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
For Quarter Ended March 31, 1995
Commission File Number 0-16329
First State Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2823506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1120 Bloomfield Avenue, CN 2449, West Caldwell,
New Jersey 07007-2449
(Address of principal executive offices)
(201) 575-5800
(Registrant's telephone number, including area code)
N/A
Former name, former address, and former fiscal year, if changed since
last report
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 report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's class of
common stock at March 31, 1995:
3,849,062 shares of common stock, par value $.01.
<PAGE>
FIRST STATE FINANCIAL SERVICES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets,
March 31, 1995 and
September 30, 1994 3
Consolidated Statements of Operations,
three and six months ended March 31,
1995 and 1994 4
Consolidated Statements of Cash Flows,
six months ended March 31,
1995 and 1994 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION 21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
(in thousands)
<CAPTION>
March 31, September 30,
1995 1994
---------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 16,177 $ 13,137
Federal funds sold - 1,000
Investment securities available for sale 8,047 17,639
Investment securities, at cost 26,297 19,769
Federal Home Loan Bank stock, at cost 3,715 3,005
Loans receivable, net 488,937 443,319
Mortgage loans held for resale, at market 1,350 3,095
Mortgage-backed securities, at cost 17,264 18,751
Accrued interest receivable 4,243 3,111
Office properties and equipment, net 10,165 10,318
Real estate owned 10,255 10,004
Cost in excess of fair value of
net assets acquired 2,510 2,777
Other assets 14,886 15,677
---------- ----------
$ 603,846 $ 561,602
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 542,562 $ 488,151
Borrowed money 17,331 31,738
Advance payments by borrowers for
taxes and insurance 3,194 2,770
Accrued expenses and other liabilities 1,005 970
---------- ----------
Total liabilities 564,092 523,629
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value,
2 million shares authorized;
none issued - -
Common stock, $.01 par value,
8 million shares authorized;
3,849,062 issued and outstanding 38 2,711
Paid-in capital 20,820 18,088
Retained income 19,050 17,453
Less: Net unrealized loss on securities
classified as available for sale (154) (279)
---------- ----------
Total stockholders' equity 39,754 37,973
---------- ----------
$ 603,846 $ 561,602
========== ==========
</TABLE>
<PAGE>
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Income
(in thousands, except per share data)
<CAPTION>
Three months ended Six months ended
March 31, March 31,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest on mortgage loans $8,039 $ 6,038 $ 15,530 $ 12,435
Interest on consumer and commercial loans 1,998 1,375 3,800 2,711
Interest on mortgage-backed securities 311 430 630 906
Interest on investments available for sale 117 250 224 467
Interest on investment securities 442 312 873 528
--------- --------- --------- ---------
Total interest income 10,907 8,405 21,057 17,047
--------- --------- --------- ---------
Interest expense:
Interest on deposits 4,971 3,140 9,297 6,360
Interest on borrowed money 267 11 522 29
--------- --------- --------- ---------
Total interest expense 5,238 3,151 9,819 6,389
--------- --------- --------- ---------
Net interest income 5,669 5,254 11,238 10,658
Provision for loan losses 300 222 500 792
--------- --------- --------- ---------
Net interest income after provision for loan
losses 5,369 5,032 10,738 9,866
--------- --------- --------- ---------
Other income:
Loan fees and other loan charges 824 512 1,524 970
Service charges on deposit accounts 439 394 862 824
Net gain on sales of loans 5 27 6 56
Net gain (loss) on sales of investments 1 135 (155) 137
Other 398 96 484 338
--------- --------- --------- ---------
Total other income 1,667 1,164 2,721 2,325
--------- --------- --------- ---------
Operating expenses:
Compensation and employee benefits 1,826 1,939 3,626 3,820
Premises and occupancy costs, net 552 555 1,035 1,061
Amortization of intangible assets 134 134 268 268
Loan expenses 1,018 392 1,828 812
Data processing 291 241 553 513
Advertising and promotion 201 179 402 348
Federal insurance premiums 322 279 607 533
Problem asset expenses, inclusive of
Real Estate Owned writedowns 464 357 627 682
Other expenses 741 678 1,549 1,510
--------- --------- --------- ---------
Total operating expenses 5,549 4,754 10,495 9,547
--------- --------- --------- ---------
Income before income tax expense 1,487 1,442 2,964 2,644
Income tax expense 499 407 1,015 700
--------- --------- --------- ---------
Net income $ 988 $ 1,035 $ 1,949 $ 1,944
========= ========= ========= =========
Net income per share (note 3) $ .26 $ .27 $ .51 $ .51
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Six Months Ended
March 31,
1995 1994
-------- --------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,949 $ 1,944
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of intangible assets 267 267
Depreciation 483 424
Net amortization and accretion of loan fees and discounts (84) (114)
Net amortization of investment premium and discount 23 (877)
Net amortization and accretion of MBS premium and discount (27) (64)
Increase in accrued interest receivable (1,132) (66)
Net gain on sale of loans (6) (56)
Net loss (gain) on sales of investments 155 (137)
Provisions for losses on loans 500 792
Decrease in other assets 791 525
Increase (decrease) in other liabilities 35 (79)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,954 2,559
-------- --------
INVESTING ACTIVITIES
Net increase in loans, receivable (45,930) (7,547)
Purchase of mortgage-backed securiti - (3,356)
Sale of mortgage-backed securities - 5,207
Principal payments on mortgage-backed securities 1,514 5,105
Proceeds from dispositions of real estate owned 1,396 4,931
Office properties and equipment expenditures (330) (198)
Purchase of investment securities (7,091) (7,977)
Purchase of investment securities available for sale (415) (1,240)
Sale of investment securities available for sale 7,677 400
(Purchase) redemption of Federal Home Loan Bank Stock (710) 414
Proceeds from maturities of investment securities 2,840 88
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (41,049) (4,173)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 54,411 10,336
Dividends paid on common stock (352) (159)
Principal repayments of borrowings (14,407) (3,588)
Net increase in advance payments by borrowers 424 217
Issuance of Ocean Independent Bank stock 59 -
Purchase of Ocean Independent Bank stock - (91)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 40,135 6,715
-------- --------
Increase in cash and cash equivalents 2,040 5,101
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,137 12,891
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,177 $17,992
======== ========
CASH PAID DURING THE SIX MONTH PERIOD FOR:
Interest $ 9,695 $ 6,518
Income taxes $ 988 $ 320
NON-CASH TRANSFERS:
Loans classified as Real Estate Owned $ 1,647 $ 1,076
Classification of investments securities available for sale
to investment securities $ 2,300 -
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
1. Presentation of Statements
In the opinion of management the accompanying unaudited consolidated
financial statements contain all adjustments (all which were normal
recurring accruals) necessary for a fair presentation. The results
of operations for the interim period are not necessarily indicative
of the results which may be expected for the entire year.
First State Financial Services, Inc., (First State) is the holding
company for First DeWitt Bank, (the Bank), its principal wholly-owned
subsidiary. Audited consolidated financial statements for the year
ended September 30, 1994 were filed with the Securities and Exchange
Commission.
2. Acquisitions
On October 21, 1994, First State issued approximately 674,000 of its
common stock in exchange for all of the outstanding common stock of
Ocean Independent Bank (Ocean or OIB). This business combination has
been accounted for as a pooling of interests combination and,
accordingly, the consolidated financial statements for periods prior
to the combination have been restated to include the accounts and
results of Ocean.
3. Earnings Per Share
Earnings per share information has been calculated by dividing the net
income amounts by the weighted average number of shares outstanding
throughout the periods. For the period(s) ended March 31, 1994, this
calculation included the First State average shares in addition to the
Ocean average shares factored in at the actual conversion ratio (1.271
shares of First State stock for each share of Ocean stock). For the
period(s) ended March 31, 1995, the shares issued in connection with
the business combination were considered outstanding for the entire
period. Shares issuable under stock option plans have not been included
in the calculation in either period as their effect was not material.
<PAGE>
FIRST STATE FINANCIAL SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
On October 21, 1994, First State Financial Services Inc., ("First State")
issued approximately 674,000 shares of common stock in exchange for all of
the outstanding common stock of Ocean Independent Bank ("OIB"). The business
combination has been accounted for as a pooling of interests combination and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of OIB.
OIB'S assets totaled $49.4 million at September 30, 1994.
Financial Condition
Total assets of First State Financial Services, Inc., were $603.8 million at
March 31, 1995. This is an increase of $42.2 million in total assets since
September 30, 1994. The principal increases in assets were in net loans
receivable of $45.6 million, an increase in investment securities of $6.5
million and an increase in cash on hand and in banks of $3.0 million. The
increase in loans was mainly due to the continued aggressive marketing of a
number of competitive loan products. First DeWitt Bank (the "Bank"), First
State's principal wholly-owned subsidiary, originated $70.7 million in mortgage
loans, $5.9 million in consumer loans, and $19.8 million in commercial loans
since September 30, 1994. The increase in investment securities was
attributable to the purchase of short-term notes issued by municipalities in
which the Bank operates branch offices as well as the reclassification
discussed below. Cash in banks includes approximately $8.1 million of funds
in Nationar for checks cleared by that correspondent institution. On February
6, 1995, the Acting Superintendent of the Banks of the State of New York (the
Superintendent) took possession of business and assets of Nationar for purposes
of an orderly liquidation of their affairs. First DeWitt has received $4.7
million from Nationar subsequent to March 31, 1995 and believes that, as a
preferred creditor, the remaining balance will be received in the near future.
First DeWitt's status as a preferred creditor was determined by recent court
rulings, which counsel for the Superintendent has concurred with. The
principal decreases in assets were a $9.6 million decrease in investment
securities available for sale, a decrease of $1.7 million in mortgage loans
held for resale, a decrease of $1.5 million in mortgage-backed securities
(mainly due to repayments) a decrease of $1.0 million in federal funds sold,
and a $791,000 decrease in other assets. The decrease in other assets was
mainly due to the clearing of several suspense items that were recorded as of
September 30, 1994. The decrease in investment securities available for sale
is partially due to the reclassification of $2.3 million as investment
securities held to maturity. The securities were acquired through the
business combination with OIB. The cash generated from the decreases in the
mentioned assets was mainly used to fund loan originations, to fund security
purchases and also to provide funds for normal operations.
Total liabilities of First State were $564.1 million at March 31, 1995. This
is an increase of $40.5 million from September 30, 1994. The increase was
mainly attributable to an increase in deposits of $54.4 million offset by a
decrease of $14.4 million in borrowings. The funds generated from increased
deposits were mainly used to repay borrowings at the Federal Home Loan Bank
of New York and to fund loan originations. The increase in deposits was
primarily due to the increase in certificates of deposits. Certificates of
deposit increased $70.8 million from September 30, 1994 to $305.4 million at
March 31, 1995. The Bank continued to successfully market eight month and
fourteen month certificate of deposit programs. The programs are competitively
priced to attract new savings as well as to offer an alternative to depositors
who have funds in money market and other lower interest rate paying accounts.
Non-performing assets, including current restructured loans, decreased to
$26.0 million at March 31, 1995 from $28.9 million at December 31, 1994. The
table below details the composition of these assets.
3/31/95 12/31/94 9/30/94
(in thousands)
Non-accrual loans $11,816 $15,320 $12,357
Real estate owned 10,255 9,561 9,316
Current restructured loans 3,960 3,981 4,165
-------- -------- --------
Total non-performing loans $26,031 $28,862 $25,838
======== ======== ========
The decrease in non-accrual loans was mainly due to the sale of a problem tract
development loan and to the foreclosure of property collateralizing a $500,000
loan. The sale of the track development loan was directly related to the
increased charge-offs recognized in the current quarter. Previous provisions
had been allocated toward this loan. When a loan becomes 90 days or more past
due or the collection of interest becomes uncertain, the accrual of income is
discontinued. These loans are classified as non-accrual and interest income is
only recognized subsequently in the period collected. Loans are returned to an
accrual status when all past due amounts have been collected and factors
indicating doubtful collectibility on a timely basis no longer exist. If
non-accrual loans had been current in accordance with their original terms,
the Bank would have realized additional interest income of approximately
$689,000 for the period from September 30, 1994 to March 31, 1995, and
approximately $293,000 in the quarter ended March 31, 1995. There was no
interest income recognized on these non-accrual loans in either period.
The allowance for loan losses totaled $5.6 million at March 31, 1995.
An analysis of the allowance for loan losses follows:
Balance at 9/30/94 $6,351,000
Charge-off's:
Consumer loans 43,000
Commercial loans 23,000
Mortgage loans 1,216,000
Recoveries:
Consumer loans 17,000
Commercial loans 23,000
-----------
Net charge-offs 1,242,000
Additions charged to operations 500,000
-----------
Balance at March 31, 1995 $5,609,000
===========
Ratio of net charge-offs during the
period to average loans
outstanding during the period .003%
Management closely monitors the loan portfolio and is concentrating on workouts
with the Bank's troubled loans and real estate owned properties. The Bank's
loan review committee analyzes the loan portfolio on a quarterly basis for
classification of problem and potentially problem loans. The loan review
committee also reviews the allocation of loss reserves to loans. Management
believes that the present allowance for loan losses is adequate in light of
management's assessment of the risk inherent in the portfolio. However, while
management uses its best judgment in providing for possible loan losses,
management recognizes that additional problems could develop and that future
adjustments may be necessary. The Financial Accounting Standards Board has
issued Statement of Accounting Standard 114, "Accounting by Creditors for
Impairment of a Loan" (FAS 114). This statement prescribes the recognition
criteria for loan impairment and the measurement methods for certain impaired
loans whose terms are modified in troubled debt restructurings. Management
does not anticipate any impact from the adoption of FAS 114 as management feels
their current valuation policies are consistent with the provisions of
FAS 114.
Real estate owned totaled $10.3 million at March 31, 1995 compared to $9.6
million at December 31, 1994. The increase in mainly due to the Bank taking
title to a property with a value of approximately $500,000. Management
negotiated a sales contract for a real estate owned property carried on the
books at an amount in excess of $1.0 million. The consummation of this
contract is pending one additional municipal-level approval. Management
anticipates that the closing on this property will occur in the last quarter
of the fiscal year. Real estate owned is carried on the Bank's books at fair
value. Management recognizes that future adjustments may be necessary if the
real estate values decline.
Liquidity and Capital Resources
First State's principal sources of funds are funds provided from operations
and dividends received from subsidiaries. The Bank's principal sources of
funds are deposits; scheduled loan amortization payments; sales and prepayments
of loan principal; sales and repayments of mortgage-backed securities, sales
and maturities of investment securities and short-term investments; borrowings
and funds provided from operations.
The financing activities section of the Consolidated Statement of Cash Flows
reflects a net increase in deposits of $54.4 million during the six months
ended March 31, 1995. The increase in deposits consisted of $45.1 million in
net deposits and $9.3 million in interest credited to deposit accounts. The
increase was mainly due to the successful marketing of certificate of deposit
special programs. See the "Financial Condition" section of this report for
additional information. Deposits increased $10.3 million during the same
1994 period. The increase consisted of $3.9 million in net deposits along
with $6.4 million in interest credited to deposit accounts. The additional
deposits were mainly used to fund loans in connection with the Bank's investing
activities, and also to repay borrowings. The Bank reduced net borrowings by
$14.4 million during the six months ended March 31, 1995 compared to the net
repayment of $3.6 million in borrowings in the 1994 period.
In the investing activities section of the Statement of Cash Flows, a net
increase in loans receivable of $45.9 million is reported for the six months
ended March 31, 1995 compared to a net increase of $7.5 million for the same
1994 period. Loans originated in the 1995 period totaled $96.4 million. Loan
repayments and proceeds from sales of loans provided a substantial portion of
the funds for the origination of loans. Such sources of funds provided $51.5
million in the 1995 period. Deposit funds and funds obtained through normal
operations were also utilized to fund the origination of loans. The Bank
actively markets several competitive loan programs and has successfully
utilized the services of loan solicitors for the origination of mortgage
loans. Principal repayments of mortgage-backed securities totaled $1.5
million in the 1995 quarter. The Bank did not purchase any mortgage-backed
securities in the 1995 period. In the 1994 period, the Bank received $5.1
million in funds from principal repayments and $5.2 million from the sales of
such securities; $3.4 million of these funds were reinvested in mortgage-backed
securities. In the 1995 period, the Bank also received $7.7 million in cash
from activities in its investments held for sale accounts and also $2.8 million
from maturities of investments. The securities sold were those acquired in the
OIB merger. The cash proceeds were principally invested in short term notes
of local municipalities. Investment securities purchased in the 1995 period
totaled $7.1 million. In the 1994 period, the Bank purchased $8.0 million in
securities, mainly municipal securities, and $1.2 million is securities held
for resale. Cash funds received from the disposition of real estate properties
owned amounted to $1.4 million in the six month period ended March 31, 1995
compared to $4.9 million in the same 1994 period.
The Bank is required to maintain minimum levels of liquid assets as defined by
the OTS regulations, such as United States Government and federal agency
securities. This requirement, which may be varied by the OTS, is based upon
a percentage of deposits and short-term borrowings. The required ratio is
currently 5.00%. The Bank's ratio was 7.69% at March 31, 1995. The Bank
anticipates maintaining its liquidity at or above the level required by
regulatory agencies.
At March 31, 1995 the Bank had $18.4 million in outstanding commitments to
originate loans, $73.4 million in commitments to sell loans, and $31.6 million
in unused lines of credit primarily available under home equity loan credit
lines. The Bank had no material commitments for capital expenditures as of
March 31, 1995. The vast majority of the commitments to sell loans are best
effort commitments with no negative impact if the commitments are not filled
in their entirety. Management intends to fund the loan commitments from
internal operations and available liquid assets. Any shortfall in obtaining
the funds internally will be satisfied by additional borrowings. As a member
of the Federal Home Loan Bank (FHLB) system, the Bank may borrow from the
FHLB of New York. The Bank maintains a $23.4 million line of credit with the
FHLB. The Bank had $7.0 million in borrowings against the line of credit at
March 31, 1995.
The Financial Institutions Reform Recovery and Enforcement Act of 1989
(FIRREA), among other things, imposed more stringent capital requirements,
increased deposit insurance premiums, restricted investment activities,
restricted loans to one borrower, and increased the required ratio of housing
related assets in order to qualify as an insured institution. The Bank's
capital exceeds all regulatory requirements.
The regulatory capital requirements and First DeWitt Bank's capital position
as of March 31, 1995 are as follows;
Capital
Capital Requirement Excess
(Dollars in Thousands) Amount % Amount % Amount %
Tangible Capital $35,019 5.8% $ 9,020 1.5% $25,999 4.3%
Core Capital 35,019 5.8 18,041 3.0 16,978 2.8
Risk-based Capital 39,856 10.0 31,996 8.0 7,860 2.0
The OTS has proposed an increase in the core capital requirement, from the
current 3% to a level that is expected to be between 4% and 5%.
Results of Operations
Comparison of Three Months Ended March 31, 1995 and March 31, 1994
First State recorded net income of $988,000, or $.26 per share, for the quarter
ended March 31, 1995 compared to a net income of $1.0 million, or $.27 per
share, for the same quarter in 1994. Net interest income increased $415,000
and other income increased $503,000 in the quarter ended March 31, 1995 over
the same 1994 period. Operating expenses and loan loss provisions also
increased over the same 1994 quarter by $795,000 and $78,000, respectively.
Additional information regarding the components of the statement of income
follow.
Total interest income increased $2.5 million during the quarter ended March
31, 1995 compared to the same period in 1994. The increase in interest income
was primarily due to the $2.0 million increase in interest on mortgage loans
and the increase in interest on consumer and commercial loans of $623,000.
Both increases were attributable to the growth in the size of the loan
portfolios. The loan portfolios totaled $490.3 million at March 31, 1995
compared to $374.7 million at March 31, 1994. Interest on mortgage-backed
securities decreased $119,000 during the 1995 period mainly because of
prepayments of such securities. Interest income from the investment
securities portfolio increased $130,000 and was offset by a $133,000 decrease
in interest income on investment securities available for sale during the
1995 quarter. The Bank primarily invests its funds in loans and intends to
continue to be active in originating loans. Adjustable rate and shorter term
fixed rate loans are mainly originated for the loan portfolio while long-term
fixed rate loans are mainly originated with the intent of selling the loans
to others. If non-accrual loans of $11.8 million at March 31, 1995 had been
current in accordance with their original terms, the Bank would have realized
additional interest income of approximately $293,000 during the quarter ended
March 31, 1995. The average yield on loans and investments was 8.22% at March
31, 1995.
Total interest expense increased $2.1 million in the quarter ended March 31,
1995, compared to the same period in 1994. The increase was mainly due to the
$1.8 million increase in interest expense on deposits and was attributable to
the volume increase in the amount of deposits and also to increased interest
rates paid on deposits. The increased interest rates paid on deposits reflect
the increases in general market interest rates. The average interest rate on
deposits was 3.94% at March 31, 1995. Deposits increased to $542.6 million
at March 31, 1995 from $440.5 million at March 31, 1994. The general increase
in market interest rates has increased competition among financial institutions
for the acquisition of deposits, particularly in the rates paid on certificates
of deposit. The Bank has continued to successfully market eight and fourteen
month certificate of deposit programs which were introduced during the December
1994 quarter. The Bank will continue to offer deposit programs that are
competitively priced to attract new deposits as well as retain savings of
existing depositors. Interest on borrowed money increased $256,000 in the
1995 quarter mainly because of increased borrowings. Borrowings totaled
$17.3 million, with $7.0 million in overnight borrowings, at March 31, 1995
compared to $507,000 at March 31, 1994. The average cost of deposits and
borrowings was 4.01% at March 31, 1995.
Net interest income increased $415,000 during the quarter ended March 31, 1995,
compared to the same period in 1994. The interest income and interest expense
elements of the changes in net interest income are described above.
The provision for loan losses amounted to $300,000 in the quarter ended March
31, 1995. This was $78,000 more than the provision made in the same 1994
quarter. This increased provision was primarily related to the increased
size of the loan portfolio. Loan loss reserves at March 31, 1995, after
$300,000 in loss provisions, $24,000 in recoveries, and $1.3 million in
losses charged against the reserve during the quarter, were $5.6 million.
See the "Financial Condition" section of this report for additional details
and a discussion of non-accrual loans, loss provisions, and loss reserves.
Total other income increased $503,000 during the quarter ended March 31, 1995,
compared to the same 1994 quarter. The principal changes from the 1994 period
were an increase of $312,000 in loan fees and other loan charges, an increase
of $302,000 in the "other" category of other income, and a decrease in gain
of sales of investments of $134,000. The decrease in gain on sales of
investments reflects a $1,000 gain on the sales of investments in the 1995
period compared to a gain of $135,000 gain on sales in the 1994 period. The
increase in loan fees and service charges was mainly attributable to fees
collected in connection with credit card activities and other consumer loan
business. First State obtained a serviced credit card portfolio through the
merger with Ocean. First State has found the arrangement to be profitable and
expanded their business with the servicer. The effect of the accounting for
this credit card portfolio has caused increases in the areas of consumer loan
interest income; loan fees and other loan charges; and loan expenses. The
increase in the "other" category of other income was mainly due to increased
cash surrender values of life insurance policies on certain executive officers.
Total operating expenses increased $795,000 during the quarter ended March
31, 1995 compared to the same 1994 quarter. The principal changes were an
increase in loan expenses of $626,000, a increase in problem asset expenses,
inclusive of real estate owned writedowns, of $107,000, and a decrease in
compensation and employee benefits expense of $113,000. The increase in loan
expenses was mainly due to servicing costs in connection with credit card
activities. See discussion, above, regarding these credit card activities.
The increase in problem asset expenses was attributable to asset write-downs
of $100,000 and to expenses of $7,000. Real estate owned and non-accrual
assets are discussed in the "Financial Condition" section of this report.
A $113,000 decrease in compensation and employee benefits was also realized
in the 1995 period. This was mainly attributable to the savings effected by
the merger of OIB and also to a reduction of pension expense and employees
stock ownership plan expenses.
The income tax expense of $499,000 incurred in the quarter ended March 31,
1995 and income tax expense of $407,000 incurred in the quarter ended March
31, 1994 was due to the generation of taxable income. The Corporation adopted
the Statement of Financial Accounting Standard 109, "Accounting for Income
Taxes" ("FAS 109"), effective October 1, 1992. A blended rate of income tax
expense was used over the fiscal year ended September 30, 1994, utilizing all
remaining estimated benefit from the implementation of FAS 109. This blended
rate is slightly less than the expected rate of tax on pretax income. No
benefit from FAS 109 is expected in the current fiscal year. The Corporation
does not expect any material effects, with regard to rate of income tax on
taxable income, from the business combination with Ocean.
Comparison of Six Months ended March 31, 1995 and March 31, 1994
First State recorded net income of $1.9 million, or $.51 per share, for the
six month period ended March 31, 1995 and also the six month period ended
March 31, 1994. Net interest income increased $580,000 and other income
increased $396,000 in the six month period ended March 31, 1995 over the same
1994 period. Operating expenses increased $948,000 while loan loss provisions
decreased $292,000 over the same 1994 period. Additional information regarding
the components of the statement of income follow.
Total interest income increased $4.0 million during the six month period ended
March 31, 1995 compared to the same period in 1994. The increase in interest
income was primarily due to the $3.1 million increase in interest on mortgage
loans and the increase in interest on consumer and commercial loans of $1.1
million. Both increases were attributable to the growth in the size of the
loan portfolios. The loan portfolios totaled $490.3 million at March 31, 1995
compared to $374.7 million at March 31, 1994. Interest on mortgage-backed
securities decreased $276,000 during the 1995 period mainly because of
prepayments of such securities. Interest income from the investment
securities portfolio increased $345,000 while interest income on investment
securities available for sale decreased $243,000 in the 1995 period. The
changes in income reflect the changes in the size of the portfolios. The
investment securities portfolio increased to $26.3 million at March 31, 1995
from $13.0 million at March 31, 1994. The investment securities available for
sale portfolio decreased to $8.0 million at March 31, 1995 from $22.0 million
at March 31, 1994. A substantial portion of the investment securities
available for sale portfolio were held by OIB and the securities were sold in
October, 1994. The Bank primarily invests its funds in loans and intends to
continue to be active in originating loans. Adjustable rate and shorter term
fixed rate loans are mainly originated for the loan portfolio while long-term
fixed rate loans are mainly originated with the intent of selling the loans
to others. If non-accrual loans of $11.8 million at March 31, 1995 had been
current in accordance with their original terms, the Bank would have realized
additional interest income of approximately $689,000 during the six months
ended March 31, 1995. The average yield on loans and investments was 8.22%
at March 31, 1995.
Total interest expense increased $3.4 million in the six months ended March
31, 1995, compared to the same period in 1994. The increase was principally
due to the $2.9 million increase in interest expense on deposits. The increased
interest expense was mainly attributable to the volume increase in the amount
of deposits and also to the increased interest rates paid on deposits. The
increased interest rates paid on deposits reflect the increases in general
market interest rates. The average interest rate on deposits was 3.94% at
March 31, 1995. Deposits increased to $542.6 million at March 31, 1995 from
$440.5 million at March 31, 1994. The general increase in market interest
rates has increased competition among financial institutions for the
acquisition of deposits, particularly in the rates paid on certificates of
deposit. The Bank has continued to successfully market eight and fourteen
month certificate of deposit programs which were introduced during the
December 1994 quarter. The Bank will continue to offer deposit programs that
are competitively priced to attract new deposits as well as retain savings of
existing depositors. Interest on borrowed money increased $493,000 in the
1995 period mainly because of increased borrowings. Borrowings totaled
$17.3 million at March 31, 1995 compared to total borrowings of $507,000 at
March 31, 1994. The average cost of deposits and borrowings was 4.01% at
March 31, 1995.
Net interest income increased $580,000 during the six months ended March 31,
1995, compared to the same period in 1994. The interest income and interest
expense elements of the changes in net interest income are described above.
The provision for loan losses amounted to $500,000 in the six months ended
March 31, 1995. This was $292,000 less than the provision made in the same
1994 quarter. The decreased loan loss provision in the 1995 period reflects
management's assessment of the risk inherent in the loan portfolio. Loan
loss reserves were $5.6 million at March 31, 1995. See the "Financial
Condition" section of this report for additional details and a discussion of
non-accrual loans, loss provisions, and loss reserves.
Total other income increased $396,000 during the six months ended March 31,
1995, compared to the same 1994 period. The principal changes from the 1994
period were an increase of $554,000 in loan fees and other loan charges, an
increase of $146,000 in the "other" category of other income, and a decrease
in gain of sales of investments of $292,000. The decrease in gain on sales of
investments reflects a loss on sale of investments of $155,000 in the 1995
period (attributable to the sale of several of OIB's investment securities
in October 1994) compared to a $137,000 gain on sale of investments in the
six month period ended March 31, 1994. The increase in loan fees and service
charges was mainly attributable to fees collected in connection with credit
card activities and other consumer loan business. First State obtained a
serviced credit card portfolio through the merger with Ocean. First State has
found the arrangement to be profitable and expanded their business with the
servicer. The effect of the accounting for this credit card portfolio has
caused increases in the areas of consumer loan interest income; loan fees and
other loan charges; and loan expenses. The increase in the "other" category
of other income was mainly due to increased cash surrender values of life
insurance policies on certain executive officers which was partially offset
by decreased commissions earned on annuity product sales through First State
Investment Services, Inc., a subsidiary of the Company.
Total operating expenses increased $948,000 during the six month period ended
March 31, 1995 compared to the same 1994 period. The principal changes were
an increase in loan expenses of $1.0 million and a decrease in compensation
and employee benefits expense of $194,000. The increase in loan expenses was
mainly due to servicing costs in connection with credit card activities. See
discussion, above, regarding First State's credit card activities. The
decrease in compensation and employee benefits was mainly attributable to the
savings effected by the merger of OIB and also a reduction of pension and
employee stock ownership plan expenses.
The income tax expense of $1.0 million incurred in the six month period ended
March 31, 1995 and income tax expense of $700,000 incurred in the six month
period ended March 31, 1994 was due to the generation of taxable income. The
Corporation adopted the Statement of Financial Accounting Standard 109,
"Accounting for Income Taxes" ("FAS 109"), effective October 1, 1992. A
blended rate of income tax expense was used over the fiscal year ended
September 30, 1994, utilizing all remaining estimated benefit from the
implementation of FAS 109. This blended rate is slightly less than the
expected rate of tax on pretax income. No benefit from FAS 109 is expected
in the current fiscal year. The Corporation does not expect any material
effects, with regard to rate of income tax on taxable income, from the
business combination with Ocean.
<PAGE>
PART II. OTHER INFORMATION
FIRST STATE FINANCIAL SERVICES, INC.
Item 1. Legal Proceedings
The company is not engaged in any legal proceedings of a
material nature at the present time. From time to time,
First DeWitt is a party to legal proceedings within the normal
course of business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders of First State Financial
Services, Inc. was held on January 18, 1995 (the "Meeting").
(b) Messrs. Henry F. Albinson, Frank H. Bridge and Ralph M. Riefolo
were re-elected as directors by the stockholders at the Meeting, and the
following directors continued in office following the Meeting: Patrick N.
Ciccone, Theodore F. Cox, Walter J. Davis, Clarence R. Lommerin, Marie G.
Martino, and Michael J. Quigley, III.
(c) The following matters were voted upon at the Meeting, and received
the indicated votes:
(i) The approval of an amendment to the Company's Certificate
of Incorporation to reduce the number of authorized shares of stock.
For Against Abstain
Number of Votes 2,441,767 16.683 18.782
Percentage of votes
present in person or
by proxy 63.1% 0.4% 0.4%
There were 573.916 broker non-votes.
(ii) The nominees for election as directed received the following
votes:
For Withheld
Henry F. Albinson: 2,999,215 51,933
Frank H. Bridge: 3,000,614 50,534
Ralph M. Riefolo: 3,006,772 44,376
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on form 8-K have been filed during
the quarter ended March 31, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Financial Services, Inc.
Dated: 05/15/95 By: Michael J. Quigley, III
Michael J. Quigley, III
Chairman, President and
Chief Executive Officer
Dated: 05/15/95 By: Emil J. Butchko
Emil J. Butchko
Vice President and Treasurer
