SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
Commission File No. 0-16532
First State Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
22-2823506
(I.R.S. Employer Identification No.)
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
(Address of principal office, including zip code)
(201)575-5800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed by reference to the last reported sales price of such
stock on the NASDAQ National Market System on December 21, 1995, was
approximately $48.5 million.
The number of shares outstanding of the registrant's Common Stock, the
registrant's only class of outstanding capital stock, as of December 21, 1995,
was 3,874,405.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the Fiscal Year ended September 30, 1995
(Part II).
2. Proxy Statement for the 1995 Annual Meeting of Stockholders (Part III).
TABLE OF CONTENTS
Item No. Description Page
Part I
1 Business 3
2 Properties 27
3 Legal Proceedings 28
4 Submission of Matters to a Vote of
Security Holders 28
Part II
5 Market for Registrant's Common Equity and
Related Stockholder Matters 28
6 Selected Financial Data 28
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
8 Financial Statements and Supplementary Data 28
9 Changes in and Disagreements on Accounting
and Financial Disclosure 28
Part III
10 Executive Officers of the Registrant 29
Incorporation by Reference 29
Part IV
14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 30
Part I
Item I - Business
General First State Financial Services, Inc. ("First State" or the "Holding
Company"), a Delaware business corporation, is a holding company whose
principal subsidiary is First DeWitt Bank, (the Bank), an FDIC-insured
federally chartered bank, headquartered in West Caldwell, New Jersey. The
Holding Company was organized at the direction of the Bank in connection with
the Bank's conversion from mutual to stock form of organization. The
conversion was completed on December 29, 1987. On March 1, 1993, First DeWitt
converted to a federal bank charter from a state chartered savings and loan
association.
The Bank conducts its business through 12 full-service banking offices
located in Belleville, Bloomfield, Brick Township, Cedar Grove, Englishtown,
Hopatcong, Morris Plains, Ocean, and West Caldwell, New Jersey, and is
principally engaged in the business of attracting retail deposits from the
general public and investing those funds in residential mortgage loans,
consumer loans, and commercial loans. A thirteenth office was added in Toms
River, New Jersey, subsequent to September 30, 1995. At September 30, 1995,
the Bank had deposits of $567.7 million and loans of $528.9 million.
Revenues of the Bank are derived principally from interest earned on
loans, fees charged in connection with loans and banking services, and interest
and dividends from investment and mortgage-backed securities. The Bank's
primary sources of funds are deposit inflows, interest and principal repayments
on loans outstanding, prepayment of loan balances, and proceeds from the sale
of loans, borrowings, maturities and sales of investment securities and
repayment of mortgage-backed securities.
The Bank has three wholly-owned subsidiaries, Cedar Grove Service
Corporation (CGSC), Southport (Wall) Associates (Southport) and Ridge
(Caldwell) Associates (the Ridge). All three subsidiaries have completed their
previous endeavors of real estate development and are now inactive. Southport
and the Ridge were formed in order to facilitate completion of foreclosed
condominium/townhouse construction loans.
First State Financial Services, Inc. organized First State Investment
Services, Inc., a wholly-owned subsidiary, primarily to offer professional
financial services and new investment alternatives, such as tax deferred
annuities, mutual funds, etc., to the Bank's customers.
Ratios. The following table sets forth certain ratios regarding the
profitability of the Bank and the Holding Company:
Year ended September 30,
1995 1994 1993
Return on assets (net income divided by
average total assets) 0.67% 0.70% 0.53%
Return on equity (net income divided by
average equity) 10.27% 9.62% 7.56%
Equity-to-assets ratio (average equity divided
by average assets) 6.56% 7.27% 6.99%
Dividend payout ratio (dividends declared per
share divided by net income per share) 20.79% 13.19% --
Rate/Volume Analysis
<TABLE>
The following table represents changes in interest income, interest
expense, and net interest income which are attributable to changes in the
average amounts of interest-earning assets and interest-bearing liabilities
outstanding and/or to changes in rates earned or paid thereon. The net changes
attributable to both volume and rate have been allocated proportionately.
<CAPTION>
Year Ended September 30,
1995 compared to 1994 1994 compared to 1993
Increase / (Decrease) Increase / (Decrease)
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans $ 7,634 $ 2,140 $ 9,774 $ 1,720 $(1,122) $ 598
Mortgage-backed Securities (301) (48) (349) (334) (239) (573)
Investment securities 598 (1) 597 (114) 196 82
Investmentents available for sale (648) 69 (579) 561 (251) 310
Federal Funds (79) 67 (12) 1 (59) (58)
Investments required by law 24 (41) (17) (30) (18) (48)
Total income on interest earning assets $ 7,228 $ 2,186 $ 9,414 $ 1,804 $(1,493) $ 311
Interest Bearing Liabilities
NOW and money market deposits $ 207 $ 85 $ 292 $ 274 $ (462) $ (188)
Passbook accounts (563) (108) (671) 339 (1,021) (682)
Certificate accounts 4,324 3,622 7,946 (343) (888) (1,231)
Borrowed money 587 163 750 21 127 148
Total expense on interest bearing liabilities $ 4,555 $ 3,762 $ 8,317 $ 291 $(2,244) $(1,953)
Net interest income $ 2,673 $(1,576) $ 1,097 $ 1,513 $ 751 $ 2,264
</TABLE>
LENDING ACTIVITIES
<TABLE>
The bank concentrates its lending activities in residential loans, mortgage-
backed securities and consumer and commercial loans. The following table sets
forth the composition of the Bank's loan portfolio and mortgage-backed
securities at the dates indicated.
<CAPTION>
1995 1994 1993 1992 1991
Amount % Amount % Amount % Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans & mortgage-backed securities:
Residential:
1-4 family $ 284,449 51.32 $ 301,292 63.78 $ 247,520 60.09 $ 237,348 59.89 $ 239,632 59.29
5 or more family 23,645 4.27 20,102 4.26 17,767 4.31 13,286 3.35 8,968 2.22
Commercial 55,792 10.07 44,222 9.36 34,860 8.46 31,300 7.90 29,996 7.42
Construction &
land (1) 15,368 2.77 11,385 2.41 9,296 2.26 14,838 3.74 15,185 3.76
Loans held for
resale 67,219 12.13 3,095 .66 10,937 2.66 10,160 2.56 14,151 3.50
Mortgage-backed
securities 18,915 3.41 18,835 3.99 26,022 6.32 30,811 7.78 40,792 10.09
Total 465,388 83.97 398,931 84.46 346,402 84.10 337,743 85.22 348,724 86.28
Less:
Unearned discounts &
deferred fees 338 850 1,373 1,648 1,545
Allowance for
loan losses 4,634 4,918 6,614 5,891 6,252
Net 460,416 393,163 338,415 330,204 340,927
Consumer loans:
Home equity 27,442 4.95 26,350 5.58 26,915 6.54 24,137 6.08 21,689 5.36
Credit cards 19,729 3.56 10,338 2.19 11,289 2.74 10,008 2.52 8,844 2.18
Property
improvement 1,405 .25 1,708 .36 2,284 .55 2,875 .73 3,539 .88
Student loans 658 .12 530 .11 505 .12 775 .20 401 .10
Savings account 1,122 .20 935 .20 929 .23 1,277 .32 1,290 .32
Auto 1,031 .19 627 .13 461 .11 380 .10 635 .16
Other 1,990 .36 1,420 .30 1,940 .47 2,176 .55 2,614 .65
Total 53,377 9.63 41,908 8.87 44,323 10.76 41,628 10.50 39,012 9.65
Less (Plus):
Unearned discounts &
deferred fees (136) (128) (125) (120) (99)
Allowance for
loan losses 493 341 253 269 623
Net 53,020 41,695 44,195 41,479 38,488
Commercial
loans 35,470 6.40 31,509 6.67 21,158 5.14 16,948 4.28 16,433 4.07
Less:
Unearned discounts &
deferred fees 123 110 67 36 23
Allowance for
loan losses 955 1,092 1,244 840 1,137
Net 34,392 30,307 19,847 16,072 15,273
Total loans & mortgage-
backed securities $ 554,235 100.00 $ 472,348 100.00 $ 411,883 100.00 $ 396,319 100.00 $ 404,169 100.00
Total net loans & mortgage-
backed securities $ 547,828 $ 465,165 $ 402,457 $ 387,755 $ 394,688
(1) Net of loans in process.
</TABLE>
Origination, Purchase and Sale of Loans.
Set forth below is a schedule showing the Bank's loan and mortgage-backed
security activity for the years indicated:
Year ended September 30,
1995 1994 1993
(Dollars in thousands)
Real estate loan originations;
Residential:
1-4 family $ 89,216 $ 108,878 $ 121,165
5 or more family 5,954 3,204 11,102
Construction and land development 18,735 9,763 1,904
Commercial 15,193 15,609 4,347
Total real estate loan originations 129,098 137,454 138,518
Consumer loan originations 16,016 15,284 14,570
Commercial loan originations 34,733 33,348 15,043
Total loan originations 179,847 186,086 168,131
Real estate loan purchases:
Residential:
1-4 family 36 -- 134
5 or more family -- -- --
Commercial 256 -- 2,038
Mortgage-backed securities purchased 5,809 5,048 5,920
Total purchases 6,101 5,048 8,092
Total originations & purchases 185,948 191,134 176,223
Principal repayments & prepayments 92,835 96,753 91,606
Sales of:
Whole loans 6,924 19,820 65,610
Loan participations -- -- --
Mortgage-backed securities 1,630 5,207 --
Consumer loans -- 6,570 --
Total sales of whole loans, loan
participations, mortgage-backed
securities and consumer loans 8,554 31,597 65,610
Transfers to real estate owned 2,672 2,319 3,443
Total principal repayments, sales
and transfers 104,061 130,669 160,659
Net increase in loans &
mortgage-backed securities $ 81,887 $ 60,465 $ 15,564
Loan Maturity.
<TABLE>
The following table sets forth certain information at September 30, 1995,
regarding the dollar amount of loans maturing in the Bank's loan portfolio, by
type, on scheduled payments to maturity.
<CAPTION>
Total Maturing Within Year:
Outstanding at ------------------------------------------------------
September 30, 1997- 1999- 2001- 2006-
1995 1996 1998 2000 2005 2025
( Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential(1) $ 375,313 $ 18,150 $ 40,728 $ 25,352 $ 70,017 $ 221,066
Commercial 55,792 3,117 3,312 12,511 18,588 18,264
Construction and land 15,368 10,500 4,868 -- -- --
Consumer loans 53,377 11,352 20,032 6,104 10,046 5,843
Commercial loans 35,470 14,765 4,779 1,480 433 14,013
Mortgage-backed
securities(3) 18,915 1,728 3,487 2,534 3,368 7,798
Total(2) $ 554,235 $ 59,612 $ 77,206 $ 47,981 $ 102,452 $ 266,984
(1) Includes loans held for resale.
(2) Of the $494.6 million principal amount of loans maturing after September
30,1996, loans with an aggregate principal amount of $223.1 million
have fixed interest rates while $271.5 million have adjustable rates.
(3) Excludes premiums and discounts.
(/TABLE>
The following table sets forth residential mortgage loans at September 30,
1995, by yield range and percent of residential mortgage loans.
Yield Range Amount Percent
(Dollars in thousands)
14.00% and above $ 942 .25%
13.00% to 13.99% 570 .15
12.00% to 12.99% 605 .16
11.00% to 11.99% 1,377 .37
10.00% to 10.99% 9,511 2.53
9.00% to 9.99% 56,389 15.02
8.00% to 8.99% 105,080 28.00
7.00% to 7.99% 139,927 37.28
6.99% and below 60,912 16.24
Total (1) $ 375,313 100.00%
(1) Includes loans held for resale.
Residential Mortgage Lending.
The Bank originates fixed-rate loans and adjustable rate mortgages
("ARMs") on single-family and multifamily residential properties. The Bank
currently originates loans with maturities from 5 to 30 years. Loans
originated for sale in the secondary market are underwritten and originated in
accordance with Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") standards which enables the Bank to sell
or securitize these loans in the secondary mortgage market, except as described
below. The Bank also originates fixed-rate and adjustable rate first mortgage
loans in principal amounts above $203,150, the maximum limit permitted under
FHLMC guidelines, generally to a maximum of $500,000.
Generally, the single-family residential ARMs offered by the Bank have
interest rates which adjust either after one, three or five years based upon
the one-, three- or five- year U.S. Treasury Constant Maturity Index,
respectively. The Bank has emphasized the origination of ARM loans. Consumer
demand, however, has been in the area of fixed-rate loans over the past fiscal
year. The Bank has responded to this change in product preference by selling
the majority of its fixed-rate originations in the secondary market in order to
conform to its asset/liability management policy.
The Bank's residential mortgage loans include due-on-sale clauses that
require repayment of the loan upon sale of the underlying property which has
the effect of shortening the average term of existing loans by allowing for the
amounts paid under such clauses to be used for new loan originations at current
market rates.
The Bank also originates ARMs and balloon mortgages secured by multifamily
residential properties. The underwriting criteria used by the Bank when
evaluating such loans are designed to minimize risk to the Bank. The primary
method used by the Bank to evaluate a multifamily residential mortgage loan is
based on an income approach pursuant to which the Bank determines if the net
operating income derived from gross rents from the project will be sufficient
to support the related debt and other associated costs.
Upon receipt of a loan application from a prospective borrower, a credit
report is ordered to verify information relating to the applicant's employment,
income, and credit standing. The Bank generally requires that the borrower
provide a minimum down payment of 20% of the appraised value or of the purchase
price, whichever is greater, of the property being purchased or constructed or
10% if the borrower obtains private mortgage insurance. An independent
appraisal of the real estate used to secure the proposed loan is undertaken.
It is the Bank's policy to obtain title insurance on all real estate loans and
to have borrowers obtain hazard insurance prior to closing. Additionally, the
Bank generally requires borrowers to advance funds on a monthly basis together
with their payment of principal and interest to a mortgage escrow account from
which the Bank makes disbursements for real estate taxes, and private mortgage
insurance premiums, if any, as they become due.
The Bank also services real estate loans for investors. The Bank receives
a servicing fee, in the form of a portion of the interest rate on the loan, in
exchange for their servicing efforts. The total loans serviced for others
amounted to approximately $113.4 million, $115.2 million and $121.7 million at
September 30, 1995, 1994 and 1993, respectively. The gross servicing fees
received in return for servicing these loans totaled $390,000, $435,000, and
$555,000, for the twelve months ended September 30, 1995, 1994 and 1993,
respectively.
Consumer Lending.
In recent years, the Bank has increased its emphasis on the origination of
consumer loans in order to provide a broader range of financial services to its
customers and because the shorter term and normally higher interest rates on
such loans help the Bank maintain a profitable interest rate spread between its
average loan yield and its cost of funds. The Bank's consumer loan department
offers a variety of consumer loan products, including automobile loans, loans
secured by passbook or certificate accounts, home equity loans, bridge loans,
personal loans, student loans guaranteed by the State of New Jersey, boat
loans, overdraft checking, AMEX line of credit, and Visa/Master credit cards.
The Bank has significantly expanded it's credit card operations over the past
year. The expansion began with the portfolio acquired through the merger with
Ocean Independent Bank on October 21, 1994. The arrangement between First
DeWitt Bank and the servicer of the credit cards, Applied Card Systems (ACS) of
Wilmington, Delaware, provides a guaranteed net return to the Bank. All
interest and fees associated with the credit cards serviced by ACS are recorded
by the Bank in their respective interest income and fee income accounts. The
Bank records loan expense to offset the interest and fees to arrive at the
guaranteed net return.
Construction and Land Development Lending.
The Bank's construction loans are primarily for single-family and
multifamily residential properties. The Bank may also provide the permanent
financing on these residential construction loans, but commitments for
permanent financing either from the Bank or another financial institution is
not required as a condition to closing the residential construction loan. In
those instances when the Bank commits to provide the permanent financing, the
construction loan is reclassified at the time the permanent financing is
provided either as a residential or commercial real estate loan. Also included
in construction loans are land development loans, which are loans for the
development of land into residential or commercial uses.
The underwriting criteria used by the Bank are designed to evaluate and
minimize the risks of each construction loan. Among other things, the Bank
generally considers an appraisal of the project, the reputation of the borrower
and the contractor, the amount of the borrower's equity in the project,
independent valuations and a review of cost estimates, plans and
specifications, preconstruction sale and leasing information, current and
expected economic conditions in the area of the project, cash flow projections
of the borrower, and to the extent available, guarantees by the borrower and/or
third parties. Notwithstanding the above, construction and land development
loans are generally viewed as riskier than loans secured by single-family
properties.
Commercial Lending
The Bank offers loans for commercial purposes to businesses and to
individuals. The loans are generally term loans and lines of credit which are
reviewed annually. Term loans can be for a fixed or adjustable rate.
Requests for commercial loans are reviewed as to their viability, the
prospective borrower's financial condition, and their ability to repay the
debt. Also taken into consideration during the review process is the
collateral offered. In some instances, these loans are secured by real estate
or assets owned by either the individuals, principals of the business, or the
business itself.
Delinquent Loans, Classified Assets, and Allowances for Loan Losses.
When a borrower fails to make a payment on a loan, the Bank takes steps to
have the borrower cure the delinquency and restore the loan to current status.
As a matter of policy, the Bank commences collection procedures by sending the
borrower a late notice once a loan payment is 15 days past due. If the
delinquency exceeds 60 days and is not cured through the Bank's normal
collection procedures, the Bank will institute measures to enforce its remedies
resulting from the default, including, in the case of mortgage loans,
commencing a foreclosure action. It is the policy of the Bank to discontinue
the accrual of interest when a loan is 90 days delinquent or collection becomes
uncertain. In addition, any accrued but unpaid interest on such loans is
charged against current earnings.
The aggregate amount of loans delinquent 90 days or more at September 30,
1995 was $18.5 million compared to $13.9 million at September 30, 1994 and
$20.1 million at September 30, 1993. A slow recovery in the economy and in the
New Jersey real estate market has negatively affected the loan portfolio. All
of the loans included in this delinquent total have been classified by
management.
The Bank has adopted a policy consistent with the OTS's classification
system for problem assets of insured institutions, which covers all problem
assets. Under this classification system, problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics discussed below.
An asset is considered "substandard" if inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility " that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have
all of the weakness inherent in those classified "substandard" with the added
characteristic that the weaknesses present make collection in full, on the
basis of currently existing facts, conditions, and values, highly questionable
and improbable. Assets classified "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for
loan losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When insured institution
classifies problem assets as "loss" it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS examination staff, who can order the establishment
of additional general or specific loss allowances.
The Bank regularly reviews the problem loans in its portfolio to determine
whether any loans require classification in accordance with applicable
regulations. On the basis of such periodic review, management of the Bank
classified $24.1 million as substandard assets, $4.7 million as doubtful loans
and $1.7 million as loss at September 30, 1995. The substandard classification
included all assets currently included in the real estate owned balance sheet
caption in addition to other classified loans. The impact of these actions is
reflected in the general allowance, the provision for loan losses and losses
charged against the allowance.
</TABLE>
<TABLE>
Nonperforming assets were as follows:
<CAPTION>
1995 1994 1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans:
Mortgage loans $ 16,280 $ 12,231 $ 16,868 $ 22,132 $ 20,446
Consumer & Cml loans 2,223 1,711 3,242 4,132 2,231
18,503 13,942 20,110 26,264 22,677
Real estate owned 8,564 10,004 15,320 18,968 24,376
Current restructured loans 3,476 4,165 3,872 3,644 4,450
Other nonperforming assets -- -- 558 29 266
Total nonperforming assets $ 30,543 $ 28,111 $ 39,860 $ 48,905 $ 51,769
</TABLE>
Loans are classified as nonaccrual if they become 90 days or more past due
or collection becomes uncertain. When a loan is classified nonaccrual, the
accrual of income is discontinued and any accrued but unpaid interest is
reversed against current earnings.
Interest income recognized on nonperforming loans for the twelve months
ended September 30, 1995, 1994,and 1993 totaled $340,000, $243,000 and $370,000,
respectively.
The following table presents information concerning the Bank's allowance
for possible loan losses and charge-offs for the years indicated.
1995 1994 1993 1992 1991
(Dollars in thousands)
Balance at beginning
of period $ 6,351 $ 8,111 $ 6,999 $ 8,011 $ 7,745
Charge-offs:
Residential - 92 489 1,745 3,902
Commercial real estate 351 1,134 0 285 580
Construction & land 1,216 2,012 726 1,555 677
Consumer 103 74 373 93 73
Commercial 321 579 200 209 664
Total 1,991 3,891 1,788 3,887 5,896
Recoveries:
Residential 20 32 150 0 12
Commercial real estate -- 357 0 0 0
Construction & land -- 5 288 182 115
Consumer 24 12 22 12 15
Commercial 28 3 0 4 0
Total 72 409 460 198 142
Net charge-offs 1,919 3,482 1,328 3,689 5,754
Additions charged to
operations 1,650 1,892 2,440 2,677 6,020
Pooling adjustment -- (170) -- -- --
Balance at end of period $ 6,082 $ 6,351 $ 8,111 $ 6,999 $ 8,011
Ratio of net Charge-offs
during period to avg.
loans outstanding
during period 0.394% 0.889% 0.358% 1.041% 1.430%
In the following table, the allowance for loan losses has been allocated
by category for purposes of complying with the disclosure requirements of the
Securities and Exchange Commission ("SEC"). The amount allocated on the
following table to any category should not be interpreted as an indication of
future losses on any category, since the Bank's allowance is a general
allowance.
<TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
At September 30,
(Dollars in thousands)
1995 1994 1993 1992 1991
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocated to:
Residential $ 2,398 70.11% $ 1,608 71.55% $ 1,535 71.59% $ 1,482 71.35% $ 2,086 72.31%
Commercial
real estate 935 10.42% 914 9.75% 1,799 9.03% 834 8.56% 602 8.25%
Construction
and land 1,301 2.87% 2,396 2.51% 3,287 2.41% 3,575 4.06% 3,864 4.18%
Consumer 393 9.97% 341 9.24% 253 11.49% 268 11.39% 323 10.74%
Commercial 1,055 6.63% 1,092 6.95% 1,237 5.48% 40 4.64% 1,136 4.52%
$ 6,082 100.00% $ 6,351 100.00% $ 8,111 100.00% $ 6,999 100.00% $ 8,011 100.00%
</TABLE>
Investment Activities
The Bank is required to maintain minimum levels of liquid assets as
defined by the Office of Thrift Supervision (OTS) regulations, such as United
States Government and federal agency securities. This requirement, which may
be varied by OTS, is based upon a percentage of deposits and short-term
borrowings. The required ratio is currently 5.00%. The Bank's ratios were
6.13%, 5.51% and 7.05% at September 30, 1995, 1994, and 1993, respectively.
The Bank anticipates maintaining its liquidity at or above the level required
by regulatory agencies.
<TABLE>
The following tables set forth certain information regarding the Bank's
investments:
<CAPTION>
1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C>
Investment Securities:
Held to Maturity Portfolio:
U.S. Treasury securities $ 1,256 $ -- $ --
U.S. Government & Agency obligations 9,647 8,713 4,018
Municipal obligations 9,986 11,056 197
20,889 19,769 4,215
Available for Sale Portfolio:
U.S. Treasury securities 1,001 5,670 5,538
U.S. Government & Agency obligations -- 2,445 2,388
Municipal obligations 2,717 -- --
U.S. Government mutual funds 221 606 8,564
Adjustable rate mortgage mutual funds 7,407 8,885 4,182
Commercial paper mutual funds 419 -- --
Other investments 34 33 25
11,799 17,639 20,697
Total investment portfolio $ 32,688 $ 37,408 $ 24,912
Average life ( in years ) of total
Investment portfolio (1) 10.4 6.5 4.9
(1) Excludes mutual funds
<CAPTION>
At September 30,1995
Average
Life in Amortized Market Average
Years Cost Value Yield(1)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Held to Maturity Portfolio:
U.S. Treasury securities 1.52 $ 1,256 $ 1,268 6.33 %
U.S. Government & Agency obligations 4.39 9,647 9,486 5.98
Municipal obligations 7.92 9,986 9,903 6.87
Total 5.90 20,889 20,657 6.42(1)
Available for Sale Portfolio:
U.S. Treasury securities 1.67 $ 1,007 $ 1,001 5.68
Municipal obligations 17.12 2,728 2,717 7.91
U.S. Government mutual funds -- 236 221 6.20
Adjustable rate mortgage mutual funds -- 7,475 7,407 6.37
Commercial paper mutual funds -- 419 419 5.25
Other investments 5.26 28 34 6.97
Total 12.90(2) $ 11,893 $ 11,799 6.62
Total investment portfolio 6.96(2) $ 32,782 $ 32,456 6.49 %
(1) Tax equivalent yield
(2) Excludes mutual funds
<CAPTION>
Maturity at September 30, 1995
1 Year or less 1 to 5 Years 6 to 10 Years More than 10 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity Portfolio:
U.S. Treasury securities $ 410 5.86% $ 846 6.56% $ -- % $ -- %
U.S. Government & Agency
obligations 199 6.27 7,255 5.87 1,622 6.58 571 5.62
Municipal obligations 1,821 6.18 460 5.81 3,650 7.08 4,055 7.10
Total 2,430 6.13% 8,561 5.93 5,272 6.93 4,626 6.92
Available for Sale Portfolio:
U.S. Treasury securities -- 1,007 5.68 -- --
Municipal obligations -- -- -- 2,728 7.91
Mutual funds 8,130 6.30 -- -- --
Other investments -- -- 28 6.97 --
Total 8,130 6.30 1,007 5.68 28 6.97 2,728 7.91
$ 10,560 6.26% $ 9,568 5.90% $ 5,300 6.93% $ 7,354 7.29%
(1) Tax equivalent yield.
</TABLE>
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending
and other general business purposes. In addition to deposits, the Bank obtains
funds from loan repayment and prepayments, advances from the FHLB of New York
and other borrowings and from sales of loans.
Deposits. The Bank has a number of different deposit programs designed to
attract both short-term and long-term deposits. These programs include
passbook, statement savings and club accounts, commercial checking, NOW
accounts, money market checking and passbook, IRA, SEPP and Keogh retirement
accounts, certificate accounts which include jumbo certificates in
denominations of $100,000 or more, and credit card services to individuals and
businesses. In recent years the Bank has emphasized attracting noninterest
bearing commercial checking and NOW accounts.
The Bank's deposits are obtained primarily from residents of the five
counties in the state of New Jersey where the Bank's offices are located. The
majority of the deposits are obtained from residents of Essex County where the
Bank has six offices. The principal methods used by the Bank to attract
deposit accounts include offering a wide variety of services and accounts,
competitive interest rates, and convenient office hours and locations.
The following table presents the deposit activity of the Bank for the year
indicated.
Year ended September 30,
1995 1994 1993
(Dollars in thousands)
Deposits $ 623,172 $ 411,106 $ 353,845
Withdrawals 555,480 376,841 365,423
Net deposits (withdrawals) 67,692 34,265 (11,578)
Interest credited 20,654 13,087 15,188
Net increase in deposits $ 88,346 $ 47,352 $ 3,610
The following table presents the average nominal interest rates on
certificate accounts outstanding at September 30, 1995.
Percent of Average
Amount Total Deposits interest rate
(Dollars in thousands)
Market rate certificates maturing
in the quarter ending:
December 31, 1995 $ 107,044 18.86% 5.13%
March 31, 1996 100,262 17.66 5.58
June 30, 1996 12,589 2.22 6.02
September 30, 1996 78,175 13.77 5.62
December 31, 1996 4,953 .87 6.28
March 31, 1997 4,220 .74 6.22
June 30, 1997 3,993 .70 6.30
September 30, 1997 5,387 .95 6.20
Oct. 1, 1997 - Sept. 30, 2005 17,595 3.10 6.54
Total certificate accounts $ 334,218 58.87% 5.54%
At September 30, 1995 the Bank had jumbo certificate accounts in the amount of
$100,000 or more maturing as follows:
Amount
(In thousands)
Within:
One Year $ 55,341
One to Three Years 9,443
Three to Five Years 2,680
Total $ 67,464
Borrowings
The Bank obtains advances from the FHLB of New York which are secured by
its capital stock in the FHLB of New York and certain of the Bank's first
mortgages and participation certificates. Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on either a fixed percentage of assets or an assessment of
the Bank's creditworthiness. The FHLB of New York advances are generally
available to meet seasonal and other withdrawals of deposit accounts and to
permit increased lending. In addition, the Bank maintains a $60.4 million line
of credit with the FHLB of New York.
The Bank entered into a reverse repurchase agreement with Merrill Lynch on
September 30,1994, which matured on October 19,1994. The interest rate on the
agreement was 5.15%. The securities underlying the agreement consisted of U.S.
Treasury notes with a book value of $3.1 million. There have been no other
reverse repurchase agreements during the past three years.
The following table sets forth information with respect to borrowings:
At September 30,
1995 1994 1993
(Dollars in thousands)
Borrowings outstanding $ 23,105 $ 31,738 $ 5,680
Weighted average rate paid on borrowings 6.76% 5.75% 4.03%
Year Ended September 30,
1995 1994 1993
(Dollars in Thousands)
Maximum amount of borrowings
outstanding at any month end: $ 27,730 $ 31,738 $ 17,593
Approximate average borrowings outstanding $ 18,028 $ 7,048 $ 6,620
Approximate weighted average rate paid 6.16% 5.12% 3.22%
Holding Company Subsidiaries
First State is a Delaware corporation which acquired all of the stock of
the Bank upon its conversion from a New Jersey state chartered mutual savings
and loan association to a New Jersey state chartered stock savings and loan
association. The stock conversion was completed on December 29, 1987. The Bank
converted to a federal savings bank charter on March 1, 1993 and on August 1,
1994, the institution became known as First DeWitt Bank. The information and
consolidated financial statements in this annual report of First State relates
primarily to its wholly-owned subsidiary, First DeWitt Bank, through which
First State conducts its principal business activity, and also First State
Investment Services, Inc., an investment services company.
The Bank has three wholly-owned subsidiaries, Cedar Grove Service
Corporation (CGSC), Southport (Wall) Associates (Southport) and Ridge
(Caldwell) Associates (the Ridge). All three subsidiaries have completed their
previous endeavors of real estate development and are now inactive. Southport
and the Ridge were formed in order to facilitate completion of a foreclosed
condominium/townhouse construction loans.
First State organized First State Investment Services, Inc., a wholly-
owned subsidiary, primarily to offer professional financial services and new
investment alternatives to First DeWitt's customers.
Competition
The Bank faces significant competition both in originating mortgage and
consumer loans and in attracting deposits. The Bank's competition for loan
originations comes principally from savings and loan associations, savings
banks, mortgage banking companies (many of which are subsidiaries of major
commercial banks), insurance companies and other institutional lenders. Its
most direct competition for deposits has historically come from savings and
loan associations, savings banks, commercial banks, credit unions and other
financial institutions. The Bank faces additional competition for deposits
from short-term money market funds and other corporate and government
securities funds. Competition may increase as a result of the continuing
reduction in the restrictions on the interstate operations of financial
institutions. Many of the Bank's competitors, whether traditional financial
institutions or otherwise, have much greater financial and marketing resources
than those of the Bank.
The Bank competes for loans principally through the interest rates and the
loan fees it charges as well as the efficiency and quality of services it
provides borrowers and their real estate brokers. It competes for deposits
through pricing, convenience, location of offices and the offering of a variety
of deposit accounts.
Regulation and Supervision
General
The Bank is a member of the FHLB system and its deposit accounts are
insured up to applicable limits by the FDIC primarily through the Savings
Association Insurance Fund ("SAIF")($64.1 million of deposits at September 30,
1995, were insured through the Bank Insurance Fund (the "BIF"), the deposit
insurance fund that insures most commercial bank deposits). The Bank is
subject to extensive regulation by the OTS and the FDIC, as the deposit
insurer. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. There are periodic examinations by
the OTS and the FDIC to assess the Bank's financial condition and test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is included primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the OTS, the FDIC or the Congress could have a material
adverse impact on the Company, the Bank and their operations. The Holding
Company, as a savings and loan holding company, is required to file certain
reports with, and otherwise comply with, the rules and regulations of the OTS
and of the SEC under the federal securities laws. Certain of the regulatory
requirements applicable to the Bank and to the Company are referred to below or
elsewhere herein.
Federal Deposit Insurance Corporation Improvement Act of 1991
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became law. While the FDICIA primarily
addresses additional sources of funding for the Bank Insurance Fund, which
insures the deposits of commercial banks and savings banks, it also imposes a
number of new mandatory supervisory measures on savings associations and banks.
Among other things, FDICIA requires the federal banking agencies to take
prompt corrective action if a depository institution fails to satisfy certain
minimum capital requirements. The prompt corrective action regulations define
five specific capital categories. The capital categories are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
be undercapitalized. Institutions categorized as "undercapitalized" are
subject to certain restrictions, including the requirement to file a capital
plan with its primary Federal regulator, and subject to growth limitations,
among other restrictions. More severe restrictions may be imposed on a
"significantly undercapitalized" institution, including requirements to raise
additional capital, sell assets, or sell the entire institution. Critically
undercapitalized institutions are generally placed in receivership or
conservatorship. For an institution to be classified as "well capitalized," it
must have a core ratio of at least 5%, a Tier 1 risk-based capital ratio of at
least 6%, and a total risk-based capital ratio of at least 10%. To be
considered "adequately capitalized," an institution must generally have a core
ratio of at least 4%, a Tier 1 risk-based capital ratio of at least 4%, and a
total risk-based capital ratio of at least 8%. The Bank is considered "well
capitalized" under the above definitions.
Pursuant to FDICIA, the FDIC established a risk-based assessment system
for deposit insurance and authorizes the FDIC to privately reinsure up to 10%
of its risk of loss with respect to an institution and base its assessment on
the cost of such reinsurance.
FDICIA seeks to encourage enforcement of existing consumer protection laws
and enacts new consumer-oriented provisions including a requirement of notice
to regulators and customers for any proposed branch closing and provisions
intended to encourage the offering of "lifeline" banking accounts and lending
in distressed communities. FDICIA also includes a Truth in Savings provision
which requires depository institutions to make additional disclosures to
depositors with respect to the rate of interest and the terms of their deposit
accounts.
Section 112 of FDICIA also imposes numerous reporting requirements and
internal control procedures upon institutions with assets greater than $500
million. First DeWitt was subject to the reporting requirements of Section 112
of FDICIA as of September 30, 1995.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed
by the Home Owner's Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDI Act"). The HOLA and the FDI Act were
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), which was enacted for the purpose of resolving problem savings
institutions, establishing a new thrift insurance fund, reorganizing the
regulatory structure applicable to savings institutions and imposing bank-like
standards on savings institutions. FDICIA also amended certain provisions of
the HOLA and the FDI Act. As a result of FIRREA, and FDICIA, the operations of
savings institutions, including the Bank, have been significantly affected.
The federal banking statutes, as amended by the FIRREA and FDICIA: (1) restrict
the use of brokered deposits by troubled savings institutions that are not well-
capitalized, (2) prohibit the acquisition of any corporate debt security that
is not rated in one of the four highest rating categories, (3) generally
restrict the aggregate amount of loans secured by non-residential real estate
property to 400% of capital, (4) permit savings and loan holding companies to
acquire up to 5% of the voting shares of non-subsidiary savings institutions or
savings and loan holding companies without prior approval, (5) permit bank
holding companies to acquire healthy savings institutions, and (6) require the
federal banking agencies to establish by regulation loan-to-value limitations
on real estate lending.
Loans to One Borrower. Under the HOLA, as amended, savings institutions
are generally subject to the national bank limits on loans to one borrower.
Savings institutions may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus. The Bank's limitation at September 30, 1995, is approximately
$6.0 million. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate. The OTS can impose more stringent limits if deemed
necessary to protect safety and soundness.
QTL Test. The HOLA, as amended, requires savings institutions to meet a
qualified thrift lender test ("QTL"). Effective July 1, 1991, savings
institutions were required to maintain 70% of their portfolio assets (defined
as all assets minus intangible assets, property used by the institution in
conducting its business and liquid assets equal to 10% of total assets) in
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) and continue to meet
such test for each subsequent two-year period.
The FDICIA liberalized the QTL test by reducing the qualified thrift
investment percentage that must be maintained from 70% to 65%, increasing the
amount of liquid assets excludable from portfolio assets, and expanding the
definition of qualified thrift investments. As of September 30, 1995, the Bank
met the QTL test.
Enforcement. Under the FDI Act, the OTS has primary federal enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. In
addition, regulators have significant flexibility to impose enforcement action
on an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements, or engages in unsafe or
unsound practices. Possible enforcement action includes the imposition of a
capital plan, capital directive, or cease and desist order, removal of
directors or officers and receivership, conservatorship or the termination of
deposit insurance. Under the FDI Act, the FDIC has the authority to recommend
to the Director of OTS enforcement action to be taken with respect to a
particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operation of the OTS. The general
assessment is paid on a semi-annual basis, is computed based upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the Bank's latest quarterly thrift financial report. The Bank's OTS assessment
for the year ended September 30, 1995 was $126,000.
The OTS Capital Requirements. The OTS capital regulations currently
require savings institutions to meet three capital standards: a 1.5% tangible
capital standard; a 3% leverage (core capital) ratio; and a 8.0% total risk
based capital ratio. Core capital is defined as common stockholder's equity
(including retained earnings), noncummulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than qualifying supervisory goodwill and
certain purchased mortgage servicing rights. The OTS regulations also require
that in meeting the leverage ratio, tangible and risk-based capital standard
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
In April, 1991, the OTS issued a proposal to amend the regulatory capital
regulations to establish a 3% leverage ratio (defined as the ratio of core
capital to adjusted total assets) for institutions in the strongest financial
and managerial condition, with a 1 MACRO Rating (the highest rating of the OTS
for savings institutions). For all other institutions, the minimum core
capital leverage ratio would be 3% plus at least an additional 100 to 200 basis
points. In determining the amount of additional capital under the proposal,
the OTS would assess both the quality of risk management systems and the level
of overall risk in each individual institution through the supervisory process
on a case-by-case basis. Based on this criteria, the Bank anticipates that the
OTS would require it to maintain a leverage ratio of 4-5%. Although the OTS
has not yet adopted this regulation in final, generally a savings association
that has a leverage capital ratio of less than 4.0% will be deemed to be
"undercapitalized" under the OTS prompt corrective action rule and
consequently, may be subject to various limitations on lending activities.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed
earlier under the 3% leverage standard. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-adjusted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core
capital.
At September 30, 1995, the Bank met each of its capital requirements. The
Bank's tangible and leverage ratios were both 5.87%. This exceeded applicable
requirements by 4.37% or $27.8 million (tangible), and 2.87% or $18.3 million
(leverage). The Bank's risk-based capital ratio was 10.52%, which exceeded
applicable requirements by 2.52% or $10.2 million.
Effective December 31, 1992, the OTS requires all savings banks to use
fair value for valuation of foreclosed assets including repossessed assets.
Previously, foreclosed assets could be carried at the lower of cost or net
realizable value. Under this rule, after foreclosure, foreclosed assets must
be carried at the lower of cost or fair value based on the assumption that such
assets are held for sale. Accordingly, the OTS removed the previous risk
weight assignment of 200 percent and assigned foreclosed assets a risk weight
of 100 percent.
The OTS has issued a rule which would set forth the methodology for
calculating an interest rate component that would be incorporated in the OTS
regulatory capital rule. The rule replaces an earlier proposal by the OTS to
calculate interest rate risk. Under the new rule, only savings associations
with "above normal" interest rate risk exposure (i.e., where an institution's
market value portfolio equity would decline in value by more than 2% of assets
in the event of a hypothetical 200-basis-point move in interest rates) would be
required to maintain additional capital. The additional capital that such an
institution would be required to maintain would be equal to one half the
difference between its measured interest rate risk and 2%, multiplied by the
market value of its assets. That dollar amount of capital would be in addition
to an institution's existing risk-based capital requirement. The OTS has
adopted a final form of this regulation, but has postponed the effectiveness.
Based on management's preliminary analysis, this regulation is not expected to
materially impact the Banks capital requirements.
The following table summarizes the Bank's current capital requirements at
September 30, 1995:
At September 30, 1995
Capital Actual Excess
Requirement % Capital % Capital %
(Dollars in thousands)
Tangible $ 9,563 1.5% $ 37,404 5.9% $ 27,841 4.4%
Leverage 19,126 3.0 37,404 5.9 18,278 2.9
Risk-based 32,273 8.0 42,448 10.5 10,175 2.5
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government securities, state or federal agency obligations,
shares of certain mutual funds and certain corporate debt securities and
commercial paper) equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4% to 10% depending upon economic conditions and the
savings flows of member institutions, and is currently 5%. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawals deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The liquidity of the Bank for September, 1995 was 6.13%, which
exceeds the applicable 5% liquidity requirement. Its short-term liquidity
ratio for September, 1995, was 3.36 %.
Insurance or Deposits Accounts. The Bank paid $1.2 million in federal
deposits insurance premiums to the FDIC for the year ended September 30, 1995.
For the semiannual assessment period beginning January 1, 1993, a risk-based
insurance system was implemented by the FDIC pursuant to the FDICIA. Under the
rule implementing the risk-based system, the FDIC assigns an institution to one
of three capital categories based on the institution's June 30, 1992, financial
information, consisting of 1) well capitalized, 2) adequately capitalized or 3)
undercapitalized. An institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds (which may include,
if applicable, information provided by the institution's state supervisor). An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the system, there are nine assessment
risk classifications (i.e., combinations of capital groups and supervisory
subgroups) to which differing assessment rates are applied. Assessment rates
range from .23% of deposits for an institution in the highest category (i.e.,
well-capitalized and "healthy") to .31% of deposits for an institution in the
lowest category (i.e., undercapitalized and "substantial supervisory concern").
The Bank's SAIF assessment rate is .26% of deposits.
The deposits of the Bank are insured by the FDIC primarily through the
Savings Association Insurance Fund ("SAIF") ($64.1 million of deposits at
September 30, 1995 were insured through the Bank Insurance Fund (the "BIF"),
the deposit insurance fund that insures most commercial bank deposits). Both
the SAIF and the BIF are statutorily required to be recapitalized to a level
equal to 1.25% of insured deposits. Members of the SAIF are currently paying
average deposit insurance premiums of between 24 and 25 basis points per $100
of insured deposits. While the BIF has reached the required reserve ratio, the
SAIF is not expected to be recapitalized until 2002 at the earliest.
On August 8, 1995, the FDIC established a new assessment rate schedule of
4 to 31 basis points for BIF members beginning on or about June 30, 1995. Under
the new assessment rate schedule, approximately 92% of BIF members will pay the
lowest assessment rate of 4 basis points. With respect to SAIF member
institutions, the FDIC determined to retain the existing assessment rate
schedule of 23 to 31 basis points per $100 of insured deposits. In announcing
the assessment reduction for BIF deposits, the FDIC noted that the premium
differential may have adverse consequences for SAIF members, including reduced
earnings and an impaired ability to raise funds in the capital markets.
Moreover, the FDIC has announced that for the six month period commencing
January 1, 1996, no insurance assessment will be levied with respect to an
estimated 90% of the banks that are members of BIF.
Legislation is pending in Congress to recapitalize the SAIF by a one-time
charge to SAIF insured institutions of approximately $.85 to $.90 for every
$100 of assessable deposits, and to eventually merge the SAIF with the BIF. If
the Bank were subject to a special assessment of $.85 for every $100 of
assessable deposits, the Bank would be required to pay approximately $4.3
million, or $2.7 million net of income taxes, based upon its deposits at
September 30, 1995.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by
the FDIC or the OTS. Management does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Limitation on Capital Distributions. The OTS imposes limitations upon all
capital distributions by savings institutions, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions based
primarily on an institution's capital level. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year up to the higher of (i) 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year, or (ii) 75% of its net income over the most
recent four quarter period. Any additional capital distributions would require
prior regulatory approval. As of September 30, 1994, the Bank was a Tier 1
Association. In the event the Bank's capital fell below its fully phased-in
requirement or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted or eliminated. In addition, the OTS could prohibit a proposed
capital distribution by any institution, which would otherwise be permitted by
the regulation, if the OTS determines that such distribution would constitute
an unsafe or unsound practice. Moreover, the FDICIA provides that, as a
general rule, a financial institution may not make a capital distribution if it
would be undercapitalized after making the distribution.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and its non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in the FRA and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with nonaffiliated
companies. In the absence of comparable transactions, such transactions may
occur only under terms and circumstances, including credit standards, that in
good faith would be offered to or would apply to nonaffiliated companies.
Notwithstanding Sections 23A and 23B, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4(c)8 of the Bank Holding Company Act
("BHC Act"). Further, no savings institution may purchase the securities of
any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors,
and 10% or greater shareholders, as well as entities such persons control, is
currently governed by Sections 22(g) and 22(h) of the FRA and Subpart A of
Regulation O promulgated by the Federal Reserve Board. Among other things,
these regulations require such loans to be made on terms and conditions that
are substantially similar to those offered to unaffiliated individuals, place
limits on the amount of loans, individually and in the aggregate, the Bank may
make to such persons based, in part, on the Bank's capital position, and
require certain approval procedures to be followed. Pursuant to amendments
made by the FDIC's loans to executive officers are further restricted in terms
of the amounts and types of loans that can be made. OTS regulations, with the
exception of minor variations, apply Regulation O to savings associations.
Community Reinvestment and Other Consumer Compliance Laws. Under the
Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a
savings institution has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA also
requires all institutions to make public disclosure of the CRA ratings. The
OTS also reviews the Bank's performance under other consumer compliance
regulations, in addition to the CRA. The consumer regulations include, among
others, the Equal Credit Opportunity Act, the OTS Nondiscrimination
Regulations, the Bank Secrecy Act, the Truth in Lending Act, the Electronic
Funds Transfer Act, and the Real Estate Settlement Procedures Act. The Bank
received an "outstanding" CRA rating based on its 1995 CRA examination.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-NY, is required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB-NY, whichever is greater. The Bank is in compliance
with this requirement, with an investment in FHLB-NY stock at September 30,
1995 of $3.7 million. FHLB advances must be secured by specified types of
collateral and may be obtained primarily for the purpose of providing funds for
residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the year ended September 30, 1995, dividends
from the FHLB-NY to the Bank amounted to $263,000. Should dividends be
reduced, or interest on future FHLB advances increased, the Bank's net interest
income might also be reduced. Further there can be no assurance that the
impact of the FIRREA on the FHLBs will not also cause a decrease in the value
of the FHLB-NY stock held by the Bank.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and checking accounts). The Federal Reserve Board regulations
generally require that reserves of 3% must be maintained against aggregate
transaction accounts of $52.0 million or less (subject to adjustment by the
Federal Reserve Board) and an initial reserve of $1.4 million plus 10% (subject
to adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $54.0 million. The first
$4.3 million or otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the OTS. Because required reserves
must be maintained in the form of either vault cash, a non-interest-bearing
account at a Federal Reserve Bank, or a pass-through account as defined by the
Federal Reserve Board, the effect of this reserve requirement is to reduce the
Bank's interest-earning assets. FHLB System members are also authorized to
borrow from the Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Holding Company Regulation
The Holding Company is a nondiversified savings and loan holding company
within the meaning of the HOLA, as amended. As such, the Company is registered
with the OTS and is subject to OTS regulations, examination supervision and
reporting requirements. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary savings and loan holding
company, or a nonsubsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
As a unitary savings and loan holding company, the Company is generally
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. Upon any
nonsupervisory acquisition by the Company of another savings association or
savings bank that meets the QTL test and is deemed to be a savings institution
by OTS, the Company would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would be
subject to extensive limitations on the types of business activities in which
it could engage. The HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) or the
BHC Act, subject to the prior approval of the OTS, and activities authorized by
OTS regulation for multiple holding companies as of March 5, 1987. Such
activities include mortgage banking, consumer finance, fiduciary activities,
securities brokerage and insurance agency.
The OTS is prohibited from approving any acquisitions that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
Although the conditions imposed upon acquisitions in those states which have
enacted such legislation vary, most such statutes are of the "regional
reciprocity" type which require both that the acquiring holding company be
located (as defined by the location of its subsidiary savings institutions) in
a state within a defined geographic region and that the state in which the
acquiring holding company is located have enacted reciprocal legislation
allowing savings institutions in the target state to purchase savings
institutions in the acquiror's home state on terms no more restrictive than
those imposed by the target state on the acquiror. Some states authorize
acquisition by out-of-state holding companies only in supervisory cases, and
certain states do not authorize interstate acquisitions under any
circumstances. OTS regulations do, however, permit federal savings
associations and banks to branch across state lines.
Federal law generally provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control" of a federally-insured savings institution without giving at least 60
days' written notice to the OTS and providing the OTS an opportunity to
disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined among
other things, that (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interests of
its depositors; or (iii) the competency, experience or integrity of the
acquiring person or the proposed management personnel indicates that it would
not be in the interest of the depositors or the public to permit the
acquisition of control of such person.
Taxation
Federal. First State files a calendar year consolidated federal
income tax return with its subsidiaries, and reports its income and expense
using the accrual method of accounting.
Savings institutions are generally taxed in the same manner as other
corporations. However, unlike other corporations, qualifying savings
institutions such as the Bank are allowed to establish a reserve for bad debts
and are permitted to deduct additions to that reserve for each tax year. For
purposes of computing the addition to the Bank's bad debt reserve, the loans
are separated into "qualifying real property loans" (in general, loans secured
by interests in improved real property) and all other loans ("nonqualifying
loans"). The deduction with respect to qualifying real property loans may be
determined using the most favorable of the following two methods: (i) a method
based on the institution's actual loss experience (the "experience method"), or
(ii) a method based on a specified percentage of the institution's taxable
income (the "percentage of taxable income method"). The addition to the
reserve for nonqualifying loans must be computed under the experience method.
The deduction for qualifying real property loans is then reduced by an amount
equal to all or part of the deduction for nonqualifying loans if the percentage
of taxable income method is used. The net effect of this special bad debt
deduction is that the maximum effective federal income tax rate on income,
computed without regard to actual bad debts and certain other factors, for
qualifying institutions using the percentage of taxable income method is 31.28%
for taxable years beginning on or before July 1, 1986, or beginning after June
30, 1987. The effective rate was 36.80% for taxable years beginning in the
period between those dates, such as the Bank's 1987 taxable year, because
"blended" maximum corporate income tax rates were in effect for that period.
The Bank used the experience method in calendar years 1993 and 1994, and
anticipates using the experience method in calendar year 1995.
The amount of the bad debt deduction that a savings institution may claim
with respect to additions to its reserve for bad debts is subject to certain
limitations. First , under the percentage of taxable income method the bad
debt deduction attributable to "qualifying real property loans" cannot exceed
the greater of (i) the amount deductible under the experience method or (ii)
the amount which, when added to the bad debt deduction for nonqualifying loans,
equals the amount by which 12% of the sum of the total deposits and the advance
payments by borrowers for taxes and insurance at the end of the taxable year
exceeds the sum of the surplus, undivided profits, and reserves at the
beginning of the taxable year. Second, the amount of the bad debt deduction
attributable to qualifying real property loans computed using the percentage of
taxable income method is permitted only to the extent that the institution's
reserve for losses on qualifying real property loans at the close of the
taxable year does not exceed 6% of such loans outstanding at such time. Third,
a savings institution that computes its bad debt deduction using the percentage
of taxable income method and files its federal income tax return as part of a
consolidated group, as the Bank does, is required to reduce proportionately its
bad debt deduction for losses attributable to activities of nonsavings
institution members of the consolidated group that are "functionally related"
to the savings institution member. (The savings institutions member is
permitted, however, to proportionately increase its bad debt deduction in
subsequent years to recover any such reduction to the extent the nonsavings
institution members realize income in future years from their "functionally
related" activities.) Fourth, the full deduction is available only if at
least 60% of the savings institution's assets fall within certain designated
categories. In addition, if the savings institution's percentage of these
assets falls below the 60% level, the institution will be required to restore
some or all of its bad debt reserve to taxable income.
As of September 30, 1995, the Bank's bad debt reserve for Federal income
tax purposes totaled approximately $10.0 million. To the extent that (i) the
Bank's reserve for losses on qualifying real property loans exceeds the amount
that would have been allowed under the experience method and (ii) the Bank
makes a distribution to the Holding Company, as its sole stockholder, that is
considered withdrawn from the reserve, included in pre-tax income will be the
amount actually distributed plus the amount necessary to pay the tax with
respect to the withdrawal. Dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for Federal income tax
purposes, however, will not be considered to result in withdrawals from the
Bank's bad debt reserves. Dividends in excess of the Bank's current and
accumulated earning and profits, distributions in redemption of stock and
distributions in partial or complete liquidation of the Bank will be considered
to result in withdrawals from the Bank's bad debt reserves for this purpose.
The FASB has issued Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes," ("FAS 109"), which supersedes Statement of
Financial Accounting Standards 96, "Accounting for Income Taxes" (FAS 96").
The Corporation adopted FAS 109 as of October 1, 1992. The Corporation
previously accounted for income taxes under Accounting Principles Board Opinion
No. 11 ("APB 11"), having elected not to adopt FAS 96 prior to its required
effective date. FAS 109 has changed the Corporation's method of accounting for
income taxes from the deferred method required under APB 11 to the asset and
liability method. Under the deferred method, annual income tax expense is
matched with pretax accounting income by providing deferred taxes at current
tax rates for temporary differences between the determination of net income and
financial reporting and tax purposes. The objective of the asset and liability
method is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Corporation's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled. The acquisition of Ocean on
October 21, 1994, warranted a reduction of the valuation allowance associated
with FAS 109.
State Taxation. The Bank is taxed under the New Jersey Savings Institution Tax
Act. This Act exempts the Bank from all other taxes imposed by the State for
State income tax purposes, and from all local taxation imposed by political
subdivisions. The Savings Institutions Tax is an excise tax upon the privilege
of doing business in the State of New Jersey at the rate of 3% per annum.
The Bank's Federal and State income tax returns have not been audited
during the past five years.
For information regarding federal and state taxes, see Note 10 of the
Notes of Consolidated Financial Statements.
Item 2 - Properties
The Bank conducts its business through 12 full-service offices located in
Essex, Monmouth, Morris, Ocean, and Sussex Counties, New Jersey. In addition
to its branch offices, the Bank owns and occupies a portion of the second floor
of the building as its corporate headquarters. The building also houses a full-
service branch office, a consumer loan department, and a commercial loan
department.
The Bank's 12 branch network is the result of mergers in 1977, 1982 and
1994, as well as the purchase of two branches in 1985 and the opening of two
new offices in 1987 and one in 1993 (an additional new office was opened in
October, 1995).
Personnel
At September 30, 1995, the Holding Company and subsidiaries had
approximately 142 employees, including approximately 38 part-time employees.
The Bank's employees are not represented by any collective bargaining group.
The Bank considers its employee relations to be excellent.
Item 3 - Legal Proceedings
At September 30, 1995, and for the year ended on that date, the Company
and the Bank were not involved in any pending legal proceedings, other than
routine legal proceedings occurring in the ordinary course of business which
are believed by management, with the advice of counsel, to be immaterial to the
business and financial condition of the Company and Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the fourth
quarter of the fiscal year ended September 30, 1995.
Part II
Item 5 - Market for Registrants Common Equity and Related Stockholder Matters
Stockholder Information
Executive Offices
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Annual Meeting
The annual meeting of First State Financial Services, Inc. will be held at
Mayfair Farms, 481 Eagle Rock Avenue, West Orange, New Jersey 07052, on
January 17, 1996 at 10:00 a.m. Eastern Time.
Market Information for Common Stock
The common stock is traded over-the-counter and is quoted on NASDAQ
National Market System under the symbol "FSFI." At December 1, 1995 there were
1,203 holders of record of First State's common stock, as reported on the
NASDAQ National Market System, as well as information regarding dividends
declared during such periods.
Fiscal 1995 High Low
Quarter ended September 30, 1995 $ 13.250 $ 12.125
Quarter ended June 30, 1995 12.250 9.250
Quarter ended March 31, 1995 9.500 6.750
Quarter ended December 31, 1994 8.750 6.625
Fiscal 1994 High Low
Quarter ended September 30, 1994 $ 8.750 $ 7.750
Quarter ended June 30, 1994 8.125 6.375
Quarter ended March 31, 1994 7.000 6.375
Quarter ended December 31, 1993 7.250 6.125
Stockholder Relations
Stockholders are encouraged to contact the Secretary with any questions or
comments about their investments. A copy of the Annual Report or Form 10-
K for the year ended September 1995, as filed with the Securities and
Exchange Commission, will be furnished without charge to stockholders as
of the record date upon written request to the Secretary.
Direct Inquiries to:
Marie G. Martino, Secretary
First State Financial Services, Inc.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
(201) 575-5800
Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Independent Auditors
KPMG Peat Marwick LLP
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Attorneys
Gaccione, Pomaco and Beck Luse Lehman Gorman Pomerenk & Schick
523 Union Avenue 5335 Wisconsin Avenue, N.W.
Belleville, New Jersey 07109 Washington, DC 20015
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may each provide for the payment of dividends.
Future declaration of cash dividends by First State will depend upon dividend
payments by the Bank to the Corporation, which is its primary source of income.
Under Office of Thrift Supervision ("OTS") regulations, if the Bank satisfies
all applicable capital requirements, the Bank is permitted to pay cash
dividends during a calendar year in an amount equal to 100% of its net income
to date during that calendar year plus 50% of the amount by which its capital
exceeds its capital requirements at the beginning of the year. The Bank is
required to give 30 days' prior notice to the OTS of the intention to pay a
dividend, and the OTS may prohibit the payment of the dividend.
Earnings allocated to bad debt reserves for losses and deducted for federal
income tax purposes are not available for dividends or other distributions with
respect to the Bank's capital stock without the payment of tax at the then
current income tax rate on approximately 150% of the amount so used, assuming a
34% corporate income tax rate.
At the time of conversion from mutual to stock form, a liquidation account was
established in an amount equal to the Bank's retained income at December 31,
1986. The liquidation account was established for the benefit of eligible
account holders who continue to maintain their accounts at First DeWitt after
conversion. The liquidation account will be reduced annually to the extent
that eligible account holders have reduced their eligible deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in a proportionate amount to the current adjusted eligible account
balances then held. The balance of the liquidation account at September 30,
1995 was $1,654,000 ($1,972,000 at September 30,1994).
Item 6 - Selected Financial Data
<TABLE>
<CAPTION>
As of and for the Year Ended September 30,
1995 1994 1993 1992 1991
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $ 637,020 $ 553,483 $ 476,370 $ 470,520 $ 467,487
Loans receivable:
Net mortgage loans (1) 441,455 374,412 312,578 299,597 300,403
Net consumer and commercial loans 87,412 72,002 64,042 57,551 53,761
Total loans receivable 528,867 446,414 376,620 357,148 354,164
Mortgage-backed securities 18,961 18,751 25,837 30,607 40,524
Total loans receivable and
mortgage-backed securities $ 547,828 $ 465,165 $ 402,457 $ 387,755 $ 394,688
Total investment securities and FHLB stock $ 36,403 $ 40,413 $ 28,331 $ 33,421 $ 10,417
Excess of cost over fair value of net assets
required 2,349 2,777 3,311 3,845 4,374
Deposits 567,710 479,364 432,012 428,402 428,852
Borrowed money 23,105 31,738 5,680 5,846 3,811
Retained income, substantially restricted 20,693 17,453 14,431 11,906 11,190
Total stockholder's equity 41,592 37,973 34,179 31,490 30,668
OPERATING DATA:
Interest income $ 44,349 $ 34,935 $ 34,624 $ 36,479 $ 41,644
Interest expense 21,765 13,448 15,401 20,474 29,269
Net interest income 22,584 21,487 19,223 16,005 12,375
Provision for loan losses 1,650 1,892 2,440 2,677 6,020
Net interest income (loss) after provision
for loan losses 20,934 19,595 16,783 13,328 6,355
Other income 6,368 4,150 4,205 3,881 3,448
Operating expenses 22,172 18,881 18,448 16,997 15,156
Income (loss) before income tax
expense (benefit) 5,130 4,864 2,540 212 (5,353)
Income tax expense (benefit) 1,132 1,363 15 (504) (1,610)
Extraordinary item - - - - 10
Net income (loss) $ 3,998 $ 3,501 $ 2,525 $ 716 $ (3,733)
Net income (loss) per share $ 1.01 $ 0.91 $ 0.65 $ .19 $ (0.97)
SELECTED OTHER DATA:
Return on average assets 0.67% 0.70% 0.53% 0.15% (0.77)%
Return on average equity 10.27 9.62 7.56 2.28 (11.88)
Average equity to average assets 6.56 7.27 6.99 6.70 6.52
Interest rate spread(2) 4.25 4.72 4.50 3.94 2.99
Net yield on average interest-earning assets(3) 4.18 4.73 4.46 3.82 2.86
Average interest-earning assets to
average interest-bearing liabilities 0.98x 1.01x 0.99x 0.98x 0.98x
Book value per share of common stock
outstanding $ 10.71 $ 9.89 $ 8.86 $ 8.17 $ 7.95
Dividends Paid per share of common stock
outstanding $ 0.21 $ 0.12 $ - $ - $ -
Dividend payout ratio 20.79% 13.19% 0.00% 0.00% 0.00%
Number of full service offices 12 12 12 11 11
(1)Includes construction and land development loans of $ 23 million, $19.7
million, $11.3 million, $19.1 million, and $15.4 million, at September 30,
1995, 1994, 1993, 1992, and 1991, respectively. Also includes mortgage loans
held for resale of $ 67.2 million,$3.1 million, $10.9 million, $10.2 million,
and $14.2 million at September 30, 1995, 1994, 1993, 1992, and 1991, respectively.
(2)Represents the average yield earned on interest-earning assets less the
average cost of interest-bearing liabilities.
(3)Represents net interest income as a percentage of average interest-earning
assets.
</TABLE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
MANAGEMENT'S DISCUSSION and ANALYSIS
Introduction
First State Financial Services, Inc. (First State) conducts its principal
business activity through First DeWitt Bank, (the Bank), a wholly-owned
subsidiary.
Highlights for the fiscal year ended September 30, 1995 include the following:
Record asset growth
Record profitability
Substantial stock price appreciation
Acquisition of a commercial bank
Increased quarterly cash dividend
Regulatory approval to open two new branches
First State Financial Services Inc., on October 21, 1994, issued
approximately 678,000 shares of common stock in exchange for all of the
outstanding common stock of Ocean Independent Bank. The business combination
was accounted for as a pooling of interests combination, and accordingly, the
consolidated balance sheet at September 30, 1994 and any balance sheet accounts
reported on herein were adjusted to include Ocean Independent Bank's accounts
at that date. Statements of income or any of their components reported herein
were also adjusted to include Ocean Independent's operations for the applicable
periods. Ocean Independent Bank's assets totaled $49.4 million at September
30, 1994.
On a consolidated basis, at September 30, 1995, First State had total
assets of $637.0 million. This represented a growth in assets of $83.5
million, or 15.1%, from September 30, 1994, a record one year increase bringing
First State's assets to an all-time high. The $83.5 million growth in assets
when coupled with the acquisition of Ocean Independent Bank's $41.4 million in
consolidated assets amounted to a very substantial $124.9 million increase in
assets. Total liabilities were $595.4 million and total stockholders' equity
amounted to $41.6 million at September 30, 1995. The merger of Ocean
Independent Bank added $3.6 million to stockholder's equity.
Net income for the year ended September 30, 1995 totaled $4.0 million, or
$1.01 per share, compared to a net income of $3.5 million for the year ended
September 30, 1994, or $.91 per share. The $4.0 million was a new record in
earnings for First State.
Net income is primarily dependent upon net interest income, which
represents the difference between interest income on interest earning assets
and the cost of interest bearing liabilities. Earnings could be affected by
interest rate fluctuations to the extent that interest bearing liabilities
mature or reprice more rapidly than interest earning assets. Such
asset/liability structure may result in lower net interest income during
periods of rising interest rates and may be beneficial in times of declining
interest rates. Interest rates began increasing in 1994 and continued to
increase through June 1995. The increasing interest rates contributed to a
lower interest rate spread in 1995. The net interest rate spread for fiscal
1995 was 4.25% compared to 4.72% for fiscal 1994. Net income, which is affected
by interest rate spread, is also affected by lack of income from nonperforming
assets, gains or losses on sales of loans and securities, provision for loan
losses, other income, operating expenses, and income taxes.
Both First State's and the Bank's capital positions remain strong. At
September 30, 1995, the Bank's risk-based capital of $42.4 million exceeded
regulatory requirements by $10.2 million. Core capital totaled $37.4 million
and was $18.3 million in excess of regulatory requirements. Tangible capital
of $37.4 million exceeded regulatory requirements by $27.8 million.
First State's stock price reached record highs in 1995. At September 30,
1995, the stock closed at $12.75 per share. This compares to a stock price of
$8.50 at September 30, 1994 and a $5.50 stock price in December, 1987 when
First State became a public corporation. On June 21, 1995, the Board of
Directors increased the regular quarterly cash dividend payment by 10%.
First DeWitt Bank continues to expand it franchise. On October 20, 1995,
the Bank had a very successful grand opening of a new branch office in Ocean
County, New Jersey. The Bank has also received regulatory approval to open a
branch office in Wall Township, New Jersey. It is anticipated that this office
will commence business in January, 1996. The two new offices will bring the
Bank's total number of offices in its "southern region" to six and the overall
branch office total to fourteen.
The discussion herein reflects the financial condition and results of
operations of First State and should be reviewed in conjunction with the
consolidated financial statements and related notes to consolidated financial
statements included in this report.
Financial Condition
Total assets of First State were $637.0 million at September 30, 1995.
This was a net increase of $83.5 million from September 30, 1994 and
represented a record one year growth in assets for First State. The principal
increases in assets were in net loans receivable of $82.5 million, an increase
in cash on hand and in banks of $6.8 million and an increase in investment
securities of $1.1 million. Net loans receivable consisted of first mortgage
loans of $441.5 million, consumer loans totaling $53.0 million, and commercial
loans totaling $34.4 million. Although mortgage loan originations slowed
somewhat industry wide because of a soft housing market, the Bank originated
$129.1 million in mortgage loans during the fiscal year. This compares with
loan originations of $137.5 million during fiscal 1994. The performance was
mainly attributable to the Bank's loan soliciting operations. The Bank offers
many attractive loan products, most of which permit interest rate reductions
for additional loan fees (points) paid at the loan closing. The Bank will
continue to structure loan products that are attractive to borrowers and which
effectively compete with mortgage banking companies and other lending
institutions. The other significant increases in assets were a $6.8 million
increase in cash on hand and in banks and a $1.1 million increase in investment
securities. The increase in cash on hand and in banks was mainly due to the
increase in volume of check clearances which included approximately $3.0
million of funds in Nationar Bank (Nationar) for funds 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 the
business and assets of Nationar for purposes of an orderly liquidation of their
affairs. First DeWitt has received $4.7 million from Nationar for check
clearances and believes that, as a preferred creditor, the remaining $3.0
million 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 $1.1 million increase in investment
securities was mainly attributable to the purchase of short term notes issued
by municipalities where the Bank operates branch offices.
The principal decreases in assets were in investment securities available
for sale of $5.8 million, in federal funds sold of $1.0 million, and a decrease
of $1.4 million in real estate owned, elaborated on below. The cash generated
from investment security sales, the reduction in federal funds sold, and real
estate owned disposals was mainly used to fund new loan originations.
Problem assets at September 30, 1995 totaled $30.5 million and consisted
of $18.5 million in nonaccrual loans, $8.6 million in real estate owned, and
$3.5 million in current restructured loans. Comparable figures at September 30,
1994 were total problem assets of $28.1 consisting of nonaccrual loans of $13.9
million, real estate owned of $10.0 million, and current restructured loans of
$4.2 million. The increase in problem assets was due to a $4.6 million
increase in nonaccrual loans. The increase was mainly due to three loans
approximating $4.0 million, and also to an increase in non-accruing loans on
one-to-four family houses. Subsequent to September 30, 1995, two of the three
loans which were part of the $4.0 million were brought current and substantial
payments toward principal were received on the third. Many banks recently have
been reporting increased delinquencies in loans on one-to-four family houses.
Nonaccruing loans on one-to-four family houses in the Bank's service area
totaled $5.8 million at September 30, 1995 compared to $3.8 million at
September 30, 1994. Management does not anticipate that the Bank will acquire
many of the properties through foreclosure, since the mortgaged properties, in
most cases, represent the borrowers' primary residences. Management
strengthened its early intervention collection procedures in an attempt to
reduce these delinquencies. It is the Bank's policy to work with and to
accommodate borrowers who are experiencing financial difficulties as much as
possible without jeopardizing the Bank's position. Management anticipates a
significant reduction of problem assets in fiscal 1996.
The allowance for loan losses at September 30, 1995 was $6.1 million or
32.9% of nonaccrual loans. The allowance for loan losses at September 30, 1994
was $6.4 million or 45.6% of nonaccrual loans. Provisions for loan losses
during fiscal 1995 totaled $1.7 million, recoveries were $72,000 and charges
against the reserve were $2.0 million. This compares with provisions for loan
losses of $1.9 million during fiscal 1994 (less a pooling adjustment of
$170,000), recoveries of $409,000 and charges against the reserve of $3.9
million. The Bank's Loan Review Committee analyzes the loan portfolio on a
quarterly basis for classification of problem and potential problem loans. The
analysis of classified loans considers such factors as the borrower's ability
to repay, value of underlying collateral, loan delinquency experience, level of
allowance for loan losses, and other matters which warrant consideration. The
Loan Review Committee also reviews the allocation of loss reserves to loans.
Management is constantly monitoring the loan portfolio and is
concentrating on workouts of the Bank's troubled 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.
Real estate owned totaled $8.6 million at September 30, 1995 compared to
$10.0 million at September 30, 1994. Included in the real estate owned
category are four properties carried at $7.2 million. Two of the properties
were sold subsequent to September 30, 1995. Real estate owned is carried on
the Bank's books at fair value less estimated costs to sell. Management
recognizes that future adjustments may be necessary if the real estate values
decline.
Total liabilities of First State were $595.4 million at September 30,
1995, reflecting a net increase of $79.9 million from September 30, 1994. The
principal changes were an increase in deposits of $88.3 million and a decrease
in borrowed money of $8.6 million. Certificate of deposit accounts increased
by $108.1 million during fiscal 1995. The Bank aggressively marketed
certificate of deposit accounts and also utilized short-term brokered
certificates of deposit as a source of funds. The brokered certificates of
deposit were substantially repaid subsequent to September 30, 1995. The Bank
also continued to concentrate its efforts on attracting checking account
depositors. As a result of these efforts, commercial checking and NOW checking
accounts increased $8.3 million, or 13.5%, during the year. Checking accounts
generate service fees and are not generally interest rate sensitive. The Bank
intends to concentrate on attracting checking account business and on
developing other banking relationships with depositors. The new deposit funds
were used to fund loans and also to repay borrowings.
The deposits of the Bank are insured by the FDIC primarily through the
Savings Association Insurance Fund ("SAIF") ($64.1 million of deposits at
September 30, 1995 were insured through the Bank Insurance Fund (the "BIF"),
the deposit insurance fund that insures most commercial bank deposits). Both
the SAIF and the BIF are statutorily required to be recapitalized to a level
equal to 1.25% of insured deposits. Members of the SAIF are currently paying
average deposit insurance premiums of between 24 and 25 basis points per $100
of insured deposits. While the BIF has reached the required reserve ratio, the
SAIF is not expected to be recapitalized until 2002 at the earliest.
On August 8, 1995, the FDIC established a new assessment rate schedule of
4 to 31 basis points for BIF members beginning on or about June 30, 1995.
Under the new assessment rate schedule, approximately 92% of BIF members will
pay the lowest assessment rate of 4 basis points. With respect to SAIF member
institutions, the FDIC determined to retain the existing assessment rate
schedule of 23 to 31 basis points per $100 of insured deposits. In announcing
the assessment reduction for BIF deposits, the FDIC noted that the premium
differential may have adverse consequences for SAIF members, including reduced
earnings and an impaired ability to raise funds in the capital markets.
Moreover, the FDIC has announced that for the six month period commencing
January 1, 1996, no insurance assessment will be levied with respect to an
estimated 90% of the banks that are members of BIF.
Legislation is pending in Congress to recapitalize the SAIF by a one-time
charge to SAIF insured institutions of approximately $.85 to $.90 for every
$100 of assessable deposits, and to eventually merge the SAIF with the BIF. If
the Bank were subject to a special assessment of $.85 for every $100 of
assessable deposits, the Bank would be required to pay approximately $4.3
million, or $2.7 million net of income taxes, based upon its deposits at
September 30, 1995.
First State's stockholders' equity increased $3.6 million during the year
bringing total equity to $41.6 million at September 30, 1995. The net increase
was attributable to earnings for the year of $4.0 million, an increase of
$190,000 by the issuance of additional shares of common stock, an increase of
$189,000 due to the change in net unrealized loss on securities classified as
available for sale, and a decrease of $758,000 due to the payment of
dividends. Future declaration of cash dividends by First State will depend
upon dividend payments by the Bank to First State, which is its primary source
of income and which is subject to regulatory restrictions. For further
information regarding dividends, see Note 16 to the Consolidated Financial
Statements. The Bank maintains a strong capital position and is categorized as
"well capitalized" under the Federal Deposit Insurance Corporation Improvement
Act of 1991 definitions.
RESULTS OF OPERATIONS
A comparison of years ended September 30, 1995 and September 30, 1994 is
discussed below.
General
First State Financial Services, Inc. recorded net income of $4.0 million
for the year ended September 30, 1995. This compares to net income of $3.5
million for the year ended September 30, 1994 and represents a 14.2% increase
over 1994. The improved performance in 1995 is primarily attributable to
increases in net interest income and loan fees and other loan charges.
Interest Income
Interest income totaled $44.3 million reflecting an increase of $9.4
million during 1995. The increase in the Bank's interest income in 1995 was
mainly attributable to the increase in the size of the Bank's loan portfolios
and also to the increased average interest yield of the portfolios. The
average balance of the loan portfolios was $486.6 million in 1995 compared to
$391.7 in 1994. The average yield on the loan portfolios was 8.40% in 1995
compared to 7.94% in 1994. At September 30, 1995, the loan portfolios
consisted of mortgage loans of $441.5 million (which includes $228.5 million in
adjustable rate mortgages), consumer loans of $53.0 million, and commercial
loans of $34.4 million. The Bank utilizes the services of loan solicitors for
mortgage loan production. The Bank has aggressively marketed adjustable rate
loans because of their interest rate sensitivity in a rising interest rate
environment. The Bank intends to continue its emphasis on attracting
adjustable rate loans. Long-term, fixed-rate mortgage loans will be originated
with the intent, in most cases, of selling them. The Bank will also continue
its efforts to attract consumer and commercial loans by structuring products
attractive to borrowers and effectively marketing the products. If nonaccrual
loans had been current in accordance with their original terms, total interest
income would have been increased by approximately $1.5 million in 1995 and
approximately $899,000 in 1994. The Bank invests its funds primarily in loans.
It will invest in mortgage-backed or other securities when loan demand is slow
or when security investments are a better alternative. The average yield on
all interest-earning assets was 8.21% in 1995 compared to 7.70% in 1994.
Interest Expense
Interest expense increased $8.3 million to $21.8 million during 1995. The
increase was mainly attributable to increased deposits and to higher interest
rates paid on deposits. The average balance of deposits in 1995 was $532.1
million compared to $444.6 million in 1994. The average cost of deposits in
1995 was 3.88% compared to 2.94% in 1994. General market interest rates began
to trend upward in 1994 and continued increasing through June, 1995. Interest
rates began to trend downward after that date and should have a lowering effect
on the interest rates paid on deposits going forward. The Bank will continue
to concentrate its efforts to attract checking accounts, money market demand
accounts, and NOW accounts. Accounts of this type are generally less interest
rate sensitive than certificates of deposits and other savings deposits. In
addition to providing opportunities to generate service fees, checking accounts
present opportunities to develop solid core depositor relationships. At
September 30, 1995, the Bank had $90.9 million in commercial checking, NOW, and
money market checking accounts. This compares to $83.8 million in similar
accounts at September 30, 1994. Interest expense on borrowings increased
$750,000 in 1995 and was mainly due to increased borrowings during the year.
Average borrowings were $18.0 million during 1995 compared to $7.0 million in
1994. The average interest rate on all interest-bearing liabilities was 3.96%
for 1995 compared to 2.98% for 1994. Rising interest rates will also increase
the cost of borrowing going forward.
Net Interest Income
Net interest income, which represents the difference between total
interest earned on assets and total interest paid on deposits and borrowings
supporting those assets, increased $1.1 million to $22.6 million in 1995 from
$21.5 million in 1994. The components of net interest income are discussed
above in more detail. The average balance of interest-earning assets was
$540.7 million, yielding 8.21% in 1995, compared to $454.0, yielding 7.70% in
1994. The average balance of interest-bearing liabilities was $550.2 million in
1995 and cost 3.96%, compared to $451.7 million costing 2.98% in 1994.
The following table sets forth, for the periods indicated, information
regarding: (i) First State's average balance sheet; (ii) the dollar amounts of
income from interest-earning assets and the resulting average yields; (iii) the
total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs; (iv) net interest income; (v) interest rate
spread; (vi) net yield earned on interest-earning assets; and (vii) the ratio
of total interest-earning assets to total interest-bearing liabilities.
Average balances were calculated on a daily basis (except for the balance
adjustments due to Ocean in 1994 and 1993, which were annualized).
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (1) $ 486,641 $ 40,876 8.40% $ 391,701 $ 31,102 7.94% $ 370,498 $ 30,504 8.23%
Mortgage-Backed Securities 17,807 1,238 6.95 21,996 1,587 7.21 26,283 2,160 8.22
Investment securities 23,216 1,387 5.97 13,220 790 5.98 15,316 708 4.62
Investments available for sale 8,588 525 6.11 20,487 1,104 5.39 11,569 794 6.86
Federal Funds 1,010 67 6.63 3,516 79 2.25 3,492 137 3.92
Investments required by law 3,393 256 7.54 3,097 273 8.81 3,419 321 9.39
Total interest-earning assets 540,655 44,349 8.21 454,017 34,935 7.70 430,577 34,624 8.04
Non-interest-earning assets 52,448 44,294 47,077
Total Assets $ 593,103 $ 498,311 $ 477,654
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities:
NOW and money mkt deposits 86,220 1,742 2.02 75,614 1,450 1.92 62,782 1,638 2.61
Passbook accounts 150,938 3,727 2.47 173,227 4,398 2.54 160,596 5,080 3.16
Certificate accounts 294,987 15,185 5.15 195,777 7,239 3.70 204,761 8,470 4.14
Borrowed Money 18,028 1,111 6.16 7,048 361 5.12 6,620 213 3.22
Total interest-bearing liabilities $ 550,173 21,765 3.96 $ 451,666 13,448 2.98 $ 434,759 15,401 3.54
Non-interest bearing liabilities 4,013 10,259 9,485
554,186 461,925 444,244
Stockholders' equity 38,917 36,386 33,410
Total liabilities and
stockholders' equity $ 593,103 $ 498,311 $ 477,654
Net interest income,
interest rate spread $ 22,584 4.25% $ 21,487 4.72% $ 19,223 4.50%
Net interest-earning assets
(liabilities),net yield on
interest-earning assets $ (9,518) 4.18% $ 2,351 4.73% $ (4,182) 4.46%
Ratio of interest-earning assets to
interest-bearing liabilities .98x 1.01x .99x
(1) Includes non-accrual loans
Provision for Loan Losses
</TABLE>
Provisions for loan losses totaled $1.7 million during 1995 and $1.9
million in 1994. The related allowance for loan losses totaled $6.1 million at
September 30, 1995. This compares to a $6.4 million allowance for loan losses
at September 30, 1994. Substantially all of the nonaccrual loans are secured by
first mortgage liens on real property. See "Financial Condition" section for
information regarding factors which influence management's judgment in
determining the amount of additions to the loan loss allowance.
Although management considers the allowance for loan losses to be
adequate, management recognizes that additional problems could develop and lead
to additional loss provisions and asset write-downs.
Other Income
Total other income increased $2.2 million to $6.4 million in 1995.
Increased income from loan fees and other loan charges of $2.1 million
substantially accounted for the increase. The increase was due to the increase
in mortgage activity discussed earlier and also from the Bank's credit card
programs. The Bank expects to continue to expand it's activities in these
areas. Service charges on deposit accounts increased $198,000 in 1995.
Management continued to make a concerted effort to expand the Bank's checking
account business in 1995 and, as mentioned earlier, increased those accounts by
approximately $7.1 million in 1995. Management intends to continue its efforts
in acquiring checking accounts and to increase other branch service fee income
through the marketing of its broad range of banking services. The net gain on
sales of loans decreased $386,000 and was due to decreased sales activity.
Loans sold in 1995 totaled $6.9 million compared to $26.4 million in 1994. The
net loss on sale of investment securities in 1995 of $125,000 was due to the
sale of securities carried on Ocean Independent Bank's books as available-for-
sale at the time of merger. The increase in other income was mainly due to the
increase in the cash surrender value of life insurance policies covering the
Bank's senior officers.
Operating Expenses
Operating expenses increased $3.3 million to $22.2 million in 1995. The
principal increase was in loan expenses of $3.2 million. The principal decrease
was in compensation and employee benefits of $286,000. The decrease, as
anticipated, was mainly due to savings attained by consolidating Ocean
Independent Bank's operations into First DeWitt's operations. Medical insurance
expense was also reduced by switching to a managed care program. The increase
in loan expenses was partially due to mortgage lending but primarily due to
credit card activities. The expenses incurred in connection with the credit
card programs were more than offset by interest income and fee income generated
from the programs. The types of other expenses together with a comparison of
the prior two years are shown in Note 9 to the Consolidated Financial
Statements.
Problem asset expenses, inclusive of real estate writedowns totaled $1.6
million in 1995 compared to $1.5 million in 1994. These expenses can be
expected to be reduced with a decreased level of problem assets. Management is
constantly pursuing various avenues of problem asset disposal.
Income Tax Expense
Income tax expense of $1.1 million incurred in 1995 and income tax expense
of $1.4 million incurred in 1994 was due to the generation of taxable income.
Taxable income was reduced because of allowable deductions for increases in
specific loan and REO reserves and charge-offs. In addition, First State
adopted the Statement of Financial Accounting Standards 109 "Accounting for
Income Taxes" ("FAS 109"), effective October 1, 1992. FAS 109 had the effect
of significantly reducing income tax expense for the year ended September 30,
1993, and affected the 1994 period to a much lesser extent. The acquisition of
Ocean on October 21, 1994, warranted a reduction of the valuation allowance
associated with FAS 109. This reduction of the valuation allowance had the
effect of reducing income tax expense for First State in 1995. See Note 10 to
the Consolidated Financial Statements for additional discussion of income
taxes.
RESULTS OF OPERATIONS
Comparison of years ended September 30, 1994 and September 30, 1993
General
First State Financial Services, Inc. recorded net income of $3.5 million
for the year ended September 30, 1994. This compares to net income of $2.5
million for the year ended September 30, 1993 and represents a 38.7% increase
over 1993. The improved performance in 1994 is primarily attributable to an
increase in net interest income and to reductions in problem asset related
expenses including write-downs and loss provisions. Income tax expense of $1.4
million recorded in fiscal 1994 was substantially greater than the $15,000
income tax expense recorded in fiscal 1993. The increase in 1994 was due to the
1993 implementation of FAS 109.
Interest Income
Interest income totaled $34.9 million reflecting an increase of $311,000
during 1994. The decline in general market interest rates which continued
throughout 1993 reversed in 1994 and interest rates began to rise. However,
the increase in the Bank's interest income in 1994 was mainly attributable to
the increase in the size of the Bank's loan and investment security portfolios.
The loan portfolios increased by $69.8 million and the investment security
portfolio increased by $15.6 million during 1994. At September 30, 1994, the
loan portfolios consisted of mortgage loans of $371.3 million, consumer loans
of $41.7 million, and commercial loans of $30.3 million (in addition to
mortgage loans held for resale of $3.1 million). Loan origination operations
were expanded in 1994 by utilizing the services of four additional loan
solicitors. The Bank has aggressively marketed adjustable rate loans because
of their interest rate sensitivity in a rising interest rate environment. The
Bank intends to continue its emphasis on attracting adjustable rate loans.
Long-term, fixed-rate mortgage loans will be originated with the intent, in
most cases, of selling them. The Bank will also continue its efforts to
attract consumer and commercial loans by structuring products attractive to
borrowers and effectively marketing the products. The increase in the
investment security portfolio of $15.6 million was mainly due to municipal
security and governmental agency security purchases. The municipal securities
are income tax exempt. Interest on mortgage-backed securities decreased
$573,000 during 1994. This was mainly due to principal repayments of $7.0
million. The cash flow from mortgage-backed securities repayments was used to
fund loan originations and/or investment security purchases. In 1994, the loan
portfolios yielded 7.94%, investment securities yielded 5.98%, and the mortgage-
backed securities portfolio yielded 7.21%, compared to 8.23%, 4.62%, and 8.22%,
respectively in 1993. If nonaccrual loans had been current in accordance with
their original terms, total interest income would have been increased by
approximately $899,000 in 1994 and approximately $1.4 million in 1993. The
average yield on all interest-earning assets was 7.70% in 1994 compared to
8.04% in 1993.
Interest Expense
Interest expense decreased $2.0 million to $13.4 million during 1994. The
decreases were mainly attributable to lower interest rates paid on deposits.
The average cost of deposits in 1994 was 2.94% compared to 3.55% in 1993.
General market interest rates began to trend upward in 1994 and will have a
greater effect on the rates paid on deposits going forward. The Bank will
continue to concentrate its efforts to attract checking accounts, money market
demand accounts, and NOW accounts. Accounts of this type are generally less
interest rate sensitive than certificates of deposits and other type savings
deposits. In addition to providing opportunities to generate service fees,
checking accounts present opportunities to develop solid core depositor
relationships. At September 30, 1994 the Bank had $83.8 million in commercial
checking, NOW, and money market checking accounts. Interest expense on
borrowings increased $148,000 in 1994 and was due to both increased cost and
increased borrowings during the year. Rising interest rates will also increase
the cost of borrowing going forward. The average interest rate on all interest-
bearing liabilities was 2.98% for 1994 compared to 3.54% for 1993.
Net Interest Income
Net interest income, which represents the difference between total
interest earned on assets and total interest paid on deposits and borrowings
supporting those assets, increased $2.3 million to $21.5 million in 1994 from
$19.2 million in 1993. Although the increase in net interest income is mainly
due to lower interest rates paid on deposits, it is noteworthy that the average
balance of total interest-earning assets increased $23.4 million while the
average balance of total interest-bearing liabilities increased only $16.9
million in 1994. The components of net interest income are discussed above in
more detail. The average balance of interest-earning assets was $454.0
million, yielding 7.70% in 1994, compared to $430.6, yielding 8.04% in 1993.
The average balance of interest-bearing liabilities was $451.7 million in 1994
and cost 2.98% compared to $434.8 million costing 3.54% in 1993. The Bank's
net interest spread increased to 4.72% at September 30, 1994 from 4.50% at
September 30, 1993.
Provision for Loan Losses
Provisions for loan losses totaled $1.9 million during 1994 compared to
$2.4 million in 1993. The related allowance for loan losses totaled $6.4
million and was 45.6% of nonaccrual loans at September 30, 1994. This
compares to an $8.1 million allowance for loan losses at September 30, 1993
which was 41.1% of nonaccrual loans. Substantially all of the nonaccrual loans
are secured by first mortgage liens on real property. See "Financial
Condition" section for information regarding factors which influence
management's judgment in determining the amount of additions to the loan loss
allowance.
Although management considers the allowance for loan losses to be
adequate, management recognizes that additional problems could develop and lead
to additional loss provisions and asset write-downs.
Other Income
Total other income decreased $55,000 in 1994. A decrease in net gain on
sales of loans, due to decreased sales activity, accounted for $361,000.
Increases in service charges on deposits accounts of $188,000, net gain on
sales of investments of $77,000 and loan fees and other loan charges of $47,000
offset this decrease. Management made a concerted effort of expanding the
Bank's checking account business and increased the average balances of those
accounts by approximately $12.8 million. Management intends to continue its
efforts in acquiring checking accounts and to increase other branch service fee
income through the marketing of its broad range of banking services. The
increase in loan fees was due to the increase in mortgage activity and fees
generated from the credit card programs.
Operating Expenses
Operating expenses increased $433,000 to $18.9 million in 1994. The
increase is attributable to the increases in loan expense of $1.2 million,
compensation and employee benefits of $661,000, data processing of $198,000 and
occupancy expense of $158,000. The decreases in operating expenses were $1.6
million in problem asset expense and $191,000 in other expenses. The $1.6
million decrease in problem asset expenses and real estate owned write-downs
exceeded the increases in other expense categories. The increase in loan
expenses was partially due to mortgage lending but primarily due to credit card
activities. The expenses incurred in connection with the credit card programs
were more than offset by interest income and fee income generated from the
programs. The increase in compensation and employee benefits was primarily
attributable to compensation increases of approximately $366,000, increased
pension expense of $193,000, and increased medical insurance costs of $82,000.
The increase in compensation is mainly due to an average merit salary increase
of 5%, a bonus equal to one week's salary paid to all employees, a full years
expenses relating to an experienced commercial lender and three other loan
department personnel employed in 1993, and benefit related expenses of four new
loan solicitors engaged in 1994. The increase in data processing is due to the
servicing costs associated with the increased growth of the loan and deposit
portfolios. The increased occupancy expenses were mainly due to heating and
snow removal expenses incurred during the unusually severe winter months. They
also include a full years operations of our Englishtown branch office opened in
August, 1993. The types of other expenses together with a comparison of the
prior two years are shown in Note (9 ) to the Consolidated Financial
Statements.
Problem asset expenses decreased substantially in 1994. They totaled $1.5
million in 1994 compared to $3.1 million in 1993. These expenses can be
expected to be reduced with a decreased level of problem assets. Problem
assets were decreased by $11.4 million in 1994. Management is constantly
pursuing various avenues of problem asset disposal.
Provision for writedowns of real estate owned totaled $700,000 in 1994
compared to $1.1 million during 1993. Management determined that additional
write-downs of $700,000 of real estate owned assets were necessary based on
fair market value analyses performed throughout the year.
Income Tax Expense
Income tax expense of $1.4 million incurred in 1994 and income tax expense
of $15,000 incurred in 1993 was due to the generation of taxable income.
Taxable income was reduced because of allowable deductions for increases in
specific loan and REO reserves and charge-offs, however, the effects were far
greater in 1993. In addition, First State adopted the Statement of Financial
Accounting Standards 109 "Accounting for Income Taxes ("FAS 109"), effective
October 1, 1992. FAS 109 had the effect of significantly reducing income tax
expense for the year ended September 30, 1993, and effected the comparable 1994
period to a much lesser extent. First State estimated the benefit remaining
from FAS 109 as of September 30, 1993, and used a blended rate of income tax
expense for fiscal 1994. This blended rate is slightly less than the expected
rate of tax on pretax income. See Note (1) and Note (10) to the Consolidated
Financial Statements for additional discussion of income taxes.
Item 8 - Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First State Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of First
State Financial Services, Inc. and subsidiaries as of September 30, 1995 and
1994, the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period
ended September 30, 1995. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
State Financial Services,Inc. and subsidiaries at September 30, 1995 and 1994
and the results of their operations, and their cash flows for each of the
years in the three-year period ended September 30, 1995, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 6, 1995
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 11,792 $ 5,018
Federal funds sold - 1,000
Investment securities available for sale (note 3) 11,799 17,639
Investment securities, market value of $20,657 and
$18,633 at September 30, 1995 and 1994 (note 3) 20,889 19,769
Stock in FHLB of New York, at cost 3,715 3,005
Loans receivable, net (note 4) 461,648 443,319
Mortgage loans held for resale, market value of
$67,642 and $3,098 at September 30, 1995 and 1994 67,219 3,095
Mortgage-backed securities, market value of $19,002
and $18,280 at September 30, 1995 and 1994 (notes 3 and 6) 18,961 18,751
Accrued interest receivable (note 8) 4,046 3,111
Office properties and equipment, net (note 7) 10,523 10,318
Real estate owned 8,564 10,004
Cost in excess of fair value of net assets acquired 2,349 2,777
Other assets 15,515 15,677
$ 637,020 $ 553,483
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 5) $ 567,710 $ 479,364
Borrowed money (note 6) 23,105 31,738
Advance payments by borrowers for taxes and insurance 3,253 2,788
Accrued expenses and other liabilities 1,360 1,620
Total liabilities 595,428 515,510
Stockholders' Equity (note 14):
Preferred stock, $.01 par value,
2 million shares authorized; none issued - -
Common stock, $.01 par value, 8 million shares
authorized; 3,883,765 issued, 3,874,405 outstanding
in 1995 and 3,837,623 issued and outstanding in 1994 39 38
Additional paid-in capital 20,949 20,760
Net unrealized loss on securities available for sale (89) (278)
Retained income, substantially restricted
(notes 10 and 16) 20,693 17,453
Total stockholders' equity 41,592 37,973
Commitments (note 12)
$ 637,020 $ 553,483
See accompanying notes to the consolidated financial statements
</TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
Year Ended September 30,
1995 1994 1993
Interest income:
Interest on mortgage loans (note 4) $ 32,738 $ 25,217 $ 24,660
Interest on consumer and commercial loans 8,138 5,885 5,844
Interest on mortgage-backed securities 1,238 1,587 2,160
Interest on investments available for sale 525 1,104 794
Interest on investment securities 1,710 1,142 1,166
Total interest income 44,349 34,935 34,624
Interest expense:
Interest on deposits (note 5) 20,654 13,087 15,188
Interest on borrowed money 1,111 361 213
Total interest expense 21,765 13,448 15,401
Net interest income 22,584 21,487 19,223
Provision for loan losses (note 4) 1,650 1,892 2,440
Net interest income after
provision for loan losses 20,934 19,595 16,783
Other income:
Loan fees and other loan charges 3,725 1,589 1,542
Service charges on deposit accounts 1,784 1,586 1,398
Net gain on sales of loans 88 474 835
Net gain (loss) on sales of investments (125) 82 5
Other 896 419 425
Total other income 6,368 4,150 4,205
Operating expenses:
Compensation and employee benefits (note 11) 7,362 7,648 6,987
Premises and occupancy expense, net 2,007 2,046 1,888
Amortization of cost of intangible assets 427 536 534
Loan expenses 4,491 1,254 96
Data processing 1,100 1,036 838
Advertising and promotion 812 724 726
Federal insurance premiums 1,234 1,097 1,027
Problem asset expenses, inclusive of
real estate owned writedowns 1,615 1,456 3,077
Other expenses (note 9) 3,124 3,084 3,275
Total operating expenses 22,172 18,881 18,448
Income before income tax expense 5,130 4,864 2,540
Income tax expense (note 10) 1,132 1,363 15
Net income $ 3,998 $ 3,501 $ 2,525
Net income per share $ 1.01 $ 0.91 $ 0.65
See accompanying notes to consolidated financial statements.
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<CAPTION>
Net Unrealized Common Stock Acquired By
Retained Loss on Employees
Additional Income Securities Stock Management
Common Paid-In Substantially Available Ownership Recognition
Stock Capital Restricted for Sale Plan Plan Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992 $ 38 $ 20,869 $ 11,906 $ - $(1,218) $ (105) $ 31,490
Distribution of Management Recognition
Plan Stock - 19,049 shares 105 105
Distributions of Employee Stock
Ownership Plan Stock - 10,725 shares 59 59
Net income for year ended
September 30, 1993 2,525 2,525
Balance at September 30, 1993 $ 38 $ 20,869 $ 14,431 - $(1,159) $ - $ 34,179
Distributions of Employee Stock
Ownership Plan Stock - 210,798 shares 1,159 1,159
Cash dividends declared and paid (476) (476)
Change in net unrealized loss on securities
classified as available for sale (278) (278)
Net income for the year 3,501 3,501
Stock cancellation upon Ocean merger (109) (109)
Adjustment for the pooling of a company
with a different year end (3) (3)
Balance at September 30, 1994 $ 38 $ 20,760 $ 17,453 $ (278) $ - $ - $ 37,973
Cash dividends declared and paid (758) (758)
Issuance of common stock under stock
option plans (note 14) -46,143 shares 1 189 190
Change in net unrealized loss on securities
classified as available for sale 189 189
Net income for the year 3,998 3,998
Balance at September 30, 1995 $ 39 $ 20,949 $ 20,693 $ (89) $ - $ - $ 41,592
See accompanying notes to the consolidated financial statements
</TABLE>
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(In thousands, except per share amounts)
<CAPTION>
Year ended September 30,
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,998 $ 3,501 $ 2,525
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangible assets 428 534 534
Depreciation 962 1,087 887
Net amortization and accretion of loan fees
and discounts (376) (382) (231)
Net amortization and accretion of investment
premium and discount (96) (733) 98
Net amortization and accretion of MBS
premium and discount 58 (102) (19)
(Increase) decrease in interest receivable (935) (598) 541
Proceeds from loan sales 7,012 26,864 66,445
Origination of loans held for resale (10,278) (7,962) (64,589)
Net gain on sale of real estate owned (19) - (103)
Net gain on sale of loans (88) (474) (835)
Net loss (gain) on sale of investments 125 (82) (5)
Gain on sale of fixed assets - - (4)
Provisions for losses on loans 1,650 1,892 2,440
Provision for writedowns of real estate owned 900 700 1,125
Decrease (increase) in other assets 162 (11,202) (1,974)
(Decrease) increase in other liabilities (260) 908 275
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,243 13,951 7,110
INVESTING ACTIVITIES
Net increase in loans, receivable (82,753) (91,881) (23,972)
Mortgage loans purchased (292) - (2,172)
Purchase of mortgage-backed securities (5,809) (5,048) (5,920)
Proceeds from sales of mortgage-backed securities 1,630 5,207 --
Principal payments on mortgage-backed securities 4,065 7,029 10,709
Proceeds from dispositions of real estate owned 3,231 6,935 6,069
Decrease in investment in and loans to joint
ventures, net - - 73
Office properties and equipment expenditures (1,167) (669) (705)
Purchase of investment securities (8,297) (14,901) (14,507)
Purchase of investment securities available
for sale (12,934) (1,427) -
Proceeds from sale of investment securities
available for sale 16,538 4,704 -
Proceeds from sale of investment securities - - 507
Proceeds from sale of office properties and equipment - - 9
(Purchase) redemption of Federal Home Loan Bank Stock (710) 414 -
Proceeds from maturities of investment securities 9,419 - 18,553
NET CASH USED BY INVESTING ACTIVITIES (77,079) (89,637) (11,356)
FINANCING ACTIVITIES
Net increase in deposits 88,346 47,352 3,610
Dividends paid on common stock (758) (476) -
Principal repayments of borrowings (13,633) (1,176) (1,751)
Additional borrowings 5,000 27,234 1,585
Net increase (decrease) in advance payments by
borrowers for taxes and insurance 465 160 (394)
Common stock issued 190 - -
Adjustment for the pooling of a company with a
different year-end - (173) -
NET CASH PROVIDED BY FINANCING ACTIVITIES 79,610 72,921 3,050
Increase (decrease) in cash and cash equivalents 5,774 (2,765) (1,196)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,018 8,783 9,979
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,792 $ 6,018 $ 8,783
CASH PAID DURING THE YEAR FOR:
Interest $ 21,467 $ 13,346 $ 14,581
Income taxes $ 2,213 $ 1,235 $ 1,005
NON-CASH TRANSFERS:
Loans classified as Real Estate Owned $ 2,672 $ 2,319 $ 3,443
Transfer of investment securities to investment
securities available for sale $ 2,300 - $ 21,141
Reclassification of Loans, Rec. to Mortgage
loans held for resale $ 60,770 - -
Cancellation of common shares in conjunction
with Ocean merger - $ 109 -
Release of ESOP stock - $ 1,159 $ 59
Release of Management Recognition Plan stock - - $ 105
See accompanying notes to consolidated financial statements.
</TABLE>
(1) Summary of Significant Accounting Policies
The following is a description of the more significant accounting policies used
in preparation of the accompanying consolidated financial statements.
Principles of Consolidation
The consolidated financial statements are comprised of the accounts of First
State Financial Services, Inc. (First State and/or the Corporation), its wholly-
owned subsidiaries, First DeWitt Bank, (First DeWitt or the Bank), and First
State Investment Services, Inc. (FSIS); and First DeWitt's wholly-owned
subsidiaries, Cedar Grove Service Corporation (CGSC), Ridge (Caldwell)
Associates (Ridge) and Southport (Wall) Associates (Southport). All
intercompany accounts and transactions have been eliminated in consolidation.
Business
First State conducts its principal business activity through First DeWitt Bank.
First DeWitt provides a full range of banking services to individual and
corporate customers through branch offices in New Jersey. First DeWitt is
subject to competition from other financial institutions and is subject to the
regulations of certain federal agencies and undergoes periodic examinations by
those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the balance sheet date. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change in
the next accounting cycle relate to the determination of the allowance for loan
losses and the current valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of these allowances and the valuation of real estate owned, management obtains
independent appraisals for significant properties.
Cash and Cash Equivalents
The caption of cash and cash equivalents used in the statements of cash flows
includes the balance sheet caption "Cash on hand and in banks" and "Federal
funds sold." Generally, federal funds sold are sold for one day periods.
Investments, Investments Available for Sale and Mortgage-backed Securities
Investment securities and mortgage-backed securities are carried at amortized
cost. Investment securities available for sale are carried at market value.
They are adjusted for unamortized premiums and unearned discounts which are
recognized as interest income over the terms of the securities for investments
and the estimated remaining lives based on anticipated prepayments for mortgage-
backed securities using a method which approximates the level-yield interest
method. Investment and mortgage-backed securities are carried at cost because
First State intends and has the ability to hold them to maturity. Gains or
losses on the sale of securities are determined using the specific
identification method and are recognized upon realization.
On September 30, 1993, First State adopted Statement of Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
("FAS 115"). Debt securities to be held for indefinite periods of time and not
intended to be held to maturity, as well as marketable equity securities, are
classified as available for sale. Investment securities available for sale are
carried at fair value and unrealized gains and losses, net of related tax
effect, on such securities are excluded from earnings but are included in
stockholders' equity.
First DeWitt, as a member of the FHLB of N.Y., is required to hold shares of
capital stock in the FHLB of N.Y. in an amount equal to 1% of the outstanding
balance of residential mortgage loans and similar obligations or 5% of its
outstanding advances from the FHLB of N.Y., whichever is greater. First DeWitt
complied with this requirement as of September 30, 1995.
Loans
Loans are stated at their principal amounts outstanding net of unearned income.
Interest is accrued monthly as earned, except when a loan becomes 90 days or
more past due or collection becomes uncertain, in which case the accrual of
income is discontinued. Any accrued but unpaid interest on such loans is
reversed against current earnings. These loans are classified as nonaccrual
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 collectability on a timely basis no
longer exist.
Discounts on loans purchased are accreted to income over the expected lives of
such loans using a method that approximates the level-yield interest method of
accounting.
Loan origination fees and certain direct loan origination costs are deferred
and amortized into income using a method which approximates the level-yield
interest method over the estimated lives of the related loans as an adjustment
to the related loan yields.
Mortgage Loans Held for Resale
First DeWitt from time to time sells its fixed rate conforming loan
originations and retains all other types of loan originations for its loan
portfolio. Included in mortgage loans held for resale on September 30, 1995,
is a portfolio that totalled $60.7 million. This portfolio was sold during the
first quarter of the 1996 fiscal year. This sale resulted in a gain on sale of
approximately $397,000.
Mortgage loans intended for sale are carried at the lower of cost or market
using the aggregate method.
Allowance for Loan Losses
Provisions for losses on loans are charged to operations based upon periodic
review and management's assessment of the risk inherent in the loan portfolio
in relation to the level of the allowance for loan losses, loan loss
experience, changes in the nature and volume of the loan portfolio, estimated
value of the collateral underlying the loan agreements, economic conditions and
other matters which warrant consideration.
Management believes that the allowance for losses on loans is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in their market area. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
allowance for losses on loans. Such agencies may require the Corporation to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated
depreciation. Depreciation of office properties and equipment is accumulated
on a straight-line basis over their estimated useful lives of three to forty
years.
Real Estate Owned
Real estate acquired through foreclosure or by deed in lieu of foreclosure,
is recorded at the carrying value at the foreclosure date, not in excess of
fair market value. Subsequently, such assets are reported at the lower of
their new cost basis or fair value less estimated costs to sell. An allowance
for REO losses is maintained for subsequent declines in fair value. Gains
and losses from sales are recognized as incurred. Carrying costs are generally
expensed as incurred.
Cost in Excess of Fair Value of Net Assets Acquired
Costs in excess of fair value of net assets acquired in business combinations
are amortized on a straight-line basis over periods of either 10 or 25 years.
The remaining balance at September 30, 1995, is being amortized over 25 years.
Income Taxes
The Corporation and the Bank file a consolidated Federal income tax return.
State income tax returns are filed on a separate basis.
Loan Servicing
The Bank services real estate loans for investors which are not included in the
accompanying consolidated balance sheets. Fees earned for servicing loans are
reported as income when the related mortgage loan payments are collected. Loan
servicing costs are charged to expense as incurred.
Net Income Per Share
Net income per share is computed by dividing net income by the average number
of common shares outstanding during the period. Shares exercisable under stock
option plans have been included in the calculation of primary earnings per
share using the treasury stock method for periods in which this calculation was
dilutive.
Financial Statement Presentation
Certain amounts in the 1994 and 1993 consolidated financial statements have
been reclassified to comply with the 1995 presentation.
(2) Business Combinations
On October 21, 1994, the Corporation issued approximately 678,000 shares of its
common stock for all the outstanding stock of Ocean Independent Bank, a New
Jersey chartered bank located in Ocean, New Jersey (Ocean). This business
combination was accounted for as a pooling-of-interests combination and,
accordingly, the Corporation's historical consolidated financial statements
have been restated to include the accounts and results of operations of Ocean
for all years presented. The results of operations of the Corporation and
Ocean for the years ended September 30, 1994 and 1993 prior to restatement are
as follows:
Years ended September 30,
1994 1993
(In thousands)
The Corporation:
Net Interest Income $ 19,058 $ 17,709
Net Income 3,189 2,275
Ocean:
Net Interest Income 2,429 1,514
Net Income 312 250
Combined:
Net Interest Income 21,487 19,223
Net Income 3,501 2,525
Prior to the combination, Ocean's fiscal year ended December 31. In recording
the pooling-of-interests combination, Ocean's financial statements for the
twelve months ended September 30, 1994 were combined with the
Corporation's financial statements for the same period. In addition, Ocean's
financial statements for the years ended December 31, 1993 and 1992 were
combined with the Corporation's financial statements for the years ended
September 30, 1993 and 1992. Ocean's unaudited results of operation for the
three months ended December 31, 1993, included net interest income of $649,000
and net income of $3,000. An adjustment has been made to stockholders' equity
to eliminate the effect of including Ocean's results of operations for the
three months ended December 31, 1994 in both the year ended September 30, 1994
and the year ended September 30, 1993.
(3)Investment Securities Available for Sale, Investments and Mortgage-Backed
Securities
The amortized costs, gross unrealized gains and losses and estimated market
values of investment debt securities are as follows:
<TABLE>
<CAPTION>
September 30, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity Portfolio:
Investment Securities
US Treasury Securities $ 1,256 $ 12 $ - $ 1,268
US Government & Agency Obligations 9,647 10 (171) 9,486
Municipal Obligations 9,986 75 (158) 9,903
20,889 97 (329) 20,657
Mortgage-Backed Securities
GNMA 3,873 39 (6) 3,906
FNMA 6,396 120 (79) 6,437
FHLMC 8,692 88 (121) 8,659
18,961 247 (206) 19,002
$ 39,850 $ 344 $ (535) $ 39,659
Available for Sale Portfolio:
Investment Securities
US Treasury Securities $ 1,007 $ - $ (6) $ 1,001
Municipal Obligations 2,728 6 (17) 2,717
Other Investments 28 6 - 34
3,763 12 (23) 3,752
Mutual Funds
US Government Securities 236 - (15) 221
Adjustable Rate Mortgages 7,475 - (68) 7,407
Commercial Paper 419 - - 419
8,130 - (83) 8,047
$ 11,893 $ 12 $ (106) $ 11,799
September 30, 1994
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity Portfolio:
Investment Securities
US Government & Agency Obligations $ 8,713 $ - $ (534) $ 8,179
Municipal Obligations 11,056 6 (608) 10,454
19,769 6 (1,142) 18,633
Mortgage-Backed Securities
GNMA 2,372 10 (28) 2,354
FNMA 4,718 15 (245) 4,488
FHLMC 11,661 87 (310) 11,438
18,751 112 (583) 18,280
$ 38,520 $ 118 $(1,725) $ 36,913
Available for Sale Portfolio:
Investment Securities
US Treasury Securities $ 5,805 $ - $ (135) $ 5,670
US Government & Agency Obligations 2,490 - (45) 2,445
Other Investments 28 5 - 33
8,323 5 (180) 8,148
Mutual Funds
US Government Securities 625 - (19) 606
Adjustable Rate Mortgages 9,095 - (210) 8,885
9,720 - (229) 9,491
$ 18,043 $ 5 $ (409) $ 17,639
</TABLE>
The amortized cost and estimated market value of investment debt securities at
September 30,1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties. The
contractual maturities of mortgage-backed securities generally exceeds twenty
years; however, the effective lives are expected to be less due to anticipated
prepayments.
Estimated
Amortized Market Average
Cost Value Yield(a)
(Dollars in thousands)
Held to Maturity Portfolio:
Investment Securities
Due in one year or less $ 2,429 $ 2,430 6.13%
Due after one year through five years 8,561 8,449 5.93
Due after five years through ten years 5,273 5,288 6.93
Due after ten years 4,626 4,490 6.92
20,889 20,657 6.42
Mortgage-Backed Securities 18,961 19,002 6.78
$ 39,850 $ 39,659 6.59%
Available for Sale Portfolio:
Investment Securities
Due in one year or less $ - $ - -%
Due after one year through five years 1,010 1,010 5.67
Due after five years through ten years 25 25 7.50
Due after ten years 2,728 2,717 7.91
3,763 3,752 7.31
Mutual Funds
Due in one year or less 8,130 8,047 6.30
$ 11,893 $ 11,799 6.62%
(a) Tax equivalent yields
The carrying value of investment securities pledged as required for public
funds and deposits amounted to $5,057,000 at September 30,1995. In addition,
certain investment and mortgage-backed securities 'are pledged as collateral
under various borrowing agreements. See note 6.
(4) Loans Receivable, Net
Loans receivable, net consists of the following:
September 30,
1995 1994
(Dollars in thousands)
First Mortgage loans:
Conventional $ 351,416 $ 354,961
Partially guaranteed by VA or insured by FHA 2,377 2,831
Participation in conventional loans 10,093 7,825
Loans for land and construction 23,031 19,695
386,917 385,312
Commercial loans 35,470 31,509
Property improvement loans 28,847 28,057
Credit Cards 19,729 10,338
Guaranteed student loans 658 530
Loans secured by deposits 1,122 935
Other loans 3,022 2,047
88,848 73,416
Less:
Allowance for loan losses 6,082 6,351
Deferred loan fees 350 707
Unearned discounts (premium) 22 41
Loans in process 7,663 8,310
14,117 15,409
$ 461,648 $ 443,319
The following table presents information concerning loans accounted for on a
nonaccrual basis and loans whose terms have been restructured to provide a
reduction of interest rate charged to the borrower:
September 30,
1995 1994
No. Amount No. Amount
(Dollars in thousands)
Nonaccrual loans 159 $ 18,503 121 $ 13,942
Current restructered loans 3 3,476 7 4,165
Total 162 $ 21,979 128 $ 18,107
If the total nonaccrual loans had been current and performing in accordance
with their original terms, total interest income would have been increased by
approximately $1.5 million, $899,000 and $1.4 million for the years ended
September 30, 1995, 1994 and 1993, respectively.
The following is an analysis of the allowance for loan losses:
Year ended September 30,
1995 1994 1993
(Dollars in thousands)
Balance, beginning of period $ 6,351 $ 8,111 $ 6,999
Adjustment for the pooling of a
company with a different year-end - (170) -
Provisions charged to operations 1,650 1,892 2,440
Recoveries 72 409 460
Losses charged against the allowance (1,991) (3,891) (1,788)
Balance, end of period $ 6,082 $ 6,351 $ 8,111
First DeWitt services real estate loans for investors which are not included in
the accompanying consolidated balance sheets. The total of such loans serviced
amounted to approximately $113.4 million, $115.2 million, and $121.7 million at
September 30, 1995, 1994, and 1993, respectively.
(5) Deposits
Savings deposits are comprised of the following:
<TABLE>
<CAPTION>
September 30,
1995 1994
Rate Amount % Rate Amount %
<S> <C> <C> <C> <C> <C> <C>
Balance by type of account
and interest rate:
(Dollars in thousands)
Commercial Checking -% $ 19,563 3.45% -% $ 17,101 3.57%
Personal Checking 2.47 50,075 8.82 2.47 44,256 9.23
Money Market Checking 2.52 21,268 3.75 2.52 22,428 4.68
Money Market Passbook 2.52-3.93 31,898 5.62 2.52-3.25 42,957 8.96
Savings 2.37 108,240 19.06 2.37 123,911 25.85
Club 2.37 2,064 0.36 2.37 2,440 0.51
233,108 41.06 253,093 52.80
Certificates:
Regular 3.20-5.51(a) 266,754 46.99 2.81-5.51 213,422 44.52
Jumbo 5.50-7.68(a) 67,464 11.88 4.60-5.00 12,692 2.65
334,218 58.87 226,114 47.17
Accrued Interest payable 384 0.07 157 0.03
567,710 100.00% 479,364 100.00 %
</TABLE>
September 30,
1995 1994
Amount % Amount %
(Dollars in thousands)
Contractual maturity of
certificate accounts:
Within one year $ 298,070 89.19% $ 196,091 86.72%
One to two years 18,553 5.55 9,139 4.04
Two to three years 5,627 1.68 6,627 2.93
Over three years 11,968 3.58 14,257 6.31
334,218 100.00 % 226,114 100.00%
(a)At September 30,1995, the weighted average interest rates for regular and
jumbo certificates were 5.50% and 5.71%, respectively.
Interest expense on deposits is comprised of the following:
Year Ended September 30,
1995 1994 1993
(Dollars in thousands)
Personal and money market
checking accounts $ 1,742 $ 1,450 $ 1,597
Savings, money market passbook
and certificate accounts 18,912 11,637 13,591
$ 20,654 $ 13,087 $ 15,188
(6) Borrowed Money
Notes payable and other borrowings are as follows:
(Dollars in thousands)
Interest September 30,
Due Date Rate 1995 1994
FHLB of N.Y. (a)(d) Mar. 3, 2008 6.56 % $ 130 $ 132
FHLB of N.Y. (b)(d) Sept. 11,2006 8.16 200 200
FHLB of N.Y. (b)(d) May 5, 2000 6.63 3,000 -
FHLB of N.Y. (b)(d) Jan. 30, 1998 7.97 2,000 -
FHLB of N.Y. (b)(d) Aug. 29, 1995 5.98 - 3,000
FHLB of N.Y. (b)(d) Aug. 1, 1995 5.87 - 5,000
FHLB of N.Y. (b)(d) Jan. 30, 1995 5.30 - 2,000
FHLB of N.Y. (b)(d) Dec. 29, 1994 5.44 - 3,000
FHLB of N.Y. (c)(d) Demand 5.88 - 15,200
FHLB of N.Y. (c)(d) Demand 6.63 17,775 -
Midlantic National Bank (e) Dec. 29, 1994 6.16 - 87
Reverse Repurchase Agreement (f) Oct. 19, 1994 5.15 - 3,119
$ 23,105 $ 31,738
(a)These borrowings require periodic amortization.
(b)These borrowings do not require periodic amortization.
(c)The Corporation maintains a $60.4 million line of credit.
(d)First DeWitt maintains a blanket collateral agreement with FHLB for the
above borrowings. The amortized cost of mortgage-backed securities,
investments, and mortgage loans pledged toward this agreement at September
30,1995 was $16.9 million, $8.7 million and $13.7 million,respectively. The
maximum borrowings outstanding cannot exceed 90% of the amounts pledged.
(e)The Bank borrowed $1.2 million to fund the Employee Stock Ownership Plan.
Repayments were required quarterly with interest at 85% of Midlantic
National Bank's prime rate. The loan was secured by 189,641 shares of First
State Financial Services,Inc. Stock which was purchased with the proceeds
of the loan for the ESOP.
(f)The Corporation entered into a reverse repurchase agreement with Merrill
Lynch on September 30,1994 which matured on October 19,1994. The interest
rate on the agreement was 5.15%. The securities underlying the agreement
consist of US Treasury notes with a book value of $3,051,000.
(7) Office Properties and Equipment
Office properties and equipment are summarized as follows:
September 30,
1995 1994
( Dollars in thousands )
At cost:
Land $ 1,563 $ 1,563
Buildings and improvements 9,076 9,079
Furniture, equipment and automobiles 7,111 6,108
17,750 16,750
Less accumulated depreciation 7,227 6,432
10,523 10,318
(8) Accrued Interest Receivable
A breakdown of accrued interest receivable on assets follows:
September 30,
1995 1994
( Dollars in thousands )
Mortgage and other loans $ 5,292 $ 3,863
Mortgage-backed securities 122 140
Investments 495 596
5,909 4,599
Reserve for uncollectible interest (1,863) (1,488)
$ 4,046 $ 3,111
(9) Other Expenses
Other Expenses include the following:
Year ended September 30,
1995 1994 1993
(Dollars in thousands)
Telephone, postage and supplies $ 669 $ 559 $ 458
Insurance and bond premium 457 425 333
Legal expenses 256 215 289
Branch operations expense 276 223 345
Examination and audit services expense 315 445 360
Other employee expense 280 246 221
Other 871 971 1,269
$ 3,124 $ 3,084 $ 3,275
(10) Income Taxes
If certain conditions are met, thrift institutions, in determining taxable
income, are allowed a special bad-debt deduction based on specified experience
formulas or on a percentage of taxable income before such deduction. The
specific experience method was used in preparing the Federal income tax return
for calendar year 1994 and is expected to be used in calendar year 1995.
Retained income at September 30, 1995 includes approximately $10.0 million for
which no provision for income tax has been made. This amount represents an
allocation of income to bad-debt deductions for tax purposes only. Reduction
of amounts so allocated by other than tax bad-debt losses or recomputations of
bad-debt deductions resulting from operating loss carrybacks to prior years
will create income for tax purposes only, which will be subject to the then
current corporation income tax rate.
Income tax expense is made up of the following components:
Year ended September 30,
1995 1994 1993
(Dollars in thousands)
Current tax expense:
Federal $ 1,575 $ 1,550 $ 913
State 147 142 115
1,722 1,692 1,028
Deferred federal tax benefit (590) (329) (1,013)
Total income tax expense $ 1,132 $ 1,363 $ 15
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1995
and 1994 are as follows:
1995 1994
Deferred tax assets: (In thousands)
Allowance for losses on loans and
real estate owned per books $ 1,850 $ 1,584
Loan origination fees deferred for book purposes 126 262
Write-off of assets below tax-basis 40 21
Reserve for uncollected interest 476 345
Other, net 19 11
Net operating loss carryforwards 564 798
Total gross deferred tax asset 3,075 3,021
Less valuation allowance 281 683
2,794 2,338
Deferred tax liabilities:
Depreciation 862 996
$ 1,932 $ 1,342
A reconciliation of income tax benefit and the "expected" income tax expense,
restated to reflect the pooling of Ocean, follows:
Year ended September 30,
1995 1994 1993
(Dollars in thousands)
Expected income tax expense $ 1,744 $ 1,653 $ 830
Amortization of excess cost over fair value
of net assets acquired 145 191 191
State tax, net of Federal benefit 33 93 83
Increase in cash surrender value of
insurance policies (227) - -
Interest income exclusion (265) - -
Other, net 104 (7) (35)
Change in the beginning-of-the-year balance
of the valuation allowance for deferred
tax assets allocated as income tax expense (402) (567) (1,054)
Income tax expense per consolidated
financial statements $ 1,132 $ 1,363 $ 15
The valuation allowance for deferred assets as of October 1, 1994 was $683,000.
The net change in the total valuation allowance for the year ended September
30, 1995 was a decrease of $402,000.
Except for the effects of the reversal of net deductible temporary differences,
the Corporation is not currently aware of any factors which would cause any
significant differences between taxable income and pretax book income in future
years. However, there can be no assurances that there will be no significant
differences in the future between taxable income and pretax book income if
circumstances change (such as, for example, changes in tax laws or the
Corporation's financial condition or performance). In order to fully realize
the deferred tax asset, the Corporation will need to generate future taxable
income. Management believes it is more likely than not that the Corporation
will realize the benefit of net deductible temporary differences and that such
net deductible temporary differences will reverse during periods in which the
Corporation generates net taxable income. The net deferred tax asset, net of
valuation allowances, is predicated on the Corporation generating sufficient
taxable income in the carryforward period. Management has projected that the
Corporation will generate sufficient taxable income to utilize the deferred tax
asset. There can be no assurance, however, that the Corporation will generate
any earnings or any specific level of continuing earnings.
(11) Employee Benefit Plans
The Corporation has a noncontributory defined benefit pension plan. The plan
covers all employees provided they are at least 21 years of age and have
worked a minimum of 1000 hours in the plan year. Benefits are generally based
on years of service and the employee's compensation during the last 5 years of
employment.
The following table sets forth the plan's funded status (in thousands):
<TABLE>
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
Plan assets at fair value, primarily investment rated bonds and
mortgages with call protection $ 2,337 $ 2,079
Actuarial present value of benefit obligations:
Accumulated benefit obligation for service rendered to date,
including vested benefits of $2,860 and $2,045, respectively 3,106 2,924
Additional future benefits based on estimated salary levels 301 98
Projected benefit obligation 3,407 3,022
Excess of projected benefit obligation over plan assets (1,070) (943)
Unrecognized net transition asset being recognized over 21.5
and 22.5 years, respectively (9) (9)
Unrecognized prior service cost 843 907
Unrecognized net gain (37) (14)
Additional minimum balance sheet liability (496) (786)
Accrued pension cost included in other (assets) liabilities $ (769) $ (845)
Year ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Net periodic pension cost included the following components:
Service cost-benefits earned during the period $ 273 $ 265 $ 366
Interest cost on projected benefit obligation 226 202 204
Actual return on plan assets (112) (43) (180)
Net amortization and deferral 10 (72) 82
Total net periodic pension cost $ 397 $ 352 $ 472
</TABLE>
Annual pension contributions are made by the Bank in accordance with the
requirements of the Employee Retirement Income Security Act of 1974. The
weighted average discount rate of 7.5% in 1995 and 1994 and 7.0% in 1993, and
the rate of increase in future compensation levels of 5.5% in 1995, 1994 and
1993, were used in determining the actuarial present value of benefit
obligations. The expected long-term rate of return on assets was 7.5% for 1995
and 9.0% for 1994 and 1993.
First DeWitt has established an Employee Stock Ownership Plan ("ESOP"). This
plan covers all employees included in the pension benefit plan except the
President and Chief Executive Officer. The ESOP, which is a tax-qualified
employee benefit plan, became effective upon conversion At September 30, 1995,
the ESOP owned 183,478 shares of the Corporation's common stock.
As of October 1, 1994, the Bank adopted deferred compensation plans for the
benefit of certain executive officers. Under the plans, the Bank agrees (i) in
return for the participants relinquishing the right to a portion of their
current compensation and (ii) as a supplemental retirement benefit, to pay
certain officers retirement benefits in a lump sum or in the form of monthly
payments of up to 240 months. The Bank will accrue on the books the present
value of the benefits, so the amounts required will be provided at normal
retirement dates and thereafter. Full retirement benefits are immediately
payable to the participant's beneficiary if death of the participant occurs
prior to retirement.
In conjunction with the formation of these plans, the Bank purchased life
insurance on the participants. The cash surrender value of that insurance was
approximately $11.6 million at September 30, 1995 and is carried in Other
Assets on the consolidated balance sheet.
(12) Commitments and Contingencies
In the ordinary course of business, to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates, the
Bank is a party to various financial instruments which are not reflected in the
consolidated financial statements. These instruments consist of commitments to
extend credit and unused lines of credit available under consumer loan credit
lines and involve elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated financial statements. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based upon management's credit
evaluation of the counterparty.
Loan commitments outstanding at September 30, 1995 and 1994 totaled $17.3
million and $21.4 million, respectively. The loan commitments outstanding at
September 30, 1995 consist of variable rate commitments approximating $11.6
million and fixed rate commitments approximating $5.7 million. The later
commitments had rates primarily from 7.00% to 12.00%. Unused line of credit
available under credit lines aggregated $34.6 million and $21.4 million at
September 30, 1995 and 1994. These off-balance sheet commitments generally
have fixed expiration dates or other termination clauses.
In addition, the Bank had commitments to sell mortgage loans outstanding at
September 30, 1995 totaling $34.7 million. These commitments consist of "best
effort" commitments with minimal detrimental effects if they are not filled.
These commitments expire on March 31,1996. At September 30, 1994, there were
similar commitments to sell mortgage loans outstanding totaling $74.5 million.
The Bank grants residential, consumer, construction and commercial loans
secured generally by real estate to customers located primarily in New Jersey.
A substantial portion of the Bank's loans are secured by real estate located in
a currently weak market. In addition, real estate acquired by foreclosure is
located in the same market area. Accordingly, as with most financial
institutions in the market area, the ultimate collectibility of a substantial
portion of the loan portfolio and recoverability of real estate acquired by
foreclosure are susceptible to changes in market conditions.
In the normal course of business, First State may be party to various
outstanding legal proceedings and claims. In the opinion of management, the
disposition of such legal proceedings and claims will not materially affect
First State's consolidated financial statements.
(13) Selected Quarterly Financial Data (unaudited)
Quarterly results from 1995 and 1994 are shown below (in thousands, except per
share amounts):
1995
First Second Third Fourth
Interest income $ 10,151 $ 10,907 $ 11,450 $ 11,841
Net interest income 5,569 5,669 5,724 5,622
Provisions for loan losses 200 300 600 550
Income before income taxes 1,476 1,487 1,332 835
Net income 961 988 958 1,091
Net income per share 0.24 0.26 0.24 0.27
1994
First Second Third Fourth
Interest income $ 8,642 $ 8,405 $ 8,666 $ 9,222
Net interest income 5,404 5,254 5,397 5,432
Provisions for loan losses 570 222 200 900
Income before income taxes 1,202 1,442 1,140 1,080
Net income 909 1,035 802 755
Net income per share 0.23 0.27 0.21 0.20
(14) Stock Option Plans
The Corporation has various stock option plans which have been approved by the
Corporation's stockholders. Under an initial plan, approved in 1987, there are
215,950 options outstanding at September 30, 1995, that are exerciseable at
$5.50 per share. As of September 30, 1995, 19,000 options have been exercised
under this plan.
On January 19, 1994, the Corporation's stockholders approved the 1993 Long-term
Incentive Stock Benefit Plan for Officers and Employees (the 1993 Plan) and the
1993 Stock Option Plan for Outside Directors (the 1993 Directors Option Plan).
The 1993 plan authorizes the issuance of up to 254,000 shares of Common Stock
of the Company, issuance pursuant to grants of stock options, stock
appreciation rights, or stock awards. As of September 30, 1995, 51,800 options
exerciseable at $7.25 per share and 11,700 stock awards, were granted under the
1993 plan. Recipients of the options and awards are vested over a five year
period. Vested options and awards under this plan totaled 10,360 and 2,340,
respectively, at September 30, 1995. No options have been exercised under this
plan.
Under the 1993 Director Option Plan, options for 63,500 shares of common stock
have been reserved for outside directors. As of September 30, 1995, 57,150
options at a weighted average exercise price of $6.94, have been granted under
this plan. Recipients of the options are vested over a four year period.
Vested options under this plan totaled 12,700 at September 30, 1995. No options
have been exercised under this plan.
On October 14, 1994, Ocean Independent Bank issued shares under an existing
stock option plan that converted to 15,443 shares of First State common stock.
(15) Condensed Financial Information of Parent Company
September 30,
1995 1994
Balance Sheets (Dollars in thousands)
Assets
Cash $ 220 $ 267
Investment securities available for sale 964 510
Investment securities 410 -
Loans receivable 217 231
Investments in Subsidiaries 39,779 36,745
Other assets 2 220
$ 41,592 $ 37,973
Stockholders' equity 41,592 37,973
$ 41,592 $ 37,973
Years ended September 30,
1995 1994 1993
Statements on Income (Dollars in thousands)
Operating income:
Dividends from subsidiary $ 1,000 $ 1,250 $ 450
Other income 76 31 1
Total income 1,076 1,281 451
Operating expenses: 276 274 285
Income before income taxes and equity in
undistributed earnings of subsidiaries 800 1,007 166
Income tax expense (benefit) (384) - 1
Income before equity in undistributed
earnings of subsidiaries 1,184 1,007 165
Equity in undistributed earnings of
subsidiaries 2,814 2,494 2,360
Net income $ 3,998 $ 3,501 $ 2,525
<TABLE>
<CAPTION>
Years ended September 30,
1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C>
Statements of Cash Flows
Operating Activities:
Net income $ 3,998 $ 3,501 $ 2,525
Net accretion of investment discount (29) - -
Provision for losses on loans 50 - -
Decrease (increase) in other assets 218 100 (1)
Net cash provided by operating activities 4,237 3,601 2,524
Investing activities:
Decrease in investment in joint ventures - - 73
Increase in investment in subsidiaries (2,655) (2,417) (2,463)
Proceeds from loan repayments 8 20 3
Origination of loans receivable (44) (154) (84)
Purchase of investment securities available for sale (454) (510) -
Purchase of investment securities (1,097) - -
Proceeds from maturities of investment securities 716 - -
Net cash used by investing activities (3,526) (3,061) (2,471)
Financing activities:
Dividends paid on common stock (758) (476) -
Net cash used by financing activities (758) (476) -
Increase (decrease) in cash (47) 64 53
Cash at beginning of year 267 203 150
Cash at end of year $ 220 $ 267 $ 203
NON-CASH TRANSFERS:
Release of Management Recognition Plan stock - - $ 105
Release of Employee Stock Ownership Plan stock - $ 1,159 $ 59
Cancellation of common shares in conjunction with merger - $ 109 -
</TABLE>
(16) Stockholders' Equity and Regulatory Matters
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may each provide for the payment of dividends.
Future declaration of cash dividends by First State will depend upon dividend
payments by the Bank to the Corporation, which is its primary source of income.
Under Office of Thrift Supervision ("OTS") regulations, if the Bank satisfies
all applicable capital requirements, the Bank is permitted to pay cash
dividends during a calendar year in an amount equal to 100% of its net income
to date during that calendar year plus 50% of the amount by which its capital
exceeds its capital requirements at the beginning of the year. The Bank is
required to give 30 days' prior notice to the OTS of the intention to pay a
dividend, and the OTS may prohibit the payment of the dividend.
Earnings allocated to bad debt reserves for losses and deducted for federal
income tax purposes are not available for dividends or other distributions with
respect to the Bank's capital stock without the payment of tax at the then
current income tax rate on approximately 150% of the amount so used, assuming a
34% corporate income tax rate.
At the time of conversion from mutual to stock form, a liquidation account was
established in an amount equal to the Bank's retained income at December 31,
1986. The liquidation account was established for the benefit of eligible
account holders who continue to maintain their accounts at First DeWitt after
conversion. The liquidation account will be reduced annually to the extent
that eligible account holders have reduced their eligible deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in a proportionate amount to the current adjusted eligible account
balances then held. The balance of the liquidation account at September 30,
1995 was $1,654,000 ($1,972,000 at September 30,1994).
(17) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement 107), requires disclosure of
estimated fair value for financial instruments. Fair value estimates, methods
and assumption are set forth below for the Bank's financial instruments for
which it is practical to estimate those values.
Cash and Cash Equivalents
For cash and due from banks, interest-bearing deposits in other banks and
Federal funds sold, the carrying amount approximates fair value.
Investments Available for Sale, Investments and Mortgage-backed Securities
The fair value of investments available for sale, investments and mortgage-
backed securities, were based on quoted market prices or dealer quotes, if
available. If a quoted market price or dealer quote was not available, fair
value was estimated using quoted market prices of similar securities.
Stock in Federal Home Loan Bank of New York
The fair value for FHLB stock is its carrying value, since this is the amount
for which it could be redeemed. There is no active market for this stock and
the Bank is required to maintain a minimum balance based upon the unpaid
principal of home mortgage loans and similar obligations.
Loans, Receivable
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type. Each loan category was
further segmented into fixed and adjustable rate interest terms.
The fair value of loans is estimated by discounting the future cash flows and
prepayments using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining terms.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as passbook, NOW,
money market and commercial deposit accounts, is equal to the amount payable on
demand as of September 30,1995 and 1994. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
Borrowed Money
The fair value of borrowed money is the carrying value for short-term
obligations while long-term borrowing fair values are estimated using rates
available on borrowings with similar terms and maturities.
The estimated fair values of the Bank's financial instruments as of
September 30, 1995 and 1994 are presented in the following table. Since the
fair value of off-balance-sheet commitments approximates book value, these
disclosures are not included.
<TABLE>
<CAPTION>
1995 1994
Book Fair Book Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 11,792 $ 11,792 $ 6,018 $ 6,018
Investment securities 20,889 20,657 19,769 18,633
Investment securities, available
for sale 11,799 11,799 17,639 17,639
Mortgage-backed securities 18,961 19,002 18,751 18,280
Federal Home Loan Bank of
New York stock 3,715 3,715 3,005 3,005
Loans receivable, net 461,648 465,742 443,319 441,652
Mortgage loans held for resale 67,219 67,642 3,095 3,098
Financial liabilities:
Deposits 567,710 567,126 479,364 480,429
Borrowed money 23,105 23,159 31,738 31,738
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. The tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10 - Executive Officers of the Registrant
The following table sets forth the executive officers name, age, and
position held with First State and the Bank.
Age at
Name September 30, 1995 Position Held
Michael J. Quigley, III 55 Chairman, President and Chief Executive
Officer,
First State Financial Services, Inc.
Chairman, President and Chief Executive
Officer, First DeWitt Bank.
Emil J. Butchko 60 Vice President, Treasurer and Chief
Financial Officer,
First State Financial Services, Inc.
Sr. Vice President, Treasurer and Chief
Financial Officer, First DeWitt Bank.
John A. Rogers 53 Vice President, First State Financial
Services, Inc.
Sr. Vice President, First DeWitt Bank.
Robert H. Blum 47 Vice President, First DeWitt Bank.
Joseph J Burghardt 60 Vice President, First Dewitt Bank.
Alan M. Chadrjian 39 Vice President, First DeWitt Bank.
John M. Fields, Jr. 32 Vice President and Principal Accounting
Officer,
First State Financial Services, Inc.
Vice President and Controller,First
DeWitt Bank.
John H. Isemann 53 Vice President, First State Financial
Services, Inc.
Vice President, First DeWitt Bank.
Richard O Lindsey 55 Vice President, First Dewitt Bank.
Marie G. Martino 54 Secretary, First State Financial
Services, Inc.
Vice President and Secretary, First
DeWitt Bank.
Henrik Tvedt, Jr. 34 Vice President, First DeWitt Bank.
To the extent included in Part III, Item 10, "Executive Officers of the
the Registrant," Part III is incorporated by reference to the Corporation's
proxy statement dated December 18, 1995.
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements
The following financial statements are included in the Bank's Annual
Report to Shareholders for the year ended September 30, 1995
- Consolidated Balance Sheets at September 30, 1995 and 1994
- Consolidated Statements of Income for each of the years in the three-
year period ended September 30, 1995
- Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three-year period ended September 30, 1995
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended September 30, 1995
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
Financial Statement Schedules
Financial Statement schedules are omitted because they are not required or
because the required information is set forth in the consolidated financial
statements or notes thereto.
Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference to documents previously filed by the
Corporation with the SEC.
Exhibit
Number Description
3 Certificate of Incorporation and Bylaws of First State Financial
Services, Inc.(1)
10.1 First DeWitt Bank. Employee Stock Ownership Plan(1)
10.2 First State Financial Services, Inc. Incentive Stock Option
Plan(2)
10.3 First State Financial Services, Inc. 1993 Stock Option Plan for
Outside Directors(3)
10.4 First State Financial Services, Inc. 1993 Long Term Incentive
Stock Benefit Plan(3)
10.5 Employment Agreements between the Bank and the Holding company
and Mr. Quigley(1)
10.5 Special Termination Agreements between the Bank and the Holding
Company and Messrs. Butchko, Isemann, and Rogers(1)
11 Statement re: computation of per share earnings
22 Subsidiaries of First State Financial Services, Inc.
23 Accountant's consent to incorporation by reference of Audit
report in Registration statements on form S-8.
(1) Incorporated by reference to Exhibits filed with Registration Statement
on Form S-1, No. 33-16532
(2) Incorporated by reference to Exhibits filed with Registration Statement
on Form S-8, No. 33-25608
(3) Incorporated by reference to Exhibits filed with Registration Statement
on Form S-8, No. 33-90434
Reports on Form 8-K
There were no Form 8-K reports filed during the last quarter of the fiscal
year.
FIRST STATE FINANCIAL SERVICES, INC.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Form 10-K
September 30, 1995
<TABLE>
Exhibit 11. Statement re: Computation of Per Share Earnings
<CAPTION>
Year ended Year ended Year ended
September 30,1995 September 30,1994 September 30,1993
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income $ 3,998 $ 3,501 $ 2,525
Average primary common
shares outstanding 3,963 3,847 3,856
Primary earnings per share $ 1.01 $ 0.91 $ 0.65
Average fully diluted common
shares outstanding(1) 3,995 3,885 3,856
Fully diluted earnings per share $ 1.00 $ 0.90 $ 0.65
(1) - Fully diluted shares outstanding were calculated via the treasury stock
method by using the ending period market value regarding stock options.
The average primary common shares outstanding was used if this
calculation was anti-dilutive.
</TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Form 10-K
September 30, 1995
Exhibit 22. Subsidiaries of the Registrant
First DeWitt Bank
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
State of Incorporation: New Jersey
First State Investment Services, Inc.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
State of Incorporation: Delaware
Subsidiaries of First DeWitt Bank:
Cedar Grove Service Corp.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
State of Incorporation: New Jersey
Southport (Wall) Associates
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
State of Incorporation: New Jersey
Ridge (Caldwell) Associates
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
State of Incorporation: New Jersey
FIRST STATE FINANCIAL SERVICES, INC.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Form 10-K
September 30, 1995
Exhibit 23. Accountant's consent to incorporation by reference of Audit
report in Registration statements on form S-8
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
First State Financial Services, Inc.
We consent to the incorporation by reference in the registration statement
(No. 33-90434) relating to the First State Financial Services, Inc. 1993
Long-Term Incentive Stock Benefit Plan and the First State Financial
Services, Inc. 1993 Stock Option Plan for Outside Directors on Form S-8 of
First State Financial Services, Inc. and subsidiary of our report dated
November 6,1995, relating to the consolidated balance sheets of First State
Financial Services, Inc. and subsidiary as of September 30, 1995 and 1994,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 1995, which report appears in the September 30, 1995 annual
report on Form 10-K.
KPMG Peat Marwick LLP
Short Hills, New Jersey
December 27, 1995
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and as of the
date indicated.
Michael J. Quigley, III
Chairman of the Board of Directors,
Michael J. Quigley, III President and Chief Executive Officer
Emil J. Butchko
Vice President and Chief Financial
Emil J. Butchko Officer
John M. Fields, Jr
Vice President and Principal
John M. Fields, Jr. Accounting Officer
Henry F. Albinson
Director
Henry F. Albinson
Frank H. Bridge
Director
Frank H. Bridge
Theodore F. Cox
Director
Theodore F. Cox
Walter J. Davis
Director
Walter J. Davis
Clarence R. Lommerin
Director
Clarence R. Lommerin
Marie G. Martino
Director
Marie G. Martino
Ralph M. Riefolo
Director
Ralph M. Riefolo
Patrick N. Ciccone, M.D.
Director
Patrick N. Ciccone, M.D.
Dated December 29, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 11,198
<INT-BEARING-DEPOSITS> 594
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,799
<INVESTMENTS-CARRYING> 20,889
<INVESTMENTS-MARKET> 20,657
<LOANS> 528,867
<ALLOWANCE> 6,082
<TOTAL-ASSETS> 637,020
<DEPOSITS> 567,710
<SHORT-TERM> 17,775
<LIABILITIES-OTHER> 4,613
<LONG-TERM> 5,330
<COMMON> 39
0
0
<OTHER-SE> 41,553
<TOTAL-LIABILITIES-AND-EQUITY> 637,020
<INTEREST-LOAN> 44,601
<INTEREST-INVEST> 3,473
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 48,074
<INTEREST-DEPOSIT> 20,654
<INTEREST-EXPENSE> 21,765
<INTEREST-INCOME-NET> 22,584
<LOAN-LOSSES> 1,650
<SECURITIES-GAINS> (125)
<EXPENSE-OTHER> 3,124
<INCOME-PRETAX> 5,130
<INCOME-PRE-EXTRAORDINARY> 3,998
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,998
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 8.21
<LOANS-NON> 18,503
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,476
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,351
<CHARGE-OFFS> 1,991
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 6,082
<ALLOWANCE-DOMESTIC> 1,317
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,765
</TABLE>
