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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q. -QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2002.
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________________ to ________________
Commission file number 1-12487
FIRST STATE BANCORPORATION
(Exact name of registrant as specified in its charter)
NEW MEXICO 85-0366665
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7900 JEFFERSON NE
ALBUQUERQUE, NEW MEXICO 87109
(Address of principal executive offices) (Zip Code)
(505) 241-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No ___
--
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,890,426 shares of common
stock, no par value, outstanding as of August 13, 2002.
FIRST STATE BANCORPORATION AND SUBSIDIARY
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-1-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
First State Bancorporation and Subsidiary
Consolidated Condensed Balance Sheets
(unaudited)
Assets June 30, 2002 December 31, 2001
------- -------------- -----------------
Cash and due from banks $ 36,849,438 $ 37,362,627
Interest-bearing deposits with banks 31,843,235 4,782,910
Federal funds sold 13,633,391 22,745,023
-------------- -----------------
Total cash and cash equivalents 82,326,064 64,890,560
Investment securities:
Held to maturity (at amortized cost, market value of $59,426,787 at cost
June 30, 2002, and $55,139,934 at December 31, 2001) 58,328,143 54,853,227
Available for sale (at market, amortized cost of $106,810,998 at
June 30, 2002, and $129,242,715 at December 31, 2001) 107,861,476 130,290,113
Federal Home Loan Bank Stock and Federal Reserve Bank Stock at cost 2,318,150 2,278,750
-------------- -----------------
Total investment securities 168,507,769 187,422,090
-------------- -----------------
Loans net of unearned interest 605,120,057 548,722,467
Less allowance for loan losses 7,749,653 7,207,118
-------------- -----------------
Net loans 597,370,404 541,515,349
Premises and equipment 14,629,913 14,324,259
Accrued interest receivable 3,849,203 4,154,790
Other real estate owned 815,200 272,042
Goodwill, net 360,852 360,852
Cash surrender value of bank owned life insurance 7,816,595 7,597,775
Deferred tax asset, net 3,023,742 2,677,395
Other assets 4,190,074 4,706,158
-------------- -----------------
Total assets $882,889,816 $827,921,270
============== =================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest-bearing $163,506,541 $135,798,116
Interest-bearing 567,313,420 549,223,949
-------------- -----------------
Total deposits 730,819,961 685,022,065
Securities sold under agreements to repurchase 53,453,138 72,258,011
Other liabilities 3,203,042 3,515,661
Long-term debt 33,523,539 8,780,820
-------------- -----------------
Total liabilities 820,999,680 769,576,557
Stockholders' equity:
Common stock, no par value, 20,000,000 shares authorized; issued
5,243,446 at June 30, 2002 and 5,235,134 at December 31, 2001;
outstanding 4,889,396 at June 30, 2002 and 4,885,584 at December 31,
2001 30,591,293 30,348,120
Treasury stock, at cost (354,050 shares June 30, 2002 and 349,550) (4,880,755) (4,786,788)
Retained earnings 35,486,282 32,092,144
Accumulated other comprehensive gains -
Unrealized gain on investment securities available for sale, net 693,316 691,237
-------------- -----------------
Total stockholders' equity 61,890,136 58,344,713
-------------- -----------------
Total liabilities and stockholders' equity $882,889,816 $827,921,270
============== =================
Book value per share $ 12.66 $ 11.94
============== =================
Tangible book value per share $ 12.58 $ 11.87
============== =================
See accompanying notes to unaudited consolidated condensed financial
statements.
-2-
First State Bancorporation and Subsidiary
Consolidated Condensed Statements of Operations
For the three and six months ended June 30, 2002 and 2001
(unaudited)
Three months Three months Six months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
2002 2001 2002 2001
--------------------------------------------------------------
Interest Income:
Interest and fees on loans $ 11,310,783 $11,700,111 $22,186,065 $23,360,050
Interest on investment securities:
Taxable 2,242,448 2,000,068 4,560,584 3,975,614
Nontaxable 38,187 45,904 78,483 91,859
Federal funds sold 40,593 50,665 110,451 89,340
Interest-bearing deposits with banks 24,672 170,267 75,007 277,228
--------------------------------------------------------------
Total interest income 13,656,683 13,967,015 27,010,590 27,794,091
--------------------------------------------------------------
Interest expense:
Deposits 3,488,189 4,680,945 7,138,015 9,475,849
Short-term borrowings 150,521 560,801 308,434 1,311,275
Long-term debt 148,252 25,338 257,729 50,933
--------------------------------------------------------------
Total interest expense 3,786,962 5,267,084 7,704,178 10,838,057
--------------------------------------------------------------
Net interest income before provision for loan losses 9,869,721 8,699,931 19,306,412 16,956,034
Provision for loan losses 519,000 627,000 1,188,000 1,131,500
--------------------------------------------------------------
Net interest income after provision for loan losses 9,350,721 8,072,931 18,118,412 15,824,534
-------------------------------------------------------------
Non interest income:
Service charges on deposit accounts 836,799 719,077 1,653,108 1,434,883
Other banking service fees 271,901 120,788 523,385 241,958
Credit and debit card transaction fees 1,060,386 758,341 1,974,975 1,417,943
Gain on sale or call of investment securities 8,225 36,737 21,229 36,737
Gains on sales of mortgage loans 526,300 376,141 1,123,940 674,043
Check imprint income 132,697 124,460 256,371 243,755
Other 176,548 87,525 316,468 164,558
--------------------------------------------------------------
Total non interest income 3,012,856 2,223,069 5,869,476 4,213,877
--------------------------------------------------------------
Non interest expenses:
Salaries and employee benefits 3,829,520 3,304,262 7,710,050 6,445,662
Occupancy 1,019,713 859,275 2,016,889 1,660,881
Data Processing 501,937 328,947 890,551 654,918
Credit card interchange 546,272 387,554 998,119 728,612
Equipment 665,357 492,948 1,299,037 972,074
Legal, accounting, and consulting 157,092 135,010 357,937 258,629
Marketing 554,464 375,152 929,146 728,710
Supplies 142,030 149,767 283,384 300,655
Other real estate owned expenses 26,743 56,382 83,557 182,611
Check imprint expense 116,888 112,964 230,028 220,395
Amortization of goodwill - 26,052 - 52,103
Other 1,171,233 1,010,840 2,191,162 1,773,299
--------------------------------------------------------------
Total non interest expenses 8,731,249 7,239,153 16,989,860 13,978,549
--------------------------------------------------------------
Income before income taxes 3,632,328 3,056,847 6,998,028 6,059,862
Income tax expense 1,388,242 1,096,571 2,667,143 2,164,320
--------------------------------------------------------------
Net income $ 2,244,086 $ 1,960,276 $ 4,330,885 $ 3,895,542
==============================================================
Basic earnings per share $ 0.46 $ 0.40 $ 0.89 $ 0.80
==============================================================
Diluted earnings per share $ 0.44 $ 0.39 $ 0.85 $ 0.77
==============================================================
Dividends per common share $ 0.10 $ 0.09 $ 0.19 $ 0.16
==============================================================
See accompanying notes to unaudited consolidated condensed financial statements.
-3-
FIRST STATE BANCORPORATION AND SUBSIDIARY
Consolidated Condensed Statements of Comprehensive Income
For the three and six months ended June 30, 2002 and 2001
(unaudited)
Three months Three months Six months Six months
ended June ended June ended June ended June
2002 2001 2002 2001
--------------------------------------------------------
Net Income $ 2,244,086 $ 1,960,276 $4,330,885 $3,895,542
Other comprehensive income net of tax-
Unrealized holding gains on securities
available for sale arising during period 910,261 130,952 23,308 694,891
Reclassification adjustment for gains included in net income (8,225) (36,737) (21,229) (36,737)
--------------------------------------------------------
Total comprehensive income $ 3,146,122 $ 2,054,491 $4,332,964 $4,553,696
========================================================
See accompanying notes to unaudited consolidated condensed financial statements.
-4-
First State Bancorporation and Subsidiary
Consolidated Condensed Statements of Cash Flows
For the three and six months ended June 30, 2002 and 2001
(unaudited)
Three Months Three Months Six Months Six Months
ended ended ended ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
----------------------------------------------------------
Cash flows from operating activities:
Net Income $ 2,244,086 $ 1,960,276 $ 4,330,885 $ 3,895,542
-----------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses 519,000 627,000 1,188,000 1,131,500
Provision for decline in value of other real estate owned - 26,820 50,671 95,114
Depreciation and amortization 570,879 502,641 1,124,756 962,170
Amortization of securities, net (62,095) (18,529) (110,241) 23,490
Mortgage loans originated for sale (40,543,942) (32,086,318) (75,959,020) (53,725,757)
Proceeds from sale of mortgage loans originated for sale 40,832,908 31,081,662 85,861,732 53,083,241
(Increase) decrease in accrued interest receivable 92,529 (110,325) 305,587 501,841
Increase in other assets, net (212,458) (121,947) (50,154) (583,298)
Decrease in other liabilities, net (567,237) (1,143,624) (239,334) (461,454)
----------------------------------------------------------
Total adjustments 629,584 (1,242,620) 12,171,997 1,026,847
----------------------------------------------------------
Net cash provided by operating activities 2,873,670 717,656 16,502,882 4,922,389
----------------------------------------------------------
Cash flows from investing activities:
Net increase in loans (40,962,896) (24,308,052) (67,570,696) (33,835,821)
Purchases of investment securities carried at amortized cost (22,403,626) (13,140,000) (60,462,219) (47,190,500)
Maturities of investment securities carried at amortized cost 8,830,130 32,990,475 57,106,823 69,907,929
Purchases of investment securities carried at market (6,609,576) (132,127,455) (47,071,795) (162,127,455)
Maturities of investment securities carried at market 34,889,551 87,881,216 69,454,903 117,331,068
Purchases of premises and equipment (763,351) (1,472,454) (1,430,410) (2,248,856)
Sales of and payments on other real estate owned 16,100 367,338 31,100 1,085,261
----------------------------------------------------------
Net cash used in investing activities (27,003,668) (49,808,932) (49,942,294) (57,078,374)
----------------------------------------------------------
Cash flows from financing activities:
Net increase in interest-bearing deposits 12,214,097 23,249,209 18,089,471 38,562,426
Net increase in non-interest-bearing deposits 23,578,791 12,834,386 27,708,425 18,721,761
Net increase (decrease) in securities sold under repurchase agreements 312,560 15,620,910 (18,804,873) 3,341,366
Payments on long-term debt (11,206) (13,173) (257,281) (26,059)
Proceeds from issuance of long-term debt 25,000,000 - 25,000,000 -
Common stock issued 85,081 64,881 169,889 135,084
Dividends paid (493,275) (441,105) (936,748) (783,998)
Purchase of treasury stock - (94,861) (93,967) (199,126)
----------------------------------------------------------
Net cash provided by financing activities 60,686,048 51,220,247 50,874,916 59,751,454
----------------------------------------------------------
Increase in cash and cash equivalents 36,556,050 2,128,971 17,435,504 7,595,469
Cash and cash equivalents at beginning of period 45,770,014 44,333,519 64,890,560 38,867,021
----------------------------------------------------------
Cash and cash equivalents at end of period $ 82,326,064 $ 46,462,490 $ 82,326,064 $ 46,462,490
==========================================================
Supplemental disclosure of noncash investing and financing activities:
Additions to other real estate owned in settlement of loans $ - $ 65,613 $ 624,929 $ 1,343,827
===========================================================
Additions to loans in settlement of other real estate owned $ - $ - $ - $ 575,493
==========================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,770,790 $ 5,360,271 $ 7,983,877 $ 10,828,277
===========================================================
Cash paid for income taxes $ 2,345,000 $ 2,430,000 $ 2,345,000 $ 3,000,000
===========================================================
See accompanying notes to unaudited consolidated condensed financial statements.
-5-
First State Bancorporation and Subsidiary
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Consolidated Condensed Financial Statements
The accompanying consolidated condensed financial statements are unaudited and
include our accounts and those of our subsidiary, First State Bank of Taos (the
"Bank") (100% owned). All significant intercompany accounts and transactions
have been eliminated. Information contained in our consolidated condensed
financial statements and notes thereto should be read in conjunction with our
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K for the year ended December 31, 2001.
The consolidated condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and instructions to Form 10-Q. Accordingly,
they do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In our opinion, all adjustments (consisting only of
normally recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 2002, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002.
2. Earnings per Common Share
Basic earnings per share are computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
outstanding during the period (the denominator). Diluted earnings per share are
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 for the three and six months ended June 30:
Quarter Ended June 30,
2002 2001
----------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------
Basic EPS:
Net income $2,244,086 4,887,784 $0.46 $1,960,276 4,890,777 $0.40
=========== ==========
Effect of dilutive securities:
Options 204,396 144,287
Diluted EPS:
----------------------------------------------------------------------------------------
Net income $2,244,086 5,092,180 $0.44 $1,960,276 5,035,064 $0.39
========================================================================================
Six Months Ended June 30,
2002 2001
----------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------
Basic EPS:
Net income $4,330,855 4,886,230 $0.89 $3,895,542 4,893,637 $0.80
=========== ==========
Effect of dilutive securities:
Options 197,556 140,688
Diluted EPS:
----------------------------------------------------------------------------------------
Net income $4,330,855 5,083,786 $0.85 $3,895,542 5,034,325 $0.77
========================================================================================
-6-
3. Treasury Stock
Our Board of Directors has authorized our management to purchase up to 525,000
shares of our common stock. As of June 30, 2002, management has purchased
354,050 shares including 4,500 shares totaling $93,967 during the first six
months of 2002. Management intends to purchase additional shares, the amount of
which will be determined by cash available for dividends from the Bank.
4. New Accounting Pronouncements
We adopted Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"),
"Goodwill and Other Intangible Assets", as of January 1, 2002, and no longer
amortize goodwill. As of the date of adoption, we had unamortized goodwill in
the amount of $360,852, which was subject to the transition provisions of SFAS
No. 142. We have determined there is no transitional impairment loss at January
1, 2002. There was no amortization expense for the three and six months ended
June 30, 2002, whereas this expense amounted to $26,052 for the quarter ended
June 30, 2001, and $52,103 for the six months ended June 30, 2001. Our reported
net income for the three and six months ended June 30, 2001, adjusted for the
effects of goodwill amortization, would have been $1,986,328 compared to
$2,244,086 and $3,947,645 compared to $4,330,885 for the three and six months
ended June 30, 2002. Likewise, our basic and diluted earnings per share for the
three months ended June 30, 2001 adjusted for excluding the effects of goodwill
amortization would have been $0.41 and $0.39, respectively, compared to $0.46
and $0.44 for the three months ended June 30, 2002, respectively. Our basic and
diluted earnings per share for the six months ended June 30, 2001 adjusted for
excluding the effects of goodwill amortization would have been $0.81 and $0.78,
respectively, compared to $0.89 and $0.85 for the six months ended June 30,
2002, respectively.
In August 2001, the Financial Accounting Standards Board 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. The adoption of SFAS No. 144 did not have an impact
on our consolidated financial statements.
5. June 2002 Offering of Trust Preferred Securities
In June 2002, we formed First State NM Statutory Trust II for the purpose of
issuing trust-preferred securities in a pooled transaction to unrelated
investors. The trust preferred transaction closed on June 26, 2002. First State
NM Statutory Trust II used the gross proceeds from the sale of trust-preferred
securities to purchase $25,774,000 of Junior Subordinated Deferrable Interest
Debentures issued by us, which are included in long-term debt in the
accompanying consolidated condensed balance sheet at June 30, 2002. The
debentures have a final maturity of 30 years and bear interest at an annual rate
equal to the three-month London Interbank Offered Rate plus 3.45%, payable at
three-month intervals beginning September 26, 2002. The annual rate of interest
on the debentures is equal to 5.34% at June 30, 2002. The annual rate is
adjusted at each payment date beginning with the first interest payment date of
September 26, 2002. Prior to June 26, 2007, the annual rate will not exceed
11.95%. The debentures are callable at par beginning June 26, 2007. So long as
there are no events of default, we may defer payments of interest for up to
twenty consecutive interest payment periods. However, if we defer payments of
interest, we will be prohibited from paying any dividends on any class of
capital stock for as long as the trust preferred interest payments remain
deferred.
6. Pending Acquisition of First Community Industrial Bank
On May 22, 2002, we entered into an agreement to acquire First Community
Industrial Bank, an indirect wholly owned subsidiary of Washington Mutual, Inc.
First Community is a Colorado-chartered industrial bank headquartered in Denver,
Colorado. It operates six branches in the Colorado front-range market and three
branches in the Salt Lake City and Ogden, Utah metropolitan areas.
-7-
Under the terms of the merger agreement, First Community will merge with and
into the Bank in a taxable transaction. Prior to closing, First Community will
pay a dividend of approximately $37.5 million to its parent. At closing, we will
pay to Washington Mutual, Inc. approximately $67 million, plus the amount if any
by which the aggregate pre-closing dividend is less than $37.5 million.
We expect to finance the merger with the proceeds of our June 26, 2002 offering
of approximately $25 million in trust preferred securities and with the proceeds
of our planned public offering of approximately 2.1 million shares of our common
stock.
The merger is subject to various conditions including the successful placement
of our common shares, receipt of regulatory approvals, and expiration of all
applicable statutory waiting period. As of July 26, 2002, all regulatory
approvals had been received. The statutory waiting period will conclude on
August 9, 2002.
We expect to close the merger by October 11, 2002, but the merger agreement
provides that upon our request and subject to certain conditions, closing may be
extended to November 12, 2002. However, our regulatory approval from the Federal
Reserve Bank of Kansas City requires us to close on or before October 25, 2002,
unless such period is extended by the Federal Reserve System.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Consolidated Condensed Balance Sheets
Our total assets increased by $55.0 million from $827.9 million as of December
31, 2001, to $882.9 million as of June 30, 2002. The increase was made up of a
$17.4 million increase in cash and cash equivalents, an $18.9 million decrease
in investment securities, and a $55.9 million increase in net loans. The
increase in cash and cash equivalents was a result of issuing approximately $25
million in Trust Preferred Securities, which were issued in anticipation of
completing the First Community Industrial Bank acquisition.
The following table presents the amounts of our loans, by category, at the dates
indicated.
June 30, 2002 December 31, 2001 June 30, 2001
------------------------------------------------------------------------------------
(in thousands)
Amount % Amount % Amount %
------------------------------------------------------------------------------------
Commercial $ 92,999 15.4% $ 90,187 16.4% $ 84,884 17.2%
Real estate-mortgage 383,410 63.4% 321,912 58.7% 306,344 62.1%
Real estate-construction 98,465 16.3% 98,086 17.9% 71,018 14.4%
Consumer and other 25,862 4.3% 25,557 4.6% 25,073 5.1%
Mortgage loans available for sale 4,384 0.6% 12,980 2.4% 5,775 1.2%
------------------------------------------------------------------------------------
Total $ 605,120 100.0% $548,722 100.0% $493,094 100.0%
====================================================================================
Deposits, which are our main source of funds for loans, investments, and federal
funds sold, increased by $45.8 million from $685.0 million as of December 31,
2001, to $730.8 million as of June 30, 2002. We believe that this increase is a
result of our continuing efforts to increase market share. Customer repurchase
agreements decreased $18.8 million from $72.3 million December 31, 2001 to $53.5
million at June 30, 2002. The following table represents customer deposits, by
category, at the dates indicated.
June 30, 2002 December 31, 2001 June 30, 2001
------------------------------------------------------------------------------------
(in thousands)
Amount % Amount % Amount %
------------------------------------------------------------------------------------
Non-interest-bearing $ 163,506 22.4% $135,798 19.8% $117,350 20.0%
Interest-bearing demand 162,801 22.3% 144,728 21.1% 115,549 19.7%
Money market savings accounts 36,908 5.1% 69,452 10.1% 51,008 8.7%
Regular savings 48,248 6.6% 46,219 6.8% 40,233 6.9%
Certificates of deposit less than $100,000 119,737 16.3% 112,720 16.5% 119,146 20.4%
Certificates of deposit greater than $100,000 199,620 27.3% 176,105 25.7% 142,406 24.3%
------------------------------------------------------------------------------------
Total $ 730,820 100.0% $685,022 100.0% $585,692 100.0%
====================================================================================
-8-
Consolidated Results of Operations For the Three Months Ended June 30, 2002
Our net income for the three months ended June 30, 2002, was $2.24 million, an
increase of $284,000 or 14% from $1.96 million for the same period of 2001. The
increase in net income resulted from an increase in net interest income before
provision for loan losses of $1.2 million and an increase in non interest income
of $790,000, partially offset by an increase in non interest expenses of $1.5
million and income taxes of $292,000. Our annualized return on average assets
was 1.05% for the three months ended June 30, 2002, compared to 1.14% for the
same period of 2001.
Our net interest income before the provision for loan losses increased $1.2
million to $9.9 million for the second quarter of 2002 compared to $8.7 million
for the second quarter of 2001. This increase was composed of a $310,000
decrease in total interest income offset by a $1.5 million decrease in total
interest expense. The decrease in interest income was composed of an increase of
$3.0 million due to an increase in average interest earning assets of $138.3
million, offset by $3.3 million due to a 1.67% decrease in the yield on average
interest earning assets. The decrease in total interest expense was due to a
$763,000 increase resulting from a $110.9 million increase in average interest
bearing liabilities and a $2.2 million decrease due to a 1.65% decrease in the
cost of interest bearing liabilities.
Decreases in interest rate precipitated by the Federal Reserve Board's decreases
in the discount rate during 2001 have decreased the yield on interest earning
assets and have caused management to decrease rates paid on deposits. We believe
that the impact on the net interest margin of changes in interest rates will be
significantly determined by the competitive environment for deposits. We also
believe that additional decreases in rates would cause compression of our net
interest margin, while increases would cause an increase in our net interest
margin.
Our provision for loan losses was $519,000 for the second quarter of 2002,
compared to $627,000 for the second quarter of 2001. Net charge-offs for the
second quarter of 2002 were $147,000 compared to $346,000 for the second quarter
of 2001. The allowance for loan losses to total loans was 1.28% and the
allowance for loan losses to non-performing loans was 277% at June 30, 2002,
compared to allowance for loan losses to total loans of 1.37% and the allowance
for loan losses to non-performing loans of 266% at June 30, 2001. Total
non-performing assets to total assets were 0.41% at June 30, 2002, compared to
0.58% at June 30, 2001. We provide for loan losses based upon our judgments
concerning the adequacy of the allowance for loan losses considering such
factors as loan growth, delinquency trends, previous charge-off experience, and
local and national economic conditions.
Our total non interest income increased by $790,000 to $3.0 million for the
three months ended June 30, 2002, compared to $2.2 million for the same period
of 2001. The increase was primarily composed of a $150,000 increase in gains on
sales of mortgage loans, caused by greater new home construction and refinancing
resulting from the lower interest rate environment, a $302,000 increase in
credit and debit card transaction fees resulting from increased transaction
volume due to increased market share, a $118,000 increase in service charges on
deposits resulting from increased deposits, and a $151,000 increase in other
banking service fees primarily due to increased volume in ATM fees.
Our total non interest expenses increased by $1.5 million to $8.7 million for
the second quarter of 2002, compared to $7.2 million for the same period of
2001. This increase was due partially to increases in salaries and employee
benefits, occupancy expense, and credit and debit card interchange expense.
Salary and employee benefits expense increased $525,000 resulting from an
$110,000 increase in mortgage loan commissions, $75,000 from two new branches
(one opened during the second quarter of 2001 and one during the first quarter
of 2002), and from our overall growth and annual salary increases. Occupancy
expense increased $160,000, of which $20,000 resulted from opening of the two
new branches and $119,000 resulted from rent expense as a result of expansion of
our ATM network during the first quarter of 2002. Credit and debit card
interchange expense increased $159,000. Each of these items had corresponding
increases in non interest income.
Consolidated Results of Operations For the Six Months Ended June 30, 2002
Our net income for the six months ended June 30, 2002, was $4.3 million, an
increase of $435,000 or 11% from $3.9 million for the same period of 2001. The
increase in net income resulted from an increase in net interest income before
provision for loan losses of $2.4 million and an increase in non interest income
of $1.7 million, partially offset by an increase in non interest expenses of
$3.0 million and income taxes of $503,000. Our annualized return on average
assets was 1.04% for the six months ended June 30, 2002, compared to 1.18% for
the same period of 2001.
-9-
Our net interest income before the provision for loan losses increased $2.4
million to $19.3 million for the six months ended June 30, 2002 compared to
$17.0 million for the same period of 2001. This increase was composed of a
$784,000 decrease in total interest income and a $3.1 million decrease in total
interest expense. The decrease in interest income was composed of an increase of
$6.5 million due to increased average interest earning assets of $152.6 million
offset by $7.3 million due to a 1.97% decrease in the yield on average interest
earning assets. The decrease in total interest expense was due to a $2.0 million
increase resulting from a $123.7 million increase in average interest bearing
liabilities and a $5.1 million decrease due to a 1.85% decrease in the cost of
interest bearing liabilities.
Our provision for loan losses was $1.2 million for the first six months of 2002,
compared to $1.1 million for the first six months of 2001. Net charge-offs for
the six months ended June 30, 2002 were $645,000 compared to $700,000 for the
six months ended June 30, 2001. The allowance for loan losses to total loans was
1.28% and the allowance for loan losses to non-performing loans was 277% at June
30, 2002, compared to allowance for loan losses to total loans of 1.37% and the
allowance for loan losses to non-performing loans of 266% at June 30, 2001.
Total non-performing assets to total assets were 0.41% at June 30, 2002,
compared to 0.58% at June 30, 2001. We provide for loan losses based upon our
judgments concerning the adequacy of the allowance for loan losses considering
such factors as loan growth, delinquency trends, previous charge-off experience,
and local and national economic conditions.
Our total non interest income increased by $1.7 million to $5.9 million for the
six months ended June 30, 2002, compared to $4.2 million for the same period of
2001. For the first six months of 2002 compared to the first six months of 2001,
the gains on sales of mortgage loans increased $450,000 as a result of greater
new home construction and refinancing resulting from the lower interest rate
environment, credit and debit card transaction fees increased $557,000 resulting
from increased transaction volume due to increased market share, service charges
on deposit accounts increased $218,000 as a result of increased deposits, and
other banking service fees increased $281,000 primarily as a result of increased
volume of ATM fees.
Our total non interest expenses increased by $3.0 million to $17.0 million for
the six months ended June 30, 2002, compared to $14.0 million for the same
period of 2001. This increase was due partially to $1.3 million increase in
salary and employee benefit expense resulting from a $325,000 increase in
mortgage loan commissions, expenses of $154,000 from the opening of our two new
branches, and our overall growth and annual salary increases. Occupancy expense
grew $356,000, $52,000 related to the two new branches and $223,000 from rent
expense as a result of expansion of our ATM network during the first quarter of
2002. Credit and debit card interchange expense grew $270,000 as a result of
increased volume.
-10-
Allowance for Loan Losses
The following tables set forth the allowance for loan losses and non-performing
assets.
(Dollars in thousands)
-------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES : June 30, 2002 December 31, 2001 June 30, 2001
-------------------------------------------------------------
Balance beginning of period $ 7,207 $ 6,308 $6,308
Provision for loan losses $ 1,188 $ 2,386 $1,131
Net charge-offs ($645) ($1,487) ($ 700)
-------------------------------------------------------------
Balance end of period $ 7,750 $ 7,207 $6,739
=============================================================
Allowance for loan losses to total loans 1.28% 1.31% 1.37%
Allowance for loan losses to non-performing loans 277% 290% 266%
NON-PERFORMING ASSETS:
Accruing loans - 90 days past due $ 297 $ 3 $ 14
Non-accrual loans $ 2,503 $ 2,480 $2,518
-------------------------------------------------------------
Total non-performing loans $ 2,800 $ 2,483 $2,532
Other real estate owned $ 815 $ 272 $1,604
-------------------------------------------------------------
Total non-performing assets $ 3,615 $ 2,755 $4,136
=============================================================
Potential problem loans $12,445 $13,331 $8,323
=============================================================
Total non-performing assets to total assets 0.41% 0.33% 0.58%
During the past twelve months, our potential problem loans have increased by
approximately $4.1 million. Included in that increase are four lending
relationships totaling $3.9 million with balances in excess of $300,000. These
loans are secured by first mortgages on various types of real estate collateral
with an estimated value of $7.1 million. We continually monitor these lending
relationships and we do not believe they currently pose a threat to the adequacy
of the allowance for loan losses.
Liquidity and Capital Expenditures
Our primary sources of funds are customer deposits, loan repayments, and
maturities of investment securities. We have additional sources of liquidity in
the form of borrowings. Borrowings include federal funds purchased, securities
sold under repurchase agreements, and borrowings from the Federal Home Loan
Bank.
-11-
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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 our ratio of
average interest-earning assets to average interest-bearing liabilities. No tax
equivalent adjustments were made and all average balances are daily average
balance. Non-accruing loans have been included in the table as loans carrying a
zero yield.
Three Months Ended June 30,
2002 2001
------------------------------------- ------------------------------------
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Balance Expense Cost Balance Expense Cost
------------------------------------- ------------------------------------
(Dollars in thousands)
Assets
Loans:
Commercial ................................... $ 89,572 $ 1,558 6.98% $ 81,846 $ 2,075 10.17%
Real estate--mortgage ........................ 370,296 6,779 7.34% 297,831 7,000 9.43%
Real estate--construction .................... 97,904 1,862 7.63% 70,617 1,793 10.18%
Consumer ..................................... 25,504 692 10.88% 24,797 476 7.70%
Mortgage ..................................... 4,120 420 40.89% 5,010 356 28.50%
Other ........................................ 552 - - 548 - -
------------------------------------ ------------------------------------
Total loans ................................ 587,948 11,311 7.72% 480,649 11,700 9.76%
Allowance for loan losses ........................ (7,646) (6,774)
Securities:
U.S. government and mortgage-backed .......... 176,980 2,221 5.03% 140,438 1,968 5.62%
State and political subdivisions:
Nontaxable ................................. 3,404 38 4.48% 4,045 46 4.56%
Taxable .................................... - - - - - -
Other ...................................... 2,308 21 3.65% 2,245 32 5.72%
------------------------------------ ------------------------------------
Total securities ............................. 182,692 2,280 5.01% 146,728 2,046 5.59%
Interest-bearing deposits with banks ............. 6,238 25 1.61% 16,041 170 4.25%
Federal funds sold ............................... 9,554 41 1.72% 4,747 51 4.31%
------------------------------------ ------------------------------------
Total interest-earning assets ................ 786,432 13,657 6.97% 648,165 13,967 8.64%
Non-interest-earning assets:
Cash and due from banks .......................... 34,644 24,413
Other. ........................................... 34,853 25,909
----------- -----------
Total non-interest-earning assets ............ 69,497 50,322
----------- -----------
Total assets ................................. $ 848,283 $ 691,713
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing demand accounts ............. $ 158,565 $ 313 0.79% $ 113,006 $ 405 1.44%
Certificates of deposit ...................... 285,417 2,711 3.81% 256,767 3,674 5.74%
Money market savings accounts ................ 71,245 318 1.79% 49,314 361 2.94%
Regular savings accounts ..................... 47,356 146 1.24% 39,335 241 2.46%
------------------------------------ ------------------------------------
Total interest-bearing deposits ........ 562,583 3,488 2.49% 458,422 4,681 4.10%
Federal funds purchased and securities sold
under agreements to repurchase .................. 61,904 151 0.98% 64,022 561 3.51%
Long-term debt ................................... 1,028 23 8.97% 1,082 25 9.27%
Trust Preferred securities ....................... 8,880 125 5.65% - - -
------------------------------------ ------------------------------------
Total interest-bearing liabilities ..... 634,395 3,787 2.39% 523,526 5,267 4.04%
Non-interest-bearing demand accounts ............. 149,767 109,445
Other non-interest-bearing liabilities ........... 3,076 4,080
----------- -----------
Total liabilities ...................... 787,238 637,051
Stockholders' equity ............................. 61,045 54,662
------------ -----------
Total liabilities and
stockholders' equity ................. $ 848,283 $ 691,713
=========== --------- =========== ---------
Net interest income .............................. $ 9,870 $ $8,700
========= =========
Net interest spread .............................. 4.58% 4.60%
Net interest margin .............................. 5.03% 5.38%
Ratio of average interest-earning assets to
average interest-bearing liabilities ........... 123.97% 123.81%
-12-
Six Months Ended June 30,
2002 2001
--------------------------------------- --------------------------------------
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Balance Expense Cost Balance Expense Cost
--------------------------------------- --------------------------------------
(Dollars in thousands)
Assets
Loans:
Commercial ................................... $ 88,595 $ 3,101 7.06% $ 80,817 $ 3,783 9.44%
Real estate--mortgage ........................ 352,836 13,137 7.51% 290,908 13,897 9.63%
Real estate--construction .................... 97,546 3,648 7.54% 69,378 3,662 10.64%
Consumer ..................................... 25,430 1,382 10.96% 24,699 1,408 11.50%
Mortgage ..................................... 5,197 919 35.66% 4,428 610 27.78%
Other ........................................ 562 - - 550 - -
------------------------------------- ------------------------------------
Total loans ................................ 570,166 22,187 7.85% 470,780 23,360 10.01%
Allowance for loan losses ........................ (7,502) (6,706)
Securities:
U.S. government and mortgage-backed .......... 177,948 4,519 5.12% 131,415 3,912 6.00%
State and political subdivisions:
Nontaxable ................................. 3,454 78 4.55% 4,049 92 4.58%
Taxable .................................... - - - - - -
Other ...................................... 2,300 42 3.68% 2,233 64 5.78%
----------- ------------- ------- ----------- --------- --------
Total securities ............................. 183,702 4,639 5.09% 137,697 4,068 5.96%
Interest-bearing deposits with banks ............. 9,635 75 1.57% 12,011 277 4.65%
Federal funds sold ............................... 13,415 110 1.65% 3,813 89 4.71%
----------- ------------- ------- ----------- --------- --------
Total interest-earning assets ................ 776,918 27,011 7.01% 624,301 27,794 8.98%
Non-interest-earning assets:
Cash and due from banks .......................... 32,542 23,275
Other . .......................................... 34,596 25,311
----------- -----------
Total non-interest-earning assets ............ 67,138 48,586
----------- -----------
Total assets ................................. $ 836,554 $666,181
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing demand accounts ............. $ 155,362 $ 608 0.79% $ 108,606 $ 896 1.66%
Certificates of deposit ...................... 282,080 5,604 4.01% 247,296 7,257 5.92%
Money market savings accounts ................ 72,972 636 1.76% 48,295 834 3.48%
Regular savings accounts ..................... 46,099 290 1.27% 37,955 489 2.60%
----------- ------------- ------- ----------- --------- --------
Total interest-bearing deposits ............ 556,513 7,138 2.59% 442,152 9,476 4.32%
Federal funds purchased and securities
sold under agreements to repurchase .............. 63,772 308 0.97% 62,685 1,312 4.22%
Long term debt ................................... 1,035 48 9.35% 1,088 50 9.27%
Trust preferred securities ....................... 8,297 210 5.10% - - -
------------------------------------- ------------------------------------
Total interest-bearing liabilities ......... 629,617 7,704 2.47% 505,925 10,838 4.32%
Non-interest-bearing demand accounts ............. 143,324 102,369
Other non-interest-bearing liabilities ........... 3,199 4,232
----------- -----------
Total liabilities .......................... 776,140 612,526
Stockholders' equity ............................. 60,414 53,655
----------- -----------
Total liabilities and ......................
stockholders' equity ...................... $ 836,554 $ 666,181
=========== --------- =========== ---------
Net interest income .............................. $ 19,307 $ 16,956
========= =========
Net interest spread .............................. 4.54% 4.66%
Net interest margin .............................. 5.01% 5.48%
Ratio of average interest-earning assets to 123.40%
average interest-bearing liabilities ........... 123.40%
-13-
To effectively measure and manage interest rate risk, we use 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, we quantify interest rate risk and we develop and implement
appropriate strategies. Additionally, we utilize duration and market value
sensitivity measures when these measures provide added value to the overall
interest rate risk management process. The overall interest rate risk position
and strategies are reviewed by management and the Bank's Board of Directors on
an ongoing basis.
Rising and falling interest rate environments can have various impacts on a
bank's net interest income, depending on the short-term interest rate gap that
the bank maintains, the relative changes in interest rates that occur when the
bank's various assets and liabilities reprice, unscheduled repayments of loans,
early withdrawals of deposits and other factors. As of June 30, 2002, our
cumulative interest rate gap for the period up to three months was a positive
$130.6 million and for the period up to one year was a positive $163.1 million.
Based solely on our interest rate gap of twelve months or less, our net income
could be unfavorably impacted by decreases in interest rates or favorably
impacted by increases in interest rates.
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap of our interest-earning assets and interest-bearing
liabilities at June 30, 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 More than
three less than One to five five
months one year years years Total
------------- ----------- ------------- ------------ ----------
(Dollars in thousands)
Interest-earning assets:
Investment securities ...................................... $ 52,266 $ 47,792 $ 51,926 $ 16,524 $ 168,508
Interest-bearing deposits with banks ....................... 31,843 - - - 31,843
Federal funds sold ......................................... 13,633 - - - 13,633
Loans:
Commercial .............................................. 59,906 15,199 17,146 748 92,999
Real estate ............................................. 233,637 86,594 145,244 20,784 486,259
Consumer ................................................ 7,886 5,746 11,370 860 25,862
---------- ---------- --------- ---------- ---------
Total interest-earning assets ...................... $ 399,171 $ 155,331 $ 225,686 $ 38,916 $ 819,104
---------- ---------- --------- ---------- ---------
Interest-bearing liabilities:
Savings and NOW accounts ................................... $ 65,347 $ - $ - $ 182,610 $ 247,957
Certificates of deposit of $100,000 or more ................ 79,439 71,646 47,546 989 199,620
Other time accounts ........................................ 37,808 51,235 30,512 182 119,737
Securities sold under agreements to repurchase ............. 53,453 - - - 53,453
Long term debt ............................................. 32,500 - - 1,024 33,524
---------- ---------- --------- ---------- ---------
Total interest-bearing liabilities ................. $ 268,547 $ 122,881 $ 78,058 $ 184,805 $ 654,291
---------- ---------- --------- ---------- ---------
Interest rate gap ............................................... $ 130,624 $ 32,450 $ 147,628 ($145,889) $ 164,813
========== ========== ========= ========== =========
Cumulative interest rate gap at June 30, 2002 ................... $ 130,624 $ 163,074 $ 310,702 $ 164,813
========== ========== ========= ==========
Cumulative gap ratio at June 30, 2002 ........................... 1.49 1.42 1.66 1.25
========== ========== ========= ==========
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. 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, economic conditions, competition's responses to our
marketing strategy, and competition in the geographic and business areas in
which we conduct our operations.
-14-
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On June 7, 2002 we held our annual meeting of shareholders. At that meeting the
following items were submitted to a vote of security holders:
1. The following three directors were elected:
Shares Voted
------------
Name Term For Withheld
- -----------------------------------------------------------------------------------------------
Douglas M. Smith, M.D. 3 years 4,321,996 58,125
Herman N. Wisenteiner 3 years 4,321,996 58,125
Kevin L. Reid 3 years 4,321,996 58,125
As a result of the election of the above listed directors, our Board of
Directors will consist of those directors and the following directors: H.
Patrick Dee, Leonard J. DeLayo, Jr., Eloy A. Jeantete, Bradford M. Johnson,
Marshall G. Martin and Michael R. Stanford.
2. Proposal to ratify the selection of KPMG LLP as our independent public
accountants. Votes: For 4,347,187; Against 28,579; Abstain 4,353.
Item 5. Other Information
On August 8, 2002, we announced the sale of 2.1 million shares of our common
stock to an underwriting group. The shares are being offered to the public at
$22.50 per share. The underwriters have a 30-day option to purchase an
additional 315,000 shares of our common stock solely to cover over-allotments,
if any. We anticipate the public offering of the 2.1 million shares to close on
August 14, 2002. We intend to use all of the net proceeds of this offering along
with a portion of the net proceeds from our trust preferred offering to pay the
purchase price for the acquisition of First Community Industrial Bank. Pending
the use of the net proceeds for that purpose, we intend to invest the net
proceeds in short-term, interest-bearing investments.
-15-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
2 Agreement and Plan of Merger, dated as of May 22, 2002, by and among
First State Bancorporation, First State Bank of Taos, First Community
Industrial Bank, Blazer Financial Corporation, and Washington Mutual
Finance Corporation. /(1)/
3.1 Restated Articles of Incorporation of First State Bancorporation. /(2)/
3.2 Articles of Amendment to the Restated Articles of Incorporation of
First State Bancorporation. /(3)/
3.3 Bylaws of First State Bancorporation. /(3)/
4.1 Shareholder Protection Rights Agreement dated October 25, 1996. /(4)/
10.1 Stock Option Plan of First State Bancorporation. /(5)/
10.2 Executive Employment Agreement. /(6)/
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.
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.
_______________________________
(1) Incorporated by reference from Exhibit 2.1 to our Current Report on
Form 8-K, dated May 22, 2002, filed with the Commission on May 31,
2002.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-2, Commission File No. 333-24417, declared effective April 25,
1997.
(3) Incorporated by reference from our Form 10-SKB for the year ended
December 31, 1997.
(4) Incorporated by reference from the Company's Form 10-QSB for the
quarter ended September 30, 1996.
(5) Incorporated by reference from our Registration Statement on Form S-8,
Commission File No. 333-83132, declared effective February 20, 2002
(which incorporates our Registration Statement on Form S-8, Commission
File No. 333-92795, declared effective December 15, 1999).
(6) Incorporated by reference from our Form 10-K for the year ended
December 31, 2001.
(b) Reports on Form 8-K.
We filed a current report on Form 8-K, dated May 22, 2002, announcing that
we had entered into the merger agreement under which we expect to acquire First
Community Industrial Bank.
We filed a current report on Form 8-K, dated June 26, 2002, announcing that
we had issued approximately $25 million in trust preferred securities.
-16-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST STATE BANCORPORATION
Date: August 13, 2002 By: /s/ Michael R. Stanford
----------------------------------------
Michael R. Stanford, President & Chief
Executive Officer
Date: August 13, 2002 By: /s/ H. Patrick Dee
----------------------------------------
H. Patrick Dee, Executive Vice President
& Chief Operating Officer
Date: August 13, 2002 By: /s/ Brian C. Reinhardt
----------------------------------------
Brian C. Reinhardt, Executive Vice
President and Chief Financial Officer
-17-