SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995
----------------------------------------------
Commission File Number 0-16329
-----------------------------------------
First State Financial Services, Inc.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2823506
------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1120 Bloomfield Avenue, CN 2449, West Caldwell, NJ 07007-2449
---------------------------------------------------------------
(Address of principal executive offices)
(201) 575-5800
-------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------------------
Former name, former address, and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
class of common stock at June 30, 1995: 3,879,762 shares of
common stock, par value $.01.
FIRST STATE FINANCIAL SERVICES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets,
June 30, 1995 (unaudited) and
September 30, 1994 (audited) 3
Consolidated Statements of Income,
three and nine months ended June 30,
1995 and 1994 (unaudited) 4
Consolidated Statements of Cash Flows,
nine months ended June 30, 1995 and
1994(unaudited) 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION 22
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
---------------------------------
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
(in thousands)
<CAPTION>
June 30, September 30,
1995 1994
------------- -------------
(unaudited) (note)
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 14,383 $ 13,137
Federal Funds - 1,000
Investment securities available for sale 10,025 17,639
Investment securities, at cost 23,326 19,769
Federal Home Loan Bank stock, at cost 3,715 3,005
Loans receivable, net 504,635 443,319
Mortgage loans held for resale 1,434 3,095
Mortgage-backed securities, at cost 17,744 18,751
Accrued interest receivable 4,772 3,111
Office properties and equipment, net 10,276 10,318
Real estate owned 8,987 10,004
Cost in excess of fair value of
net assets acquired 2,399 2,777
Other assets 16,154 15,677
---------- ----------
$ 617,850 $ 561,602
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 543,248 $ 488,151
Borrowed money 27,730 31,738
Advance payments by borrowers for
taxes and insurance 3,392 2,770
Accrued expenses and other liabilities 2,782 970
---------- ----------
Total liabilities 577,152 523,629
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value,
2 million shares authorized; none issued - -
Common stock, $.01 par value,
8 million shares authorized;
3,879,762 issued and outstanding 39 2,711
Paid-in capital 20,949 18,088
Net unrealized loss on investment
securities for sale (105) (279)
Retained income 19,815 17,453
---------- ----------
Total stockholders' equity 40,698 37,973
---------- ----------
$ 617,850 $ 561,602
========== ==========
Note: The Consolidated Balance Sheet at September 30, 1994 has been taken
from the audited financial statements as of that date.
</TABLE>
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Income
(in thousands, except per share data)
<CAPTION>
Three months Ended Nine months Ended
June 30, June 30,
1995 1994 1995 1994
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest on mortgage loans $ 8,504 $ 6,209 $ 24,034 $ 18,644
Interest on consumer and commercial loans 2,090 1,495 5,890 4,206
Interest on mortgage-backed securities 297 337 927 1,243
Interest on investments available for sale 134 251 358 718
Interest on investment securities 425 374 1,298 902
-------- -------- --------- ---------
Total interest income 11,450 8,666 32,507 25,713
-------- -------- --------- ---------
Interest expense:
Interest on deposits 5,472 3,196 14,769 9,556
Interest on borrowed money 254 73 776 102
-------- -------- --------- ---------
Total interest expense 5,726 3,269 15,545 9,658
-------- -------- --------- ---------
5,724 5,397 16,962 16,055
Provision for loan losses 600 200 1,100 992
--------- -------- --------- ---------
Net interest income after provision
for loan losses 5,124 5,197 15,862 15,063
--------- -------- --------- ---------
Other income:
Loan fees and other loan charges 1,019 439 2,543 1,409
Service charges on deposit accounts 459 427 1,321 1,251
Net gain on sales of loans 36 5 42 61
Net gain (loss) on sales of investments 11 (53) (144) 84
Other 297 139 781 477
Total other income --------- -------- --------- ---------
1,822 957 4,543 3,282
--------- -------- --------- ---------
Operating expenses:
Compensation and employee benefits 1,866 1,906 5,492 5,726
Premises and occupancy costs, net 471 505 1,506 1,566
Amortization of intangible assets 110 134 378 402
Loan expenses 1,233 389 3,061 1,201
Data processing 271 261 824 774
Advertising and promotion 201 176 603 524
Federal insurance premiums 322 275 929 808
Problem asset expenses, inclusive of
Real Estate Owned writedowns 354 624 981 1,306
Other expenses 786 744 2,335 2,254
--------- -------- --------- ---------
Total operating expenses 5,614 5,014 16,109 14,561
--------- -------- --------- ---------
Income before income tax expense 1,332 1,140 4,296 3,784
Income tax expense 374 340 1,389 1,040
--------- -------- --------- ---------
Net income $ 958 $ 800 $ 2,907 $ 2,744
========= ======== ========= =========
Earnings per share of common stock
Primary $ .24 $ .21 $ .75 $ .71
========= ======== ========= =========
Fully Diluted $ .24 $ .21 $ .72 $ .71
========= ======== ========= =========
</TABLE>
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Nine Months Ended
June 30,
1995 1994
-------- --------
(unaudited)
<S>
OPERATING ACTIVITIES <C> <C>
Net income $ 2,907 $ 2,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 378 401
Depreciation 723 632
Net amortization and accretion of loan fees and discounts (182) (245)
Net amortization of investment premium and discount (50) (102)
Net amortization and accretion of MBS premium and discounts 58 (762)
(Increase) decrease in accrued interest receivable (1,661) 7
Net gain on sale of loans (42) (61)
Net loss (gain) on sales of investments 144 (84)
Provisions for losses on loans 1,100 992
(Increase) decrease in other assets (477) 2,335
Increase (decrease) in other liabilities 1,812 (384)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,710 5,473
-------- --------
INVESTING ACTIVITIES
Net increase in loans, receivable (62,271) (36,369)
Purchase of mortgage-backed securities (2,325) (5,048)
Sale of mortgage-backed securities - 5,207
Principal payments on mortgage-backed securities 3,382 6,136
Proceeds from dispositions of real estate owned 2,757 6,145
Office properties and equipment expenditures (681) (292)
Purchase of investment securities (7,655) (15,158)
Purchase of investment securities available for sale (4,677) (1,367)
Sale of investment securities available for sale 10,021 4,169
(Purchase) redemption of Federal Home Loan Bank Stock (710) 414
Proceeds from maturities of investment securities 6,340 350
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (55,819) (35,813)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 55,097 20,905
Dividends paid on common stock (545) (320)
Principal repayments of borrowings (4,008) (1,132)
Additional borrowings - 13,000
Net increase in advance payments by borrowers 622 254
Issuance of First State Financial Services Stock 130 -
Issuance of Ocean Independent Bank stock 59 -
Purchase of Ocean Independent Bank stock - (109)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 51,355 32,598
-------- --------
Increase in cash and cash equivalents 246 2,258
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,137 12,891
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,383 $15,149
======== ========
CASH PAID DURING THE NINE MONTH PERIOD FOR:
Interest $15,521 $ 9,705
Income taxes $ 2,213 $ 859
NON-CASH TRANSFERS:
Loans classified as Real Estate Owned $ 1,740 $ 1,725
Classification of investments securities available
for sale to investment securities $ 2,300 -
</TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
----------------------------------------------------------------
1. Presentation of Statements
In the opinion of management the accompanying unaudited
consolidated financial statements contain all
adjustments (all which were normal recurring accruals)
necessary for a fair presentation. The results of
operations for the interim period are not necessarily
indicative of the results which may be expected for the
entire year.
First State Financial Services, Inc., is the holding
company for First DeWitt Bank, its principal wholly-
owned subsidiary. Audited consolidated financial
statements for the year ended September 30, 1994 were
filed with the Securities and Exchange Commission.
2. Earnings Per Share
Earnings per share was calculated for each period by
dividing the net income for the period by the average
number of primary shares outstanding over the period.
The actual average primary shares outstanding in each
period were as follows: 4,010,295 and 3,856,033 for the
three and nine months ended June 30, 1995,
respectively, and 3,849,062 for both the three and nine
months periods ended June 30, 1994. Additional dilutive
shares were calculated by using the ending market value
when utilizing the treasury stock method regarding
stock options for the nine month period ended June 30,
1995. The additional shares calculated under this
method (165,761), brought the average fully diluted
shares outstanding for the nine month period ended June
30,1995, to $4,021,794. Calculations for fully diluted
shares were not applicable to any other reported
period.
FIRST STATE FINANCIAL SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
General
-------
On October 21, 1994, First State Financial Services Inc., ("First
State") issued approximately 674,000 shares of common stock in
exchange for all of the outstanding common stock of Ocean
Independent Bank ("OIB"). The business combination has been
accounted for as a pooling of interests combination and,
accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the
accounts and results of OIB. OIB'S assets totaled $49.4 million
at September 30, 1994.
Financial Condition
-------------------
Total assets of First State Financial Services, Inc., were $617.9
million at June 30, 1995. This is an increase of $56.2 million
in total assets since September 30, 1994. The principal
increases in assets were in net loans receivable of $61.3
million, an increase in investment securities of $3.6 million, an
increase in accrued interest receivable of $1.7 million, and an
increase in cash on hand and in banks of $1.2 million. The
increase in loans was mainly due to the continued aggressive
marketing of a number of competitive loan products. First DeWitt
Bank (the "Bank"), First State's principal wholly-owned
subsidiary, originated $96.4 million in mortgage loans, $7.9
million in consumer loans, and $26.5 million in commercial loans
since September 30, 1994. The increase in investment securities
was attributable to the purchase of short-term notes issued by
municipalities in which the Bank operates branch offices as well
as the reclassification discussed below. The $1.7 million
increase in accrued interest receivable was mainly due to the
growth in the loan and security portfolios. Cash in banks
includes approximately $3.1 million of funds in Nationar for
checks cleared by that correspondent institution. On February 6,
1995, the Acting Superintendent of the Banks of the State of New
York (the Superintendent) took possession of the business and
assets of Nationar for purposes of an orderly liquidation of
their affairs. First DeWitt has received $4.7 million from
Nationar and believes that,as a preferred creditor, the remaining
$3.1 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 principal decreases in assets were a $7.6 million
decrease in investment securities available for sale, a decrease
of $1.7 million in mortgage loans held for resale, a decrease of
$1.0 million in mortgage-backed securities (mainly due to
repayments exceeding purchases), a decrease of $1.0 million in
federal funds sold, and a $1.0 million decrease in real estate
owned (discussed below). The decrease in investment securities
available for sale is partially due to the reclassification of
$2.3 million as investment securities held to maturity. The
securities were acquired through the business combination with
OIB. The cash generated from the decreases in the mentioned
assets was mainly used to fund loan originations, to fund
security purchases and also to provide funds for normal
operations.
Total liabilities of First State were $577.2 million at June 30,
1995. This is an increase of $53.5 million from September 30,
1994. The increase was mainly attributable to an increase in
deposits of $55.1 million, an increase in accrued expenses and
other liabilities of $1.8 million and a decrease in borrowings of
$4.0 million. The funds generated from increased deposits were
mainly used to fund loan originations and to repay borrowings at
the Federal Home Loan Bank of New York. Net borrowings were
reduced by $4.0 million since September 30, 1994. The increase in
deposits was mainly due to certificates of deposit. Certificates
of deposit increased $69.1 million from September 30, 1994 to
$303.7 million at June 30, 1995. The Bank successfully marketed
special eight month and fourteen month certificate of deposit
programs. The Bank has other programs which are competitively
priced to attract new savings as well as to offer an alternative
to depositors who have funds in money market and other lower
interest rate paying accounts. The increase in accrued expenses
and other liabilities of $1.8 million was mainly due to the
timing of payments on various suspense items.
Non-performing assets, including current restructured loans,
increased to $26.4 million at June 30, 1995 from $26.0 million at
March 31, 1995 and $25.8 million at September 30, 1994. The table
below details the composition of these assets.
6/30/95 3/31/95 9/30/94
--------- --------- ---------
(in thousands)
Non-accrual loans $ 13,923 $ 11,816 $ 12,357
Real estate owned 8,987 10,255 9,316
Current restructured loans 3,486 3,960 4,165
--------- --------- ---------
Total non-performing loans $ 26,396 $ 26,031 $ 25,838
========= ========= =========
The increase in non-accrual loans in the current quarter was
mainly due to a transaction where the proceeds from the sale of
several loans, totaling approximately $1.6 million, were
disbursed to parties other than the Bank. The Bank received
$500,000 in connection with the mentioned loans and expects full
recovery since it maintains a first lien position on the
collateral properties. The increase in non-accrual loans during
the quarter was also due to a group of condominium loans,
approximating $500,000, which became more than 90 days past due.
The problem with the condominium loans was resolved subsequent to
June 30, 1995. When a loan becomes 90 days or more past due or
the collection of interest becomes uncertain, the accrual of
income is discontinued. These loans are classified as non-accrual
and interest income is only recognized subsequently in the period
collected. Loans are returned to an accrual status when all past
due amounts have been collected and factors indicating doubtful
collectibility on a timely basis no longer exist. If non-accrual
loans had been current in accordance with their original terms,
the Bank would have realized additional interest income of
approximately $1.0 million for the period from September 30, 1994
to June 30, 1995, and approximately $312,000 in the quarter ended
June 30, 1995. There was no interest income recognized on the
non-accrual loans in either period.
The allowance for loan losses totaled $5.8 million at June 30,
1995. An analysis of the allowance for loan losses follows:
Balance at September 30, 1994 $ 6,351,000
Charge-off's:
Consumer loans 62,000
Commercial loans 58,000
Mortgage loans 1,567,000
Recoveries:
Consumer loans 42,000
Commercial loans 23,000
Mortgage loans 7,000
------------
Net charge-offs 1,615,000
Additions charged to operations 1,100,000
------------
Balance at June 30, 1995 $ 5,836,000
============
Ratio of net charge-offs during the
period to average loans
outstanding during the period .34%
Management closely monitors the loan portfolio and is
concentrating on workouts with the Bank's troubled loans and real
estate owned properties. The Bank's loan review committee
analyzes the loan portfolio on a quarterly basis for
classification of problem and potentially problem loans. The
loan review committee also reviews the allocation of loss
reserves to loans. Management believes that the present
allowance for loan losses is adequate in light of management's
assessment of the risk inherent in the portfolio. However, while
management uses its best judgment in providing for possible loan
losses, management recognizes that additional problems could
develop and that future adjustments may be necessary. The
Financial Accounting Standards Board has issued Statement of
Accounting Standard 114, "Accounting by Creditors for Impairment
of a Loan" (FAS 114). This statement prescribes the recognition
criteria for loan impairment and the measurement methods for
certain impaired loans whose terms are modified in troubled debt
restructurings. Management does not anticipate any impact from
the adoption of FAS 114 as management feels their current
valuation policies are consistent with the provisions of FAS 114.
This statement will be adopted by the Bank effective October
1,1995.
Real estate owned totaled $9.0 million at June 30, 1995 compared
to $10.3 million at March 31, 1995 and $10.0 million at September
30, 1994. The decrease during the quarter was mainly due to the
disposition of properties. Real estate owned is carried on the
Bank's books at fair value. Management recognizes that future
adjustments may be necessary if the real estate values decline.
Liquidity and Capital Resources
-------------------------------
First State's principal sources of funds are funds provided from
operations and dividends received from subsidiaries. The Bank's
principal sources of funds are deposits; scheduled loan
amortization payments; sales and prepayments of loan principal;
sales and repayments of mortgage-backed securities, sales and
maturities of investment securities and short-term investments;
borrowings and funds provided from operations.
The financing activities section of the Consolidated Statement of
Cash Flows reflects a net increase in deposits of $55.1 million
during the nine months ended June 30, 1995. The increase in
deposits consisted of $40.3 million in net deposits and $14.8
million in interest credited to deposit accounts. The increase
was mainly due to the successful marketing of certificate of
deposit special programs. See the "Financial Condition" section
of this report for additional information. Deposits increased
$20.9 million during the same 1994 period. The increase
consisted of $11.3 million in net deposits along with $9.6
million in interest credited to deposit accounts. The additional
deposits were mainly used to fund loans in connection with the
Bank's investing activities, and also to repay borrowings. The
Bank reduced net borrowings by $4.0 million during the nine
months ended June 30, 1995 compared to a net increase in
borrowings of $11.9 million in the 1994 period.
In the investing activities section of the Statement of Cash
Flows, a net increase in loans receivable of $62.3 million is
reported for the nine months ended June 30, 1995 compared to a
net increase of $36.4 million for the same 1994 period. Loans
originated in the 1995 period totaled $130.8 million. Loan
repayments and proceeds from sales of loans provided a
substantial portion of the funds for the origination of loans.
Such sources of funds provided $68.5 million in the 1995 period.
Deposit funds and funds obtained through normal operations were
also utilized to fund the origination of loans. The Bank
actively markets several competitive loan programs and has
successfully utilized the services of loan solicitors for the
origination of mortgage loans. Principal repayments of mortgage-
backed securities totaled $3.4 million in the 1995 quarter. The
Bank also purchased $2.3 million of mortgage-backed securities in
the 1995 period. In the 1994 period, the Bank received $6.1
million in funds from principal repayments and $5.2 million from
the sales of such securities; $5.0 million of these funds were
reinvested in mortgage-backed securities. In the 1995 period, the
Bank also received $10.0 million in cash from sales of
investments held in its securities available for sale portfolio
and also $6.3 million from maturities of investments. The
securities sold were those acquired in the OIB merger. The cash
proceeds were principally invested in short term notes of local
municipalities. Investment securities purchased in the 1995
period totaled $12.3 million, of which $4.7 million were held for
resale. In the 1994 period, the Bank purchased $15.2 million in
securities, mainly municipal securities, and $1.4 million in
securities held for resale. Cash funds received from the
disposition of real estate properties owned amounted to $2.8
million in the nine month period ended June 30, 1995 compared to
$6.1 million in the same 1994 period.
The Bank is required to maintain minimum levels of liquid assets
as defined by the OTS regulations, such as United States
Government and federal agency securities. This requirement,
which may be varied by the OTS, is based upon a percentage of
deposits and short-term borrowings. The required ratio is
currently 5.00%. The Bank's ratio was 6.68% at June 30, 1995. The
Bank anticipates maintaining its liquidity at or above the level
required by regulatory agencies.
At June 30, 1995 the Bank had $18.1 million in outstanding
commitments to originate loans, $37.2 million in commitments to
sell loans, and $32.6 million in unused lines of credit primarily
available under home equity loan credit lines. The Bank had no
material commitments for capital expenditures as of June 30,
1995. The vast majority of the commitments to sell loans are best
effort commitments with no negative impact if the commitments are
not filled in their entirety. Management intends to fund the
loan commitments from internal operations and available liquid
assets. Any shortfall in obtaining the funds internally will be
satisfied by additional borrowings. As a member of the Federal
Home Loan Bank (FHLB) system, the Bank may borrow from the FHLB
of New York. The Bank maintains a $23.4 million line of credit
with the FHLB. The Bank had $14.4 million in borrowings against
the line of credit at June 30, 1995.
The Financial Institutions Reform Recovery and Enforcement Act of
1989 (FIRREA), among other things, imposed more stringent capital
requirements, increased deposit insurance premiums, restricted
investment activities, restricted loans to one borrower, and
increased the required ratio of housing related assets in order
to qualify as an insured institution. The Bank's capital exceeds
all regulatory requirements.
The regulatory capital requirements and First DeWitt Bank's
capital position as of June 30, 1995 are as follows;
Capital
Capital Requirement Excess
(Dollars in Thousands)
Amount % Amount % Amount %
Tangible Capital $ 36,195 5.9% $ 9,262 1.5% $ 26,933 4.4%
Core Capital 36,195 5.9 18,524 3.0 17,672 2.9
Risk-based Capital 41,081 10.5 31,232 8.0 9,849 2.5
The OTS has proposed an increase in the core capital requirement,
from the current 3% to a level that is expected to be between 4%
and 5%.
In August, 1995, the FDIC Board determined to reduce the
insurance premiums assessed on deposits insured by the Bank
Insurance Fund ("BIF"), from the current range of 23 to 31 basis
points, which is the range of premiums currently paid on deposits
insured by the Savings Association Insurance Fund ("SAIF"), to a
range of 4 to 31 basis points. The FDIC estimated that in
excess of 95% of banks whose deposits are insured through
the BIF would be assessed at the lowest premium rate. Due
to the reserve levels of the SAIF, the FDIC is not reducing
SAIF insurance premiums and it is not expected that, absent
legislative developments, the insurance premiums assessed on SAIF
deposits could be reduced until the end of the decade. Most of
the deposits held by the Bank are insured through the SAIF and,
although the Bank currently pays the next lowest premium assessed
on SAIF deposits, any reduction in BIF premiums, without a
similar reduction in SAIF premiums, would likely place the Bank
at a competitive disadvantage since BIF insured institutions
could either: (1) pass through to depositors in the form of
higher rates the reduction in deposit premiums, which could cause
the Bank to increase rates on its deposits without an offsetting
reduction in premium expense; (2) increase BIF insured
institutions profitability, which may not be available to the
Bank; or (3) a combination of both. Management continues to
monitor the situation and is working with various trade
organizations the Bank is affiliated with to achieve equality in
the insurance premium assessment.
In connection with the above-mentioned action, there has been
an additional proposal regarding the recapitalization of the SAIF
fund and a possible consolidation of the BIF and SAIF funds. One
feature of this proposal calls for a special one-time assessment
on all SAIF-insured institutions of approximately 85 basis points
to bring the SAIF fund up to its required level of
capitalization. It is assumed that after the assessment takes
place, that the on-going level of insurance premium assessments
for the SAIF-insured institutions would be reduced to the same
range as proposed for the BIF-insured institutions. Based upon
the Bank's deposit base at June 30, 1995, the special assessment
would cause a charge to pre-tax earnings of approximately $4.0
million, while a reduction in the SAIF insurance premium
insurance assessment rate from 26 basis points to 4 basis points
would reduce annual premium expenses by approximately $1.0
million. It is not known at this time when and if the proposal
will be approved and implemented.
Results of Operations
---------------------
Comparison of Three Months Ended June 30, 1995 and June 30, 1994
----------------------------------------------------------------
First State recorded net income of $958,000, or $.24 per share,
for the quarter ended June 30, 1995 compared to net income of
$800,000, or $.21 per share, for the same quarter in 1994. Net
interest income increased $327,000 and other income increased
$865,000 in the quarter ended June 30, 1995 over the same 1994
period. Operating expenses and loan loss provisions also
increased $600,000 and $400,000, respectively, over the same 1994
quarter. Additional information regarding the components of the
statement of income follow.
Total interest income increased $2.8 million during the quarter
ended June 30, 1995 compared to the same period in 1994. The
increase in interest income was primarily due to the $2.3 million
increase in interest on mortgage loans and the increase in
interest on consumer and commercial loans of $595,000. Both
increases were attributable to the growth in the size of the
loan portfolios. The loan portfolios totaled $506.1 million at
June 30, 1995 compared to $402.8 million at June 30, 1994.
Interest income from the investment securities portfolio
increased $51,000 and was offset by a $117,000 decrease in
interest income from the investment securities available for sale
portfolio during the 1995 quarter. The Bank primarily invests its
funds in loans and intends to continue to be active in
originating loans. Adjustable rate and shorter term fixed rate
loans are mainly originated for the loan portfolio while long-
term fixed rate loans are mainly originated with the intent of
selling the loans to others. If non-accrual loans of $13.9
million at June 30, 1995 had been current in accordance with
their original terms, the Bank would have realized additional
interest income of approximately $312,000 during the quarter
ended June 30, 1995. The average yield on loans and investments
was 8.25% at June 30, 1995.
Total interest expense increased $2.5 million in the quarter
ended June 30, 1995, compared to the same period in 1994. The
increase was mainly due to the $2.3 million increase in interest
expense on deposits and was attributable to the volume increase
in the amount of deposits and also to increased interest rates
paid on deposits. The increased interest rates paid on deposits
reflect the increases in general market interest rates. The
average interest rate on deposits was 4.07% at June 30, 1995.
Deposits increased to $543.2 million at June 30, 1995 from
$451.1 million at June 30, 1994. The volatility in interest
rates during the quarter has increased competition among
financial institutions for the acquisition of deposits,
particularly in the rates paid on certificates of deposit. The
Bank continued to successfully market the special eight and
fourteen month certificate of deposit programs which were
introduced during the December 1994 quarter. The Bank will
continue to offer deposit programs that are competitively priced
to attract new deposits as well as retain savings of existing
depositors. Interest on borrowed money increased $181,000 in the
1995 quarter mainly because of increased borrowings. Borrowings
totaled $27.7 million, with $14.4 million in overnight
borrowings, at June 30, 1995 compared to $16.0 million at June
30, 1994. The average cost of deposits and borrowings was 4.14%
at June 30, 1995.
Net interest income increased $327,000 during the quarter ended
June 30, 1995, compared to the same period in 1994. The interest
income and interest expense elements of the changes in net
interest income are described above.
The provision for loan losses amounted to $600,000 in the quarter
ended June 30, 1995. This was $400,000 more than the provision
made in the same 1994 quarter. The increased provision was made
after the regular quarterly loan review and is primarily related
to the increased size of the loan portfolio. Loan loss reserves
at June 30, 1995, after $600,000 in loss provisions, $32,000 in
recoveries, and $405,000 in losses charged against the reserve
during the quarter, were $5.8 million. See the "Financial
Condition" section of this report for additional details and a
discussion of non-accrual loans, loss provisions, and loss
reserves.
Total other income increased $865,000 during the quarter ended
June 30, 1995, compared to the same 1994 quarter. The principal
changes from the 1994 period were an increase of $580,000 in loan
fees and other loan charges, an increase of $158,000 in the
"other" category of other income, and an increase in gain of
sales of loans and investments of $95,000. The gains were
realized on loans originated and securities purchased
specifically for resale. The increase in loan fees and service
charges was mainly attributable to fees collected in connection
with credit card activities and other consumer loan business.
First State obtained a serviced credit card portfolio through the
merger with Ocean. First State has found the arrangement to be
profitable and expanded their business with the servicer. The
effect of the accounting for this credit card portfolio has
caused increases in the areas of consumer loan interest income;
loan fees and other loan charges; and loan expenses. The
increase in the "other" category of other income was mainly due
to increased cash surrender values of life insurance policies on
certain executive officers. The policies were not in effect in
the 1994 period. In addition the Bank settled several
outstanding issues with the Internal Revenue Service (IRS) during
the quarter. The Bank received refunds on issues dating back to
1974. The Bank received interest on these refunds totaling
$117,000 that is reflected in this category.
Total operating expenses increased $600,000 during the quarter
ended June 30, 1995 compared to the same 1994 quarter. The
principal changes were an increase in loan expenses of $844,000
and a decrease in problem asset expenses, inclusive of real
estate owned writedowns, of $270,000. The increase in loan
expenses was mainly due to servicing costs in connection with
credit card activities. See discussion, above, regarding these
credit card activities. The decrease in problem asset expenses
was mainly attributable to asset write-downs. Asset write-downs
were $100,000 in the 1995 quarter compared to $500,000 in the
1994 period. Real estate owned and non-accrual assets are
discussed in the "Financial Condition" section of this report.
The income tax expense of $374,000 incurred in the quarter ended
June 30, 1995 and income tax expense of $340,000 incurred in the
quarter ended June 30, 1994 was due to the generation of taxable
income. The Corporation adopted the Statement of Financial
Accounting Standard 109, "Accounting for Income Taxes" ("FAS
109"), effective October 1, 1992. A blended rate of income tax
expense was used over the fiscal year ended September 30, 1994,
utilizing all remaining estimated benefit from the implementation
of FAS 109. This blended rate is slightly less than the expected
rate of tax on pretax income. No benefit from FAS 109 is
expected in the current fiscal year. The current fiscal year,
however, has been affected by the Corporation's investment mix.
A higher concentration of tax-free assets are now owned by First
State resulting in an actual tax percentage that is less than
would ordinarily be expected. The Corporation does not expect any
material effects, with regard to rate of income tax on taxable
income, from the business combination with OIB.
Comparison of Nine Months ended June 30, 1995 and June 30, 1994
---------------------------------------------------------------
First State recorded net income of $2.9 million, or $.75 per
share, ($.72 per fully diluted share)for the nine month period
ended June 30, 1995 compared to net income of $2.7 million, or
$.71 per share, for the same period in 1994. Net interest income
increased $907,000 and other income increased $1.3 million in the
same period. Operating expenses and loan loss provisions also
increased $1.5 million and $108,000, respectively, over the same
1994 period. Additional information regarding the components of
the statement of income follow.
Total interest income increased $6.8 million during the nine
month period ended June 30, 1995 compared to the same period in
1994. Interest income on loans of $7.1 million, offset by a
$316,000 decrease in interest on mortgage-backed securities,
mainly account for the change. Interest income on mortgage loans
increased $5.4 million and interest on consumer and commercial
loans increased $1.7. Both increases were attributable to the
growth in the size of the loan portfolios. The loan portfolios
totaled $506.1 million at June 30, 1995 compared to $402.8
million at June 30, 1994. Interest on mortgage-backed securities
decreased $316,000 during the 1995 period mainly because of
prepayments of such securities. Interest income from the
investment securities portfolio increased $396,000 while interest
income on investment securities available for sale decreased
$360,000 in the 1995 period. The changes in income reflect the
changes in the size of the portfolios. The investment securities
portfolio increased to $23.3 million at June 30, 1995 from $19.8
million at June 30, 1994. The investment securities available for
sale portfolio decreased to $10.0 million at June 30, 1995 from
$18.3 million at June 30, 1994. A substantial portion of the
investment securities available for sale portfolio were held by
OIB and the securities were sold in October, 1994. The Bank
primarily invests its funds in loans and intends to continue to
be active in originating loans. Adjustable rate and shorter term
fixed rate loans are mainly originated for the loan portfolio
while long-term fixed rate loans are mainly originated with the
intent of selling the loans to others. If non-accrual loans of
$13.9 million at June 30, 1995 had been current in accordance
with their original terms, the Bank would have realized
additional interest income of approximately $1.0 million during
the nine months ended June 30, 1995. The average yield on loans
and investments was 8.25% at June 30, 1995.
Total interest expense increased $5.9 million in the nine months
ended June 30, 1995, compared to the same period in 1994. The
increase was principally due to the $5.2 million increase in
interest expense on deposits. The increased interest expense was
mainly attributable to the volume increase in the amount of
deposits and also to the increased interest rates paid on
deposits. The increased interest rates paid on deposits reflect
the increases in general market interest rates. The average
interest rate on deposits was 4.07% at June 30, 1995. Deposits
increased to $543.2 million at June 30, 1995 from $451.1 million
at June 30, 1994. The general increase in market interest rates
has increased competition among financial institutions for the
acquisition of deposits, particularly in the rates paid on
certificates of deposit. The Bank continued to successfully
market the special eight and fourteen month certificate of
deposit programs which were introduced during the December 1994
quarter. The Bank will continue to offer deposit programs that
are competitively priced to attract new deposits as well as
retain savings of existing depositors. Interest on borrowed
money increased $674,000 in the 1995 period mainly because of
increased borrowings. Borrowings totaled $27.7 million at June
30, 1995 compared to total borrowings of $16.0 at June 30, 1994.
The average cost of deposits and borrowings was 4.14% at June 30,
1995.
Net interest income increased $907,000 during the nine months
ended June 30, 1995, compared to the same period in 1994. The
interest income and interest expense elements of the changes in
net interest income are described above.
The provision for loan losses amounted to $1.1 million in the
nine months ended June 30, 1995. This was $108,000 more than the
provision made in the same 1994 period. Loan loss reserves were
$5.8 million at June 30, 1995. See the "Financial Condition"
section of this report for additional details and a discussion of
non-accrual loans, loss provisions, and loss reserves.
Total other income increased $1.3 million during the nine months
ended June 30, 1995, compared to the same 1994 period. The
principal changes from the 1994 period were an increase of $1.1
million in loan fees and other loan charges, an increase of
$304,000 in the "other" category of other income, and a decrease
in gain of sales of investments of $228,000. The decrease in gain
on sales of investments reflects a loss on sale of investments of
$144,000 in the 1995 period (attributable to the sale of several
of OIB's investment securities in October 1994) compared to a
$84,000 gain on sale of investments in the nine month period
ended June 30, 1994. The increase in loan fees and service
charges was mainly attributable to fees collected in connection
with credit card activities and other consumer loan business.
First State obtained a serviced credit card portfolio through the
merger with Ocean Independent Bank and has expanded their
business with the servicer. The effect of the accounting for
this credit card portfolio has caused increases in the areas of
consumer loan interest income; loan fees and other loan charges;
and loan expenses. The increase in the "other" category of other
income was mainly due to increased cash surrender values of life
insurance policies on certain executive officers placed in effect
in September, 1994. In addition the Bank settled several
outstanding issues with the Internal Revenue Service (IRS) during
the quarter. The Bank received refunds on issues dating back to
1974. The Bank received interest on these refunds totaling
$117,000 that is reflected in this category.
Total operating expenses increased $1.5 million during the nine
month period ended June 30, 1995 compared to the same 1994
period. The principal changes were an increase in loan expenses
of $1.9 million, a decrease in compensation and employee benefits
expense of $234,000, and a decrease of $325,000 in problem asset
expenses. The increase in loan expenses was mainly due to
servicing costs in connection with credit card activities. See
discussion, above, regarding First State's credit card
activities. The decrease in compensation and employee benefits
was mainly attributable to the savings effected by the merger of
OIB and also due to the elimination of employee stock ownership
plan expenses (the plan was fully vested). The reduction in
problem asset expenses is related to the reduction in problem
assets in the 1995 period and to the reduction in Real Estate
Owned writedowns.
The income tax expense of $1.4 million incurred in the nine month
period ended June 30, 1995 and income tax expense of $1.0 million
incurred in the nine month period June 30, 1994 was due to the
generation of taxable income. The Corporation adopted the
Statement of Financial Accounting Standard 109, "Accounting for
Income Taxes" ("FAS 109"), effective October 1, 1992. A blended
rate of income tax expense was used over the fiscal year ended
September 30, 1994, utilizing all remaining estimated benefit
from the implementation of FAS 109. This blended rate is slightly
less than the expected rate of tax on pretax income. No benefit
from FAS 109 is expected in the current fiscal year. The current
fiscal year, however, has been affected by the Corporation's
investment mix. A higher concentration of tax-free assets are
now owned by First State resulting in an actual tax percentage
that is less than would ordinarily be expected. The Corporation
does not expect any material effects, with regard to rate of
income tax on taxable income, from the business combination with
Ocean.
PART II. OTHER INFORMATION
FIRST STATE FINANCIAL SERVICES, INC.
----------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
The company is not engaged in any legal
proceedings of a material nature at the present time.
From time to time, First DeWitt is a party to legal
proceedings within the normal course of business.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) None
(b) No reports on form 8-K have been filed during
the quarter ended June 30, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
First State Financial Services, Inc.
Dated: 08/15/95 By: Michael J. Quigley, III
--------------------------
Michael J. Quigley, III
Chairman, President and
Chief Executive Officer
Dated: 08/15/95 By: Emil J. Butchko
--------------------------
Emil J. Butchko
Senior Vice President
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 13,373
<INT-BEARING-DEPOSITS> 1,010
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,025
<INVESTMENTS-CARRYING> 41,070
<INVESTMENTS-MARKET> 41,913
<LOANS> 511,905
<ALLOWANCE> 5,836
<TOTAL-ASSETS> 617,850
<DEPOSITS> 543,248
<SHORT-TERM> 22,400
<LIABILITIES-OTHER> 6,174
<LONG-TERM> 5,330
<COMMON> 39
0
0
<OTHER-SE> 40,659
<TOTAL-LIABILITIES-AND-EQUITY> 617,850
<INTEREST-LOAN> 32,467
<INTEREST-INVEST> 2,583
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 35,050
<INTEREST-DEPOSIT> 14,769
<INTEREST-EXPENSE> 15,545
<INTEREST-INCOME-NET> 19,505
<LOAN-LOSSES> 1,100
<SECURITIES-GAINS> (144)
<EXPENSE-OTHER> 2,335
<INCOME-PRETAX> 4,296
<INCOME-PRE-EXTRAORDINARY> 2,907
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,907
<EPS-PRIMARY> .75
<EPS-DILUTED> .72
<YIELD-ACTUAL> 8.25
<LOANS-NON> 13,923
<LOANS-PAST> 146
<LOANS-TROUBLED> 3,486
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,351
<CHARGE-OFFS> 1,687
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 5,836
<ALLOWANCE-DOMESTIC> 417
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,419
</TABLE>
