##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    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: 333-119800
 FIRST STATE FINANCIAL CORPORATION
  Florida
    
    65-07714145(State or other jurisdiction or incorporation or organization)
    
    (I.R.S. Employer Identification No.)22 S. Links Avenue, Sarasota, FL
    
    34236(Address of principal executive offices)
    
    (Zip code)
  
   
  þ o
 o þ
 o þ




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TABLE OF CONTENTS
  
 PAGEPART I  FINANCIAL INFORMATIONItem 1 - Financial StatementsCondensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Income
    
    
    2Condensed Consolidated Statements of Changes in Stockholders Equity
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operation
    
    
    6Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    11Item 4 - Controls and Procedures
    
    
    12PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    12Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Item 3  Defaults Upon Senior Securities
    
    
    12Item 4  Submission of Matters to Vote of Securities Holders
    
    
    12Item 5  Other Information
    
    
    12Item 6  Exhibits
    
    
    12Signatures
    
    
    13Exhibit 31.1
    
    
    14Exhibit 31.2
    
    
    15Exhibit 32
    
    
    16Exhibit 99
    
    
    17Ex-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32 Section 906 CertificationEx-99 Second Quarter Earnings Release




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FIRST STATE FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30, 2005 (unaudited) and December 31, 2004
  September 30, 2005
    
    
    December 31, 2004ASSETSCash and due from financial institutions
    
    $
    7,652
    
    
    $
    4,901Federal funds sold
    
    
    
    
    
    
    19,951Cash and cash equivalents
    
    
    7,652
    
    
    
    24,852Interest bearing deposits in other financial institutions
    
    
    150
    
    
    
    150Securities, available for sale
    
    
    18,887
    
    
    
    16,577Loans, net of allowance of $3,180 and $2,727
    
    
    300,027
    
    
    
    224,395Federal Home Loan Bank stock
    
    
    868
    
    
    
    1,234Other assets
    
    
    7,570
    
    
    
    6,796Total Assets
    
    $
    335,154
    
    
    $
    274,004LIABILITIES and STOCKHOLDERS EQUITYDepositsNon-interest bearing
    
    $
    37,483
    
    
    $
    28,386Interest bearing
    
    
    243,492
    
    
    
    183,998Total deposits
    
    
    280,975
    
    
    
    212,384Federal funds purchased
    
    
    2,000
    
    
    
    Accrued interest payable and other liabilities
    
    
    1,428
    
    
    
    1,466Federal Home Loan Bank advances & other borrowings
    
    
    7,101
    
    
    
    18,001Total Liabilities
    
    
    291,504
    
    
    
    231,851Stockholders EquityCommon stock, $1 par value; 25,000,000 shares authorized;
5,863,265 shares issued at September 30, 2005 and
5,856,265 shares issued at December 31, 2004
    
    
    5,863
    
    
    
    5,856Additional paid-in capital
    
    
    31,763
    
    
    
    31,860Retained earnings
    
    
    6,302
    
    
    
    4,566Accumulated other comprehensive (loss)
    
    
    (278
    )
    
    
    (129
    )Total Stockholders Equity
    
    
    43,650
    
    
    
    42,153Total Liabilities and Stockholders Equity
    
    $
    335,154
    
    
    $
    274,004
  1




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##### Table of Contents



FIRST STATE FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest and Dividend IncomeLoans, including fees
    
    $
    5,209
    
    
    $
    3,365
    
    
    $
    13,740
    
    
    $
    9,547Taxable securities
    
    
    159
    
    
    
    126
    
    
    
    475
    
    
    
    414Tax exempt securities
    
    
    22
    
    
    
    
    
    
    
    34
    
    
    
    Federal funds sold and other
    
    
    19
    
    
    
    27
    
    
    
    264
    
    
    
    655,409
    
    
    
    3,518
    
    
    
    14,513
    
    
    
    10,026Interest expenseDeposits
    
    
    1,774
    
    
    
    1,125
    
    
    
    4,704
    
    
    
    3,323Federal Home Loan Bank advances and other borrowings
    
    
    80
    
    
    
    97
    
    
    
    268
    
    
    
    2371,854
    
    
    
    1,222
    
    
    
    4,972
    
    
    
    3,560Net Interest Income
    
    
    3,555
    
    
    
    2,296
    
    
    
    9,541
    
    
    
    6,466Provision for loan losses
    
    
    255
    
    
    
    199
    
    
    
    480
    
    
    
    518Net interest income after provision for loan losses
    
    
    3,300
    
    
    
    2,097
    
    
    
    9,061
    
    
    
    5,948Non-interest incomeService charges and other fees
    
    
    268
    
    
    
    228
    
    
    
    743
    
    
    
    661Mortgage banking fees
    
    
    261
    
    
    
    145
    
    
    
    767
    
    
    
    448Other
    
    
    12
    
    
    
    6
    
    
    
    29
    
    
    
    23541
    
    
    
    379
    
    
    
    1,539
    
    
    
    1,132Non-interest expenseSalaries and employee benefits
    
    
    1,432
    
    
    
    980
    
    
    
    3,884
    
    
    
    2,798Occupancy and equipment
    
    
    310
    
    
    
    264
    
    
    
    865
    
    
    
    776Data processing
    
    
    129
    
    
    
    112
    
    
    
    377
    
    
    
    352Professional services
    
    
    49
    
    
    
    25
    
    
    
    145
    
    
    
    77Stationery and supplies
    
    
    46
    
    
    
    42
    
    
    
    120
    
    
    
    100Advertising and marketing
    
    
    86
    
    
    
    38
    
    
    
    205
    
    
    
    116Other
    
    
    246
    
    
    
    163
    
    
    
    814
    
    
    
    5122,298
    
    
    
    1,624
    
    
    
    6,410
    
    
    
    4,731Income before income taxes
    
    
    1,543
    
    
    
    852
    
    
    
    4,190
    
    
    
    2,349Income tax expense
    
    
    579
    
    
    
    332
    
    
    
    1,575
    
    
    
    911Net Income
    
    $
    964
    
    
    $
    520
    
    
    $
    2,615
    
    
    $
    1,438Earnings per shareBasic
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.44
    
    
    $
    0.43Diluted
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.44
    
    
    $
    0.43Average common shares outstandingBasic
    
    
    5,863,265
    
    
    
    3,399,040
    
    
    
    5,859,701
    
    
    
    3,323,989Diluted
    
    
    5,899,147
    
    
    
    3,412,233
    
    
    
    5,885,761
    
    
    
    3,339,016Dividends per share
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.15
    
    
    $
    0.00
  2




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##### Table of Contents



FIRST STATE FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
   AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-in
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income(Loss)
    
    
    TotalBalance at December 31, 2003
    
    
    3,086,240
    
    
    $
    3,086
    
    
    $
    5,651
    
    
    $
    2,494
    
    
    $
    (121
    )
    
    $
    11,110Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,438
    
    
    
    
    
    
    
    1,438Change in net unrealized gain (loss) on
investment securities available for sale,
net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    28Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,466Exercise of stock options
    
    
    12,800
    
    
    
    13
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    34Issuance of common stock
    
    
    300,000
    
    
    
    300
    
    
    
    1,550
    
    
    
    
    
    
    
    
    
    
    
    1,850Balance at September 30, 2004
    
    
    3,399,040
    
    
    $
    3,399
    
    
    $
    7,222
    
    
    $
    3,932
    
    
    $
    (93
    )
    
    $
    14,460Balance at December 31, 2004
    
    
    5,856,265
    
    
    $
    5,856
    
    
    $
    31,860
    
    
    $
    4,566
    
    
    $
    (129
    )
    
    $
    42,153Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,615
    
    
    
    
    
    
    
    2,615Change in net unrealized gain (loss) on
investment securities available for sale,
net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149
    )
    
    
    (149
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,466Exercise stock options
    
    
    7,000
    
    
    
    7
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    19Capitalization of offering costs
    
    
    
    
    
    
    
    
    
    
    (109
    )
    
    
    
    
    
    
    
    
    
    
    (109
    )Cash
dividend declared, $.05 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (879
    )
    
    
    
    
    
    
    (879
    )Balance at September 30, 2005
    
    
    5,863,265
    
    
    $
    5,863
    
    
    $
    31,763
    
    
    $
    6,302
    
    
    $
    (278
    )
    
    $
    43,650Balance at June 30, 2004
    
    
    3,399,040
    
    
    $
    3,399
    
    
    $
    7,222
    
    
    $
    3,412
    
    
    $
    (276
    )
    
    $
    13,757Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    520
    
    
    
    
    
    
    
    520Change in net unrealized gain (loss) on
investment securities available for sale,
net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    183Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    703Balance at September 30, 2004
    
    
    3,399,040
    
    
    $
    3,399
    
    
    $
    7,222
    
    
    $
    3,932
    
    
    $
    (93
    )
    
    $
    14,460Balance at June 30, 2005
    
    
    5,863,265
    
    
    $
    5,863
    
    
    $
    31,763
    
    
    $
    5,631
    
    
    $
    (148
    )
    
    $
    43,109Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    964
    
    
    
    
    
    
    
    964Change in net unrealized gain (loss) on
investment securities available for sale,
net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130
    )
    
    
    (130
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    834Cash dividend declared, $.05 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (293
    )
    
    
    
    
    
    
    (293
    )Balance at September 30, 2005
    
    
    5,863,265
    
    
    $
    5,863
    
    
    $
    31,763
    
    
    $
    6,302
    
    
    $
    (278
    )
    
    $
    43,650
  3




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FIRST STATE FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
 Nine months ended September 30, 2005 and 2004
   2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    2,615
    
    
    $
    1,438Adjustments to reconcile net income to net cash from operating activitiesProvision for loan losses
    
    
    480
    
    
    
    518Depreciation, amortization and net changes in other assets and liabilities
    
    
    (91
    )
    
    
    490Net cash from operating activities
    
    
    3,004
    
    
    
    2,446Cash flows from investing activities:Net change in time deposits
    
    
    
    
    
    
    200Available-for-sale securities:Maturities, prepayments and calls
    
    
    3,431
    
    
    
    8,809Purchases
    
    
    (6,036
    )
    
    
    (4,240
    )Loan originations and payments, net
    
    
    (76,112
    )
    
    
    (30,413
    )Net (purchase) sale of FHLB stock
    
    
    366
    
    
    
    (150
    )Net change in premise and equipment
    
    
    (575
    )
    
    
    (342
    )Net cash from investing activities
    
    
    (78,926
    )
    
    
    (26,136
    )Cash flows from financing activities:Net change in deposits
    
    
    68,591
    
    
    
    20,584Proceeds (repayment) of short-term borrowing
    
    
    6,100
    
    
    
    (8,456
    )Repayment of long-term borrowing
    
    
    (15,000
    )
    
    
    15,000Proceeds from exercise of stock options
    
    
    19
    
    
    
    34Proceeds from issuance of common stock, net of capitalized costs
    
    
    (109
    )
    
    
    1,850Cash dividend paid
    
    
    (879
    )
    
    
    Net cash from financing activities
    
    
    58,722
    
    
    
    29,012Net change in cash and cash equivalents
    
    
    (17,200
    )
    
    
    5,322Beginning cash and cash equivalents
    
    
    24,852
    
    
    
    4,798Ending cash and cash equivalents
    
    $
    7,652
    
    
    $
    10,120Supplemental cash flow informationInterest paid
    
    $
    4,880
    
    
    $
    3,577Income taxes paid, net of refund
    
    
    1,471
    
    
    
    558
  4




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FIRST STATE FINANCIAL CORPORATION
 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2005
  NOTE 1
 INTERIM FINANCIAL STATEMENTS
  NOTE 2
 STOCK-BASED COMPENSATION
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    964
    
    
    $
    520
    
    
    $
    2,615
    
    
    $
    1,438Stock-based compensation expense determined under fair
value based method, net of tax
    
    
    21
    
    
    
    2
    
    
    
    44
    
    
    
    6Pro forma net income
    
    $
    943
    
    
    $
    518
    
    
    $
    2,571
    
    
    $
    1,432Basic earnings per share as reported
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.44
    
    
    $
    0.43Pro forma basic earnings per share
    
    
    0.16
    
    
    
    0.15
    
    
    
    0.44
    
    
    
    0.43Diluted earnings per share as reported
    
    
    0.16
    
    
    
    0.15
    
    
    
    0.44
    
    
    
    0.43Pro forma diluted earnings per share
    
    
    0.16
    
    
    
    0.15
    
    
    
    0.44
    
    
    
    0.43
 Share Based Payment
 NOTE 3
 NEW ACCOUNTING PRONOUNCEMENTS
  5




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##### Table of Contents



Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
  
    
    Providing customers with access to local executives;
    
    Pursuing commercial lending opportunities with small- to mid-sized businesses;
    
    Developing new products and services to generate additional revenue sources;
    
    Cross-selling products and services to existing customers; and
    
    Adhering to sound credit standards and maintaining the continued quality of assets.
  
    
    A 33.7% increase in net loan production (new loans less repayments);
    
    A 32.1% increase in non-interest bearing deposits; and
    
    A 32.3% increase in interest bearing deposits.
 FORWARD-LOOKING STATEMENTS
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 
    
    the effect of future economic conditions;
    
    governmental monetary and fiscal policies;
    
    legislative and regulatory changes;
    
    the risks of changes in interest rates on the level and composition of deposits, loan
demand, and the values of loan collateral;
    
    interest rate risks; and
    
    the effects of competition from other commercial banks, thrifts, consumer financial
companies, and other financial institutions operating in our market area and elsewhere.
  6




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RESULTS OF OPERATIONS
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,change
    
    
    
    
    
    
    
    
    
    
    change(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    $
    
    
    %
    
    
    2005
    
    
    2004
    
    
    $
    
    
    %Interest income
    
    $
    5,409
    
    
    $
    3,518
    
    
    $
    1,891
    
    
    
    54
    %
    
    $
    14,513
    
    
    $
    10,026
    
    
    $
    4,487
    
    
    
    45
    %Interest expense
    
    
    1,854
    
    
    
    1,222
    
    
    
    632
    
    
    
    52
    %
    
    
    4,972
    
    
    
    3,560
    
    
    
    1,412
    
    
    
    40
    %Net interest income
    
    
    3,555
    
    
    
    2,296
    
    
    
    1,259
    
    
    
    55
    %
    
    
    9,541
    
    
    
    6,466
    
    
    
    3,075
    
    
    
    48
    %Provision for loan losses
    
    
    255
    
    
    
    199
    
    
    
    56
    
    
    
    28
    %
    
    
    480
    
    
    
    518
    
    
    
    (38
    )
    
    
    -7
    %Net interest income after provision
    
    
    3,300
    
    
    
    2,097
    
    
    
    1,203
    
    
    
    57
    %
    
    
    9,061
    
    
    
    5,948
    
    
    
    3,113
    
    
    
    52
    %Non-interest income
    
    
    541
    
    
    
    379
    
    
    
    162
    
    
    
    43
    %
    
    
    1,539
    
    
    
    1,132
    
    
    
    407
    
    
    
    36
    %Non-interest expense
    
    
    2,298
    
    
    
    1,624
    
    
    
    674
    
    
    
    42
    %
    
    
    6,410
    
    
    
    4,731
    
    
    
    1,679
    
    
    
    35
    %Income before income taxes
    
    
    1,543
    
    
    
    852
    
    
    
    691
    
    
    
    81
    %
    
    
    4,190
    
    
    
    2,349
    
    
    
    1,841
    
    
    
    78
    %Income tax expense
    
    
    579
    
    
    
    332
    
    
    
    247
    
    
    
    74
    %
    
    
    1,575
    
    
    
    911
    
    
    
    664
    
    
    
    73
    %Net income
    
    $
    964
    
    
    $
    520
    
    
    $
    444
    
    
    
    85
    %
    
    $
    2,615
    
    
    $
    1,438
    
    
    $
    1,177
    
    
    
    82
    %
  For the nine months ended September 30,2005
    
    
    2004(Dollars in thousands)
    
    Average
    
    
    Income/
    
    
    Yields/
    
    
    Average
    
    
    Income/
    
    
    Yields/Balances
    
    
    Expense
    
    
    Rates
    
    
    Balances
    
    
    Expense
    
    
    RatesAssets:Earnings assets:Loans (a)
    
    $
    258,701
    
    
    $
    13,740
    
    
    
    7.10
    %
    
    $
    194,362
    
    
    $
    9,547
    
    
    
    6.56
    %Investment securities
    
    
    18,620
    
    
    
    509
    
    
    
    3.65
    %
    
    
    15,204
    
    
    
    414
    
    
    
    3.64
    %Other
    
    
    12,062
    
    
    
    264
    
    
    
    2.93
    %
    
    
    6,392
    
    
    
    65
    
    
    
    1.36
    %Total interest earning assets
    
    
    289,383
    
    
    
    14,513
    
    
    
    6.71
    %
    
    
    215,958
    
    
    
    10,026
    
    
    
    6.20
    %Non-interest earning assets
    
    
    12,379
    
    
    
    
    
    
    
    
    
    
    
    8,945Total assets
    
    $
    301,762
    
    
    
    
    
    
    
    
    
    
    $
    224,903Liabilities:Interest bearing liabilities:NOW accounts
    
    $
    14,230
    
    
    $
    30
    
    
    
    0.28
    %
    
    $
    14,641
    
    
    $
    27
    
    
    
    0.25
    %Money market
    
    
    40,184
    
    
    
    605
    
    
    
    2.01
    %
    
    
    20,961
    
    
    
    170
    
    
    
    1.08
    %Savings
    
    
    9,277
    
    
    
    51
    
    
    
    0.74
    %
    
    
    8,457
    
    
    
    20
    
    
    
    0.32
    %Time deposits
    
    
    151,860
    
    
    
    4,018
    
    
    
    3.54
    %
    
    
    133,026
    
    
    
    3,106
    
    
    
    3.12
    %Borrowings
    
    
    8,241
    
    
    
    268
    
    
    
    4.35
    %
    
    
    8,590
    
    
    
    237
    
    
    
    3.69
    %Total interest bearing liabilities
    
    
    223,792
    
    
    
    4,972
    
    
    
    2.97
    %
    
    
    185,675
    
    
    
    3,560
    
    
    
    2.56
    %Demand deposits
    
    
    33,666
    
    
    
    
    
    
    
    
    
    
    
    23,766Other non-interest bearing liabilities
    
    
    1,301
    
    
    
    
    
    
    
    
    
    
    
    1,353Total non-interest bearing liabilities
    
    
    34,967
    
    
    
    
    
    
    
    
    
    
    
    25,119Stockholders equity
    
    
    43,003
    
    
    
    
    
    
    
    
    
    
    
    14,109Total liabilities & stockholders equity
    
    $
    301,762
    
    
    
    
    
    
    
    
    
    
    $
    224,903Net Interest Income
    
    
    
    
    
    $
    9,541
    
    
    
    
    
    
    
    
    
    
    $
    6,466Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.74
    %
    
    
    
    
    
    
    
    
    
    
    3.64
    %Net interest margin (b)
    
    
    
    
    
    
    
    
    
    
    4.41
    %
    
    
    
    
    
    
    
    
    
    
    4.00
    %
 
 (a)
    
    average loans include nonperforming loans(b)
    
    net interest margin is net interest income divided by average total interest earning
assets
 7




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##### Table of Contents



For the nine months ended September 30, 2005compared to 2004Increase (decrease) due tochange inNetAverage
    
    
    Average
    
    
    Increase(Dollars in thousands)
    
    Volume
    
    
    Rate
    
    
    (Decrease)Increase (decrease) in interest income:Loans
    
    $
    3,367
    
    
    $
    826
    
    
    $
    4,193Investment securities
    
    
    93
    
    
    
    2
    
    
    
    95Other
    
    
    87
    
    
    
    112
    
    
    
    199Total interest income
    
    
    3,547
    
    
    
    940
    
    
    
    4,487Increase (decrease) in interest expense:NOW accounts
    
    
    (1
    )
    
    
    4
    
    
    
    3Money market
    
    
    225
    
    
    
    210
    
    
    
    435Savings
    
    
    2
    
    
    
    29
    
    
    
    31Time deposits
    
    
    470
    
    
    
    442
    
    
    
    912Borrowings
    
    
    (10
    )
    
    
    41
    
    
    
    31Total interest expense
    
    
    686
    
    
    
    726
    
    
    
    1,412Total change in net interest income
    
    $
    2,861
    
    
    $
    214
    
    
    $
    3,075
  For the nine months ended September 30, 2005:
    8




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##### Table of Contents



For the three months ended September 30, 2005:
    FINANCIAL CONDITION
 change(Dollars in thousands)
    
    September 30, 2005
    
    
    December 31, 2004
    
    
    $
    
    
    %Cash
    
    $
    7,802
    
    
    $
    25,002
    
    
    $
    (17,200
    )
    
    
    (69
    %)Investments
    
    
    18,887
    
    
    
    16,577
    
    
    
    2,310
    
    
    
    14
    %Loans  gross
    
    
    304,497
    
    
    
    227,929
    
    
    
    76,568
    
    
    
    34
    %net deferred fees
    
    
    (1,290
    )
    
    
    (807
    )
    
    
    (483
    )
    
    
    (60
    %)Allowance for loan loss reserve
    
    
    (3,180
    )
    
    
    (2,727
    )
    
    
    (453
    )
    
    
    (17
    %)Other
    
    
    8,438
    
    
    
    8,030
    
    
    
    408
    
    
    
    5
    %Total Assets
    
    $
    335,154
    
    
    $
    274,004
    
    
    $
    61,150
    
    
    
    22
    %Non-interest bearing deposits
    
    $
    37,483
    
    
    $
    28,386
    
    
    $
    9,097
    
    
    
    32
    %Interest bearing deposits
    
    
    243,492
    
    
    
    183,998
    
    
    
    59,494
    
    
    
    32
    %Borrowings
    
    
    9,101
    
    
    
    18,001
    
    
    
    (8,900
    )
    
    
    (49
    %)Other
    
    
    1,428
    
    
    
    1,466
    
    
    
    (38
    )
    
    
    (3
    %)Stockholders equity
    
    
    43,650
    
    
    
    42,153
    
    
    
    1,497
    
    
    
    4
    %Total Liabilities and Stockholders equity
    
    $
    335,154
    
    
    $
    274,004
    
    
    $
    61,150
    
    
    
    22
    %
  
    
    reduce outstanding borrowings by $8.9 million;
    
    increase the investment portfolio $2.3 million; and
    
    pay quarterly dividends of $879,000.
  ASSET QUALITY
 LOAN PORTFOLIO and ADEQUACY of the ALLOWANCE FOR LOAN LOSSES
 9




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##### Table of Contents




    
    the primary sources of repayment on individual loans;
    
    liquidity and financial condition of borrowers and guarantors; and
    
    the adequacy of collateral.
  
    
    the character of the loan portfolio;
    
    changes in nonperforming and past-due loans;
    
    historical loss experience;
    
    concentrations of loans to specific borrowers and industries;
    
    general and regional economic conditions; and
    
    other factors existing at the determination date.
   NONPERFORMING ASSETS
   LIQUIDITY AND CAPITAL RESOURCES
 LIQUIDITY
   10




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##### Table of Contents



CAPITAL RESOURCES
  Well-
    
    September 30, 2005
    
    December 31, 2004(Dollars in thousands)
    
    Minimum
    
    capitalized
    
    Amount
    
    Ratio
    
    Amount
    
    RatioFirst State Financial CorporationTier 1 capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    $
    43,928
    
    
    
    14.35
    %
    
    $
    42,282
    
    
    
    18.22
    %Total capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    47,108
    
    
    
    15.39
    %
    
    
    45,009
    
    
    
    19.40
    %Tier 1 leverage
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    
    
    
    
    13.81
    %
    
    
    
    
    
    
    16.72
    %First State BankTier 1 capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    43,858
    
    
    
    14.32
    %
    
    
    41,732
    
    
    
    17.99
    %Total capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    47,038
    
    
    
    15.36
    %
    
    
    44,459
    
    
    
    19.16
    %Tier 1 leverage
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    
    
    
    
    13.79
    %
    
    
    
    
    
    
    16.51
    %
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
    
    approving asset/liability policies;
    
    formulating and implementing strategies to improve balance sheet and income statement
positioning; and
    
    monitoring the interest rate sensitivity.
  
    
    maturities;
    
    reinvestment rates;
    
    prepayment speeds;
    
    repricing limits;
    
    decay rates; and
    
    other factors.
  11




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##### Table of Contents



Interest Rates Decrease
    
    
    Interest Rates
    
    
    Interest Rates Increase(Dollars in thousands)
    
    200 BP
    
    
    100 BP
    
    
    Remain Constant
    
    
    100 BP
    
    
    200 BPInterest Income
    
    $
    15,225
    
    
    $
    16,636
    
    
    $
    18,032
    
    
    $
    19,382
    
    
    $
    20,726Interest Expense
    
    
    4,490
    
    
    
    5,294
    
    
    
    6,099
    
    
    
    6,904
    
    
    
    7,708Net Interest Income
    
    $
    10,735
    
    
    $
    11,342
    
    
    $
    11,933
    
    
    $
    12,478
    
    
    $
    13,018Change in
net income after tax vs. constant rates
    
    $
    (747
    )
    
    $
    (369
    )
    
    
    
    
    
    $
    340
    
    
    $
    677
 
 Item 4. CONTROLS AND PROCEDURES
  
 PART II
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
        12




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##### Table of Contents



SIGNATURES
   FIRST STATE FINANCIAL CORPORATION/s/ Corey J. CoughlinPresident and Chief Executive Officer/s/ Dennis GrinsteinerSenior Vice President and Chief Financial Officer 13