deposit
accounts were $2.1 million in 1999, $1.7 million in 1998, and $1.5 million in
1997. Rental income from operating leases was $503,000 in 1999, $821,000 in
1998, and $1.0 million in 1997. The decrease in operating lease income was the
result of leases classified as operating leases maturing or being paid off
early, while new lease volume was in leases classified as loans. Credit card
transaction income was $1.8 million in 1999, $1.3 million in 1998, and $1.2
million in 1997. Management intends to continue to provide for potential loan
losses based upon growth in the portfolio, trends in delinquencies, charge-off
experience, and local and national economic conditions.
Non-interest Expense. Non-interest expense increased to $23.2 million in
1999, from $19.7 million in 1998, and $17.4 million in 1997. This increase was
due largely to increases in salaries and employee benefits, occupancy,
equipment, and marketing expense as a result of the Company's growth. Salaries
and employee benefits increased to $10.8 million in 1999, from $8.9 million in
1998, and $7.5 million in 1997. Occupancy expense increased to $2.6 million in
1999, from $2.3 million in 1998, and $2.1 million in 1997. Equipment expense
increased to $1.6 million in 1999, from $1.5 million in 1998, and $1.2 million
in 1997. Marketing expense increased to $1.1 million in 1999, compared to
$856,000 in 1998, and $760,000 in 1997. 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. Management anticipates
that non-interest expense will continue to increase with additional growth.
12
<PAGE>
Income Tax Expense. Income tax expense increased to $2.8 million in 1999,
from $2.2 million in 1998, and $1.7 million in 1997. In 1998, the Company began
paying state income taxes in New Mexico, to which it was not subject in previous
years due to state tax net operating loss carry-forwards utilized. Management
anticipates that the Company's marginal tax rate will be slightly higher in
2000.
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits, and loan and
lease repayments. These funds are used to make loans and leases, acquire
investment securities and other assets, and fund continuing operations.
Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and unscheduled loan 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 $463.5 million at December
31, 1999, from $409.0 million at December 31, 1998. Growth in deposits has
occurred primarily as a result of the Company's efforts to increase market share
by taking advantage of market dislocations caused by the acquisition of local
competitors and growth in the economy of the Company's trade area.
Net loans of the Company increased to $423.3 million at December 31, 1999,
from $331.1 million as of December 31, 1998. During 1999, real estate loans
increased by $66.3 million, leases increased by $13.4 million, commercial loans
increased by $11.8 million, and consumer loans increased by $2.1 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.
The sale of the subsidiary bank's leasing division will increase the
Company's liquidity by $63.0 million in the first quarter of 2000. Management
intends to use this liquidity to invest in investment securities, fund loan
growth, and reduce borrowings.
Management anticipates that the Company will continue to rely primarily on
customer deposits and loan repayments, as well as retained earnings, to provide
liquidity and will use funds so provided primarily to make loans 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").
Capital Resources
The Company's total stockholders' equity increased to $44.4 million at
December 31, 1999, from $44.1 million at December 31, 1998. Of the $273,000
increase, $5.2 million was produced by earnings offset by stock repurchases of
$3.0 million and dividend payments of $1.2 million. Management currently
intends to continue to retain a major portion of the Company's earnings to
support anticipated growth. As of December 31, 1999, the Company and its
subsidiary bank met the fully phased-in regulatory capital requirements as
further disclosed in note 10 to the consolidated financial statements.
Impact of Inflation
The consolidated 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.
13
<PAGE>
Forward-Looking Statements
Statements which are forward-looking are not historical facts, and involve
risks and uncertainties that could cause the Company's results to differ
materially from those in any forward-looking statements. These risks include the
possible loss of key personnel, need for additional capital should the Company
experience faster than anticipated growth, changes in economic conditions,
interest rate risk, factors which could affect the Company's ability to compete
in its trade areas, changes in regulations and governmental policies, and the
risks described in the Company's Securities and Exchange Commission filings.
14
<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 subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1999. 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 subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Albuquerque, New Mexico
January 28, 2000, except as to note 15
which is as of March 1, 2000
15
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 2)............................................. $ 22,725,861 $ 18,093,685
Federal funds sold........................................................... -- --
------------ ------------
Total cash and cash equivalents........................................ 22,725,861 18,093,685
Investment securities (note 3):
Available for sale (at market, amortized cost of $74,227,391 and
$61,105,643 at December 31, 1999 and 1998)................................. 72,211,289 61,147,174
Held to maturity (at amortized cost, market of $22,490,690 and
$60,932,276 at December 31, 1999 and 1998)................................. 22,590,081 60,957,141
------------ ------------
Total investment securities............................................ 94,801,370 122,104,315
Loans and leases net of unearned interest (note 4)........................... 428,637,703 335,019,140
Less allowance for loan and lease losses..................................... 5,386,622 3,874,688
------------ ------------
Net loans and leases................................................... 423,251,081 331,144,452
Premises and equipment, net (note 5)......................................... 15,060,722 14,791,656
Accrued interest receivable.................................................. 3,062,575 2,513,957
Other real estate owned...................................................... 1,917,126 697,204
Goodwill, less accumulated amortization of $1,026,541 and $922,335 at
December 31, 1999 and 1998.................................................. 569,264 673,469
Other assets................................................................. 5,495,565 3,635,623
------------ ------------
Total assets.......................................................... $566,883,564 $493,654,361
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6):
Non-interest-bearing...................................................... $ 89,303,965 $ 87,246,490
Interest-bearing.......................................................... 374,231,608 321,774,705
------------ ------------
Total deposits........................................................ 463,535,573 409,021,195
Securities sold under agreements to repurchase (note 7)..................... 38,927,736 36,692,999
Other liabilities........................................................... 8,842,326 2,590,480
Long-term debt (note 7)..................................................... 11,150,902 1,195,569
------------ ------------
Total liabilities..................................................... 522,456,537 449,500,243
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, 5,158,846 and
5,128,114 issued and outstanding at December 31, 1999 and 1998............. 29,459,807 29,107,146
Treasury stock, at cost (228,750 shares at December 31, 1999)............... (3,012,031) --
Retained earnings........................................................... 19,309,878 15,019,562
Accumulated other comprehensive gains (losses) -
Unrealized gains (losses) on investment securities (notes 1, 3, and 9)..... (1,330,627) 27,410
------------ ------------
Total stockholders' equity............................................. 44,427,027 44,154,118
Commitments and contingencies (note 12)...................................... -- --
------------ ------------
Total liabilities and stockholders' equity............................. $566,883,564 $493,654,361
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and leases....................... $37,303,249 $31,736,094 $28,428,332
Interest on marketable securities:
Taxable.................................................. 5,447,551 4,174,411 2,864,591
Nontaxable............................................... 227,478 168,286 171,982
Federal funds sold.......................................... 168,006 463,225 300,387
----------- ----------- -----------
Total interest income.................................... 43,146,284 36,542,016 31,765,292
Interest expense:
Deposits.................................................... 12,408,726 11,677,836 10,757,772
Short-term borrowings (note 7).............................. 1,830,981 953,412 660,887
Long-term debt and capital leases........................... 446,600 510,257 853,979
----------- ----------- -----------
Total interest expense.................................. 14,686,307 13,141,505 12,272,638
----------- ----------- -----------
Net interest income..................................... 28,459,977 23,400,511 19,492,654
Provision for loan and lease losses (note 4).................. 3,074,992 2,322,000 1,536,597
----------- ----------- -----------
Net interest income after provision for loan and lease
losses................................................. 25,384,985 21,078,511 17,956,057
----------- ----------- -----------
Other income:
Service charges on deposit accounts......................... 2,106,035 1,736,309 1,451,666
Other banking service fees.................................. 395,012 352,971 231,388
Credit card transaction fees................................ 1,771,106 1,275,674 1,154,511
Operating lease income...................................... 503,233 820,915 1,018,944
Check imprint income........................................ 576,674 466,021 400,156
Other....................................................... 522,789 401,150 218,285
----------- ----------- -----------
Total other income..................................... 5,874,849 5,053,040 4,474,950
----------- ----------- -----------
Other expenses:
Salaries and employee benefits (notes 10 and 11)............ 10,795,796 8,919,743 7,505,937
Occupancy................................................... 2,649,310 2,252,850 2,106,871
Data processing............................................. 1,037,497 761,459 635,276
Credit card interchange..................................... 984,710 724,584 688,986
Equipment................................................... 1,645,794 1,502,127 1,224,517
Leased equipment depreciation............................... 426,730 572,522 660,368
Legal, accounting, and consulting........................... 654,822 559,574 426,510
Marketing................................................... 1,073,045 856,035 759,830
Supplies.................................................... 505,632 385,903 393,446
Other real estate owned..................................... 246,303 124,688 256,137
FDIC insurance premiums..................................... 48,301 41,515 119,740
Amortization of intangibles................................. 104,206 104,206 190,755
Check imprint expense....................................... 441,406 400,484 350,992
Other....................................................... 2,594,745 2,468,121 2,106,927
----------- ----------- -----------
Total other expenses................................... 23,208,297 19,673,811 17,426,292
----------- ----------- -----------
Income before income taxes.................................... 8,051,537 6,457,740 5,004,715
Income tax expense (note 9)................................... 2,845,429 2,245,356 1,674,347
----------- ----------- -----------
Net income.................................................... $ 5,206,108 $ 4,212,384 $ 3,330,368
=========== =========== ===========
Earnings per share (note 1):
Basic earnings per share.................................... $ 1.04 $ 0.91 $ 0.90
=========== =========== ===========
Diluted earnings per share.................................. $ 1.01 $ 0.85 $ 0.81
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income........................................................... $ 5,206,108 $ 4,212,384 $ 3,330,368
Other comprehensive loss, net of tax-unrealized holding losses
on securities available for sale arising during period.............. (1,358,037) (13,603) (4,932)
Total comprehensive income........................................... $ 3,848,071 $ 4,198,781 $ 3,325,436
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1999, 1998, and 1997
--------------------------------------------------------------------------------------
Accumulated
Common Common other Total
Stock Stock Treasury Retained comprehensive Stockholders'
Shares Amount Stock Earnings gains (losses) Equity
---------- ----------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... 3,258,536 $11,906,581 -- $ 9,097,986 $ 45,945 $ 21,050,512
---------- ----------- ----------- ----------- --------------- -------------
Net income............................... -- -- -- 3,330,368 -- 3,330,368
Dividends ($0.14) per share.............. -- -- -- (522,870) -- (522,870)
Common shares issued from
exercise of options (note 10).......... 64,500 389,581 -- -- -- 389,581
Common shares issued pursuant to
conversion of subordinated
debentures (note 7).................... 538,928 3,675,078 -- -- -- 3,675,078
Common shares issued in
employee benefit plan................... 12,219 84,765 -- -- -- 84,765
Common shares issued pursuant
to dividend reinvestment plan........... 1,619 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............... 3,875,802 16,075,878 -- 11,597,484 41,013 27,714,375
---------- ----------- ----------- ----------- --------------- -------------
Net income............................... -- -- -- 4,212,384 -- 4,212,384
Dividends ($0.17) per share.............. -- -- -- (790,306) -- (790,306)
Common shares issued from
exercise of options (note 10)........... 8,325 58,690 -- -- -- 58,690
Common shares issued pursuant to
conversion of subordinated
debentures (note 7)..................... 1,235,804 12,856,028 -- -- -- 12,856,028
Common shares issued in
employee benefit plan................... 5,480 76,563 -- -- -- 76,563
Common shares issued pursuant to
dividend reinvestment plan.............. 2,703 39,987 -- -- -- 39,987
Net change in market value ............. -- -- -- -- (13,603) (13,603)
---------- ----------- ----------- ----------- --------------- -------------
Balance at December 31, 1998............... 5,128,114 29,107,146 -- 15,019,562 27,410 44,154,118
---------- ----------- ----------- ----------- --------------- -------------
Net income............................... -- -- -- 5,206,108 -- 5,206,108
Dividends ($0.23) per share.............. -- -- -- (1,160,271) -- (1,160,271)
Common shares issued from
exercise of options (note 10)........... 11,438 90,600 -- -- -- 90,600
Purchase of Treasury Stock (note 1)...... (228,750) -- (3,012,031) -- -- (3,012,031)
Fractional shares resulting from
stock split (note 1).................... (29) (2,145) -- -- -- (2,145)
Common shares issued in
employee benefit plan................... 16,005 228,042 -- -- -- 228,042
Common shares issued pursuant to
dividend reinvestment plan ............ 3,318 36,164 -- -- -- 36,164
Amortization of stock option plan
grants.................................. -- -- -- 244,479 -- 244,479
Net change in market value............... -- -- -- -- (1,358,037) (1,358,037)
---------- ----------- ----------- ----------- --------------- -------------
Balance at December 31, 1999............... 4,930,096 $29,459,807 $(3,012,031) $19,309,878 $ (1,330,627) $ 44,427,027
========== =========== =========== =========== =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net income........................................................................ $ 5,206,108 $ 4,212,384 $ 3,330,368
------------- ------------- ------------
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses.............................................. 3,074,992 2,322,000 1,536,597
Provision for decline in value of other real estate owned........................ 29,349 22,550 85,500
Depreciation and amortization.................................................... 1,743,079 2,338,102 2,335,490
Net gain on sale of premises and equipment....................................... -- -- (56,737)
Net loss on sales of other real estate owned..................................... -- -- 16,327
Increase in accrued interest receivable.......................................... (548,618) (235,581) (276,698)
Increase in other assets, net.................................................... (1,160,347) (670,266) (1,765,981)
Increase (decrease) in other liabilities, net.................................... 1,596,325 (7,119) 437,623
------------- ------------- ------------
Total adjustments............................................................... 4,734,780 3,769,686 2,312,121
------------- ------------- ------------
Net cash provided by operating activities....................................... 9,940,888 7,982,070 5,642,489
------------- ------------- ------------
Cash flows from investing activities:
Net increase in loans and leases.................................................. (97,352,023) (48,382,496) (39,591,220)
Purchases of investment securities carried at amortized cost...................... (310,886,000) (53,564,809) (4,500,000)
Maturities of investment securities carried at amortized cost..................... 349,376,000 38,738,500 8,825,000
Purchases of investment securities carried at market.............................. (33,163,584) (296,200,753) (40,995,968)
Maturities of investment securities carried at market............................. 20,029,102 250,568,000 15,725,000
Early payoff of operating leases.................................................. 724,632 -- --
Purchases of premises and equipment............................................... (3,285,954) (3,021,014) (2,320,692)
Sales of premises and equipment................................................... 543,177 -- 812,737
Additions to other real estate owned.............................................. -- (50,539) --
Proceeds from sale of other real estate owned..................................... 921,131 662,784 1,314,576
------------- ------------- ------------
Net cash used in investing activities........................................... (73,093,519) (111,250,327) (60,730,567)
------------- ------------- ------------
Cash flows from financing activities:
Net increase in interest-bearing deposits......................................... 52,456,903 48,957,128 47,503,101
Net increase in non-interest-bearing deposits..................................... 2,057,475 14,473,370 20,734,273
Net increase (decrease) in securities sold under agreements to repurchase......... 2,234,737 26,587,809 (3,823,325)
Common stock issued............................................................... 352,661 175,240 494,219
Proceeds from Federal Home Loan Bank borrowings................................... 20,000,000 -- 9,153,500
Payments on Federal Home Loan Bank borrowings..................................... (10,000,000) -- (14,123,500)
Dividends paid.................................................................... (1,160,271) (790,306) (522,870)
Issuance of long-term debt........................................................ -- -- 13,800,000
Payments on long-term debt........................................................ (44,667) (40,895) (31,656)
Federal funds purchased, net...................................................... 4,900,000 -- (1,500,000)
Purchase of treasury stock........................................................ (3,012,031) -- --
Redemption of put warrants........................................................ -- -- (308,000)
------------- ------------- ------------
Net cash provided by financing activities....................................... 67,784,807 89,362,346 71,375,742
------------- ------------- ------------
Increase (decrease) in cash and cash equivalents.................................. 4,632,176 (13,905,911) 16,287,664
Cash and cash equivalents at beginning of year..................................... 18,093,685 31,999,596 15,711,932
------------- ------------- ------------
Cash and cash equivalents at end of year........................................... $ 22,725,861 $ 18,093,685 $ 31,999,596
============= ============= ============
Supplemental disclosure of additional noncash investing and financing activities:
Additions to other real estate owned in settlement of loans....................... $ 2,170,402 $ 96,313 $ 1,381,101
Additions to loans in settlement of other real estate owned....................... -- 74,387 --
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)....................................................................... -- $ 12,856,028 $ 3,675,078
============= ============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................ $ 14,485,355 $ 13,351,761 $ 12,047,450
============= ============= ============
Cash paid for income taxes........................................................ $ 2,470,000 $ 2,190,000 $ 1,983,000
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<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, FSNM acquired First State Bank of
Taos ("FSBT"). In December 1993, FSNM 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."
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
21
<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.
22
<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.
The Company assesses the recoverability of goodwill 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.
23
<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
Earnings per common share is accounted for under the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128).
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 earnings 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 debentures 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. The following is a reconciliation of the numerators and
denominators of basic and diluted earnings per share.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- -------------------------------- ----------------------------------
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... $5,206,108 5,008,157 $1.04 $4,212,384 4,644,110 $0.91 $3,330,368 3,697,793 $0.90
===== ===== =====
Effect of dilutive
securities:
Options.................. -- 134,386 -- 142,994 -- 117,644
Warrants................. -- -- -- -- -- 11,175
Convertible debentures... -- -- 276,436 477,534 540,258 978,015
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS:
Net income available
to common
stockholders plus
interest on
convertible debentures... $5,206,108 5,142,543 $1.01 $4,488,820 5,264,638 $0.85 $3,870,626 4,804,627 $0.81
========== ========== ===== ========== ========== ===== ========== ========== =====
</TABLE>
On November 15, 1999, the Company affected a 3-for-2 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
The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees and related interpretations in accounting for its fixed plan
stock options." 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. Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by FAS 123, the Company has elected to
continue to apply the intrinsic value-based method and has adopted the
disclosure requirements of FAS 123.
(k) Reclassifications
Certain previous period balances have been reclassified to conform to the 1999
presentation.
24
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(l) Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 requires disclosure in the financial statements of comprehensive
income that encompasses earnings and those items currently required to be
reported directly in the equity section of the balance sheet, such as unrealized
gains and losses on available-for-sale securities. Management has adopted the
provisions of FAS 130 effective January 1, 1998, and all previous periods have
been restated to conform to the provisions of FAS 130.
(m) Accounting Standards Issued but not yet Adopted
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in the contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. The impact of FAS 133 is not expected to be a material on the Bank's
financial position, results of operations, or liquidity.
2. Cash and Due from Banks
First State Bank is required to maintain certain daily reserve balances on
hand in accordance with Federal Reserve Board requirements. The consolidated
reserve balances maintained in accordance with these requirements were
approximately $1,107,000 and $714,000 at December 31, 1999 and 1998,
respectively.
3. Investment Securities
Following is a summary of amortized costs and approximate market values of
investment securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
As of December 31, 1999
Obligations of the U.S. Treasury:
Available for sale............................... -- -- -- --
Held to maturity................................. $ 547,303 -- $ 6,758 $ 540,545
Obligations of U.S. government agencies:
Available for sale............................... 72,134,741 -- 2,016,102 70,118,639
Held to maturity................................. 17,450,118 -- 2,304 17,447,814
Obligations of states and political subdivisions--
Held to maturity................................. 4,592,660 12,122 102,451 4,502,331
Federal Home Loan Bank stock........................ 1,559,700 -- -- 1,559,700
Federal Reserve Bank stock.......................... 532,950 -- -- 532,950
------------ ---------- ---------- ------------
$ 96,817,472 $ 12,122 $2,127,615 $ 94,701,979
============ ========== ========== ============
As of December 31, 1998
Obligations of the U.S. Treasury:
Available for sale............................... $ 3,997,878 $ 27,122 -- $ 4,025,000
Held to maturity................................. 1,643,816 10,898 247 1,654,467
Obligations of U.S. government agencies:
Available for sale............................... 55,407,515 111,930 97,521 55,421,924
Held to maturity................................. 54,331,503 1,170 87,765 54,244,908
Obligations of states and political subdivisions--
Held to maturity................................. 4,981,822 70,416 19,337 5,032,901
Federal Home Loan Bank stock........................ 1,239,300 -- -- 1,239,300
Federal Reserve Bank stock.......................... 460,950 -- -- 460,950
------------ ---------- ---------- ------------
$122,062,784 $ 221,536 $ 204,870 $122,079,450
============ ========== ========== ============
</TABLE>
25
<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, 1999, 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.............................. $ 4,501,380 $ 4,459,375
Held to maturity................................ 18,547,324 18,540,290
One through five years:
Available for sale.............................. 64,712,716 62,852,615
Held to maturity................................ 869,890 873,398
Five through ten years:
Available for sale.............................. 2,000,000 1,921,240
Held to maturity................................ 2,172,867 2,077,002
After ten years :
Available for sale.............................. 920,645 885,409
Held to maturity................................ 1,000,000 1,000,000
Federal Reserve Bank stock........................ 532,950 532,950
Federal Home Loan Bank stock...................... 1,559,700 1,559,700
----------- -----------
Total..................................... $96,817,472 $94,701,979
=========== ===========
</TABLE>
Marketable securities with an amortized cost of approximately $92,190,000 and
$104,630,000 were pledged to collateralize deposits as required by law and for
other purposes at December 31, 1999 and 1998, respectively.
Proceeds from sales of investments in debt securities for the years ended
December 31, were zero in 1999, 1998, and 1997. Gross losses realized were zero
in 1999, 1998, and 1997. Gross gains realized were zero in 1999, 1998, and 1997.
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,
1999 1998
------------ ------------
<S> <C> <C>
Commercial..................................... $ 65,701,458 $ 53,941,596
Consumer and other............................. 20,203,388 18,089,867
Lease financing................................ 61,049,455 47,650,734
Real estate--mortgage.......................... 215,838,938 167,979,538
Real estate--construction...................... 65,844,464 47,357,405
------------ ------------
Total................................... $428,637,703 $335,019,140
============ ============
</TABLE>
26
<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, 1999 are as follows:
<TABLE>
<CAPTION>
Direct
Financing Operating
Leases Leases
----------- ----------
<S> <C> <C>
Years ending December 31:
2000........................................ $ 19,296,352 $ 763,973
2001........................................ 15,540,314 613,180
2002........................................ 11,343,496 317,597
2003........................................ 7,523,006 242,014
2004........................................ 3,790,326 173,237
Thereafter.................................. 1,454,895 --
------------ ----------
Net minimum future lease receipts............. 58,948,389 $2,110,001
------------ ==========
Less unearned income.......................... (11,634,500)
Unamortized initial indirect costs............ 573,881
Estimated residual value...................... 13,161,685
------------
Net investment in direct financing leases..... $ 61,049,455
============
</TABLE>
Following is a summary of changes to the allowance for loan and lease losses:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of year........ $ 3,874,688 $ 3,279,457 $2,510,155
Provision charged to operations..... 3,074,992 2,322,000 1,536,597
Loans and leases charged-off........ (1,991,901) (1,921,440) (972,047)
Recoveries.......................... 428,843 194,671 204,752
----------- ----------- ----------
Balance at end of year.............. $ 5,386,622 $ 3,874,688 $3,279,457
=========== =========== ==========
</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 the Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," was $2,725,217 at December 31, 1999,
$6,262,498 at December 31, 1998, and $3,122,765 at December 31, 1997. The
average investment in loans for which impairment has been recognized was
$4,493,000 in 1999 and $5,452,000 in 1998. The allowance for loan losses related
to these loans was $365,000 at December 31, 1999, $96,000 at December 31, 1998,
and $395,000 at December 31, 1997. The allowance for impaired loans is included
in the allowance for loan and lease losses. Interest income recognized on
impaired loans was zero in 1999, zero in 1998, and $6,218 in 1997.
Loans on which the accrual of interest has been discontinued amounted to
$2,725,217, $6,262,498, and $3,122,765 at December 31, 1999, 1998, and 1997,
respectively. If interest on such loans had been accrued, such income would have
been approximately $199,000 in 1999, $409,000 in 1998, and $144,978 in 1997.
Actual interest income on those loans, which is recorded only when received,
amounted to zero in 1999, zero in 1998, and $6,218 in 1997.
27
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity during 1999 and 1998 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>
1999 1998
---------- ----------
<S> <C> <C>
Balance at beginning of year......................... $1,157,068 $1,180,868
Advances............................................. 608,984 268,488
Repayments........................................... (150,594) (292,288)
--------- ----------
Balance at end of year............................... $1,615,458 $1,157,068
========== ==========
</TABLE>
5. Premises and Equipment
Following is a summary of premises and equipment, at cost:
<TABLE>
<CAPTION>
As of December 31,
Estimated -------------------------
Useful 1999 1998
Life (years) ----------- -----------
<S> <C> <C> <C>
Land............................................. -- $ 1,959,655 $ 2,484,977
Building and leasehold improvements.............. 15-30 10,224,025 9,945,070
Equipment........................................ 5 8,624,908 6,572,889
Equipment subject to operating lease financing: 3-5
Transportation.............................. 442,624 1,292,624
Construction................................ 1,466,230 1,729,535
Other....................................... 1,042,236 352,861
----------- -----------
23,759,678 22,377,956
Less accumulated depreciation and amortization... (8,698,956) (7,586,300)
---------- -----------
$15,060,722 $14,791,656
=========== ===========
</TABLE>
Depreciation and amortization expense on premises and equipment in 1999, 1998,
and 1997 was $1,960,064, $2,040,832, and $1,911,497, respectively.
6. Deposits
Following is a summary of interest-bearing deposits:
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest-bearing checking accounts............... $107,058,814 $ 86,340,829
Money market savings............................. 45,004,086 53,195,823
Regular savings.................................. 33,176,544 36,992,637
Time:
Denominations $100,000 and over................ 94,722,336 61,197,296
Denominations under $100,000................... 94,269,828 84,048,120
------------ ------------
$374,231,608 $321,774,705
============ ============
</TABLE>
28
<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 $38,927,736 and
$36,692,999, at December 31, 1999 and 1998, respectively. Interest expense
included in the statement of operations was $1,629,412, $947,181, and $527,746
for the years ended December 31, 1999, 1998, and 1997.
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Balance........................................... $38,927,736 $36,692,999
Weighted average interest rate.................... 3.73% 4.07%
Maximum amount outstanding at any month end....... $48,948,930 $36,692,999
Average balance outstanding during the period..... $45,325,000 $20,978,000
Weighted average interest rate during the period.. 3.59% 4.53%
</TABLE>
Subordinated Debentures
On April 28, 1998, the Company notified the holders of its 7.5% convertible
subordinated debentures due 2017 that the debentures would be called for
redemption at 100% of the original principal plus accrued interest on May 29,
1998. The indenture allowed management to redeem the debentures at par when the
Company's common stock closed at 140% of the exercise price ($11.16) for 30
consecutive trading days. As of April 24, 1998 this condition was met. All of
the debenture holders exercised the conversion privilege, resulting in 1,235,804
shares of common stock being issued and $12.9 million being added to common
equity.
On April 30, 1997, the Company called for redemption of 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 $7.00 per share or 538,928 shares. The remaining $15,000 were redeemed
at 101% of the original principal balance plus accrued interest.
Federal Home Loan Bank Advances
First State Bank has a pre-payable Federal Home Loan Bank advance with a
balance of $10,000,000 at December 31, 1999. The advance, dated May 28, 1999,
bears interest based on the LIBOR index plus .20%, 6.301% at December 31, 1999,
is collateralized by certain first real estate mortgage loans, and has a final
maturity of May 28, 2002.
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 $154,376 and $177,394 at December 31, 1999 and 1998, respectively. The note
is payable in monthly installments of principal and interest at 8.26% through
February 1, 2005.
29
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, was $996,526
with principal payments of $23,797 in 2000, $26,158 in 2001, $28,755 in 2002,
$31,609 in 2003, $34,746 in 2004, and $851,461 thereafter.
8. Leases
First State Bank leases certain of its premises and equipment under
noncancellable operating leases from certain related and unrelated parties. Rent
expense for the years ended December 31, 1999, 1998, and 1997, totaled
approximately $1,234,000, $968,000, and $949,000, respectively. Minimum future
payments under these leases at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Years ending
December 31,
---------------
<S> <C>
2000...................... $ 1,772,083
2001...................... 1,712,399
2002...................... 1,659,227
2003...................... 1,614,225
2004...................... 1,545,828
Thereafter.................. 11,088,180
---------------
$19,391,942
===============
</TABLE>
One of FSBT's branch locations was constructed on land owned by a Director
of the Company. The Company is leasing the site for an initial term of 15
years. Lease payments were $65,600 in 1999, $63,700 in 1998, and $61,800 in
1997, respectively. In the opinion of management, the lease is on terms similar
to other third-party commercial transactions in the ordinary course of business.
The Company sold a property it held for construction of an operations
building to a limited liability company controlled by Directors of the Company,
and certain officers of FSBT. This company constructed a building in which FSBT
leases significant space for bank operations. Lease payments were $145,060 in
1999. In the opinion of management, this transaction and the related lease are
on terms similar to other third-party transactions in the ordinary course of
business.
9. Income Taxes
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal........ $2,886,057 $2,259,595 $1,905,234
State.......... 223,000 251,042 --
Deferred....... (263,628) (265,281) (230,887)
---------- ---------- ----------
Total expense.. $2,845,429 $2,245,356 $1,674,347
========== ========== ==========
</TABLE>
30
<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 1999, 1998, and 1997 (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,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense....................... $2,737,000 $2,196,000 $1,702,000
Increase (reduction) in income taxes resulting from:
Tax-exempt interest................................. (234,000) (185,000) (119,000)
State tax........................................... 147,000 129,000 --
Amortization of intangibles......................... 35,000 46,000 48,000
Other............................................... 160,429 59,356 43,347
---------- ---------- ----------
Total income tax expense......................... $2,845,429 $2,245,356 $1,674,347
========== ========== ==========
</TABLE>
Components of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses....................................... $1,402,498 $1,013,935
Allowance for other real estate owned........................... 113,672 54,060
Depreciation.................................................... 300,953 234,304
Deferred compensation expense................................... 209,038 143,355
Tax effect of unrealized losses on investment securities........ 685,475 --
Other........................................................... 24,371 25,928
---------- ----------
Total gross deferred tax assets.............................. 2,736,007 1,471,582
Deferred tax liabilities:
Leases.......................................................... 551,493 207,931
Tax effect of unrealized gains on investment securities......... -- 14,120
---------- ----------
Total gross deferred tax liabilities......................... 551,493 222,051
---------- ----------
Net deferred tax asset....................................... $2,184,514 $1,249,531
========== ==========
</TABLE>
In order to fully realize the deferred tax asset on the Company's balance
sheet at December 31, 1999, of $2,736,007, the Company will need to generate
future taxable income of approximately $8,047,000. 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.
31
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity
On April 26, 1999, the Company announced that its Board of Directors
authorized management to purchase up to 300,000 shares of its common stock.
During 1999, the Company purchased 228,750 shares of common stock in the open
market. The funds for these purchases came from excess funds held by the parent
company. On October 22, 1999, the Company's Board of Directors authorized
management to purchase up to an additional 225,000 shares of its common stock.
Currently, management has not determined the timing of additional purchases, if
any. Additional purchases would come from cash dividends from the subsidiary
bank to the parent company.
At December 31, 1999, under terms of a stock option agreement, an officer
of First State Bank has an outstanding option to purchase 9,918 common shares of
the Company at a price of $3.34 per share. The options may be exercised at any
time and expire on October 12, 2003.
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 600,000 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. Vesting of these options is 20% at the
date of grant and 20% per year thereafter until fully vested. In April 1999, the
Company granted 12,750 shares at $6.00 per share and in July 1999, the Company
granted 90,000 shares at $16.08 per share. A summary of options under this plan
is as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 444,848 $ 7.71 465,192 $ 7.76
Granted....................... 102,750 14.83 -- --
Exercised..................... (11,438) 7.92 (8,325) 7.09
Forfeited..................... (6,900) 11.37 (12,019) 10.09
------- ------ ------ ------
Outstanding at year end............ 529,260 $ 9.04 444,848 $ 7.11
======= ====== ======= ======
Options exercisable at year end.... 367,433 $ 8.68 340,627 $ 6.70
======= ====== ======= ======
</TABLE>
Compensation expense of $193,186, $308,208, and $20,430 was recognized
pursuant to the grant of options in 1999, 1998, and 1997. 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 4.69% for April 1999,
4.74% for July 1999, and 5.50% for 1997; dividend yield of 1.50% for April 1999,
1.60% for July 1999, and 0.98% for 1997; expected lives of 5 years for 1999 and
1997; and volatility of 57.76% for April 1999, 36.21% for July 1999, and 40.23%
for 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported............... $5,206,108 $4,212,384 $3,330,368
Pro forma................. $5,058,040 $4,455,359 $3,107,656
Basic earnings per share:
As reported............... $ 1.04 $ 0.91 $ 0.91
Pro forma................. $ 1.01 $ 0.90 $ 0.84
Diluted earnings per share:
As reported................ $ 1.01 $ 0.85 $ 0.81
Pro forma.................. $ 0.98 $ 0.85 $ 0.76
</TABLE>
32
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Bank regulations specify the level of dividends that can be paid by First
State Bank. As of December 31, 1998, First State Bank had approximately $7.0
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.
On April 28, 1998, the Company notified the holders of its 7.5% convertible
debentures due 2017 that the debentures would be called for redemption at 100%
of the original principal plus accrued interest on May 29, 1998. The indenture
allowed management to redeem the debentures at par when the Company's common
stock closed at 140% of the exercise price ($11.16) for 30 consecutive trading
days. As of April 24, 1998 this condition was met. All of the debenture
holders exercised the conversion privilege, resulting in 1,235,804 shares of
common stock being issued and $12.9 million being added to common equity.
On April 30, 1997, the Company called for redemption of 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 $7.00 per share or 538,928 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, 1999, that the Company meets all capital adequacy requirements to
which it is subject.
33
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, 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 following 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, 1999
-----------------------------------------------------
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........................... $50,017 10.6% $37,918 8.0% $47,398 10.0%
Bank subsidiary........................ 48,462 10.2% 38,084 8.0% 47,605 10.0%
Tier I capital to risk weighted assets:
Consolidated........................... 45,189 9.6% 18,959 4.0% 28,439 6.0%
Bank subsidiary........................ 43,634 9.2% 19,042 4.0% 28,563 6.0%
Tier I capital to total assets:
Consolidated........................... 45,189 7.9% 23,214 4.0% 29,017 5.0%
Bank subsidiary........................ 43,634 7.5% 23,297 4.0% 29,121 5.0%
As of December 31, 1998
-----------------------------------------------------
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........................... $47,328 12.4% $30,466 8.0% $38,082 10.0%
Bank subsidiary........................ 39,582 10.4% 30,453 8.0% 38,067 10.0%
Tier I capital to risk weighted assets:
Consolidated........................... 43,453 11.4% 15,233 4.0% 22,849 6.0%
Bank subsidiary........................ 35,707 9.4% 15,227 4.0% 22,840 6.0%
Tier I capital to total assets:
Consolidated........................... 43,453 8.8% 19,875 4.0% 24,844 5.0%
Bank subsidiary........................ 35,707 7.2% 19,869 4.0% 24,836 5.0%
</TABLE>
11. Employee Benefit Plans
Effective January 1, 1991, First State Bank adopted an employee tax-
sheltered savings plan for substantially all full-time employees which provides
a mandatory 50% matching by First State Bank of employee contributions up to a
maximum of 6% of gross annual wages. Full vesting occurs after three years.
Contributions to the plan totaled $161,134 in 1999, $146,114 in 1998, and
$125,171 in 1997.
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,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Commitments to extend credit.. $92,389,000 $77,559,000
Standby letters of credit..... 6,135,000 2,237,000
</TABLE>
34
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Following are condensed financial statements of the parent
company.
Condensed Statements of Condition
<TABLE>
<CAPTION>
As of December 31,
--------------------
1999 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash and due from banks............................. $ 1,785 $ 8,076
Investment in subsidiary............................ 42,585 36,088
Goodwill............................................ 287 320
Deferred tax asset.................................. 210 143
Other assets........................................ 23 10
--------- ---------
Total assets..................................... $44,890 $44,637
========= =========
Liabilities and equity capital:
Liabilities--accounts payable and accrued expenses.. $ 463 $ 483
Equity capital...................................... 44,427 44,154
--------- ---------
Total liabilities and equity capital............. $44,890 $44,637
========= =========
</TABLE>
35
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Income:
Cash dividends from subsidiaries.................................... $ -- $ -- $ --
Other income........................................................ 183 415 301
------ ------ ------
Total income..................................................... 183 415 301
------ ------ ------
Expenses:
Interest expense.................................................... -- 397 766
Amortization........................................................ 32 54 84
Legal............................................................... 59 10 13
Other............................................................... 426 558 258
------ ------ ------
Total expense.................................................... 517 1,019 1,121
------ ------ ------
Loss before income taxes and undistributed income of bank subsidiary.. (334) (604) (820)
Income tax benefit.................................................... 85 188 276
Undistributed income of bank subsidiary............................... 5,455 4,628 3,874
------ ------ ------
Net income............................................................ $5,206 $4,212 $3,330
====== ====== ======
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 5,206 $ 4,212 $ 3,330
------- ------- -------
Adjustments to reconcile net income to cash used by operations:
Amortization of goodwill......................................... 32 32 32
Undistributed income of bank subsidiaries........................ (5,455) (4,628) (3,874)
(Increase) decrease in other assets.............................. (79) 329 (1,170)
Increase (decrease) in other liabilities, net.................... (20) 30 254
------- ------ -------
Total adjustments............................................. (5,522) (4,237) (4,758)
------- ------- -------
Net cash used by operating activities......................... (316) (25) (1,428)
------- ------- -------
Cash flows from financing activities:
Common stock issued................................................. 353 175 495
Payment to repurchase common stock............................... (3,012) -- --
Amortization of stock option plan grant...s...................... 244 -- --
Issuance of subordinated debentures................................. -- -- 13,800
Capital contributions to subsidiary bank............................ (2,400) -- (4,500)
Dividends paid...................................................... (1,160) (790) (523)
Redemption of put warrants.......................................... -- -- (308)
------- ------- -------
Net cash provided (used) by financing activities.............. (5,975) (615) 8,964
------- ------- -------
Increase (decrease) in cash and due from banks........................ (6,291) (640) 7,536
------- ------- -------
Cash and due from banks at beginning of year.......................... 8,076 8,716 1,180
------- ------- -------
Cash and due from banks at end of year................................ $ 1,785 $ 8,076 $ 8,716
======= ======= =======
</TABLE>
36
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (FAS 107), requires disclosure of current
fair value of all financial instruments, both assets and liabilities recognized
and not recognized in the balance sheet, for which it is practicable to estimate
fair value. FAS 107 defines fair value as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties
other than in a forced or liquidation sale.
Financial instruments are defined as cash, evidence of ownership in an
entity, or a contract that both imposes on one entity a contractual obligation:
(1) to deliver cash or another financial instrument to a second entity, or (2)
to exchange other financial instruments on potentially unfavorable terms with a
second entity, and conveys to the second entity a contractual right: (a) to
receive cash or another financial instrument from the first entity, or (b) to
exchange other financial instruments on potentially favorable terms with the
first entity.
Fair value estimates are made at a specific point in time based on
available relevant market information about the financial instrument. However, a
significant portion of the Company's financial instruments, such as commercial
real estate loans, do not currently have an active marketplace in which they can
be readily sold or purchased to determine fair value. Consequently, fair value
estimates for those financial instruments are based on assumptions made by
management regarding the financial instrument's credit risk characteristics,
prevailing interest rates, future estimated cash flows, expected loss
experience, current and future economic conditions and other factors which
affect fair value. As a result, these fair value estimates are subjective in
nature and involve uncertainties and matters of significant judgment, and
therefore, cannot be determined with precision. Accordingly, changes in
management's assumptions could cause the fair value estimates to deviate
substantially. Further, these estimates do not reflect any additional premium or
discount that could result from offering for sale, at one time, the Company's
entire holdings of a particular financial instrument or any estimated
transaction costs. Lastly, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered in the estimates.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks......................... $ 22,726 $ 22,726 $ 18,094 $ 18,094
Marketable securities available for sale........ 72,211 72,211 61,147 61,147
Marketable securities held to maturity.......... 22,590 22,491 60,957 60,932
Loans, net...................................... 428,638 425,745 335,019 340,231
Accrued interest receivable..................... 3,063 3,063 2,514 2,514
Financial liabilities:
Deposits........................................ 463,536 463,290 409,021 410,327
Securities sold under agreements to repurchase.. 38,928 38,928 36,693 36,693
Long-term debt.................................. 11,151 11,151 1,195 1,195
</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.
37
<PAGE>
FIRST STATE BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketable securities available for sale and held to maturity. The
estimated fair value of securities available for sale and held to maturity is
based on independent dealer quotations or published market price bid quotes.
Loans, net. The estimated fair value of the loan portfolio is calculated by
discounting scheduled cash flows over the estimated maturity of loans using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities or repricing terms. Credit
risk is accounted for through a reduction of contractual cash flows by loss
estimates of classified loans and as a component of the discount rate.
Accrued interest receivable. Carrying value of interest receivable
approximates fair value, since these instruments have short-term maturities.
Deposits. The estimated fair value of deposits with no stated maturity,
such as demand deposits, savings accounts and money market deposits,
approximates the amounts payable on demand at December 31, 1999 and 1998. 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. Long-term debt consists of a Federal Home Loan Bank advance
which adjusts quarterly, therefore, its carrying value approximates its fair
value, and a Federal Home Loan Bank advance and a note payable whose rates
approximate market at December 31, 1999 and 1998.
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.
38
<PAGE>
15. Sale of Leasing Division
On December 31, 1999, the Company entered into an agreement providing for
the sale of the assets of its subsidiary bank's commercial leasing division in a
transaction which closed March 1, 2000. This sale resulted in approximately $64
million of leases being sold. At closing the gain on the sale amounted to
approximately $879,000, net of transaction costs. Management intends to use the
proceeds from the sale to purchase investment securities, fund loan demand, and
reduce borrowings.
Pro forma consolidated balance sheet and statement of operations assuming
the sale of the assets of the leasing division occurred at the beginning of the
period is as follows. The pro formas assume the proceeds from sale of the
leasing division are reinvested in U.S. agency securities.
<TABLE>
<CAPTION>
Balance Sheet: 1999
--------------
<S> <C>
Cash and cash equivalents..................... $ 22,725,861
Investment securities......................... 157,201,370
Net loans..................................... 363,144,081
Other assets.................................. 23,812,252
--------------
Total assets.................................. $ 566,883,564
==============
Deposits...................................... $ 463,535,573
Other Liabilities............................. 58,920,964
Stockholders equity........................... 44,427,027
--------------
Total liabilities and stockholders' equity.... $ 566,883,564
==============
Operations:
Interest income............................... $ 42,054,645
Interest expense.............................. 14,686,307
Provision for loan loss....................... 2,668,200
Other income.................................. 5,065,250
Other expense................................. 21,660,685
Income tax expense............................ 2,864,202
--------------
Net income.................................... $ 5,240,501
==============
Earnings per share:
Basic.................................... $1.05
==============
Diluted.................................. $1.02
==============
</TABLE>
39
<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 Form S-8 of First
State Bancorporation of our report dated January 28, 2000, except as to note 15
which is as of March 1, 2000, relating to the consolidated balance sheets of
First State Bancorporation and subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999, which report appears in the December 31, 1999,
annual report on Form 10-K of First State Bancorporation.
/s/ KPMG LLP
Albuquerque, New Mexico
March 27, 2000
22
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,725,861
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,211,289
<INVESTMENTS-CARRYING> 22,590,081
<INVESTMENTS-MARKET> 22,490,690
<LOANS> 428,637,703
<ALLOWANCE> 5,386,622
<TOTAL-ASSETS> 566,883,564
<DEPOSITS> 463,535,573
<SHORT-TERM> 38,927,736
<LIABILITIES-OTHER> 8,842,326
<LONG-TERM> 11,150,902
0
0
<COMMON> 45,757,654
<OTHER-SE> (1,330,627)
<TOTAL-LIABILITIES-AND-EQUITY> 566,883,564
<INTEREST-LOAN> 37,303,249
<INTEREST-INVEST> 5,843,035
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 43,146,284
<INTEREST-DEPOSIT> 12,408,726
<INTEREST-EXPENSE> 14,686,307
<INTEREST-INCOME-NET> 28,459,977
<LOAN-LOSSES> 3,074,992
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 23,208,297
<INCOME-PRETAX> 8,051,537
<INCOME-PRE-EXTRAORDINARY> 8,051,537
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,206,108
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 5.49
<LOANS-NON> 2,725,000
<LOANS-PAST> 84,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,133,000
<ALLOWANCE-OPEN> 3,875,000
<CHARGE-OFFS> 1,992,000
<RECOVERIES> 429,000
<ALLOWANCE-CLOSE> 5,387,000
<ALLOWANCE-DOMESTIC> 5,387,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,387,000
</TABLE>
