-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J4wVAf5ZFyD+tyKkW3sZIghrb49coj+k+tSsgqmIa0pydll27Q6oQzdytY26fK8w iQu6GAw/ZfTrgODycHaC5A== 0000950134-03-004684.txt : 20030327 0000950134-03-004684.hdr.sgml : 20030327 20030327141947 ACCESSION NUMBER: 0000950134-03-004684 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST STATE BANCORPORATION CENTRAL INDEX KEY: 0000897861 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 850366665 STATE OF INCORPORATION: NM FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12487 FILM NUMBER: 03620543 BUSINESS ADDRESS: STREET 1: 7900 JEFFERSON NE CITY: ALBUQUERQUE STATE: NM ZIP: 87109 BUSINESS PHONE: 5052417500 MAIL ADDRESS: STREET 1: 7900 JEFFERSON NE CITY: ALBUQUERQUE STATE: NM ZIP: 87190 10-K 1 d04296e10vk.txt FORM 10-K 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 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 ------------------------------------------------------ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ----------------------- COMMISSION FILE NUMBER: 22-25144 FIRST STATE BANCORPORATION - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW MEXICO 85-0366665 - ---------------------------------------- ------------------------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 7900 JEFFERSON NE ALBUQUERQUE, NEW MEXICO 87109 - ---------------------------------------- ------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 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, no par value - -------------------------------------------------------------------------------- (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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] The aggregate market value of the Common Stock as of June 28, 2002 (the last business day of the registrant's most recently completed second quarter), based upon the last sale price of the Common Stock at June 28, 2002 as reported by The Nasdaq Stock Market, held by non-affiliates was approximately $113,563,000. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose. As of March 21, 2003, there were 7,405,004 shares of common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN PART III INFORMATION IS INCORPORATED HEREIN BY REFERENCE, PURSUANT TO INSTRUCTION G OF FORM 10-K, FROM FIRST STATE BANCORPORATION'S PROXY STATEMENT FOR ITS 2003 ANNUAL SHAREHOLDERS' MEETING, WHICH WILL BE FILED WITH THE COMMISSION BY APRIL 29, 2003. 1 TABLE OF CONTENTS
PART I Page - ----------------- --------------------- Item 1: Business............................................................................ 3 Item 2: Properties.......................................................................... 15 Item 3: Legal Proceedings................................................................... 16 Item 4: Submission of Matters to a Vote of Security Holders................................. 16 PART II - ----------------- Item 5: Market for Registrant's Common Equity and Related Stockholder Matters............... 17 Item 6: Selected Financial Data............................................................. 17 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 17 Item 7A: Quantitative and Qualitative Disclosures About Market Risk.......................... 18 Item 8: Financial Statements and Supplementary Data......................................... 18 Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......................................................................... 18 PART III - ----------------- Item 10: Directors and Executive Officers of the Registrant.................................. Proxy Statement Item 11: Executive Compensation.............................................................. Proxy Statement Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................................................. Proxy Statement Item 13: Certain Relationships and Related Transactions....................................... Proxy Statement Item 14: Controls and Procedures.............................................................. 18 PART IV - ----------------- Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 19
FORWARD-LOOKING STATEMENTS This document includes forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The discussions regarding our growth strategy, competition, expansion opportunities, and response to consolidation in the banking industry include forward-looking statements. Other forward-looking statements can be identified by the use of forward-looking words such as "believe," "expect," "may," "will," "should," "seek," "approximately," "intend," "plan," "estimate," or "anticipate" or the negative of those words or other comparable terminology. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statement. Some factors include fluctuations in interest rates, inflation, government regulations, loss of key personnel, faster or slower that anticipated growth, economic conditions, competition's responses to the Company's marketing strategy, and competition in the geographic and business areas in which we conduct our operations. 2 PART I ITEM 1: BUSINESS. THE COMPANY First State Bancorporation (the "Company") is a New Mexico-based bank holding company that provides commercial banking services to businesses through its subsidiary bank, First State Bank NM ("First State Bank"). The Company operates thirty offices, including twenty-one in New Mexico (three offices in Taos, eight offices in Albuquerque, two offices in Santa Fe, and one office each in Rio Rancho, Los Lunas, Bernalillo, Questa, Pojoaque, Placitas, Moriarty, and Belen), six in Colorado (Denver, Colorado Springs, Fort Collins, Lakewood, Littleton, and Longmont), and three in Utah (two offices in Salt Lake City and one in Ogden). First State Bank's branches in Colorado and Utah operate under the name First Community Bank. First State Bank began in 1922 as one bank in Taos County, and is currently the largest bank in the county. At December 31, 2002, the Company had total assets, total deposits, and total stockholders' equity of $1.4 billion, $1.1 billion, and $117 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, local businesses and governments; (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) expand operations in the Colorado and Utah markets including the Denver metropolitan area, Colorado Springs, Salt Lake City, and the surrounding areas; (iv) maintain asset quality through strict adherence to credit administration standards; (v) manage interest rate risk; (vi) continue to improve internal operating systems; and (vii) manage non-interest expenses. Management believes that the Company is well qualified to pursue an aggressive growth strategy throughout New Mexico, Colorado, and Utah due to its responsive customer service, its streamlined management structure, the strong community involvement of the Company's management and employees, the disruption caused by sales of banks with New Mexico operations to other banks with headquarters outside New Mexico, and recent expansion into the Colorado and Utah markets. Management believes that expansion opportunities are primarily centered in the Albuquerque metropolitan area, Santa Fe, the Denver metropolitan area, Colorado Springs, Salt Lake City, and the surrounding markets. The Company continues to add staff to service the additional volume of loans and deposits obtained as a result of expansion in and into 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 market 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, 2002, First State Bancorporation and First State Bank were "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. HISTORY First State Bank began operations in 1922 in Taos County, New Mexico. The Company and an affiliated company, New Mexico Bank Corporation, were organized under the laws of New Mexico 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. 3 On December 1, 1993, the Company purchased 94.5% of the outstanding shares of common stock of First State Bank of Santa Fe ("Santa Fe Bank"). The parties who sold their shares to the Company included members of the current management and directors of the Company, and two officers of First State Bank. Santa Fe Bank was merged into First State Bank as of June 5, 1994. Since its initial public offering in 1993, the Company has made significant investments in expansion and technology. Since 1993, First State Bank has opened fourteen new branches and acquired nine branches. During the fourth quarter of 1999, First State Bank opened a mortgage origination division. This fee-based division allows the bank to generate fee income from its branch network and construction lending activities as well as attract additional customers. On March 1, 2000, the Company closed the sale of the assets of First State Bank's commercial leasing division. This sale resulted in approximately $64 million of leases being sold. The gain on the sale amounted to approximately $879,000, net of transaction costs. The proceeds from the sale were used to fund loan demand, purchase investment securities, and reduce borrowings. On October 1, 2002 the Company entered the Colorado and Utah markets with the completion of the acquisition of First Community Industrial Bank ("First Community") for approximately $67 million. The Company financed this acquisition through a public offering of its common stock in August 2002, which netted approximately $51.0 million and through the issuance of approximately $25.0 million in trust preferred securities in June of 2002. The Company acquired approximately $343 million in loans and approximately $242 million in deposits, and recognized goodwill of approximately $43 million related to the transaction. First Community was merged into First State Bank. OPERATING STRATEGY The Company's operating strategies include: o Providing responsive, personal customer service o Fostering a culture in which employees are valued and respected o Attracting new account relationships o Emphasizing community involvement o Developing new business opportunities o Increasing efficiency o Optimizing asset/liability management Customer service. The Company's objective is to increase market share in both lending volume and deposits by providing responsive customer service that is tailored to its customers' needs. By maximizing personal contact with customers, maintaining low employee turnover, and endeavoring to understand the needs and preferences of its customers, the Company is working to maintain and further enhance its reputation of providing excellent customer service. 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. Employees. Management recognizes that the individual employee is the core of the Company's overall business strategy. The Company is committed to providing a workplace environment in which the individual employee is valued and respected. New account relationships. The Company emphasizes relationship banking with local businesses, local governments, and individual customers across all product lines. The acquisition of most of the Company's local competitors by out-of-state banking companies and the sales of institutions with 4 significant local operations to other out-of-state banks has created customer dissatisfaction at many of these institutions and provided an opportunity for the Company to expand its customer base. The Company intends to continue to capitalize on this opportunity by targeting its marketing efforts to those businesses, governments, and individuals who prefer the personalized customer service with local decision making emphasized by the Company and delivering a state-of-the-art array of products and services. Community Involvement. First State Bank management and other employees participate actively in a wide variety of civic and community activities and organizations in New Mexico, including the Albuquerque Chamber of Commerce, other local Chambers of Commerce, United Way, Boys and Girls Clubs, New Mexico Museum of Natural History, and Habitat for Humanity. First State Bank also sponsors a number of community-oriented events each year. First State Bank management plans to replicate this commitment to community involvement in the Colorado and Utah markets. 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 existing commercial banks or bank holding companies, or other opportunities permissible under state and federal banking regulations. Expansion efforts will be focused in areas or markets that are complementary to the Company's existing customer base and areas of operation. See "Growth Strategy." Increasing Efficiency. Management believes that investments in technology and facilities made since 1993 will allow the Company to grow revenues 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 expenses. 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 continue pursuing a growth strategy through a combination of internal growth, de novo branching, and selective acquisitions. The Company's total assets have grown from $494 million at December 31, 1998 to $1.4 billion through internal growth, de novo branching, and acquisition activity. Several banks that compete with the Company have been acquired by large out-of-state financial institutions since 1993. These institutions concentrate on the mass retail customer base and extremely large customers while reducing service levels to small to medium size businesses, affording the Company a continuing opportunity to gain profitable new account relationships and to expand existing relationships. The Company will also devote the necessary resources and support to assure that its business culture and operating strategies, based on individualized customer service, are successfully transferred to the new operations in Colorado and Utah. In addition, management believes that there continue to be attractive opportunities to open new branches. Consolidation in the banking industry and increased regulatory burdens on existing institutions provide a favorable environment for such openings. 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 5 which the branch would enhance the Company's presence in an existing market, and (v) the costs of operating the branch. Management believes that the strategy it has employed successfully in the New Mexico market can be successfully employed in other markets in the Southwest. Management therefore intends to continue exploring opportunities to expand into markets in the southwestern United States either through acquisition of existing institutions with a branch structure in markets with characteristics similar to those in New Mexico, or through de novo branching into markets that display those characteristics. The Company's goal over the next five years is to continue creating a broad-based, well capitalized, customer-focused regional financial institution. 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, Torrance, and Valencia counties), and Santa Fe. In 2002, First State Bank entered into the Colorado and Utah markets with the acquisition of First Community. First Community operates in two distinct market areas: the Colorado front range market area, which includes the Denver metropolitan area, and the Salt Lake City and Ogden, Utah metropolitan areas. Taos County is a popular year-round recreation and tourist area. Ski and golf resorts in the area attract visitors from throughout the southwestern and western United States. Taos also has an active art community catering to the tourist trade. The Albuquerque metropolitan area is the largest metropolitan area in New Mexico and is the financial center of the state. It has a diverse economy centered around federal and state government, military, service, and technology industries. Military facilities include Kirtland Air Force Base and Sandia National Laboratories. A number of companies, including Intel, General Mills, America Online, Victoria's Secret, and The Gap 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. 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. The Colorado front range market area includes the Denver metropolitan area (with branches in Denver, Littleton and Lakewood), and the surrounding communities of Colorado Springs, Longmont and Fort Collins. Denver, the capital of Colorado and the state's largest city, has a diverse economy including telecommunications, aerospace, financial services, computer software, biomedical and many other high tech sectors. Colorado Springs also plays host to a growing number of high technology industries. Many private sector leaders in their fields are located in the front range area, including AT&T Broadband, Qwest Communications, Intel, Lockheed Martin, Merrill Lynch, and Sun Microsystems. The Colorado front range has emerged as a premier center for high-tech and other businesses providing a blend of quality, affordable lifestyle, cultural and national sports attractions, and desirable climate. Salt Lake City is the state capital of Utah and the financial center of the state. The Salt Lake City and Ogden area has a diverse economy driven by technology companies, telemarketing, engineering, management services, universities, and state and local governments. Many major companies as well as small businesses operate throughout the area. The state of Utah is a recreation minded and livable community catering to year-round recreation with both mountain and desert areas nearby. 6 First State Bank's operations are divided into nine 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; Rio Rancho which includes Sandoval county; Northern Colorado which includes Larimer and Boulder counties; Central Colorado which includes Denver, Jefferson, and Arapahoe counties; Southern Colorado which includes El Paso County; and Utah which includes Salt Lake and Weber counties. First State Bank. The following table sets forth certain information concerning the banking offices of First State Bank as of December 31, 2002:
Number of Total Total Loans and Location Facilities Deposits Leases - --------------------------------------------- --------------- --------------- ------------------- (Dollars in thousands) First State Bank (by Region) Taos 4 $ 132,856 $ 48,481 Santa Fe 3 136,541 148,616 Albuquerque 8 345,376 366,514 Los Lunas 3 73,200 79,876 Rio Rancho 3 140,842 40,613 Northern Colorado 2 36,848 52,011 Central Colorado 3 114,034 116,437 Southern Colorado 1 72,220 101,064 Utah 3 27,767 63,413 --------------- ----------- ----------- Total 30 $ 1,079,684 $ 1,017,025 =============== =========== ===========
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 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 mortgage lending, 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 real estate secured commercial lending, these locations are active in residential construction lending and mortgage 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, and residential construction and mortgage lending. 7 The Colorado and Utah locations provide access to new markets enabling First State Bank to provide conventional commercial and real estate secured commercial lending in these markets. These locations also provide a full range of banking services, including a full complement of deposit and residential construction and mortgage lending, and other loan services. Prior to its acquisition by First State Bank, First Community primarily made residential mortgage and retail installment loans and was prohibited from accepting transaction deposit accounts (i.e. checking accounts) due to its charter as an industrial bank. 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, 2002: New Mexico Taos................................................ 44.17% Bernalillo.......................................... 6.38% Santa Fe............................................ 8.32% Sandoval........................................... 30.76% Valencia............................................ 12.77% Torrance............................................ 10.76% Colorado Larimer............................................ 0.27% Boulder.......................................... 0.65% Denver............................................ 0.25% Jefferson........................................... 0.50% Arapahoe............................................ 0.48% El Paso............................................ 1.75% Utah Salt Lake........................................... 0.03% Weber............................................ 0.75%
First Community was acquired by the Company on October 1, 2002. The results above represent the percentage of First Community's total deposits to total deposits of FDIC insured institutions as of June 30, 2002 and were not included in the Company's deposits as of June 30, 2002. Management believes that its greatest opportunity for growth in its current market area in New Mexico is in increasing market share in Bernalillo, Sandoval, Valencia, and Santa Fe 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. 8 Management also believes that the Colorado and Utah markets represent a great opportunity for growth as the newly acquired First Community branches now have the ability to accept demand deposits and will begin to aggressively seek commercial banking relationships with small and medium sized businesses. The change in deposit and loan products combined with the integration of the Company's individualized customer service is expected to result in increased market share in Colorado and Utah. COMPETITION First State Bank competes for loans 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 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 local 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, 2002, the Company had 418 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. SUPERVISION AND REGULATION First State Bancorporation. We are a bank holding company subject to the supervision, examination and regulation of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act (the "BHCA"). The BHCA and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. As a bank holding company, our activities and those of our banking subsidiary are limited to the business of banking and activities closely related or incidental to banking, and we may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. Supervision and regulation of bank holding companies and their subsidiaries are intended primarily for the protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation (the "FDIC") and the banking system as a whole, not for the protection of bank holding company stockholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines and other penalties for violation of laws and regulations. First State Bank N.M. As a New Mexico-chartered state member bank of the Federal Reserve System, First State Bank is subject to regulation and supervision by the Federal Reserve Board and the New Mexico Financial Institutions Division and, as a result of the insurance of its deposits, by the FDIC. Almost every aspect of the operations and financial condition of First State Bank is subject to extensive 9 regulation and supervision and to various requirements and restrictions under federal and state law, including requirements governing capital adequacy, liquidity, earnings, dividends, reserves against deposits, management practices, branching, loans, investments, and the provision of services. Various consumer protection laws and regulations also affect the operations of First State Bank. The deposits of First State Bank are insured up to applicable limits by the FDIC. Holding Company Liability. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to its banking subsidiaries and commit resources to their support. This support may be required by the Federal Reserve Board at times when, absent this Federal Reserve policy, we may not be inclined to provide it. As discussed below under "Prompt Corrective Action," a bank holding company in certain circumstances also could be required to guarantee the capital plan of an undercapitalized banking subsidiary. In addition, any capital loans by a bank holding company to any of its depository institution subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the banks. In the event of a bank holding company's bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims. Payment of Dividends. The Federal Reserve Board has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company's capital needs, asset quality and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. In addition, as noted above, bank holding companies are expected under Federal Reserve Board policy, to serve as a source of financial strength for their depository institution subsidiaries. This requirement, and the capital adequacy requirements applicable to bank holding companies, described below under "Capital Adequacy Requirements," may also limit our ability to pay dividends. As a bank holding company, we are a legal entity separate and distinct from First State Bank. Our principal asset is the outstanding capital stock of First State Bank. As a result, our ability to pay dividends on our common stock will depend primarily on the ability of First State Bank to pay dividends to us in amounts sufficient to service our obligations. Dividend payments from First State Bank are subject to federal and state limitations, generally based on the capital level and current and retained earnings of the bank. Approval of the Federal Reserve Board is required, for example, for payment of any dividend if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits (as defined by regulatory agencies) for that year combined with its retained net profits for the preceeding two years. First State Bank may not pay a dividend in an amount greater than its net profits. First State Bank is also prohibited under federal law from paying any dividend that would cause it to become undercapitalized. In addition, the Federal regulatory agencies are authorized to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of dividends could, depending on the financial condition of First State Bank, be deemed to constitute an unsafe or unsound practice. Under New Mexico law, First State Bank may not pay a dividend on its common stock unless its remaining surplus after payment of such dividend is equal to at least 20% of its minimum common capital requirement. First State Bank is also prohibited from paying dividends from undivided profits if its reserves against deposits are impaired or will become impaired as a result of such payment. 10 Capital Adequacy Requirements. We are subject to the Federal Reserve Board's risk-based capital and leverage guidelines for bank holding companies. The minimum ratio of total capital to risk-weighted assets (which are the credit risk equivalents of balance sheet assets and certain off balance sheet items such as standby letters of credit) is 8%. At least half of the total capital must be composed of common stockholders' equity (including retained earnings), qualifying non-cumulative perpetual preferred stock (and, for bank holding companies only, a limited amount of qualifying cumulative perpetual preferred stock), and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, other disallowed intangibles and disallowed deferred tax assets, among other items ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other perpetual preferred stock, hybrid capital instruments, mandatory convertible debt securities that meet certain requirements, as well as a limited amount of reserves for loan losses ("Tier 2 Capital"). The maximum amount of Tier 2 Capital that may be included in an organization's qualifying total capital is limited to 100% of Tier 1 Capital. The Federal Reserve Board has also adopted a minimum leverage ratio for bank holding companies, requiring Tier 1 Capital of at least 3% of average total consolidated assets. Our primary subsidiary, First State Bank, also is subject to risk-based and leverage capital guidelines of the Federal Reserve Board which are similar to those established by the Federal Reserve Board for bank holding companies. As discussed below under "Enforcement Powers of the Federal Regulatory Agencies," failure to meet the minimum regulatory capital requirements could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including, in most severe cases, the termination of deposit insurance by the FDIC and the placement of the institution into conservatorship or receivership. The capital ratios for the First State Bancorporation and First State Bank are provided in the chart below. RISK-BASED CAPITAL AND LEVERAGE RATIOS
AS OF DECEMBER 31, 2002 RISK-BASED RATIOS ------------------------------ TIER I TOTAL LEVERAGE CAPITAL CAPITAL RATIO ------- ------- -------- First State Bancorporation .................. 10.4% 11.6% 7.8% First State Bank ............................ 9.0% 10.1% 6.7% Minimum required ratio ...................... 4.00% 8.00% 3.00% "Well capitalized" minimum ratio ............ 6.00% 10.00% 5.00%
The federal bank regulatory agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the Federal Reserve Board provide that concentration of credit risk, interest rate risk and certain risks arising from nontraditional activities, as well as an institution's ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization's overall capital adequacy. The agencies have also adopted an adjustment to the risk-based capital calculations to cover market risk in trading accounts of certain institutions. The federal bank regulatory agencies recently adopted amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in the agencies' determination of a banking institution's capital adequacy. The amendments require such institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk. Prompt Corrective Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the federal banking agencies must take prompt supervisory and regulatory actions against 11 undercapitalized depository institutions. Depository institutions, such as First State Bank, are assigned one of five capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," and are subjected to differential regulation corresponding to the capital category within which the institution falls. Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions (including paying dividends) or paying management fees to a holding company if the institution would thereafter be undercapitalized. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits. The banking regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution's capital, the agency's corrective powers include, among other things: o prohibiting the payment of principal and interest on subordinated debt; o prohibiting the holding company from making distributions without prior regulatory approval; o placing limits on asset growth and restrictions on activities; o placing additional restrictions on transactions with affiliates; o restricting the interest rate the institution may pay on deposits; o prohibiting the institution from accepting deposits from correspondent banks; and o in the most severe cases, appointing a conservator or receiver for the institution. A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution's holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy. Failure to meet capital guidelines could subject the bank to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, and to certain restrictions on business. As of December 31, 2002, each of First State Bancorporation and First State Bank exceeded the required capital ratios for classification as "well capitalized." Enforcement Powers of the Federal Banking Agencies. The federal banking agencies have broad enforcement powers. Failure to comply with applicable laws, regulations and supervisory agreements could subject First State Bancorporation or First State Bank, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed under "Prompt Corrective Action," the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation: o the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized; o fails to become adequately capitalized when required to do so; o fails to submit a timely and acceptable capital restoration plan; o or materially fails to implement an accepted capital restoration plan. 12 Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, such as First State Bancorporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of First State Bancorporation. In addition, any company is required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of the outstanding common stock of First State Bancorporation, or otherwise obtaining control or a "controlling influence" over First State Bancorporation. Restrictions on Transactions with Affiliates and Insiders. First State Bank is subject to restrictions under federal law that limit certain transactions with us, including loans, other extensions of credit, investments or asset purchases. Such transactions by a banking subsidiary with any one affiliate are limited in amount to 10% of the bank's capital and surplus and, with all affiliates together, to an aggregate of 20% of the bank's capital and surplus. Furthermore, such loans and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts. These and certain other transactions, including any payment of money to us, must be on terms and conditions that are or in good faith would be offered to nonaffiliated companies. The restrictions on loans to directors, executive officers, principal stockholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O apply to all federally insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Regulation O institutions are not subject to the prohibitions of the Sarbanes-Oxley Act of 2002 on certain loans to insiders. Anti-Terrorism Legislation. We are subject to the USA Patriot Act of 2001 which contains the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. That Act contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions' operations. We have established policies and procedures to ensure compliance with the Act and the related regulations. Interstate Banking and Branching. The Riegle-Neal Act enacted in 1994 permits an adequately capitalized and adequately managed bank holding company, with Federal Reserve Board approval, to acquire banking institutions located in states other than the bank holding company's home state without regard to whether the transaction is prohibited under state law. In addition, national banks and state banks with different home states are permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating banking institution has passed legislation prior to that date that expressly prohibits interstate mergers. De novo interstate branching is permitted if the laws of the host state so authorize. The Gramm-Leach-Bliley Act. The GLBA became law on November 12, 1999, and key provisions affecting bank holding companies became effective March 11, 2000. The GLBA enables bank holding companies to acquire insurance companies and securities firms and effectively repeals depression-era laws which prohibited the affiliation of banks and these other financial services entities under a single holding company. Certain qualified bank holding companies and other types of financial service entities 13 may elect to become financial holding companies under the new law. Financial holding companies are permitted to engage in activities considered financial in nature, as defined in the GLBA, and may engage in a broader range of activities than bank holding companies or banks. The GLBA will enable financial holding companies to offer a wide variety of financial services, or services incident to financial services, including banking, securities underwriting, merchant banking and insurance (both underwriting and agency services). The new financial services authorized by the GLBA also may be engaged in by a "financial subsidiary" of a national or state bank, with the exception of insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, all of which must be conducted under the financial holding company. Community Reinvestment Act. First State Bank is subject to the CRA. The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") requires federal banking agencies to make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of its bank subsidiaries are reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. First State Bank received an "outstanding" CRA rating from the Federal Reserve at its most recent CRA examination. Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, First State Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the New Mexico Unfair Practices Act and the Settlement Procedures Act among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans to or engaging in other types of transactions with such customers. Effect on Economic Environment. The policies of regulatory authorities, especially the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on our business and earnings cannot be predicted. Future Legislation. Various legislation is from time to time introduced in Congress, and state legislatures with respect to the regulation of financial institutions. Such legislation may change the banking statutes and the operating environment of First State Bancorporation and its bank subsidiary in substantial and unpredictable ways. First State Bancorporation cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations, would have upon the financial condition or results of operations of First State Bancorporation or First State Bank. 14 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." AVAILABLE INFORMATION The Company's Internet address is www.fsbnm.com. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Information contained on the web site is not part of this report. 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:
Approximate building area now Approximate Approximate utilized for land area building area banking services Year constructed or (sq. ft.) (sq. ft.) (sq. ft.) last renovated ---------------- ---------------- -------------------- --------------------- 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 Pojoaque 150,000 30,000 1,000 Constructed 1-02 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 Juan Tabo 57,534 5,515 5,515 Constructed 6-01 Snowheights 32,000 4,683 4,683 Constructed 4-01 Los Lunas Los Lunas 57,243 6,647 6,647 Renovated 6-02 Moriarty 1,900 1,900 1,900 Constructed 12-97 Belen 53,997 4,636 4,636 Constructed 2-00 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 Northern Colorado Fort Collins 200,000 100,000 3,190 Constructed 1-75 Longmont 9,375 3,676 3,676 Constructed 1-64
15 Central Colorado Cherry Creek 43,000 20,000 4,000 Constructed 1-85 Lakewood 80,000 40,000 3,222 Constructed 1-85 Littleton 25,000 3,500 3,500 Constructed 1-85 Southern Colorado Colorado Springs 19,024 10,500 10,500 Constructed 1-60 Utah Holladay 20,000 2,250 2,250 Constructed 1-80 Ogden 43,000 30,000 2,350 Constructed 1-84 Salt Lake City 100,000 45,000 4,750 Constructed 1-75
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 consolidated 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 2002. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their positions, and their respective ages (as of January 1, 2003) are as follows:
Name Position Age ---- -------- --- Michael R. Stanford President, Chief Executive Officer, and 50 Director H. Patrick Dee Executive Vice President, Chief Operating 47 Officer, Secretary, Treasurer, and Director Christopher C. Spencer Senior Vice President and Chief Financial 44 Officer Thomas E. Bajusz Senior Vice President and Chief Credit 49 Officer Theresa A. Gabel Senior Vice President of Human Resources 54 and Communications James E. Warden Senior Vice President of Branch 44 Administration and Retail Services
16 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.
High Low -------------------------------- 2002 First Quarter...................... $23.89 $19.50 Second Quarter..................... 27.80 22.25 Third Quarter...................... 26.19 18.45 Fourth Quarter..................... 25.76 22.75 2001 First Quarter...................... $16.00 $13.25 Second Quarter..................... 19.45 14.06 Third Quarter...................... 19.40 17.15 Fourth Quarter..................... 21.49 17.70
The last reported sale price of the Company's Common Stock on March 21, 2003, was $21.74 per share. As of March 21, 2003, there were approximately 104 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 $2.2 million or $0.40 per share in 2002 and $1.7 million or $0.34 per share in 2001, which amounted to 21.61% and 20.47%, of net income in 2002 and 2001, 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. Information regarding dividend restrictions on the Company's banking subsidiary is incorporated herein by reference to Item 1. Business-Supervision and Regulation/Payment of Dividends. 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. 17 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 consolidated 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. Information regarding directors appearing under the caption "Election of Directors" in the Company's Proxy Statement for the 2003 Annual Meeting of Shareholders is hereby incorporated by reference. Information relating to disclosure of delinquent Form 3, 4 and 5 filers is incorporated by reference to the information appearing under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the 2003 Annual Meeting of Shareholders. Information regarding executive officers is included in Part I of this Form 10-K as permitted by General Instruction G (3). ITEM 11: EXECUTIVE COMPENSATION. Information appearing under the captions "Compensation of Directors" and "Executive Compensation" in the 2003 Proxy Statement is hereby incorporated by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information setting forth the security ownership of certain beneficial owners and management appearing under the caption "Voting Securities and Principal Holders" in the 2003 Proxy Statement is hereby incorporated by reference. Information set forth under the caption "Securities Authorized for Issuance Under Equity Compensation Plans" in the 2003 Proxy Statement is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain related transactions appearing under the caption "Certain Business Relationships" in the 2003 Proxy Statement is hereby incorporated by reference. ITEM 14: CONTROLS AND PROCEDURES. Our principal executive officer and principal financial officer have, within 90 days of the filing date of this annual report, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls since the date of evaluation. We do not believe any significant deficiencies or material weaknesses exist in our internal controls. Accordingly, no corrective actions have been taken. 18 PART IV ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K: 1. Financial Statements: o Selected Quarterly Financial Data o Independent Auditors' Report o Consolidated Balance Sheets as of December 31, 2002 and 2001 o Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, and 2000 o Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001, and 2000 o Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001, and 2000 o Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000 2. Financial Statement Schedules None 3. Exhibits
Number Description of Exhibits - ------ ----------------------- 2.1 Agreement and Plan of Merger, dated as of May 22, 2002, by and among First State Bancorporation, First State Bank NM (formerly known as First State Bank of Taos), First Community Industrial Bank, Blazer Financial Corporation, and Washington Mutual Finance Corporation. (7) 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. (4) 3.3 Bylaws of First State Bancorporation. (4) 4.1 Shareholder Protection Rights Agreement dated October 25, 1996. (3) 10.1 Stock Option Plan of the Company. (5) 10.2 Executive Employment Agreement. (6) 21.1 Subsidiaries of Registrant. (2) 23 Consent of KPMG LLP. (8) 99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8)
19 99.2 Certification of CFO Pursuant to 18. U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8)
(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 10-KSB for the year ended December 31, 1997. (5) Incorporated by reference from the Company's Registration Statement on Form S-8, Commission File No. 333-83132, declared effective February 20, 2002, (which incorporates the Company's Registration Statement on Form S-8, Commission File No. 333-92795, effective December 15, 1999). (6) Incorporated by reference from the Company's 10-K for the year ended December 31, 2001. (7) Incorporated by reference from the Company's Form 8-K filed on May 31, 2002. (8) Filed Herewith. (b) REPORTS ON FORM 8-K. On October 11, 2002, the Company filed a current report on Form 8-K announcing the Company had completed its acquisition of First Community Industrial bank. On October 21, 2002, the Company filed a current report on Form 8-K announcing the Company's third quarter 2002 financial results. On December 16, 2002, the Company filed a current report on Form 8-K/A amending the current report on Form 8-K filed on October 11, 2002, to include the remaining required financial information with respect to the Company's acquisition of First Community Industrial Bank. The following financial statements were filed as part of such Form 8-K/A: (1) First Community Industrial Bank Unaudited Condensed Balance Sheet as of September 30, 2002, (2) First State Bancorporation Unaudited Pro Forma Combined Condensed Financial Information, (3) First State Bancorporation Unaudited Pro Forma Combined Condensed Balance Sheet as of September 30, 2002, (4) First State Bancorporation Unaudited Pro Forma Combined Condensed Statement of Operations for the Nine Months Ended September 30, 2002, and (5) First State Bancorporation Unaudited Pro Forma Combined Condensed Statement of Operations for the Year Ended December 31, 2001. On December 18, 2002, the Company filed a current report on Form 8-K announcing that Michael R. Stanford, the President, Chief Executive Officer and a Director of the Company, and Mr. Leonard J. Delayo, Jr., a Director of the Company, had each entered into a "trading plan" pursuant to the requirements of Rule 10b5-1(c) promulgated by the Securities and Exchange Commission under Section 10(b) of the Securities Exchange Act of 1934, as amended. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly 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 and Chief Executive Officer Dated: March 27, 2003 Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signatures Title Date - --------------------------------------------------------------------------------------------------------- Michael R. Stanford March 27, 2003 - ---------------------------------- ------------------- Michael R. Stanford President and Chief Executive Officer and a March 27, 2003 Director (Principal Executive Officer) H. Patrick Dee March 27, 2003 - ---------------------------------- ------------------- H. Patrick Dee Executive Vice President, March 27, 2003 Secretary, Treasurer and a Director Christopher C. Spencer March 27, 2003 - ---------------------------------- ------------------- Christopher C. Spencer Senior Vice President and Chief Financial Officer March 27, 2003 (Principal Accounting Officer) Eloy A. Jeantete March 27, 2003 - ---------------------------------- ------------------- Eloy A. Jeantete Director March 27, 2003 Leonard J. DeLayo, Jr. March 27, 2003 - ---------------------------------- ------------------- Leonard J. DeLayo, Jr. Director March 27, 2003 Bradford M. Johnson March 27, 2003 - ---------------------------------- ------------------- Bradford M. Johnson Director March 27, 2003 Douglas M. Smith, M.D. March 27, 2003 - ---------------------------------- ------------------- Douglas M. Smith, M.D. Director March 27, 2003 Herman N. Wisenteiner March 27, 2003 - ---------------------------------- ------------------- Herman N. Wisenteiner Director March 27, 2003 Marshall G. Martin March 27, 2003 - ---------------------------------- ------------------- Marshall G. Martin Director March 27, 2003 Kevin L. Reid March 27, 2003 - ---------------------------------- ------------------- Kevin L. Reid Director March 27, 2003 Lowell A. Hare March 27, 2003 - ---------------------------------- ------------------- Lowell A. Hare Director March 27, 2003 A.J. (Jim) Wells March 27, 2003 - ---------------------------------- ------------------- A.J. (Jim) Wells Director March 27, 2003
21 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Michael R. Stanford, certify that: 1. I have reviewed this annual report on Form 10-K of First State Bancorporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 /s/ Michael R. Stanford -------------------------------------- Michael R. Stanford President and Chief Executive Officer 22 CHIEF FINANCIAL OFFICER CERTIFICATION I, Christopher C. Spencer, certify that: 1. I have reviewed this annual report on Form 10-K of First State Bancorporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 /s/ Christopher C. Spencer -------------------------------------- Christopher C. Spencer Senior Vice President and Chief Financial Officer and Principal Accounting Officer 23 FIRST STATE BANCORPORATION AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Financial Highlights..................................................................................... 2 Selected Quarterly Financial Data........................................................................ 3 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 4 Independent Auditors' Report............................................................................. 17 Consolidated Balance Sheets as of December 31, 2002 and 2001............................................. 18 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, and 2000.............. 19 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001, and 2000.... 20 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001, and 2000.... 21 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000.............. 22 Notes to Consolidated Financial Statements............................................................... 23
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FINANCIAL HIGHLIGHTS YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Interest income ....................................... $ 62,448 $ 55,713 $ 52,151 $ 43,146 $ 36,542 Interest expense ...................................... 18,384 20,478 20,198 14,686 13,142 ---------- ---------- ---------- ---------- ---------- Net interest income ................................... 44,064 35,235 31,953 28,460 23,400 Provision for loan and lease losses ................... 2,589 2,386 2,475 3,075 2,322 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan and lease losses .......................................... 41,475 32,849 29,478 25,385 21,078 Non-interest income ................................... 12,698 9,414 7,782 5,874 5,053 Non-interest expenses ................................. 38,584 29,600 26,179 23,208 19,674 ---------- ---------- ---------- ---------- ---------- Income before income taxes ............................ 15,589 12,633 11,081 8,051 6,457 Income tax expense .................................... 5,631 4,521 3,849 2,845 2,245 ---------- ---------- ---------- ---------- ---------- Net income ............................................ $ 9,958 $ 8,142 $ 7,232 $ 5,206 $ 4,212 ========== ========== ========== ========== ========== PER SHARE DATA: Net income per diluted share .......................... $ 1.66 $ 1.61 $ 1.45 $ 1.01 $ 0.85 Book value ............................................ 16.03 11.94 10.49 9.03 8.61 Tangible book value ................................... 9.98 11.87 10.39 9.18 8.47 Dividends paid ........................................ 0.40 0.34 0.27 0.23 0.17 Market price end of period ............................ 24.80 21.30 13.98 13.75 13.83 Average diluted common shares outstanding ............. 5,997,601 5,049,349 4,996,992 5,142,543 5,264,638 AVERAGE BALANCE SHEET DATA: Total assets .......................................... $ 998,165 $ 718,178 $ 598,365 $ 534,770 $ 431,358 Loans and leases ...................................... 692,283 497,485 425,507 387,878 308,338 Investment securities ................................. 188,628 150,118 120,601 102,281 74,857 Interest-bearing deposits with banks .................. 16,785 18,756 6,173 150 -- Federal funds sold .................................... 22,682 5,722 5,129 3,455 8,724 Deposits .............................................. 805,417 585,063 484,128 431,392 363,294 Stockholders' equity .................................. 82,053 55,623 47,475 44,446 37,315 PERFORMANCE RATIOS: Return on average assets .............................. 1.00% 1.13% 1.21% 0.97% 0.98% Return on average common equity ....................... 12.14% 14.64% 15.23% 11.71% 11.29% Net interest margin ................................... 4.79% 5.24% 5.73% 5.76% 5.97% Efficiency ratio ...................................... 67.98% 66.29% 65.89% 67.59% 69.15% Earnings to fixed charges: Including interest on deposits ..................... 1.85x 1.62x 1.55x 1.55x 1.49x Excluding interest on deposits ..................... 8.08x 6.51x 4.21x 4.54x 5.41x ASSET QUALITY RATIOS: Nonperforming assets to total loans, leases, and other real estate owned ........................... 1.17% 0.50% 0.86% 1.10% 2.19% Net charge-offs to average loans and leases ........... 0.16% 0.30% 0.37% 0.40% 0.56% Allowance for loan and lease losses to total loans ................................................. 1.16% 1.31% 1.37% 1.26% 1.16% Allowance for loan and lease losses to nonperforming loans ................................... 108% 290% 325% 192% 58% CAPITAL RATIOS: Leverage ratio ........................................ 7.82% 7.76% 7.72% 7.86% 8.75% Average stockholders' equity to average total assets ................................................ 8.22% 7.75% 7.93% 8.31% 8.65% Tier I risk-based capital ratio ....................... 10.42% 10.59% 10.15% 9.53% 11.41% Total risk-based capital ratio ........................ 11.59% 11.61% 11.36% 10.55% 12.43%
-2-
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 2002 ---------------------------------------------------- FOURTH THIRD SECOND FIRST QTR QTR QTR QTR ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Interest income ....................................... $ 21,477 $ 13,959 $ 13,657 $ 13,354 Interest expense ...................................... 6,477 4,202 3,787 3,917 ---------- ---------- ---------- ---------- Net interest income ................................... 15,000 9,757 9,870 9,437 Provision for loan losses ............................. 932 469 519 669 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses ... 14,068 9,288 9,351 8,768 ---------- ---------- ---------- ---------- Non-interest income ................................... 3,565 3,264 3,012 2,857 Non-interest expenses ................................. 12,488 9,107 8,731 8,259 Income tax expense .................................... 1,804 1,159 1,388 1,279 ---------- ---------- ---------- ---------- Net income ............................................ $ 3,341 $ 2,286 $ 2,244 $ 2,087 ========== ========== ========== ========== Net interest margin ................................... 4.78% 4.41% 5.03% 4.99% ========== ========== ========== ========== PER SHARE DATA: Net income per diluted share .......................... $ 0.44 $ 0.36 $ 0.44 $ 0.41 Book value ............................................ 16.03 15.74 12.66 12.11 Tangible book value ................................... 9.98 15.69 12.58 12.04 Dividends paid ........................................ 0.10 0.10 0.10 0.10 Average diluted common shares outstanding ............. 7,515,590 6,277,164 5,092,180 5,073,987
2001 ---------------------------------------------------- FOURTH THIRD SECOND FIRST QTR QTR QTR QTR ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Interest income ....................................... $ 13,744 $ 14,175 $ 13,967 $ 13,827 Interest expense ...................................... 4,545 5,095 5,267 5,571 ---------- ---------- ---------- ---------- Net interest income ................................... 9,199 9,080 8,700 8,256 Provision for loan losses ............................. 627 627 627 505 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses ... 8,572 8,453 8,073 7,751 ---------- ---------- ---------- ---------- Non-interest income ................................... 2,714 2,486 2,223 1,991 Non-interest expenses ................................. 7,958 7,664 7,239 6,739 Income tax expense .................................... 1,171 1,185 1,097 1,068 ---------- ---------- ---------- ---------- Net income ............................................ $ 2,157 $ 2,090 $ 1,960 $ 1,935 ========== ========== ========== ========== Net interest margin ................................... 4.93% 5.16% 5.38% 5.58% ========== ========== ========== ========== PER SHARE DATA: Net income per diluted share .......................... $ 0.43 $ 0.41 $ 0.39 $ 0.38 Book value ............................................ 11.94 11.73 11.28 10.94 Tangible book value ................................... 11.87 11.66 11.19 10.85 Dividends paid ........................................ 0.09 0.09 0.09 0.07 Average diluted common shares outstanding ............. 5,065,631 5,060,363 5,034,325 5,034,977
-3- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 BASIS OF PRESENTATION The following represents management's discussion and analysis of First State Bancorporation, Inc.'s (the "Company") consolidated financial condition as of December 31, 2002 and 2001, and its results of consolidated operations for the years ended December 31, 2002, 2001, and 2000. This discussion should be read in conjunction with the consolidated financial statements and related footnotes and the five-year summary of selected financial data. GENERAL For the year ended December 31, 2002, the Company reported net income of $10.0 million, an increase of $1.9 million or 22.3% from the $8.1 million earned in 2001. The increase in net income was primarily due to increases in net interest income to $44.1 million in 2002 from $35.2 million in 2001, and non-interest income to $12.7 million in 2002 from $9.4 million in 2001. The increase in net interest income was due to increases in loans and investment securities made possible by the Company's successful effort to capture additional deposit market share in 2002, and the acquisition of First Community Industrial Bank ("First Community"). The Company completed the acquisition and merger of First Community on October 1, 2002 for approximately $67 million. The Company financed this acquisition through a public offering of its common stock in August 2002, which netted approximately $51 million, and through the issuance of approximately $25 million in trust preferred securities in June of 2002. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of First Community were recorded at their respective fair values on October 1, 2002. First State acquired approximately $343 million in loans and approximately $242 million in deposits, and recognized goodwill of approximately $43 million related to the transaction. The First Community account balances acquired on October 1, 2002 and the results of operations since October 1, 2002 are included in the results of the Company. During 2002, the Company's deposits increased $395 million. The increase in net interest income was partially offset by increases in non-interest expenses to $38.6 million in 2002 from $29.6 million in 2001. The increases in net interest income and non-interest expenses 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 $1.4 billion in 2002 from $828 million in 2001. Total deposits have grown to $1.1 billion in 2002 from $685 million in 2001. NET INTEREST INCOME The primary component of earnings for most financial institutions is net interest income. Net interest income is the difference between interest income, principally from loan 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, 2002, 2001, and 2000, the Company's average interest-earning assets were $920 million, $672 million, and $557 million, respectively. For the same periods, the Company's net interest margins were 4.79%, 5.24%, and 5.73%. During the years ended December 31, the Company's net interest income increased by $8.9 million to $44.1 million or 25.1% in 2002 from $35.2 million in 2001, which was an increase of $3.2 million or 10.3% from $32.0 million in 2000. These increases were due to a $194.8 million or 39.2% increase in average loans to $692 million in 2002 from $497 million in 2001, and a $71.9 million or 16.9% increase from $426 million in 2000. A significant factor in the increase in average loans in 2002 was due to the $343 million ($86 million increase in average loans) of loans acquired on October 1, 2002, in the First Community acquisition. The increase as a result of increased average loan balances was offset by a decrease in yield on loans to 7.6% in 2002 from 9.4% in 2001. This decrease was a direct result of the Federal Reserve Bank cutting rates, which has a like effect on the prime rate to which a significant portion of the Company's loans are tied. During 2002, the cost of interest-bearing liabilities decreased to 2.44% from 3.76% in 2001, which was a decrease from 4.46% in 2000 as a result of decreasing interest rates precipitated by the Federal Reserve Bank's rate cuts. -4- Management believes that any additional interest rate cuts by the Federal Reserve Bank would reduce the Company's net interest margin. The extent of any reduction in net interest margin will depend on the amount and timing of any further Federal Reserve Bank reductions and the Company's ability to manage the cost of interest-bearing liabilities given its competitive position in the markets it serves. 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.
Years ended December 31, ---------------------------------------------------------------------------------------- 2002 2001 2000 ----------------------------- --------------------------- -------------------------- Interest Average Interest Average Interest Average Average Income or Yield or Average Income or Yield or Average Income or Yield or Balance Expense Cost Balance Expense Cost Balance Expense Cost --------- -------- -------- -------- ------- ------ -------- ------- ------ (Dollars in thousands) ASSETS Loans and leases: Commercial ........................... $ 91,710 $ 6,294 6.86% $ 83,486 $ 7,246 8.68% $ 74,051 $ 7,353 9.93% Real estate--mortgage ................ 467,340 34,491 7.38 303,614 27,527 9.07 248,447 24,317 9.79 Real estate--construction ............ 97,486 7,245 7.43 78,761 7,481 9.50 67,961 7,990 11.76 Consumer ............................. 28,435 3,062 10.77 25,077 2,864 11.42 22,301 2,591 11.62 Mortgage ............................. 6,728 1,830 27.19 5,992 1,530 25.53 2,218 694 31.29 Leases ............................... -- -- -- -- -- -- 10,071 839 8.34 Other ................................ 584 -- -- 555 -- -- 458 -- -- --------- -------- ------ -------- ------- ------ -------- ------- ------ Total loans and leases ............. 692,283 52,922 7.64% 497,485 46,648 9.38% 425,507 43,784 10.29% Allowance for loan and lease losses ...... (8,900) (6,924) (5,994) Securities: U.S. government and mortgage-backed .. 182,187 8,656 4.75 144,040 7,988 5.55 114,138 7,298 6.39 States and political subdivisions: Nontaxable ......................... 3,319 148 4.47 3,826 175 4.57 4,317 195 4.52 Taxable ............................ 132 2 1.89 -- -- -- -- -- -- Other ................................ 2,990 100 3.34 2,252 104 4.62 2,146 160 7.46 --------- -------- ------ -------- ------- ------ -------- ------- ------ Total securities ................. 188,628 8,906 4.72% 150,118 8,267 5.51% 120,601 7,653 6.35% Interest bearing deposits other banks .... 16,785 260 1.55 18,756 628 3.35 6,173 397 6.43 Federal funds sold ....................... 22,682 360 1.58 5,722 170 2.97 5,129 317 6.18 --------- -------- ------ -------- ------- ------ -------- ------- ------ Total interest-earning assets ...... 920,378 62,448 6.78% 672,081 55,713 8.29% 557,410 52,151 9.36% Non-interest-earning assets: Cash and due from banks............... 36,734 25,849 20,904 Other ................................ 49,953 27,172 26,045 --------- -------- -------- Total non-interest-earning assets 86,687 53,021 46,949 --------- -------- -------- Total assets...................... $ 998,165 $718,178 $598,365 ========= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest-bearing demand accounts ..... $ 165,716 $ 1,260 0.76% $115,773 $ 1,564 1.35% $103,371 $ 2,299 2.22% Certificates of deposit .............. 346,789 12,829 3.70 264,176 14,244 5.39 206,222 11,786 5.72 Money market savings accounts ........ 84,729 1,489 1.76 51,737 1,466 2.83 46,956 1,698 3.62 Regular savings accounts ............. 48,964 605 1.23 39,975 906 2.27 34,080 961 2.82 --------- -------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing deposits .. 646,198 16,183 2.50% 471,661 18,180 3.85% 390,629 16,744 4.29% Federal funds purchased and securities sold under agreements to repurchase ...... 65,467 585 0.89 71,997 2,153 2.99 57,013 3,084 5.41 Short-term FHLB borrowings ............... 5,027 104 2.07 115 7 6.09 -- -- -- Other borrowings ......................... 16,225 421 2.59 1,075 101 9.40 5,224 370 7.08 Trust preferred securities ............... 20,443 1,091 5.34 296 37 12.50 -- -- -- --------- -------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities..................... 753,360 18,384 2.44% 545,144 20,478 3.76% 452,866 20,198 4.46% Non-interest-bearing demand accounts...... 159,219 113,402 93,499 Other non-interest-bearing liabilities.... 3,533 4,009 4,525 --------- -------- -------- Total liabilities................. 916,112 662,555 550,890 Stockholders' equity...................... 82,053 55,623 47,475 --------- -------- -------- Total liabilities and stockholders' equity .......................... $ 998,165 $718,178 $598,365 ========= -------- ======== ------- ======== ------- Net interest income....................... $ 44,064 $35,235 $31,953 ======== ======= ======= Net interest spread ...................... 4.34% 4.53% 4.90% Net interest margin ...................... 4.79% 5.24% 5.73% Ratio of average interest-earning assets to average interest-bearing liabilities ...................... 122.17% 123.29% 123.08%
-5- Loan fees of $5.1 million, $3.9 million, and $2.9 million are included in interest income for the years ended December 31, 2002, 2001, and 2000, 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.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 2002 VS. 2001 2001 VS. 2000 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN DUE TO CHANGES IN ------------------------------ ------------------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS Loans and leases: Commercial ......................................... $ 714 $ (1,666) $ (952) $ 937 $ (1,044) $ (107) Real estate--mortgage .............................. 14,844 (7,882) 6,962 5,400 (2,190) 3,210 Real estate--construction .......................... 1,779 (2,014) (235) 1,270 (1,779) (509) Consumer ........................................... 384 (185) 199 323 (50) 273 Mortgage ........................................... 188 112 300 481 355 836 Leases ............................................. -- -- -- (839) -- (839) -------- -------- -------- -------- -------- -------- Total loans and leases ......................... 17,909 (11,635) 6,274 7,572 (4,708) 2,864 Securities: U.S. government .................................... 2,116 (1,449) 667 1,912 (1,222) 690 States and political subdivisions: Non-taxable .................................... (23) (3) (26) (22) 2 (20) Taxable ........................................ 2 -- 2 -- -- -- Other .............................................. 34 (38) (4) 8 (64) (56) -------- -------- -------- -------- -------- -------- Total securities ............................... 2,129 (1,490) 639 1,898 (1,284) 614 Interest-bearing deposits other banks ................. (66) (302) (368) 809 (578) 231 Federal funds sold .................................... 504 (314) 190 37 (184) (147) -------- -------- -------- -------- -------- -------- Total interest-earning assets .................... 20,476 (13,741) 6,735 10,316 (6,754) 3,562 -------- -------- -------- -------- -------- -------- INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand accounts ................... 675 (979) (304) 276 (1,011) (735) Certificates of deposit ............................ 4,454 (5,869) (1,415) 3,312 (854) 2,458 Money market savings accounts ...................... 935 (912) 23 173 (405) (232) Regular savings accounts ........................... 204 (505) (301) 166 (221) (55) -------- -------- -------- -------- -------- -------- Total interest-bearing deposits ................ 6,268 (8,265) (1,997) 3,927 (2,491) 1,436 Federal funds purchased and securities sold under agreements to repurchase ........................ (195) (1,373) (1,568) 810 (1,741) (931) Short-term FHLB borrowings ............................ 299 (202) 97 7 -- 7 Other borrowings ...................................... 1,423 (1,103) 320 (331) 62 (269) Trust preferred securities ............................ 2,518 (1,464) 1,054 37 -- 37 -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities ............... 10,313 (12,407) (2,094) 4,450 (4,170) 280 -------- -------- -------- -------- -------- -------- Total increase (decrease) in net interest income ...... $ 10,163 $ (1,334) $ 8,829 $ 5,866 $ (2,584) $ 3,282 ======== ======== ======== ======== ======== ========
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's policy is to maintain 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. -6- The interest rate sensitivity ("GAP") is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A GAP is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A GAP is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative GAP would tend to adversely affect net interest income, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. While the interest rate sensitivity GAP is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. 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. As of December 31, 2002, the Company's cumulative interest rate GAP for the period up to three months was a positive $154.0 million and for the period up to one year was a positive $154.8 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 a decrease in interest rates or favorably impacted by an increase in interest rates. During 2002, the Company experienced a significant increase in deposits as a result of its strategy to capture market share and the acquisition of First Community. As a result, the Company's total assets increased by $559 million while its loan to deposit ratio increased to 94% at December 31, 2002, from 80% at December 31, 2001, during a period of rapidly declining interest rates. Management intends to maintain the current loan to deposit ratio, which should reduce the Company's exposure to declining 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, 2002. 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 accounting principles generally accepted in the United States of America. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits, and competition.
THREE LESS THAN MONTHS TO THREE LESS THAN ONE TO FIVE OVER FIVE MONTHS ONE YEAR YEARS YEARS TOTAL ---------- ---------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS) Interest-earning assets: Investment securities ............................ $ 41,575 $ 70,771 $ 62,426 $ 19,322 $ 194,094 Interest-bearing deposits other banks ......... 22,828 -- -- -- 22,828 Federal funds sold ............................ 14,140 -- -- -- 14,140 Loans: Commercial .................................... 62,500 17,925 18,972 1,416 100,813 Real estate ................................... 366,528 169,654 291,962 52,513 880,657 Consumer ...................................... 11,350 7,812 15,377 1,016 35,555 ---------- ---------- ---------- ---------- ---------- Total interest-earning assets ............ 518,921 266,162 388,737 74,267 1,248,087 ---------- ---------- ---------- ---------- ---------- Interest-bearing liabilities: Savings and NOW accounts ......................... 122,205 -- -- 248,113 370,318 Certificates of deposit of $100,000 or more ...... 52,584 107,629 59,509 1,680 221,402 Other time accounts .............................. 85,940 134,782 76,295 1,884 298,901 Other interest-bearing liabilities ............... 104,216 22,899 56,145 679 183,939 ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities ....... 364,945 265,310 191,949 252,356 1,074,560 ---------- ---------- ---------- ---------- ---------- Interest rate GAP ..................................... $ 153,976 $ 852 $ 196,788 $ (178,089) $ 173,527 ========== ========== ========== ========== ========== Cumulative interest rate GAP at December 31, 2002 ..... $ 153,976 $ 154,828 $ 351,616 $ 173,527 ========== ========== ========== ========== Cumulative GAP ratio at December 31, 2002 ............. 1.42 1.25 1.43 1.16 ========== ========== ========== ==========
-7- 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, 2002, 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 earlier of repricing or contractual final maturity of the Company's assets and liabilities at December 31, 2002.
CHANGE IN INTEREST RATES NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY - ----------------------------------- -------------------------- ------------------------------------- +200 16% (8%) +100 6% (7%) 0 (4%) (6%) -100 (13%) (5%) -200 (23%) (4%)
INVESTMENT PORTFOLIO The following table provides the carrying value of the Company's investment portfolio at each of the dates indicated. At December 31, 2002, the market value exceeded the carrying value by approximately $2.3 million, and at December 31, 2001, the market value exceeded the carrying value by approximately $287,000.
AS OF DECEMBER 31, --------------------------------------- 2002 2001 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) U.S. Treasury securities............................................ $ 499 $ 498 $ -- U.S. government agency securities................................... 121,227 161,603 116,698 Mortgage-backed securities.......................................... 64,139 19,539 11,463 Obligations of states and political subdivisions.................... 3,665 3,503 4,054 Other securities.................................................... 4,564 2,279 2,194 -------- -------- -------- Total investment securities..................................... $194,094 $187,422 $134,409 ======== ======== ========
The table below provides the carrying values, maturities, and weighted average yield of the investment portfolio of the Company as of December 31, 2002.
AVERAGE WEIGHTED CARRYING MATURITY AVERAGE VALUE (YEARS) YIELDS -------- -------- -------- (DOLLARS IN THOUSANDS) U.S. Treasury securities ....................................... $ 499 0.14 1.62% U.S. government agency securities One year or less ......................................... 15,771 0.48 5.10 After one through five years ............................. 97,443 3.66 3.80 After five through ten years ............................. 8,013 5.51 4.13 -------- -------- -------- Total U.S. government agency securities ............... 121,227 3.37 3.99 Mortgage-backed securities After one through five years ............................. 2,097 4.04 6.47 After five through ten years ............................. 62,042 13.73 5.62 -------- -------- -------- Total mortgage-backed securities ...................... 64,139 13.41 5.65 Obligations of states and political subdivisions One year or less ......................................... 522 0.97 6.32 After one through five years ............................. 2,318 3.09 4.23 After five through ten years ............................. 825 9.64 5.13 -------- -------- -------- Total states and political subdivisions securities .... 3,665 4.26 4.73 Other securities ............................................... 4,564 -- 3.49 -------- -------- -------- Total investment securities............................ $194,094 6.62 4.54% ======== ======== ========
-8- LOAN AND LEASE PORTFOLIO
AS OF DECEMBER 31, ---------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- -------- -------- ------- --------- ------- --------- -------- ------- --------- (DOLLARS IN THOUSANDS) Commercial................ $ 100,813 9.9% $ 90,187 16.4% $ 82,901 18.0% $ 65,702 15.3% $ 53,942 16.1% Real estate--mortgage..... 759,884 74.7 321,912 58.7 279,470 60.7 214,844 50.1 167,980 50.1 Real estate--construction. 100,458 9.9 98,086 17.9 68,282 14.9 65,844 15.4 47,357 14.1 Consumer and other........ 35,555 3.5 25,557 4.6 24,451 5.3 20,203 4.7 18,089 5.5 Mortgage loans available for sale................ 20,315 2.0 12,980 2.4 4,980 1.1 995 0.3 -- -- Leases.................... -- -- -- -- -- -- 61,050 14.2 47,651 14.2 ---------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans and leases.... $1,017,025 100.0% $548,722 100.0% $460,084 100.0% $428,638 100.0% $335,019 100.0% ========== ===== ======== ===== ======== ===== ======== ===== ======== =====
The following table presents the amount of loans and leases of the Company, by category, at the dates indicated. On March 1, 2000, the Company closed the sale of the assets of its subsidiary bank's commercial leasing division. The sale resulted in $64.4 million of leases being sold. The gain on the sale was approximately $879,000, net of transaction costs. The proceeds from the sale were used to purchase investment securities, fund loan demand, and reduce short-term borrowings. The following table presents the aggregate maturities of loans in each major category of the Company's loan portfolio at December 31, 2002. Actual maturities may differ from the contractual maturities shown as a result of renewals and prepayments.
AS OF DECEMBER 31, 2002 -------------------------------------------------------------- LESS THAN ONE TO OVER FIVE ONE YEAR FIVE YEARS YEARS TOTAL -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Fixed-rate loans: Commercial ................................. $ 13,306 $ 14,539 $ 1,075 $ 28,920 Real estate ................................ 30,147 37,997 38,998 107,142 Consumer ................................... 10,776 15,267 912 26,955 Mortgage loans available for sale .......... 14,318 -- -- 14,318 -------------- -------------- -------------- -------------- Total fixed-rate loans .................. 68,547 67,803 40,985 177,335 -------------- -------------- -------------- -------------- Variable-rate loans: Commercial ................................. 67,118 4,434 341 71,893 Real estate ................................ 485,720 253,965 13,515 753,200 Consumer ................................... 8,386 110 104 8,600 Mortgage loans available for sale .......... 5,997 -- -- 5,997 -------------- -------------- -------------- -------------- Total variable-rate loans .............. 567,221 258,509 13,960 839,690 -------------- -------------- -------------- -------------- Total loans ............................ $ 635,768 $ 326,312 $ 54,945 $ 1,017,025 ============== ============== ============== ==============
-9- 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 or the Company becomes aware that adverse factors have occurred that create substantial doubt about the collectability of the loan. 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. Potential problem assets are defined as loans presently accruing interest, and not contractually past due 90 days or more and not restructured, but about which management has doubt as to the future ability of the borrower to comply with present repayment terms, which may result in the reporting of the loans as nonperforming assets in the future. Management monitors the performance and value of any collateral securing such loans monthly, and in cases where the loan balance exceeds estimated fair value of collateral, a specific portion of the allowance for loan losses is allocated to these loans. At December 31, 2002, $508,000 of the allowance for loan losses was allocated specifically to such loans. The following table sets forth information with respect to these assets at the dates indicated.
AS OF DECEMBER 31, ---------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Loans and leases past due 90 days or more ....................... $ 721 $ 3 $ 6 $ 84 $ 79 Non-accrual loans and leases .................................... 10,241 2,480 1,937 2,725 6,566 -------- -------- -------- -------- -------- Total nonperforming loans and leases ....................... 10,962 2,483 1,943 2,809 6,645 Other real estate owned ......................................... 908 272 2,016 1,917 697 -------- -------- -------- -------- -------- Total nonperforming assets ................................. $ 11,870 $ 2,755 $ 3,959 $ 4,726 $ 7,342 ======== ======== ======== ======== ======== Allowance for loan and lease losses ............................. $ 11,838 $ 7,207 $ 6,308 $ 5,387 $ 3,875 ======== ======== ======== ======== ======== Potential problem assets ........................................ $ 23,286 $ 13,331 $ 5,053 $ 5,133 $ 3,289 ======== ======== ======== ======== ======== Ratio of total nonperforming assets to total assets ............. 0.86% 0.33% 0.61% 0.83% 1.49% Ratio of total nonperforming loans and leases to total loans and leases ................................................. 1.08% 0.45% 0.42% 0.66% 1.98% Ratio of allowance for loan and lease losses to total nonperforming loans and leases ............................. 108% 290% 325% 192% 58%
Non-accrual loans as of December 31, 2002 include approximately $5,161,000 of non-accrual loans related to the acquisition of First Community, $3,046,000 of which are in the process of being sold and are classified as mortgage loans available for sale. Loans on which the accrual of interest has been discontinued amounted to $10,241,251, $2,480,575, and $1,937,452 at December 31, 2002, 2001, and 2000, respectively. If interest on such loans had been accrued, such income would have been approximately $203,000 in 2002, $70,000 in 2001, and $199,000 in 2000. Actual interest income on those loans, which is recorded only when received, amounted to zero in 2002, 2001, and 2000. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES Management uses a systematic methodology, which is applied monthly, to determine the amount of allowance for loan losses and the resultant provisions for loan losses it considers adequate to provide for anticipated loan losses. This methodology includes the following elements: - A periodic detailed analysis of the loan portfolio - A systematic loan grading system - A periodic review of the summary of the allowance for loan loss balance - Identification of loans to be evaluated on an individual basis for impairment under SFAS No. 114 - Consideration of internal factors such as the Company's size, organizational structure, loan portfolio structure, loan administration procedures, past due and delinquency trends, and loss experience - Consideration of risks inherent in different kinds of lending - Consideration of external factors such as local, regional, and national economic factors - An overall evaluation of the quality of the underlying collateral, and holding and disposition costs -10- The following table sets forth information regarding changes in the allowance for loan and lease losses of the Company for the periods indicated.
AS OF DECEMBER 31, ----------------------------------------------------------- ----------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------- (DOLLARS IN THOUSANDS) Allowance for loan and lease losses, beginning of period... $ 7,207 $6,308 $5,387 $3,875 $3,280 Charge-offs: Commercial and other................................. 598 1,034 1,153 1,315 1,083 Real estate loans.................................... 358 338 664 256 389 Consumer loans....................................... 298 201 112 101 98 Credit cards........................................... 174 130 23 129 171 Leases ............................................... -- -- 104 191 180 ------- ------ ------ ------ ------ Total charge-offs............................... 1,428 1,703 2,056 1,992 1,921 ------- ------ ------ ------ ------ Recoveries: Commercial and other.................................. 121 45 367 255 109 Real estate loans.................................... 57 47 27 50 3 Consumer loans....................................... 93 100 70 55 68 Credit cards........................................... 34 24 36 31 14 Leases................................................. -- -- 2 38 -- ------- ------ ------ ------ ------ Total recoveries................................ 305 216 502 429 194 ------- ------ ------ ------ ------ Net charge-offs............................................ 1,123 1,487 1,554 1,563 1,727 Provision for loan and lease losses........................ 2,589 2,386 2,475 3,075 2,322 Allowance acquired from First Community.................... 3,165 -- -- -- -- ------ ------ ------ ------ ------ Allowance for loan and lease losses, end of period......... $11,838 $7,207 $6,308 $5,387 $3,875 ======= ====== ====== ====== ====== As a percentage of average total loans and leases: Net charge-offs...................................... 0.16% 0.30% 0.37% 0.40% 0.56% Provision for loan and lease losses.................. 0.37 0.48 0.58 0.79 0.75 Allowance for loan and lease losses.................. 1.71 1.45 1.48 1.39 1.26 As a percentage of total loans and leases at year-end: Allowance for loan and lease losses.................. 1.16 1.31 1.37 1.26 1.16 As a multiple of net charge-offs: Allowance for loan and lease losses.................. 10.54 4.85 4.06 3.45 2.24 Income before income taxes and provision for loan and lease losses.................................. 16.19 10.13 8.72 7.12 5.08
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 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.
AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 --------------------- -------------------- --------------------- --------------------- --------------------- (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 --------- ------- --------- ------- --------- ------- --------- ------- --------- ------- Commercial and unallocated portion. $ 10,679 9.91% $ 6,376 16.40% $ 3,604 18.02% $ 3,876 15.30% $ 2,187 16.10% Real estate ........... 614 86.59 607 79.00 2,586 61.83 710 65.80 867 64.28 Leases ................ -- -- -- -- -- 14.84 305 14.20 404 14.22 Consumer .............. 545 3.50 224 4.60 118 5.31 496 4.70 417 5.40 --------- ------- --------- ------- --------- ------- --------- ------- --------- ------- Total allowance for loan and lease losses ... $ 11,838 100.00% $ 7,207 100.00% $ 6,308 100.00% $ 5,387 100.00% $ 3,875 100.00% ========= ======= ========= ======= ========= ======= ========= ======= ========= =======
-11- 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.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 2002 2001 2000 ------------------------------------------------------------------- (DOLLARS IN THOUSANDS) WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST BALANCE RATE BALANCE RATE BALANCE RATE ------- -------- ------- -------- ------- -------- Interest-bearing demand accounts.......... $165,716 0.76% $115,773 1.35% $103,371 2.22% Certificates of deposit................... 346,789 3.70 264,176 5.39 206,222 5.72 Money market savings accounts............. 84,729 1.76 51,737 2.83 46,956 3.62 Regular savings accounts.................. 48,964 1.23 39,975 2.27 34,080 2.82 Non-interest-bearing demand accounts.................................. 159,219 -- 113,402 -- 93,499 -- -------- ---- -------- ---- -------- ---- Totals.................... $805,417 2.50% $585,063 3.85% $484,128 4.29% ======== ==== ======== ==== ======== ====
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.
AS OF DECEMBER 31, ------------------------------------------------------------------ 2002 2001 2000 ------------------ ------------------ ------------------ (DOLLARS IN THOUSANDS) Three months or less...................... $ 52,584 23.75% $ 68,615 38.96% $ 39,464 34.29% Three through twelve months............... 107,629 48.61 81,535 46.30 58,643 50.96 Over twelve months........................ 61,189 27.64 25,955 14.74 16,978 14.75 -------- ------ -------- ------ -------- ------ Totals.................... $221,402 100.00% $176,105 100.00% $115,085 100.00% ======== ====== ======== ====== ======== ======
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase totaled $70.8 million, $72.3 million, and $67.8 million at December 31, 2002, 2001, and 2000, respectively. The weighted average interest rate on securities sold under agreements to repurchase was 0.49%, 1.15%, and 5.36% at December 31, 2002, 2001, and 2000, respectively. Securities sold under agreements to repurchase are summarized as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Balance................................................. $70,764,215 $72,258,011 $67,769,015 Weighted average interest rate ......................... 0.49% 1.15% 5.36% Maximum amount outstanding at any month end............. $70,764,215 $85,831,696 $67,769,015 Average balance outstanding during the period .......... $65,339,000 $71,833,000 $55,151,000 Weighted average interest rate during the period ....... 0.89% 2.68% 4.76%
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.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Return on average assets........................ 1.00% 1.13% 1.21% Return on average equity........................ 12.14 14.64 15.23 Dividend payout ratio........................... 21.61 20.47 17.91 Average equity to average assets................ 8.22 7.75 7.93
-12- RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 OVERVIEW. The Company's net income increased to $10.0 million in 2002, from $8.1 million in 2001 and from $7.2 million in 2000. Net interest income increased to $44.1 million in 2002, compared to $35.2 million in 2001 and $32.0 million in 2000. Total non-interest income increased to $12.7 million in 2002, compared to $9.4 million in 2001 and $7.8 million in 2000. These increases were offset by non-interest expenses that increased to $38.6 million in 2002, compared to $29.6 million in 2001 and $26.2 million in 2000. Income tax expense increased to $5.6 million in 2002, from $4.5 million in 2001 and $3.8 million in 2000. The Company completed the acquisition and merger of First Community Industrial Bank ("First Community") on October 1, 2002 for approximately $67 million. The Company financed this acquisition through a public offering of its common stock in August 2002, which netted approximately $51 million, and through the issuance of approximately $25 million in trust preferred securities in June of 2002. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of First Community were recorded at their respective fair values on October 1, 2002. First State acquired approximately $343 million in loans and approximately $242 million in deposits, and recognized goodwill of approximately $43 million related to the transaction. The First Community account balances acquired on October 1, 2002 and the results of operations since October 1, 2002 are included in the results of the Company. During 2001, a significant competitor in the Company's market area was acquired by another institution in the market, requiring the purchaser to divest of significant deposits to another institution owned by an out-of-state company. The Company geared many of its activities, including marketing efforts, to capturing market share disrupted by this acquisition. Management believes that a significant amount of its deposit growth in 2001 was a result of this transaction and the Company's efforts to capitalize on it. While management believes that the Company will continue to increase its market share as a result of this acquisition, management does not expect its market share growth from this acquisition to continue at the same rate as that experienced in 2002 and 2001. The decline in interest rates in 2001 and 2002 had the impact of compressing the Company's net interest margin because of the Company's asset sensitive position. If the decline in rates were to halt, this compression should be abated and any increase in rates by the Federal Reserve would be expected to have the effect of increasing the Company's net interest margin. The decline in rates also had the effect of stimulating demand for one- to four-family residential real estate. That increased demand contributed to the growth in real estate construction loans and originations of mortgage loans available for sale. With interest rates at historically low levels, management expects that increases in rates will occur that will slow the pace of demand for one- to four-family residential real estate, which would have the effect of reducing the rate of growth in construction loans and mortgage loans originated for sale. INTEREST INCOME. Interest income increased to $62.4 million in 2002, from $55.7 million in 2001 and $52.2 million in 2000. This increase was due to an increase in average interest-earning assets. Average interest-earning assets were $920 million in 2002, compared to $672 million in 2001 and $557 million in 2000. The increase in average interest-earning assets occurred in loans and investment securities, and was made possible by the acquisition of First Community and the Company's successful efforts to increase its deposit market share. Principally as a result of the Federal Reserve Bank's rate cuts, the Company's yield on interest-earning assets decreased to 6.78% in 2002, from 8.29% in 2001 and 9.36% in 2000. INTEREST EXPENSE. Interest expense decreased to $18.4 million in 2002, from $20.5 million in 2001 and $20.2 million in 2000. This decrease was due to a decrease in the cost of interest-bearing liabilities, partially offset by an increase in average interest-bearing liabilities. Average interest-bearing liabilities increased to $753 million in 2002, from $545 million in 2001 and $453 million in 2000. The increase in average interest-bearing liabilities was due to an increase in average interest-bearing deposits of $174.5 million, an increase in average borrowings of $15.2 million, and an increase in average trust preferred securities of $20.1 million. The increase in interest-bearing deposits, borrowings, and trust preferred securities is a result of the acquisition of First Community and the Company's success in increasing its market share. The average cost of interest-bearing liabilities decreased to 2.44% in 2002, from 3.76% in 2001 and 4.46% in 2000. The decrease in the cost of interest bearing liabilities is a direct result of the Federal Reserve Bank's rate cuts. NET INTEREST INCOME. Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as the volume and composition of average interest-earning assets and average interest-bearing liabilities. Net interest income increased to $44.1 million in 2002, from $35.2 million in 2001 and $32.0 million in 2000. This increase was due to increases in average loans of $194.8 million and average investment securities of $38.5 million. Net interest margin was 4.79% in 2002, compared to 5.24% in 2001 and 5.73% in 2000. -13- PROVISION FOR LOAN AND LEASE LOSSES. The provision for loan losses increased to $2.6 million in 2002, from $2.4 million in 2001 and $2.5 million in 2000. The provision in each year was based on management's judgment concerning the amount of allowance for loan losses necessary after its review of various factors, which it believes affect the credit quality of the loan portfolio. Charge-offs net of recoveries of loans and leases were $1.1 million in 2002, $1.5 million in 2001, and $1.6 million in 2000. The percentage of net charge-offs to average loans was 0.16% in 2002 and 0.30% in 2001. 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 INCOME. Non-interest income was $12.7 million in 2002, compared to $9.4 million in 2001 and $7.8 million in 2000. The increase for 2002 compared to 2001 was primarily the result of increased service charges on deposit accounts, credit card transaction fees, and an increase in the gain on sale of mortgage loans. Service charges on deposits were $3.4 million, $2.9 million, and $2.4 million for the years ended December 31, 2002, 2001, and 2000, respectively, due principally to increases in deposits in those years. The gain on the sale of mortgage loans totaled $2.8 million in 2002, $1.8 million in 2001, and $658,000 in 2000. The increase in 2002 from 2001 was significantly aided by the decrease in interest rates during 2002 and in 2001, which increased demand for one- to four-family residential properties, resulting in higher origination volumes. Credit card transaction fees increased to $4.2 million in 2002, from $3.2 million in 2001 and $2.4 million in 2000. These increases are the result of the Company's efforts to increase its market share. In 2000, non-interest income included an $879,000 gain on the sale of the Company's leasing division, a $333,000 loss on the sale of investment securities, and a $259,000 gain on the sale of a property recovered in satisfaction of a loan. NON-INTEREST EXPENSES. Non-interest expenses increased to $38.6 million in 2002, from $29.6 million in 2001 and $26.2 million in 2000. 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 $18.0 million in 2002, from $13.6 million in 2001 and $11.8 million in 2000. Occupancy expense increased to $4.4 million in 2002, from $3.4 million in 2001 and $3.1 million in 2000. Equipment expense increased to $2.8 million in 2002, from $2.1 million in 2001 and $1.9 million in 2000. Marketing expense increased to $2.1 million in 2002, compared to $1.5 million in 2001 and $1.3 million in 2000. The increases in salary and occupancy expense are due primarily to the acquisition and merger of First Community, increased commissions for the production of mortgage loans sold, and the settlement of an executive employment agreement. 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 expenses will continue to increase with additional growth. INCOME TAX EXPENSE. Income tax expense increased to $5.6 million in 2002, from $4.5 million in 2001 and $3.8 million in 2000. Management anticipates that the Company's effective tax rate will be slightly higher in 2003. 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, 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 stable sources of funds. Deposits of the Company increased to $1.080 billion at December 31, 2002, from $685 million at December 31, 2001. Growth in deposits has occurred primarily as a result of the Company's acquisition and merger of First Community and 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 market area. Net loans of the Company increased to $1.005 billion at December 31, 2002 from $542 million as of December 31, 2001. During 2002, real estate loans increased by $440.3 million, commercial loans increased by $10.6 million, consumer loans increased by $10.0 million, and mortgage loans available for sale increased by $7.3 million. The increase in loans is due to the acquisition and merger of First Community and 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 Company maintains an investment securities portfolio made up of U.S. Treasury, U.S. agency, mortgage-backed securities issued by U.S. agencies, municipal bonds, and other securities. These securities may be used as a source of liquidity either through sale of securities available for sale or pledging for qualified deposits, or as collateral for Federal Home Loan Bank borrowings. -14- 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. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following tables present contractual cash obligations, defined as principal of non-deposit obligations with maturities in excess of one year, and property and equipment operating lease obligations, and commercial commitments, defined as commitments to extended credit as of December 31, 2002. See notes 8, 9, and 13 of the notes to the consolidated financial statements.
PAYMENTS DUE BY PERIOD --------------------------------------------------------------- (DOLLARS IN THOUSANDS) --------------------------------------------------------------- ONE TO ONE YEAR THREE FOUR TO AFTER CONTRACTUAL CASH OBLIGATIONS TOTAL AND LESS YEARS FIVE YEARS FIVE YEARS ------------ ----------- ----------- ------------ ------------ FHLB advances........................................ $ 79,763 $23,811 $47,938 $ 8,014 $ -- Note Payable......................................... 911 41 91 102 677 Operating leases..................................... 23,921 2,913 5,224 4,330 11,454 Trust preferred securities........................... 32,500 -- -- -- 32,500 -------- ------- ------- ------- ------- Total contractual cash obligations.............. $137,095 $26,765 $53,253 $12,446 $44,631 ======== ======= ======= ======= =======
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD --------------------------------------------------------------- (DOLLARS IN THOUSANDS) --------------------------------------------------------------- UNFUNDED LESS THAN ONE TO FOUR TO AFTER COMMERCIAL COMMITMENTS COMMITMENTS ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS ----------- -------- ----------- ---------- ---------- Lines of credit...................................... $148,181 $ 99,410 $ 8,044 $ 68 $40,659 Standby letters of credit............................ 10,040 7,581 2,184 275 -- -------- -------- ------- ---- ------- Total commercial commitments.................... $158,221 $106,991 $10,228 $343 $40,659 ======== ======== ======= ==== =======
CRITICAL ACCOUNTING POLICIES Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. Estimating the allowance is a critical accounting policy. Management uses a systematic methodology with subjective elements that require material estimates which are subject to revision as facts and circumstances warrant. In assessing the adequacy of the allowance, management reviews the size, quality, and risks of loans in the portfolio, and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets, and economic conditions. A specific percentage is allocated to total loans in good standing and not specifically reserved, while additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are charged off. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management based on probable losses in the loan portfolio. The excess of cost over fair value of the net assets of acquired banks is recorded as goodwill. Prior to 2002, goodwill was amortized over its estimated useful life on a straight-line basis and the recoverability of goodwill assessed by determining whether the amortization can be recovered through projected undiscounted future results of operations. Beginning in 2002, goodwill is no longer amortized, but instead tested for impairment at least annually. CAPITAL RESOURCES The Company's total stockholders' equity increased to $117.5 million at December 31, 2002 from $58.3 million at December 31, 2001. Of the $59.2 million increase, $51.0 million was a result of the public offering of approximately 2.4 million shares of common stock, and $10.0 million was produced by earnings, offset by stock repurchases of $660,000 and dividend payments of $2.2 million. -15- In connection with the Company's acquisition of First Community, the Company issued 2.4 million shares of common stock. The Company offered these shares to the public at a price of $22.50 per share. In connection with this offering, the Company paid a 5% commission to the underwriters, and certain legal, accounting, and printing expenses, resulting in net proceeds to the Company of approximately $51.0 million. The net proceeds were used to pay a portion of the purchase price for First Community. During 2002, the Company issued trust preferred securities of $25 million which are included as borrowings on the consolidated balance sheet and counted as Tier I capital for regulatory capital purposes. Management currently intends to continue to retain a major portion of the Company's earnings to support anticipated growth. As of December 31, 2002, the Company and its subsidiary bank met the fully phased-in regulatory capital requirements as further disclosed in note 11 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 accounting principles generally accepted in the United States of America, 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. FORWARD-LOOKING STATEMENTS This document includes forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The discussions regarding our interest rate sensitivity include forward-looking statements. Other forward-looking statements can be identified by the use of forward-looking words such as "believe," "expect," "may," "will," "should," "seek," "approximately," "intend," "plan," "estimate," or "anticipate" or the negative of those words or other comparable terminology. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statement. Some factors include fluctuations in interest rates, inflation, government regulations, loss of key personnel, faster or slower than anticipated growth, and economic conditions and competition in the geographic and business areas in which we conduct our operations. -16- 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, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted in the United States of America. 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 presentation. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1(e) to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. KPMG LLP Albuquerque, New Mexico January 17, 2003 -17- FIRST STATE BANCORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, ----------------------------------- 2002 2001 ---------------- ---------------- ASSETS Cash and due from banks (note 3) .................................................... $ 51,902,361 $ 37,362,627 Interest-bearing deposits with banks ................................................ 22,828,489 4,782,910 Federal funds sold .................................................................. 14,140,500 22,745,023 ---------------- ---------------- Total cash and cash equivalents ...................................... 88,871,350 64,890,560 Investment securities (note 4): Available for sale (at market, amortized cost of $120,616,765 and $129,242,785 at December 31, 2002 and 2001) ................................. 121,710,744 130,290,113 Held to maturity (at amortized cost, market of $70,127,021 and $55,139,934 at December 31, 2002 and 2001) .................................. 67,818,738 54,853,227 Federal Home Loan Bank stock and Federal Reserve Bank stock at cost ............ 4,564,250 2,278,750 ---------------- ---------------- Total investment securities .......................................... 194,093,732 187,422,090 Mortgage loans available for sale (note 5) .......................................... 20,315,260 12,980,206 Loans held for investment net of unearned interest (note 5) ......................... 996,709,505 535,742,261 Less allowance for loan losses (note 5) ............................................. 11,837,887 7,207,118 ---------------- ---------------- Net loans ............................................................ 1,005,186,878 541,515,349 Premises and equipment, net (note 6) ................................................ 16,503,134 14,324,259 Accrued interest receivable ......................................................... 5,383,622 4,154,790 Other real estate owned ............................................................. 908,163 272,042 Goodwill, less accumulated amortization of $1,234,953 at December 31, 2002 and 2001 (note 2) ............................................ 43,411,817 360,852 Cash surrender value of bank owned life insurance ................................... 18,153,002 7,597,775 Deferred tax asset, net (note 10) ................................................... 3,373,164 2,677,395 Other assets, net ................................................................... 10,984,744 4,706,158 ---------------- ---------------- Total assets ......................................................... $ 1,386,869,606 $ 827,921,270 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (note 7): Non-interest-bearing ................................................ $ 189,062,626 $ 135,798,116 Interest-bearing .................................................... 890,621,676 549,223,949 ---------------- ---------------- Total deposits .................................................... 1,079,684,302 685,022,065 Securities sold under agreements to repurchase (note 8) ........................ 70,764,215 72,258,011 Borrowings (note 8) ............................................................ 113,173,894 8,780,820 Other liabilities .............................................................. 5,779,579 3,515,661 ---------------- ---------------- Total liabilities ................................................. 1,269,401,990 769,576,557 Stockholders' equity (note 11): Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding .................................................................. -- -- Common stock, no par value, 20,000,000 shares authorized; issued, 7,704,884 and 5,235,134; outstanding, 7,327,834 and 4,885,584 at December 31, 2002 and 2001 ..................................................................... 82,293,817 30,348,120 Treasury stock, at cost (377,050 shares at December 31, 2002 and 349,550 shares at December 31, 2001) ................................................. (5,446,841) (4,786,788) Retained earnings .............................................................. 39,898,614 32,092,144 Accumulated other comprehensive gains - Unrealized gains on investment securities, net of tax (notes 4 and 10) ...... 722,026 691,237 ---------------- ---------------- Total stockholders' equity ........................................ 117,467,616 58,344,713 Commitments and contingencies (notes 9, 12, and 13) ................................. -- -- ---------------- ---------------- Total liabilities and stockholders' equity ........................ $ 1,386,869,606 $ 827,921,270 ================ ================
See accompanying notes to consolidated financial statements. -18- FIRST STATE BANCORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Interest income: Interest and fees on loans and leases ................................. $ 52,921,671 $ 46,648,160 $ 43,784,197 Interest on marketable securities: Taxable .......................................................... 8,757,692 8,092,235 7,458,305 Nontaxable ....................................................... 148,324 174,385 195,062 Federal funds sold .................................................... 359,385 170,001 316,718 Interest-bearing deposits other banks ................................. 260,474 628,253 397,361 ------------ ------------ ------------ Total interest income ............................................ 62,447,546 55,713,034 52,151,643 Interest expense: Deposits .............................................................. 16,182,571 18,180,687 16,744,458 Short-term borrowings (note 8) ........................................ 689,221 2,160,061 3,083,875 Long-term debt (note 8) ............................................... 1,511,968 137,543 370,059 ------------ ------------ ------------ Total interest expense ........................................... 18,383,760 20,478,291 20,198,392 ------------ ------------ ------------ Net interest income .............................................. 44,063,786 35,234,743 31,953,251 Provision for loan and lease losses (note 5) .............................. 2,588,800 2,385,500 2,475,008 ------------ ------------ ------------ Net interest income after provision for loan and lease losses .... 41,474,986 32,849,243 29,478,243 ------------ ------------ ------------ Non-interest income: Service charges on deposit accounts ................................... 3,439,236 2,916,149 2,425,566 Other banking service fees ............................................ 1,083,012 488,689 431,011 Credit card transaction fees .......................................... 4,194,758 3,208,699 2,446,858 Operating lease income ................................................ 33,355 35,454 134,415 Gain (loss) on sale or call of investment securities .................. (8,186) 47,682 (333,142) Gain on sale of leasing division ...................................... -- -- 879,078 Check imprint income .................................................. 528,774 501,787 438,676 Gain on sale of mortgage loans ........................................ 2,767,871 1,815,218 658,332 Other ................................................................. 659,398 400,053 701,176 ------------ ------------ ------------ Total non-interest income ........................................ 12,698,218 9,413,731 7,781,970 ------------ ------------ ------------ Non-interest expenses: Salaries and employee benefits (notes 11 and 12) ...................... 18,022,784 13,641,883 11,783,716 Occupancy ............................................................. 4,352,525 3,444,408 3,107,404 Data processing ....................................................... 2,010,630 1,369,062 1,219,681 Credit card interchange ............................................... 2,004,023 1,650,381 1,252,509 Equipment ............................................................. 2,780,598 2,113,045 1,911,345 Leased equipment depreciation ......................................... -- -- 70,241 Legal, accounting, and consulting ..................................... 815,937 583,089 766,734 Marketing ............................................................. 2,109,314 1,496,305 1,330,095 Telephone expense ..................................................... 886,790 705,895 497,577 Supplies .............................................................. 755,256 588,125 460,211 Other real estate owned ............................................... 131,694 286,214 168,966 FDIC insurance premiums ............................................... 129,458 101,198 95,722 Amortization of intangibles ........................................... 52,663 104,206 104,206 Check imprint expense ................................................. 495,084 449,097 372,641 Other ................................................................. 4,037,448 3,067,338 3,038,763 ------------ ------------ ------------ Total non-interest expenses ...................................... 38,584,204 29,600,246 26,179,811 ------------ ------------ ------------ Income before income taxes ................................................ 15,589,000 12,662,728 11,080,402 Income tax expense (note 10) .............................................. 5,630,896 4,520,955 3,848,738 ------------ ------------ ------------ Net income ................................................................ $ 9,958,104 $ 8,141,773 $ 7,231,664 ============ ============ ============ Earnings per share (note 1): Basic earnings per share .............................................. $ 1.72 $ 1.66 $ 1.48 ============ ============ ============ Diluted earnings per share ............................................ $ 1.66 $ 1.61 $ 1.45 ============ ============ ============
See accompanying notes to consolidated financial statements. -19- FIRST STATE BANCORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Net income ................................................................ $ 9,958,104 $ 8,141,773 $ 7,231,664 Other comprehensive gain, net of tax - unrealized holding gains on securities available for sale arising during period ...................... 25,386 740,641 1,109,032 Reclassification adjustment for losses (gain) included in net income ...... 5,403 (47,682) 219,873 ------------ ------------ ------------ Total comprehensive income ............................................. $ 9,988,893 $ 8,834,732 $ 8,560,569 ============ ============ ============
See accompanying notes to consolidated financial statements. -20- FIRST STATE BANCORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 ---------------------------------------------------------------------------------------- ACCUMULATED COMMON COMMON OTHER TOTAL STOCK STOCK TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT STOCK EARNINGS GAINS (LOSSES) EQUITY ---------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1999 ............ 4,930,096 $ 29,459,807 $ (3,012,031) $ 19,309,878 $ (1,330,627) $ 44,427,027 ---------- ------------- ------------- ------------- ------------- ------------- Net income ......................... -- -- -- 7,231,664 -- 7,231,664 Dividends ($0.27) per share ........ -- -- -- (1,295,000) -- (1,295,000) Common shares issued from exercise of options (note 11) .. 28,112 135,012 -- -- -- 135,012 Purchase of Treasury stock ......... (89,050) -- (1,064,631) -- -- (1,064,631) Common shares issued in employee benefit plan .......... 20,839 268,194 -- -- -- 268,194 Common shares issued pursuant to dividend reinvestment plan ..... 3,083 39,525 -- -- -- 39,525 Amortization of stock option plan grants ......................... -- -- -- 246,895 -- 246,895 Net change in market value, net of tax ..................... -- -- -- -- 1,328,905 1,328,905 ---------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2000 ............ 4,893,080 29,902,538 (4,076,662) 25,493,437 (1,722) 51,317,591 ---------- ------------- ------------- ------------- ------------- ------------- Net income ......................... -- -- -- 8,141,773 -- 8,141,773 Dividends ($0.34) per share ........ -- -- -- (1,666,512) -- (1,666,512) Common shares issued from exercise of options (note 11) .. 13,295 116,932 -- -- -- 116,932 Purchase of Treasury stock ......... (40,000) -- (710,126) -- -- (710,126) Common shares issued in employee benefit plan .......... 16,560 278,884 -- -- -- 278,884 Common shares issued pursuant to dividend reinvestment plan ..... 2,649 49,766 -- -- -- 49,766 Amortization of stock option plan grants..................... -- -- -- 123,446 -- 123,446 Net change in market value, net of tax ......................... -- -- -- -- 692,959 692,959 ---------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2001 ............ 4,885,584 30,348,120 (4,786,788) 32,092,144 691,237 58,344,713 ---------- ------------- ------------- ------------- ------------- ------------- Net income ......................... -- -- -- 9,958,104 -- 9,958,104 Dividends ($0.40) per share ........ -- -- -- (2,151,634) -- (2,151,634) Common shares issued from exercise of options (note 11) .. 38,467 215,415 -- -- -- 215,415 Income tax benefit from exercise of options ..................... -- 406,293 -- -- -- 406,293 Purchase of Treasury stock ......... (27,500) -- (660,053) -- -- (660,053) Common shares issued in employee benefit plan .......... 12,982 306,186 -- -- -- 306,186 Common shares issued pursuant to dividend reinvestment plan .. 3,301 56,988 -- -- -- 56,988 Common shares issued pursuant to public offering ............. 2,415,000 50,960,815 -- -- -- 50,960,815 Net change in market value, net of tax ..................... -- -- -- -- 30,789 30,789 ---------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2002 ............ 7,327,834 $ 82,293,817 $ (5,446,841) $ 39,898,614 $ 722,026 $ 117,467,616 ========== ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements. -21- FIRST STATE BANCORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------- 2002 2001 2000 ------------- ------------- ------------- Operating activities: Net income ........................................................................ $ 9,958,104 $ 8,141,773 $ 7,231,664 ------------- ------------- ------------- Adjustments to reconcile net income to cash provided (used) by operating activities: Provision for loan and lease losses ......................................... 2,588,800 2,385,500 2,475,008 Provision for decline in value of other real estate owned ................... 50,671 95,114 82,399 Depreciation and amortization ............................................... 2,429,672 2,086,036 1,941,679 Increase in bank owned life insurance cash surrender value .................. (555,227) (97,775) -- Amortization of securities, net ............................................. (1,590,229) (127,630) (1,069,518) Gain on sale of leasing division ............................................ -- -- (879,078) Loss on sale of investment securities available for sale .................... 94,473 -- 333,142 Net gain on sales of other real estate owned ................................ -- (23,007) (299,000) Mortgage loans originated for sale .......................................... (185,772,967) (140,200,440) (51,164,507) Proceeds from sale of mortgage loans originated for sale .................... 189,555,266 134,015,327 47,838,644 Decrease (increase) in accrued interest receivable .......................... 801,060 346,403 (1,438,618) Deferred tax asset .......................................................... (711,630) (543,149) (991,299) Increase in other assets, net ............................................... (4,656,842) (1,254,395) (140,711) Increase (decrease) in other liabilities, net ............................... 861,704 (492,657) (4,463,665) ------------- ------------- ------------- Total adjustments ........................................................ 3,094,751 (3,810,673) (7,775,524) ------------- ------------- ------------- Net cash provided (used) by operating activities ......................... 13,052,855 4,331,100 (543,860) ------------- ------------- ------------- Cash flows from investing activities: Net increase in loans and leases ............................................ (130,637,704) (84,879,716) (93,088,945) Proceeds from the sale of leases ............................................ -- -- 64,427,001 Purchases of investment securities carried at amortized cost ................ (76,066,725) (298,626,694) (169,979,995) Maturities of investment securities carried at amortized cost ............... 69,211,578 283,398,925 153,908,731 Purchases of investment securities carried at market ........................ (238,628,985) (156,605,000) (37,332,305) Maturities of investment securities carried at market ....................... 249,033,647 119,997,195 4,609,000 Sale of investment securities available for sale ............................ 9,984,520 -- 11,936,858 Purchases of premises and equipment ......................................... (4,429,871) (3,554,981) (1,709,324) Sales of premises and equipment ............................................. -- -- 125,038 Proceeds from sale of and payments on other real estate owned ............... 103,096 2,612,234 2,040,708 Acquisition, net of cash acquired (note 2) .................................. (59,916,422) -- -- Purchase of bank owned life insurance ....................................... (10,000,000) (7,500,000) -- ------------- ------------- ------------- Net cash used in investing activities .................................... (191,346,866) (145,158,037) (65,063,233) ------------- ------------- ------------- Cash flows from financing activities: Net increase in interest-bearing deposits ................................... 99,410,538 119,443,872 55,548,469 Net increase in non-interest-bearing deposits ............................... 53,193,864 37,169,958 9,324,193 Net (decrease) increase in securities sold under agreements to repurchase ... (1,493,796) 4,488,996 28,841,279 Common shares issued ........................................................ 51,539,404 445,582 442,731 Proceeds from Federal Home Loan Bank borrowings ............................. 80,000,000 -- -- Payments on Federal Home Loan Bank borrowings ............................... (102,266,538) -- (10,000,000) Dividends paid .............................................................. (2,151,634) (1,666,512) (1,295,000) Payments on borrowings ...................................................... (296,984) (53,294) (48,788) Proceeds from issuance of borrowings ........................................ 25,000,000 7,732,000 -- Purchase of treasury stock .................................................. (660,053) (710,126) (1,064,631) ------------- ------------- ------------- Net cash provided by financing activities ................................ 202,274,801 166,850,476 81,748,253 ------------- ------------- ------------- Increase in cash and cash equivalents ....................................... 23,980,790 26,023,539 16,141,160 Cash and cash equivalents at beginning of year ................................. 64,890,560 38,867,021 22,725,861 ------------- ------------- ------------- Cash and cash equivalents at end of year ....................................... $ 88,871,350 $ 64,890,560 $ 38,867,021 ============= ============= ============= Supplemental disclosure of additional noncash investing and financing activities: Additions to other real estate owned in settlement of loans ................. $ 789,888 $ 1,515,464 $ 1,923,394 Additions to loans in settlement of other real estate owned ................. -- 575,493 -- Supplemental disclosure of cash flow information: Cash paid for interest ...................................................... $ 17,599,773 $ 20,534,334 $ 19,815,386 ============= ============= ============= Cash paid for income taxes .................................................. $ 5,260,000 $ 6,175,000 $ 4,340,000 ============= ============= =============
See accompanying notes to consolidated financial statements. -22- 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 is a New Mexico-based holding company that serves communities in New Mexico, Colorado, and Utah through its wholly owned subsidiary First State Bank N.M. First State Bank N.M. is a state chartered bank providing a full range of commercial banking services in Taos, Albuquerque, Santa Fe, Rio Rancho, Los Lunas, Bernalillo, Placitas, Pojoaque, Questa, Belen, and Moriarty, New Mexico. First State Bank N.M. also provides a full range of commercial banking services in the Colorado and Utah markets through branches under the name First Community Bank. First State Bancorporation and First State Bank N.M. 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 in conformity with accounting principles generally accepted in the United States of America, 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 losses and the valuation of real estate acquired in satisfaction of loans. In connection with the determination of the allowances for loan losses and real estate owned, management obtains independent appraisals for significant properties. Management believes that the estimates and assumptions it uses to prepare the consolidated financial statements, particularly as they relate to the allowances for losses on loans, 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 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 classifies investment securities in one of three categories and accounts for them as follows: (i) debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost; (ii) debt and equity securities that are bought and held primarily for the purpose of selling them in the near term are classified as trading securities and carried at fair value, with unrealized gains and losses included in earnings; and (iii) debt and equity securities not classified as either held to maturity securities or trading securities are classified as available for sale securities. These are securities that 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. -23- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (c) Loans, and Allowance for Loan Losses Interest on loans is recognized as income based upon the daily principal amount outstanding. 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. 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 losses unless in management's opinion the loan is well secured and in the process of collection. The allowance for loan losses is that amount which, in management's judgment, is considered adequate to provide for potential losses in the loan portfolio. In analyzing the adequacy of the allowance for loan losses, management uses a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of periodic external loan reviews. Historical loss experience factors and specific reserves for impaired loans, combined with other considerations, such as delinquency, non-accrual, criticized and classified loan trends, economic conditions, concentrations of credit risk, and experience and abilities of lending personnel, are also considered in analyzing the adequacy of the allowance. Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including contractual interest payments. When a loan has been identified as impaired, the amount of impairment is measured using cash flow of expected repayments discounted using the loan's contractual interest rate or at the fair value of the underlying collateral less estimated selling costs when it is determined that the source of repayment is the liquidation of the underlying collateral. The Company's loan portfolio is concentrated in New Mexico, Colorado, and Utah. A significant portion of the loan portfolio is secured by real estate in those communities. Accordingly, the ultimate collectibility of the Company'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. Mortgage loans available for sale are carried at the lower of aggregate cost or estimated fair market value. Estimated fair market value is determined using forward commitments to sell loans to permanent investors or current market rates for loans of similar quality and type. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income. Gains resulting from sales of mortgage loans are recognized at settlement date. The loans are primarily secured by one- to four-family residential real estate. (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. The Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," as of January 1, 2002, and therefore, no longer amortizes goodwill. As of the date of adoption, the Company had unamortized goodwill in the amount of $360,852, which was subject to the transition provisions of SFAS No. 142. The Company determined there was no transitional impairment loss at January 1, 2002. Goodwill amortization for the years ended December 31, 2001 and 2000 was $104,206 in each year. -24- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's reported net income and basic and diluted earnings per share adjusted for excluding the effects of goodwill amortization in fiscal periods prior to 2002 would have been as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Reported net income ................ $ 9,958 $ 8,142 $ 7,232 Addback: Goodwill amortization ..... -- 104 104 ---------- ---------- ---------- Adjusted net income ................ $ 9,958 $ 8,246 $ 7,336 ========== ========== ========== Basic earnings per share: Reported net income ............. $ 1.72 $ 1.66 $ 1.48 Goodwill amortization ........... -- 0.03 0.02 ---------- ---------- ---------- Adjusted net income ............. $ 1.72 $ 1.69 $ 1.50 ========== ========== ========== Diluted earnings per share: Reported net income ............. $ 1.66 $ 1.61 $ 1.45 Goodwill amortization ........... -- 0.02 0.02 ---------- ---------- ---------- Adjusted net income ............. $ 1.66 $ 1.63 $ 1.47 ========== ========== ==========
The Company tests goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completed its transitional and annual goodwill impairment tests as of January 1, 2002 and October 31, 2002, respectively, and found no impairment. Core deposit intangibles are amortized on an accelerated basis based on an estimated useful life of approximately 10 years. The Company reviews its core deposit intangible assets periodically for other-than-temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. (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 gains or losses from sales of other real estate owned, are charged or credited to other operating income or costs. (g) Bank Owned Life Insurance In 2002 and 2001, the Company purchased life insurance on certain of its officers. The cash surrender value of these policies was approximately $18.2 million and $7.6 million at December 31, 2002 and 2001, respectively. The increase in the cash surrender value is included in non-interest income in the consolidated statements of operations and amounted to $555,227 and $97,775 for the years ended December 31, 2002 and 2001, respectively. (h) Income Taxes The Company files a consolidated tax return with its wholly owned subsidiary. The Company uses the asset and liability method to account for income taxes. 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. -25- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (i) Statements of Cash Flows For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits with banks, and federal funds sold. (j) Earnings per Common Share Basic earnings per share is computed by dividing net income (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 had been issued. The following is a reconciliation of the numerators and denominators of basic and diluted earnings per share.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------------- 2002 2001 2000 ------------------------------- ------------------------------- ----------------------------------- PER PER PER INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR)(DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ---------- ---------- ------ ---------- ------------- ------ ----------- ------------- ---------- Basic EPS: Net income ............ $9,958,104 5,801,332 $1.72 $8,141,773 4,892,657 $ 1.66 $7,231,664 4,884,164 $ 1.48 ===== ======= ========== Effect of dilutive securities options . -- 196,269 -- 156,692 -- 112,828 ---------- ---------- ---------- ---------- ---------- ----------- Diluted EPS: Net income .......... $9,958,104 5,997,601 $1.66 $8,141,773 5,049,349 $ 1.61 $7,231,664 4,996,992 $ 1.45 ========== ========== ===== ========== ========== ======= ========== =========== ==========
(k) 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 is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method and has adopted the disclosure requirements of SFAS No. 148. Compensation expense of $13,776, $49,357, and $83,013 was recognized in 2002, 2001, and 2000, respectively, pursuant to the grant of options. Had compensation costs been determined consistent with the fair value method of SFAS No. 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 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. 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. -26- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, ------------------------------------------- 2002 2001 2000 ------------- ------------- ------------- Net income as reported: ...................... $ 9,958,104 $ 8,141,773 $ 7,231,664 Deduct: Total stock-based employee compensation expense determined under fair value-based method for awards, net of related tax effects .................... (20,425) (75,362) (150,636) ------------- ------------- ------------- Pro forma net income ......................... $ 9,937,679 $ 8,066,411 $ 7,081,028 ============= ============= ============= Earnings per share: Basic - as reported ....................... $ 1.72 $ 1.66 $ 1.48 ============= ============= ============= Basic - pro forma ......................... $ 1.71 $ 1.65 $ 1.45 ============= ============= ============= Diluted - as reported ..................... $ 1.66 $ 1.61 $ 1.45 ============= ============= ============= Diluted - pro forma ....................... $ 1.66 $ 1.60 $ 1.42 ============= ============= =============
(l) Reclassifications Certain previous period balances have been reclassified to conform to the 2002 presentation. (m) Reporting Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income," 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. (n) Other New Accounting Standards In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," but retains many of the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes APB Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Early application is permitted. The adoption of SFAS No. 144 on January 1, 2002 had no impact on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Certain disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. The adoption of this statement as of December 31, 2002 had no effect on the Company's consolidated financial position or results of operations. -27- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. ACQUISITION OF FIRST COMMUNITY The Company completed the acquisition of First Community Industrial Bank ("First Community") on October 1, 2002 for approximately $67 million. The Company financed this acquisition through a public offering of its common stock in August 2002, which netted approximately $51.0 million, and through the issuance of approximately $25.0 million in trust preferred securities in June of 2002. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of First Community were recorded at their respective fair values on October 1, 2002. The First Community account balances acquired on October 1, 2002 and the results of operations since October 1, 2002 are included in the results of the Company. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The Company is currently in negotiations to sell loans with a balance of approximately $13.1 million at a discount of approximately $3.9 million, and any difference between the recorded fair value of the loans and the final sales price will be recorded as an addition to or reduction of goodwill.
OCTOBER 1, 2002 --------------- (DOLLARS IN THOUSANDS) Cash and due from banks ..................................... $ 3,988 Interest-bearing bank balances .............................. 3,250 Securities available for sale ............................... 12,781 Federal Reserve Board and Federal Home Loan Bank stock ...... 5,867 Loans: Mortgage loans available for sale ...................... 9,200 Loans held for investment .............................. 334,160 Less: allowance for loan losses ............................. 3,165 ------------ Net loans .............................................. 340,195 Premises and equipment, net ................................. 126 Accrued interest receivable ................................. 2,030 Intangible assets - core deposit ............................ 881 Goodwill .................................................... 43,051 Other assets ................................................ 810 ------------ Total assets acquired .............................. 412,979 ------------ Deposits: Non-interest-bearing ................................... (71) Interest-bearing ....................................... (241,987) ------------ Total deposits ......................................... (242,058) Borrowed funds .............................................. (101,957) Accrued interest payable .................................... (1,264) Other liabilities ........................................... (546) ------------ Total liabilities assumed .......................... (345,825) ------------ Net assets acquired ....................... $ 67,154 ------------
-28- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pro Forma Financial Information The pro forma financial information below presents the condensed consolidated financial results of the Company assuming that First Community, acquired October 1, 2002, had been acquired at the beginning of 2001 and includes the effect of amortization of goodwill in 2001 of $104,206 and other acquired identifiable intangible assets from that date. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of future operations that would have been achieved had the acquisition taken place at the beginning of 2001. Pro forma information follows:
YEARS ENDED DECEMBER 31, -------------------------- 2002 2001 ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income: Interest and fees on loans .................................... $ 76,321 $ 83,791 Interest and dividends on securities: Taxable securities ......................................... 8,856 8,619 Non-taxable securities ..................................... 148 174 ------------ ------------ Total interest and dividends on securities ............ 9,004 8,793 Federal funds sold and interest-bearing bank balances ......... 808 955 ------------ ------------ Total interest income ................................. 86,133 93,539 Interest expense: Interest on deposits .......................................... 22,691 29,908 Short-term borrowings ......................................... 689 2,160 Long-term borrowings .......................................... 3,848 5,490 ------------ ------------ Total interest expense ................................ 27,228 37,558 ------------ ------------ Net interest income before provision for loan losses .......................................... 58,905 55,981 Provision for loan losses .......................................... 4,359 3,510 ------------ ------------ Net interest income after provision for loan losses ............................................ 54,546 52,471 Non-interest income ................................................ 12,736 9,506 Non-interest expenses .............................................. 43,954 37,641 ------------ ------------ Income before taxes ................................................ 23,328 24,336 Income tax expense ................................................. 8,776 8,992 ------------ ------------ Net income ............................................ $ 14,552 $ 15,344 ============ ============ Average Common Shares Outstanding, basic ........................... 7,308,729 7,307,657 Average Common Shares Outstanding, diluted ......................... 7,504,998 7,464,349 Basic earnings per share ........................................... $ 1.99 $ 2.10 Diluted earnings per share ......................................... $ 1.94 $ 2.06
-29- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Goodwill and Other Acquisition - Related Intangibles The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows:
(Dollars in thousands) Balance as of January 1, 2002............. $ 361 Goodwill acquired during year ............ 43,051 Impairment losses ........................ -- ------- Balance as of December 31, 2002........... $43,412 =======
Goodwill recognized in the acquisition totaled $43,051 and is expected to be fully deductible for tax purposes. Recorded in other assets, net, the carrying amount of amortizable core deposit intangible assets recognized in the acquisition for the year ended December 31, 2002 was $855,000 net of accumulated amortization of $26,000. Expected annual amortization expense related to the acquired core deposit intangible is as follows:
YEARS ENDING DECEMBER 31, ----------- (DOLLARS IN THOUSANDS) 2003..................................................................... $ 105 2004..................................................................... 102 2005 .................................................................... 98 2006 .................................................................... 95 2007 .................................................................... 90 Thereafter............................................................... 365 ----------- Total expected annual amortization expense $ 855 ===========
3. 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 $882,000 and $886,000 at December 31, 2002 and 2001, respectively. -30- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Investment Securities Following is a summary of amortized costs and approximate market values of investment securities:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------ ------------ ------------ ------------ As of December 31, 2002 Obligations of the U.S. Treasury-- Held to maturity ...................................... $ 498,903 $ 82 $ -- $ 498,985 Obligations of U.S. government agencies-- Available for sale .................................... 120,161,676 1,067,138 1,500 121,227,314 Mortgage-backed securities: Available for sale .................................... 455,089 28,341 -- 483,430 Held to maturity ...................................... 63,655,196 2,170,732 -- 65,825,928 Obligations of states and political subdivisions-- Held to maturity ...................................... 3,664,639 137,469 -- 3,802,108 Federal Home Loan Bank stock .................................. 4,031,300 -- -- 4,031,300 Federal Reserve Bank stock .................................... 532,950 -- -- 532,950 ------------ ------------ ------------ ------------ $192,999,753 $ 3,403,762 $ 1,500 $196,402,015 ============ ============ ============ ============ As of December 31, 2001 Obligations of the U.S. Treasury-- Held to maturity ...................................... $ 497,733 $ 822 $ -- $ 498,555 Obligations of U.S. government agencies: Available for sale .................................... 128,583,689 1,449,529 420,871 129,612,347 Held to maturity ...................................... 31,991,033 12,747 8,400 31,995,380 Mortgage-backed securities: Available for sale .................................... 659,096 18,670 -- 677,766 Held to maturity ...................................... 18,861,396 403,638 166,628 19,098,406 Obligations of states and political subdivisions-- Held to maturity ...................................... 3,503,065 46,788 2,260 3,547,593 Federal Home Loan Bank stock .................................. 1,745,800 -- -- 1,745,800 Federal Reserve Bank stock .................................... 532,950 -- -- 532,950 ------------ ------------ ------------ ------------ $186,374,762 $ 1,932,194 $ 598,159 $187,708,797 ============ ============ ============ ============
-31- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The amortized cost and estimated market value of investment securities at December 31, 2002, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.
ESTIMATED AMORTIZED MARKET COST VALUE -------------- -------------- Within one year: Available for sale .......... $ 15,517,442 $ 15,771,125 Held to maturity ............ 1,021,188 1,022,125 One through five years: Available for sale .......... 96,647,047 97,443,352 Held to maturity ............ 4,413,719 4,690,313 Five through ten years: Available for sale .......... 7,997,186 8,012,837 Held to maturity ............ 22,757,410 23,507,596 After ten years: Available for sale .......... 455,090 483,430 Held to maturity ............ 39,626,421 40,906,987 Federal Home Loan Bank stock ...... 4,031,300 4,031,300 Federal Reserve Bank stock ........ 532,950 532,950 -------------- -------------- Total ................... $ 192,999,753 $ 196,402,015 ============== ==============
Marketable securities available for sale with an amortized cost of approximately $117,050,000 and marketable securities held to maturity with an amortized cost of approximately $65,971,000 were pledged to collateralize deposits as required by law and for other purposes at December 31, 2002. Proceeds from sales of investments in debt securities for the years ended December 31 were $9,984,520 in 2002, zero in 2001, and $11,936,858 in 2000. Gross losses realized were $94,473 in 2002, zero in 2001, and $333,142 in 2000. Gross gains realized were zero in 2002, 2001, and 2000. The Company calculates gain or loss on sale of securities based on the specific identification method. 5. LOANS Following is a summary of loans by major categories:
AS OF DECEMBER 31, ------------------------------ 2002 2001 -------------- -------------- Commercial ................................ $ 100,812,116 $ 90,187,124 Consumer and other ........................ 35,555,144 25,557,158 Real estate--mortgage ..................... 759,884,222 321,912,296 Real estate--construction ................. 100,458,023 98,085,683 Mortgage loans available for sale ......... 20,315,260 12,980,206 -------------- -------------- Total ......................... $1,017,024,765 $ 548,722,467 ============== ==============
On March 1, 2000, the Company closed the sale of the assets of its subsidiary bank's commercial leasing division. The sale resulted in $63.7 million of leases being sold. The gain on the sale amounted to approximately $879,000, net of transaction costs. Interest income from leases from January 1, 2000 through March 1, 2000 was $838,325. -32- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Following is a summary of changes to the allowance for loan losses:
YEARS ENDED DECEMBER 31, ------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ Balance at beginning of year ................ $ 7,207,118 $ 6,307,588 $ 5,386,622 Provision charged to operations ............. 2,588,800 2,385,500 2,475,008 Loans and leases charged-off ................ (1,427,969) (1,703,304) (2,056,095) Recoveries .................................. 304,738 217,334 502,053 Allowance acquired from First Community ..... 3,165,200 -- -- ------------ ------------ ------------ Balance at end of year ...................... $ 11,837,887 $ 7,207,118 $ 6,307,588 ============ ============ ============
The recorded investment in loans which are considered impaired was $10,241,251 at December 31, 2002, $2,480,575 at December 31, 2001, and $1,937,452 at December 31, 2000. The average investment in loans for which impairment has been recognized was $3,831,501 in 2002, $2,191,875 in 2001, and $3,143,590 in 2000. The allowance for loan losses related to these loans was $568,407 at December 31, 2002, $261,532 at December 31, 2001, and $217,837 at December 31, 2000. The allowance for impaired loans is included in the allowance for loan and lease losses. Interest income recognized on impaired loans was zero in 2002, 2001, and 2000. Loans on which the accrual of interest has been discontinued amounted to $10,241,251, $2,480,575, and $1,937,452 at December 31, 2002, 2001, and 2000, respectively. If interest on such loans had been accrued, such income would have been approximately $203,000 in 2002, $70,000 in 2001, and $199,000 in 2000. Actual interest income on those loans, which is recorded only when received, amounted to zero in 2002, 2001, and 2000. Activity during 2002 and 2001 regarding outstanding loans to certain related-party loan customers of the subsidiary bank (executive officers, directors, and principal shareholders of First State Bank, including their families and companies in which they are principal owners) was as follows:
2002 2001 ------------ ------------ Balance at beginning of year ...... $ 8,911,153 $ 3,544,156 Advances .......................... 2,452,620 6,964,465 Repayments ........................ (1,444,668) (1,597,468) ------------ ------------ Balance at end of year ............ $ 9,919,105 $ 8,911,153 ============ ============
6. PREMISES AND EQUIPMENT Following is a summary of premises and equipment, at cost:
ESTIMATED AS OF DECEMBER 31, USEFUL --------------------------- LIFE (YEARS) 2002 2001 ------------- ------------ ------------ Land .................................................. -- $ 1,959,655 $ 1,959,655 Building and leasehold improvements ................... 15-30 13,838,362 12,105,149 Equipment ............................................. 5 12,573,005 10,715,245 ------------ ------------ 28,371,022 24,780,049 Less accumulated depreciation and amortization ........ (11,867,888) (10,455,790) ------------ ------------ $ 16,503,134 $ 14,324,259 ============ ============
Depreciation and amortization expense on premises and equipment in 2002, 2001, and 2000 was $2,377,009, $1,981,830, and $1,837,473, respectively. -33- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. DEPOSITS Following is a summary of interest-bearing deposits:
AS OF DECEMBER 31, ------------------------------ 2002 2001 ------------ ------------ Interest-bearing checking accounts.......... $192,067,537 $144,727,862 Money market savings........................ 125,615,541 69,451,758 Regular savings............................. 52,636,197 46,219,322 Time: Denominations $100,000 and over....... 221,401,996 176,105,189 Denominations under $100,000.......... 298,900,405 112,719,818 ------------ ------------ $890,621,676 $549,223,949 ============ ============
At December 31, 2002, the scheduled maturities of all time deposits are as follows:
YEARS ENDING DECEMBER 31, ---------------- 2003.......................................... $380,923,053 2004.......................................... 59,837,831 2005 ......................................... 31,980,449 2006 ......................................... 9,709,694 2007 ......................................... 34,286,853 Thereafter.................................... 3,564,521 ------------ $520,302,401 ============
8. 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, U.S. government agency, or U.S. government agency issued mortgage-backed securities. These securities are segregated and safekept by third-party banks. These securities had a market value of $70,764,215 and $72,258,011, at December 31, 2002 and 2001, respectively. Interest expense included in the statements of operations was $581,578, $1,927,283, and $2,622,854 for the years ended December 31, 2002, 2001, and 2000, respectively. Securities sold under agreements to repurchase are summarized as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 2002 2001 ----------- ----------- Balance................................................... $70,764,215 $72,258,011 Weighted average interest rate............................ 0.49% 1.15% Maximum amount outstanding at any month end............... $70,764,215 $85,831,696 Average balance outstanding during the period............. $65,339,000 $71,833,000 Weighted average interest rate during the period.......... 0.89% 2.68%
-34- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Trust Preferred Securities On November 14, 2001, the Company formed First State NM Statutory Trust I ("Trust I") for the purpose of issuing trust-preferred securities ("Securities") in a pooled transaction to unrelated investors. Trust I issued $7,500,000 of Securities that bear interest at an annual rate equal to the three-month LIBOR plus 3.60% (5.01% at December 31, 2002), interest only payable at three-month intervals (the "Payment Date"). The annual rate is adjusted at each Payment Date beginning with the first interest payment date of March 18, 2002, provided however, that prior to December 18, 2006, the annual rate will not exceed 12.50%. The proceeds were up streamed to the Company as Junior Subordinated Deferrable Interest Debentures ("Debentures") under the same terms and conditions. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Trust I's obligations with respect to the Securities. The Securities qualify as Tier I capital and are presented in the consolidated balance sheets as "Borrowings". The sole asset of Trust I is $7,732,000 of Debentures issued by the Company. Both the Securities of Trust I and the Debentures issued by the Company will mature on December 18, 2031; however, they are callable at par beginning December 18, 2006. So long as there are no events of default, the Company may defer payments of interest for up to twenty consecutive interest payment periods. On June 7, 2002, the Company formed First State NM Statutory Trust II ("Trust II") for the purpose of issuing trust-preferred securities ("Trust II Securities") in a pooled transaction to unrelated investors. Trust II issued $25,000,000 of Trust II Securities that bear interest at an annual rate equal to the three-month LIBOR plus 3.45% (4.85% at December 31, 2002), interest only payable at three-month intervals (the "Trust II Payment Date"). The annual rate is adjusted at each Trust II Payment Date beginning with the first interest payment date of September 26, 2002, provided however, that prior to June 26, 2007, the annual rate will not exceed 11.95%. The proceeds were up streamed to the Company as Junior Subordinated Deferrable Interest Debentures ("Trust II Debentures") under the same terms and conditions. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Trust II's obligations with respect to the Trust II Securities. The Trust II Securities qualify as Tier I capital and are presented in the consolidated balance sheets as "Borrowings". The sole asset of Trust II is $25,774,000 of Debentures issued by the Company. Both the Trust II Securities and the Trust II Debentures issued by the Company will mature on June 26, 2032; however, they are callable at par beginning June 26, 2007. So long as there are no events of default, the Company may defer payments of interest for up to twenty consecutive interest payment periods. Federal Home Loan Bank Advances First State Bank has notes payable to the Federal Home Loan Bank of Dallas included in borrowings as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 ----------- ----------- $20,000,000 note payable to FHLB, interest only at 1.77% payable monthly, due on April 2, 2003 ........................................ $20,000,000 -- $20,000,000 note payable to FHLB, interest only at 1.94% payable monthly, due on April 2, 2004 ........................................ 20,000,000 -- $20,000,000 note payable to FHLB, interest only at 2.16% payable monthly, due on October 4, 2004 ...................................... 20,000,000 -- $250,000 note payable to FHLB, interest at 8.26%, payable in monthly principal and interest installments of $3,000 through February 1, 2005 ................................................................. 72,789 102,249 $20,000,000 note payable to FHLB, interest at 2.93%, payable in monthly principal and interest installments of $359,000 through November 1, 2007 .............................................................. 19,690,058 -- ----------- ----------- Total FHLB Advances .................................... $79,762,847 $ 102,249 =========== ===========
-35- 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 6.00% adjustable every five years through 2017, payable $7,909 monthly. The balances at December 31, 2002 and 2001 were $911,047 and $946,571, respectively. As of December 31, 2002, the contractual maturities of borrowings are as follows:
YEARS ENDING DECEMBER 31, ------------ 2003......................................... $23,852,165 2004......................................... 43,969,562 2005 ........................................ 4,059,039 2006 ........................................ 4,174,696 2007 ........................................ 3,941,402 Thereafter................................... 33,177,030 ------------ $113,173,894 ============
9. LEASES The Company 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, 2002, 2001, and 2000, totaled approximately $2,533,000, $1,811,000, and $1,602,000, respectively. Minimum future payments under these leases at December 31, 2002, are as follows:
YEARS ENDING DECEMBER 31, ------------ 2003........................................... $2,912,954 2004........................................... 2,655,201 2005 .......................................... 2,569,005 2006 .......................................... 2,203,931 2007 .......................................... 2,125,799 Thereafter..................................... 11,454,412 ----------- $23,921,302 ===========
One of the Company'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 $71,956 in 2002, $69,860 in 2001, and $67,530 in 2000, 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 leases space for its operations from a limited liability company controlled by certain Directors of the Company and certain officers of First State Bank with an initial term of 15 years. Lease payments were $492,341 in 2002, $466,902 in 2001, and $454,000 in 2000. 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. -36- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. INCOME TAXES Income tax expense (benefit) consisted of the following:
YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Federal....................................................... $4,603,503 $4,533,777 $4,325,367 State......................................................... 706,092 530,327 514,670 Deferred...................................................... 321,301 (543,149) (991,299) ---------- ---------- ---------- Total expense................................................. $5,630,896 $4,520,955 $3,848,738 ========== ========== ==========
Actual income tax expense from continuing operations differs from the "expected" tax expense for 2002, 2001, and 2000 (computed by applying the U.S. federal corporate tax rate of 34 percent to income before income taxes) as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Computed "expected" tax expense...................................... $5,300,260 $4,305,328 $3,767,337 Increase (reduction) in income taxes resulting from: Tax-exempt interest............................................ (46,449) (51,768) (255,460) State tax, net................................................. 390,000 185,000 185,000 Amortization of intangibles.................................... -- 35,000 35,000 Other.......................................................... (12,915) 47,395 116,861 ---------- ---------- ---------- Total income tax expense................................... $5,630,896 $4,520,955 $3,848,738 ========== ========== ==========
Components of deferred income tax assets and liabilities are as follows:
AS OF DECEMBER 31, ------------------------ 2002 2001 ---------- ---------- Deferred tax assets: Allowance for loan losses......................................................... $3,853,481 $2,150,161 Allowance for other real estate owned............................................. 60,025 45,448 Depreciation...................................................................... 488,258 579,576 Deferred compensation expense..................................................... 258,728 254,045 Separation agreement.............................................................. 125,075 -- Other............................................................................. 2,699 4,257 ---------- ---------- Total gross deferred tax assets............................................... 4,788,266 3,033,487 Deferred tax liabilities: Goodwill.......................................................................... 1,043,149 -- Tax effect of unrealized gain on investment securities............................ 371,953 356,092 ---------- ---------- Total gross deferred tax liabilities.......................................... 1,415,102 356,092 ---------- ---------- Net deferred tax asset........................................................ $3,373,164 $2,677,395 ========== ==========
The net deferred tax asset at December 31, 2002 includes approximately $1,076,000 in assets related primarily to the allowance for loan losses acquired from First Community. In order to fully realize the deferred tax asset on the Company's consolidated balance sheet at December 31, 2002 of $4,788,266, the Company will need to generate future taxable income of approximately $14,083,000. 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. -37- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. STOCKHOLDERS' EQUITY The Board of Directors has authorized management to purchase up to 525,000 shares of its common stock in the open market. During 2002, the Company purchased 27,500 shares. The funds for these purchases came from excess funds held by the parent company. Currently, management has not determined the timing of additional purchases, if any. Under terms of a stock option agreement, an officer of First State Bank had an outstanding option to purchase 9,918 common shares of the Company at a price of $3.34 per share. This option was exercised in 2000. 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 730,000 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. Options under this plan are as follows:
2002 2001 2000 ----------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year ....... 489,521 $ 9.05 506,566 $ 9.10 529,260 $ 9.04 Granted ............................ -- -- -- -- -- -- Exercised .......................... (38,467) 5.60 (13,295) 8.80 (18,194) 5.60 Forfeited .......................... (4,200) 16.08 (3,750) 16.08 (4,500) 16.08 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at year end ................ 446,854 9.28 489,521 9.05 506,566 9.10 ========== ========== ========== ========== ========== ========== Options exercisable at year end ........ 432,154 $ 9.11 451,721 $ 8.58 418,096 $ 8.13 ========== ========== ========== ========== ========== ==========
The Company has 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. The Company offers a dividend reinvestment plan that 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. During the year ended December 31, 2002, First State Bank paid no dividends to First State Bancorporation. As of December 31, 2002, First State Bank had approximately $21.4 million in retained earnings, which were available for the payment of dividends to First State Bancorporation 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. The Company and its subsidiary bank are 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary bank must meet specific capital guidelines that involve quantitative measures of the Company's and subsidiary bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company's and subsidiary bank'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 and set forth in the following table) to risk-weighted assets, and of Tier I capital, and of Tier I capital to total assets. Management believes, as of December 31, 2002, that the Company and subsidiary bank meet all capital adequacy requirements to which they are subject. -38- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In connection with the Company's acquisition and merger of First Community into the Company, the Company issued 2.4 million shares of common stock. The Company offered these shares to the public at a price of $22.50 per share. In connection with this offering, the Company paid a 5% commission to the underwriters, and certain legal, accounting, and printing expenses, resulting in net proceeds to the Company of approximately $51.0 million. The net proceeds were used to pay a portion of the purchase price for First Community.
AS OF DECEMBER 31, 2002 ----------------------------------------------------------------- FOR CAPITAL TO BE CONSIDERED ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED ------------------- ------------------ --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ------- --------- ------ -------- --------- (DOLLARS IN THOUSANDS) Total capital to risk weighted assets: Consolidated.................................. $116,755 11.6% $80,586 8.0% $100,733 10.0% Bank subsidiary............................... 101,904 10.1% 80,491 8.0% 100,614 10.0% Tier I capital to risk weighted assets: Consolidated.................................. 104,917 10.4% 40,293 4.0% 60,440 6.0% Bank subsidiary............................... 90,066 9.0% 40,246 4.0% 60,368 6.0% Tier I capital to total assets: Consolidated.................................. 104,917 7.8% 40,255 3.0% 67,091 5.0% Bank subsidiary............................... 90,066 6.7% 40,219 3.0% 67,032 5.0%
AS OF DECEMBER 31, 2001 ----------------------------------------------------------------- FOR CAPITAL TO BE CONSIDERED ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED ------------------- ------------------ --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ------- --------- ------ -------- --------- (DOLLARS IN THOUSANDS) Total capital to risk weighted assets: Consolidated.................................. $71,010 11.6% $48,943 8.0% $61,179 10.0% Bank subsidiary............................... 62,677 10.3% 48,863 8.0% 61,079 10.0% Tier I capital to risk weighted assets: Consolidated.................................. 64,793 10.6% 24,471 4.0% 36,707 6.0% Bank subsidiary............................... 56,460 9.2% 24,432 4.0% 36,647 6.0% Tier I capital to total assets: Consolidated.................................. 64,793 7.8% 33,720 3.0% 41,949 5.0% Bank subsidiary............................... 56,460 6.8% 33,680 3.0% 41,900 5.0%
12. EMPLOYEE BENEFIT PLANS First State Bank sponsors 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 $273,229 in 2002, $211,627 in 2001, and $179,707 in 2000. 13. 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 consolidated 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:
AS OF DECEMBER 31, ----------------------------- 2002 2001 ------------ ------------ Commitments to extend credit.................................... $148,181,000 $112,121,000 Standby letters of credit....................................... 10,040,000 6,782,000
-39- 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 consolidated financial position or results of operations. 14. Condensed Financial Information of Parent Company The assets of the Company, as parent company, consist primarily of the investment in its subsidiary bank, a money market savings account, and certificates of deposit 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 and certificates of deposit. Following are condensed financial statements of the parent company: CONDENSED STATEMENTS OF CONDITION
AS OF DECEMBER 31, ----------------------------- 2002 2001 ----------------------------- (DOLLARS IN THOUSANDS) Assets Cash and due from banks............................ $ 13,001 $ 7,969 Investment in subsidiary........................... 134,893 57,289 Goodwill........................................... 223 223 Deferred tax asset................................. 259 254 Other assets....................................... 2,814 521 -------- ------- Total assets................................... $151,190 $66,256 ======== ======= Liabilities and equity capital Accounts payable and accrued expenses.............. 217 180 Long-term debt..................................... 33,506 7,732 -------- ------- Total liabilities.............................. 33,723 7,912 -------- ------- Equity capital..................................... 117,467 58,344 -------- ------- Total liabilities and equity capital........... $151,190 $66,256 ======== =======
-40- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Income: Cash dividends from subsidiary ............................................. $ -- $ 2,058 $ 1,202 Other income ............................................................... 403 33 40 ------------ ------------ ------------ Total income ........................................................... 403 2,091 1,242 ------------ ------------ ------------ Expenses: Interest expense ........................................................... 1,091 37 -- Amortization of goodwill ................................................... -- 32 32 Legal ...................................................................... 75 32 94 Other ...................................................................... 615 300 414 ------------ ------------ ------------ Total expenses ......................................................... 1,781 401 540 ------------ ------------ ------------ Income (loss) before income taxes and undistributed income of bank subsidiary .... (1,378) 1,690 702 Income tax benefit ............................................................... 763 132 168 Undistributed income of bank subsidiary .......................................... 10,573 6,320 6,362 ------------ ------------ ------------ Net income ....................................................................... $ 9,958 $ 8,142 $ 7,232 ============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income .................................................................. $ 9,958 $ 8,142 $ 7,232 ------------ ------------ ------------ Adjustments to reconcile net income to cash provided (used) by operating activities: Amortization of goodwill ............................................... -- 32 32 Undistributed income of bank subsidiary ................................ (10,573) (6,320) (6,362) Increase in other assets ............................................... (2,298) (529) (13) Increase (decrease) in other liabilities, net .......................... 444 (130) (154) ------------ ------------ ------------ Total adjustments ................................................. (12,427) (6,947) (6,497) ------------ ------------ ------------ Net cash provided (used) by operating activities .................. (2,469) 1,195 735 ------------ ------------ ------------ Cash flows from financing activities: Common stock issued ......................................................... 51,539 446 443 Payment to repurchase common stock .......................................... (660) (710) (1,065) Amortization of stock option plan grants .................................... -- 123 247 Capital contributions to subsidiary bank .................................... (67,000) -- -- Issuance of long-term debt .................................................. 25,774 7,732 -- Dividends paid .............................................................. (2,152) (1,667) (1,295) ------------ ------------ ------------ Net cash provided (used) by financing activities .................. 7,501 5,924 (1,670) ------------ ------------ ------------ Increase (decrease) in cash and due from banks .................................... 5,032 7,119 (935) ------------ ------------ ------------ Cash and due from banks at beginning of year ...................................... 7,969 850 1,785 ------------ ------------ ------------ Cash and due from banks at end of year ............................................ $ 13,001 $ 7,969 $ 850 ============ ============ ============
-41- FIRST STATE BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 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. SFAS No. 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. Finally, 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:
2002 2001 -------------------------- -------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents ................................. $ 88,871 $ 88,871 $ 64,891 $ 64,891 Marketable securities available for sale .................. 121,711 121,711 130,290 130,290 Marketable securities held to maturity .................... 67,819 70,127 54,853 55,140 Loans, net ................................................ 1,005,187 1,007,448 541,515 544,298 Accrued interest receivable ............................... 5,384 5,384 4,155 4,155 Cash surrender value of bank owned life insurance ......... 18,153 18,153 7,598 7,598 Financial liabilities: Deposits .................................................. 1,079,684 1,093,730 685,022 689,809 Securities sold under agreements to repurchase ............ 70,764 70,764 72,258 72,258 Borrowings ................................................ 113,174 113,174 8,781 8,781
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents. Carrying value approximates fair value since these instruments are payable on demand and do not present credit concerns. -42- 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. Cash surrender value of bank owned life insurance. The carrying value of cash surrender value of bank owned life insurance is the amount realizable by the Company if it were to surrender the policy to the issuing company. Because the carrying value is equal to the amount the Company could realize in cash, the carrying value is considered its fair value. 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, 2002 and 2001. 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, approximates fair value. Borrowings. Borrowings consist of Trust Preferred Securities, Federal Home Loan Bank advances, and a note payable whose rates approximate market at December 31, 2002 and 2001. 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 consolidated balance sheets. -43- Index to Exhibits
Exhibit Number Description of Exhibits - ------ ----------------------- 2.1 Agreement and Plan of Merger, dated as of May 22, 2002, by and among First State Bancorporation, First State Bank NM (formerly known as First State Bank of Taos), First Community Industrial Bank, Blazer Financial Corporation, and Washington Mutual Finance Corporation. (7) 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. (4) 3.3 Bylaws of First State Bancorporation. (4) 4.1 Shareholder Protection Rights Agreement dated October 25, 1996. (3) 10.1 Stock Option Plan of the Company. (5) 10.2 Executive Employment Agreement. (6) 21.1 Subsidiaries of Registrant. (2) 23 Consent of KPMG LLP. (8) 99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8) 99.2 Certification of CFO Pursuant to 18. U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8)
(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 10-KSB for the year ended December 31, 1997. (5) Incorporated by reference from the Company's Registration Statement on Form S-8, Commission File No. 333-83132, declared effective February 20, 2002, (which incorporates the Company's Registration Statement on Form S-8, Commission File No. 333-92795, effective December 15, 1999). (6) Incorporated by reference from the Company's 10-K for the year ended December 31, 2001. (7) Incorporated by reference from the Company's Form 8-K filed on May 31, 2002. (8) Filed Herewith. EX-23 3 d04296exv23.txt CONSENT OF KPMG LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT 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, No. 333-3048, No. 333-92795, and No. 333-83132) on Form S-8 of First State Bancorporation of our report dated January 17, 2003, with respect to the consolidated balance sheets of First State Bancorporation and subsidiary as of December 31, 2002 and 2001, 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, 2002, which report appears in the December 31, 2002, annual report on Form 10-K of First State Bancorporation. Our report refers to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, in 2002. KPMG LLP Albuquerque, New Mexico March 26, 2003 EX-99.1 4 d04296exv99w1.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of First State Bancorporation, a New Mexico corporation (the "Company"), for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Michael R. Stanford, as President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to First State Bancorporation and will be retained by First State Bancorporation and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Michael R. Stanford - ------------------------------- Michael R. Stanford President and Chief Executive Officer March 26, 2003 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.2 5 d04296exv99w2.txt CERTIFICATION OF THE CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of First State Bancorporation, a New Mexico corporation (the "Company"), for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report), Christopher C. Spencer, as Senior Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to First State Bancorporation and will be retained by First State Bancorporation and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Christopher C. Spencer - ------------------------------- Christopher C. Spencer Senior Vice President and Chief Financial Officer, and Principal Accounting Officer March 26, 2003 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----