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, 1996
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 18, 1996, was
approximately $52.5 million.
The number of shares outstanding of the registrant's Common Stock, the
registrant's only class of outstanding capital stock, as of December 18,
1996, was 3,929,455.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the Fiscal Year ended September 30,
1996 (Part II).
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.
On June 24, 1996, the Corporation signed a definitive merger agreement
providing for the acquisition of all of the outstanding stock of First
State Financial Services, Inc. by Sovereign Bancorp, Inc. (Sovereign).
This merger agreement was amended by an agreement (the "amendment") signed
by both parties on November 26, 1996. The amendment calls for First State
shareholders to receive between 1.225 and 1.84 shares of Sovereign's common
stock under a floating exchange ratio for each share of First State common
stock if Sovereign's average closing price as defined in the amendment (the
"Sovereign Market Value") is greater than or equal to $8.00 but less than
or equal to $12.04. Within this range, the exchange ratio will be $14.75
divided by the Sovereign Market Value. If the Sovereign Market Value is
greater than $12.04, the exchange ratio will be 1.225. If the Sovereign
Market Value falls below $8.00, the agreement may be terminated by First
State unless certain conditions are met. In a related agreement, Sovereign
was given an option to purchase up to 783,000 shares of First State's
issued and outstanding common stock if certain conditions occur. The
merger is subject to certain conditions, including approval by First
State's shareholders and various regulatory authorities, and is expected to
be completed by the first calendar quarter of 1997.
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 operation
of the Corporation and Ocean for the year ended September 30, 1994 prior to
restatement is as follows:
Year ended
September 30, 1994
---------------------
(in thousands)
The Corporation:
Net Interest Income $ 9,058
Net Income 3,189
Ocean:
Net Interest Income 2,429
Net Income 312
Combined:
Net Interest Income 21,487
Net Income 3,501
Prior to the combination, Ocean's fiscal year ended December 31. In
recording the pooling-of-interests combination, Ocean's unaudited 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.
The Bank conducts its business through 14 full-service banking offices
located in Belleville, Bloomfield, Brick Township, Cedar Grove,
Englishtown, Hopatcong, Morris Plains, Ocean, Toms River, Wall 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.
At September 30, 1996, the Bank had deposits of $554.3 million and loans of
$490.0 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.
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,
1996 1995 1994
-------- ------- --------
Return on assets (0.90)% 0.67 % 0.70 %
(net income divided by average total assets)
Return on equity (13.51)% 10.27 % 9.62 %
(net income divided by average equity)
Equity-to-assets ratio 6.69 % 6.56 % 7.27 %
(average equity divided by average assets)
Dividend payout ratio N/M 20.79 % 13.19 %
(dividends declared per share divided by net income per share)
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,
1996 compared to 1995 1995 compared to 1994
Increase / (Decrease) Increase / (Decrease)
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans $ 1,543 $ 2,443 $ 3,986 $ 7,634 $ 2,141 $ 9,775
Mortgage-backed Securities 790 (85) 705 (301) (48) (349)
Investment securities (308) (7) (315) 598 (2) 596
Investments available for sale 367 (53) 314 (648) 69 (579)
Federal Funds 263 (48) 215 (79) 67 (12)
Investments required by law 21 (36) (15) 24 (41) (17)
Total income on interest earning assets $ 2,676 $ 2,214 $ 4,890 $ 7,228 $ 2,186 $ 9,414
Interest Bearing Liabilities
NOW and money market deposits $ 178 $ (43) $ 135 $ 207 $ 85 $ 292
Passbook accounts (256) (77) (333) (563) (108) (671)
Certificate accounts 1,630 879 2,509 4,324 3,622 7,946
Borrowed money 3 (25) (22) 587 163 750
Total expense on interest bearing liabilities $ 1,555 $ 734 $ 2,289 $ 4,555 $ 3,762 $ 8,317
Net interest income $ 1,121 $ 1,480 $ 2,601 $ 2,673 $(1,576) $ 1,097
</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>
September 30,
1996 1995 1994 1993 1992
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 $ 303,834 56.90 284,449 51.32 $ 301,292 63.78 $ 247,520 60.09 $ 237,348 59.89
5 or more family 26,706 5.00 23,645 4.27 20,102 4.26 17,767 4.31 13,286 3.35
Commercial 65,418 12.25 55,792 10.07 44,222 9.36 34,860 8.46 31,300 7.90
Construction &
land (1) 12,146 2.27 15,368 2.77 11,385 2.41 9,296 2.26 14,838 3.74
Loans held for
resale 9,245 1.74 67,219 12.13 3,095 .66 10,937 2.66 10,160 2.56
Mortgage-backed
securities 30,618 5.74 18,915 3.41 18,835 3.99 26,022 6.32 30,811 7.78
Total 447,967 83.90 465,388 83.97 398,931 84.46 346,402 84.10 337,743 85.22
Less:
Unearned discounts &
deferred fees (93) 338 850 1,373 1,648
Market value allowance
on loans held for resale 139 - - - -
Allowance for
loan losses 9,915 4,634 4,918 6,614 5,891
Net 438,006 460,416 393,163 338,415 330,204
Consumer loans:
Home equity 26,503 4.96 27,442 4.95 26,350 5.58 26,915 6.54 24,137 6.08
Credit cards 17,079 3.20 19,729 3.56 10,338 2.19 11,289 2.74 10,008 2.52
Property
improvement - .00 1,405 .25 1,708 .36 2,284 .55 2,875 .73
Student loans 306 .06 658 .12 530 .11 505 .12 775 .20
Savings account 1,263 .24 1,122 .20 935 .20 929 .23 1,277 .32
Auto 662 .12 1,031 .19 627 .13 461 .11 380 .10
Other 1,866 .35 1,990 .36 1,420 .30 1,940 .47 2,176 .55
Total 47,679 8.93 53,377 9.63 41,908 8.87 44,323 10.76 41,628 10.50
Less (Plus):
Unearned discounts &
deferred fees (134) (136) (128) (125) (120)
Allowance for
loan losses 1,097 493 341 253 269
Net 46,716 53,020 41,695 44,195 41,479
Commercial
loans 38,289 7.17 35,470 6.40 31,509 6.67 21,158 5.14 16,948 4.28
Less:
Unearned discounts &
deferred fees 678 123 110 67 36
Allowance for
loan losses 1,272 955 1,092 1,244 840
Net 36,339 34,392 30,307 19,847 16,072
Total loans & mortgage-
backed securities $ 533,935 100.00 $ 554,235 100.00 $ 472,348 100.00 $ 411,883 100.00 $ 396,319 100.00
Total net loans & mortgage-
backed securities $ 521,061 $ 547,828 $ 465,165 $ 402,457 $ 387,755
(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,
1996 1995 1994
(Dollars in thousands)
Real estate loan originations;
Residential:
1-4 family $ 76,862 $ 89,216 $ 108,878
5 or more family 4,115 5,954 3,204
Construction and land development 5,947 18,735 9,763
Commercial 20,448 15,193 15,609
Total real estate loan originations 107,372 129,098 137,454
Consumer loan originations 80,341 16,016 15,284
Commercial loan originations 45,695 34,733 33,348
Total loan originations 233,408 179,847 186,086
Real estate loan purchases:
Residential:
1-4 family - 36 --
5 or more family - -- --
Commercial - 256 --
Mortgage-backed securities purchased 16,415 5,809 5,048
Total purchases 16,415 6,101 5,048
Total originations & purchases 249,823 185,948 191,134
Principal repayments & prepayments 125,515 92,835 96,753
Sales of:
Whole loans 81,856 6,924 19,820
Loan participations - -- --
Mortgage-backed securities 1,179 1,630 5,207
Consumer loans 59,635 -- 6,570
Total sales of whole loans, loan
participations,mortgage-backed
securities and consumer loans 142,670 8,554 31,597
Transfers to real estate owned 1,938 2,672 2,319
Total principal repayments, sales and
transfers 270,123 104,061 130,669
Net (decrease) increase in loans &
mortgage-backed securities $ (20,300) $ 81,887 $ 60,465
Loan Maturity.
<TABLE>
The following table sets forth certain information at September 30,
1996, 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, 1998- 2000- 2002- 2007-
1996 1997 1999 2001 2006 2026
( Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential (1) $ 339,785 $ 29,104 $ 35,930 $ 22,697 $ 57,703 $194,351
Commercial 65,418 4,172 5,248 6,817 33,653 15,528
Construction and land 12,146 9,996 2,150 - - -
Consumer loans 47,679 21,124 5,574 5,689 9,996 5,296
Commercial loans 38,289 16,798 5,198 1,980 628 13,685
Mortgage-backed
securities (3) 30,618 2,944 5,263 3,403 4,435 14,573
Total (2) $ 533,935 $ 84,138 $ 59,363 $ 40,586 $106,415 $243,433
(1) Includes loans held for resale.
(2) Of the $449.8 million principal amount of loans maturing after
September 30,1997, loans with an aggregate principal amount of $ 185.8
million have fixed interest rates while $264.0 million have adjustable
rates.
(3) Excludes premium s and discounts.
</TABLE>
The following table sets forth residential mortgage loans at September
30, 1996, by yield range and percent of residential mortgage loans.
Yield Range Amount Percent
14.00% and above $ 570 .17 %
13.00% to 13.99% 374 .11
12.00% to 12.99% 338 .10
11.00% to 11.99% 723 .21
10.00% to 10.99% 4,149 1.22
9.00% to 9.99% 34,868 10.26
8.00% to 8.99% 88,601 26.08
7.00% to 7.99% 141,474 41.63
6.99% and below 68,688 20.22
Total (1) $ 339,785 100.00 %
(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 $207,100,
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. Under certain conditions, the Bank has also originated
single-family residential ARMs that have interest rates which adjust either
after seven or ten years based upon the seven- or ten- year U.S. Treasury
Constant Maturity Index, respectively. The Bank has emphasized the
origination of ARM loans. Consumer demand, however, has been primarily 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 $166.8 million, $113.4
million, and $115.2 million at September 30, 1996, 1995 and 1994,
respectively. The gross servicing fees received in return for servicing
these loans totaled $562,000, $390,000 and $351,000 for the twelve months
ended September 30, 1996, 1995 and 1994, 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 had
significantly expanded it's credit card operations over the past year. The
credit card portfolio was 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, provided for a guaranteed net return to the Bank.
The total credit card receivables outstanding that were serviced by ACS
totaled $16.6 million at September 30, 1996. Total credit card receivables
serviced by ACS reached a high of $74.6 million over the year. On August
15, 1996, the Corporation entered into an agreement to sell the credit card
portfolio. Between August 15 and September 30, 1996, $59.6 million in
credit card receivables were sold at par. Substantially all of the
remaining credit card portfolio was sold at par subsequent to September 30,
1996.
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, 1996 was $19.9 million compared to $18.5 million at September 30, 1995
and $13.9 million at September 30, 1994. 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 the 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 $16.3 million as substandard assets, $5.6 million as
doubtful loans and $6.3 million as loss at September 30, 1996. 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>
Nonperforming assets were as follows:
<CAPTION>
At September 30, 1996
1996 1995 1994 1993 1992
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans:
Mortgage loans $ 17,525 $ 16,280 $ 12,231 $ 16,868 $ 22,132
Consumer &
Commercial loans 2,334 2,223 1,711 3,242 4,132
19,859 18,503 13,942 20,110 26,264
Real estate owned 4,045 8,564 10,004 15,320 18,968
Current restructured
loans 1,416 3,476 4,165 3,872 3,644
Other nonperforming
assets -- -- -- 558 29
Total nonperforming
assets $ 25,320 $ 30,543 $ 28,111 $ 39,860 $ 48,905
</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.
There were approximately $2.4 million and $1.1 million in loans that were
90 days or more past due in principal repayments while maintaining current
interest payments at September 30, 1996 and 1995, respectively.
Interest income recognized on nonperforming loans for the twelve
months ended September 30, 1996, 1995,and 1994 totaled $584,000, $340,000,
and $243,000, respectively.
<TABLE>
The following table presents information concerning the Bank's
allowance for possible loan losses and charge-offs for the years indicated.
<CAPTION>
For the years ended September 30,
1996 1995 1994 1993 1992
(Dollars in thousands)
<S> <C>> <C> <C> <C> <C>
Balance at beginning of $ 6,082 $6,351 $8,111 $6,999 $8,011
period:
Charge-offs:
Residential 1,370 - 92 489 1,745
Commercial real estate 594 351 1,134 0 285
Construction & land - 1,216 2,012 726 1,555
Consumer 623 103 74 373 93
Commercial 252 321 579 200 209
2,839 1,991 3,891 1,788 3,887
Recoveries:
Residential 31 20 32 150 0
Commercial real estate -- -- 357 0 0
Construction & land -- -- 5 288 182
Consumer 95 24 12 22 12
Commercial 15 28 3 0 4
141 72 409 460 198
Net charge-offs 2,698 1,919 3,482 1,328 3,689
Additions charged to
operations 8,900 1,650 1,892 2,440 2,677
Pooling adjustment -- -- (170) -- --
Balance at end of period $12,284 $6,082 $6,351 $8,111 $6,999
Ratio of net charge-offs during
period to avg. loans
outstanding during period 0.535% 0.394% 0.889% 0.358% 1.041%
</TABLE>
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)
1996 1995 1994 1993 1992
Percent Percent Percent Percent Percent
of of of of of
total total total total 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 $ 2,661 67.51 $2,398 70.11 $1,608 71.55 $1,535 71.59 $1,482 71.35
Commercial real
estate 3,767 13.00 935 10.42 914 9.75 1,799 9.03 834 8.56
Construction
and land 3,487 2.41 1,301 2.87 2,396 2.51 3,280 2.41 3,575 4.06
Consumer 1,097 9.47 493 9.97 341 9.24 253 11.49 268 11.39
Commercial 1,272 7.61 955 6.63 1,092 6.95 1,244 5.48 840 4.64
$12,284 100.00 $6,082 100.00 $6,351 100.00 $8,111 100.00 $6,999 100.00
</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 5.13%, 6.13% and 5.51% at September 30, 1996, 1995, and 1994,
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>
Book Value at September 30,
1996 1995 1994
(Dollars in thousands)
Investment Securities:
Held to Maturity Portfolio:
<S> <C> <C> <C>
U.S. Treasury securities $ 847 $ 1,256 $ --
U.S. Government & Agency
obligations 9,310 9,647 8,713
Municipal obligations 14,486 9,986 11,056
24,643 20,889 19,769
Book Value at September 30,
1996 1995 1994
(Dollars in thousands)
Available for Sale Portfolio:
U.S. Treasury securities 743 1,001 5,670
U.S. Government & Agency
obligations -- -- 2,445
Municipal obligations 7,472 2,717 --
U.S. Government mutual funds 231 221 606
Adjustable rate mortgage mutual
funds 579 7,407 8,885
Commercial paper mutual funds 427 419 --
Other investments 14 34 33
9,466 11,799 17,639
Total investment portfolio $ 34,109 $ 32,688 $ 37,408
Average life (in years) of total
investment portfolio (1) 13.0 10.4 6.5
(1) Excludes mutual funds
</TABLE>
<TABLE>
<CAPTION>
At September 30,1996
Average
Life in Amortiz Market Average
ed
Years Cost Value Yield (1)
(Dollars in thousands)
Investment Securities:
Held to Maturity Portfolio:
<S> <C> <C> <C> <C>
U.S. Treasury securities 1.24 $ 847 $ 853 6.59 %
U.S. Government & Agency
obligations 4.74 9,310 9,172 6.10
Municipal obligations 16.49 14,486 14,330 7.57
11.58 24,643 24,355 7.01(1)
Available for Sale Portfolio:
U.S. Treasury securities 1.34 750 743 5.03
Municipal obligations 18.96 7,720 7,472 7.44
U.S. Government mutual funds -- 250 231 6.02
Adjustable rate mortgage mutual
funds -- 582 579 5.96
Commercial paper mutual funds -- 427 427 4.89
Other investments -- 3 14 0.00
17.39(2) $ 9,732 $ 9,466 7.02
Total investment portfolio 13.03(2) $34,375 $ 33,821 6.99 %
(1) Tax equivalent yield
(2) Excludes mutual funds
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
1 Year or 1 to 5 Years 6 to 10 Years More than 10
less Years
Amortized Avg. Amortized Avg. Amortized Avg. Amortized Avg.
Cost Yield(1) Cost Yield(1) Cost Yield(1) Cost Yield(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity Portfolio:
U.S. Treasury
securities $ 500 6.50 % $ 347 6.27 % $ - % $ - %
U.S. Government
& Agency obligations -- 7,250 5.97 1,060 6.03 1,000 7.07
Municipal obligations 1,555 5.98 -- 1,970 7.09 10,961 7.88
2,055 6.11% 7,597 6.00 3,030 6.72 11,961 7.81
Available for Sale Portfolio:
U.S. Treasury
securities -- 750 5.03 -- --
Municipal obligations -- -- 419 6.76 7,300 7.48
Mutual funds 1,260 5.61 -- -- --
Other investments -- -- -- 3 --
1,260 5.61 750 5.03 419 6.76 7,303 7.48
$ 3,315 5.92 % $ 8,347 5.91 % $3,449 6.72 % $19,264 7.68 %
(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,
1996 1995 1994
(Dollars in thousands)
Deposits $ 695,483 $ 623,172 $ 411,106
Withdrawals 731,838 555,480 376,841
Net deposits (withdrawls) (36,355) 67,692 34,265
Interest credited 22,965 20,654 13,087
Net increase in deposits $ (13,390) $ 88,346 $ 47,352
The following table presents the average nominal interest rates on
certificate accounts outstanding at September 30, 1996
Certificates Average
Amount as % of interest
deposits rate
(Dollars in thousands)
Market rate certificates maturing
in the quarter ending:
December 31, 1996 $104,609 18.88 % 5.07 %
March 31, 1997 76,197 13.75 5.20
June 30, 1997 12,582 2.27 5.36
September 30, 1997 95,589 17.24 5.47
December 31, 1997 3,823 .69 5.69
March 31, 1998 3,254 .59 5.61
June 30, 1998 3,003 .54 5.64
September 30, 1998 4,014 .72 5.60
Oct. 1, 1998-
Sept. 30, 2006 17,312 3.12 6.27
Total certificate
accounts $320,383 57.80 % 5.32 %
At September 30, 1996 the Bank had jumbo certificate accounts in the amount
of $100,000 or more maturing as follows:
Amount
(In thousands)
Within:
One Year $ 30,596
One to Three Years 200
Total $ 30,796
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 $63.3 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 three years
ended September 30, 1996.
The following table sets forth information with respect to borrowings:
At September 30,
1996 1995 1994
(Dollars in thousands)
Borrowings outstanding $ 5,928 $ 23,105 $ 31,738
Weighted average rate paid on
borrowings 7.08% 6.76% 5.75%
Year Ended September 30,
1996 1995 1994
(Dollars in Thousands)
Maximum amount of borrowings
outstanding at any month end: $ 50,429 $ 27,730 $ 31,738
Approximate average borrowings
outstanding $ 18,079 $ 18,028 $ 7,048
Approximate weighted average
rate paid 6.02% 6.16% 5.12%
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.
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")($67.3 million of deposits at September
30, 1996, 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 "adequately capitalized" under the above definitions
and as such, FDIC approval is required for the Bank to accept or renew
brokered deposits.
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, 1996.
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,
1996, is approximately $5.3 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, 1996,
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, 1996 was $139,000.
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, 1996, the Bank met each of its capital requirements.
The Bank's tangible and leverage ratios were both 5.24%. This exceeded
applicable requirements by 3.74% or $22.8 million (tangible), and 3.24% or
$13.7 million (leverage). The Bank's risk-based capital ratio was 9.40%,
which exceeded applicable requirements by 1.40% or $5.5 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, 1996:
At September 30, 1996
Capital Actual Excess
Requirement % Capital % Capital %
(Dollars in thousands)
Tangible $ 9,143 1.5 % $ 31,954 5.2 % $ 22,811 3.7 %
Leverage 18,285 3.0 31,954 5.2 13,669 2.2
Risk-based 31,419 8.0 36,921 9.4 5,502 1.4
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, 1996 was 5.13%,
which exceeds the applicable 5% liquidity requirement. Its short-term
liquidity ratio for September, 1996, was 2.77%.
Insurance of Deposits Accounts. The Bank paid $1.3 million in federal
deposits insurance premiums to the FDIC for the year ended September 30,
1996. 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") ($67.3 million of deposits at
September 30, 1996 were insured through the Bank Insurance Fund (the
"BIF"), the deposit insurance fund that insures most commercial bank
deposits). On September 30, 1996, the Deposit Insurance Funds Act of 1996
(the "Funds Act") was enacted into law. The Funds Act amended the Federal
Deposit Insurance Act in several ways to recapitalize the SAIF and reduce
disparity in the assessment rates for BIF and the SAIF.
The Funds Act authorized the FDIC to impose a special assessment on
all institutions with SAIF-assessable deposits in the amount necessary to
re-capitalize the SAIF. As implemented by the FDIC, the special assessment
has been fixed, subject to adjustment, at 0.657% of an institution's SAIF-
assessable deposits, and the special assessment was paid on November 27,
1996. The special assessment is based on the amount of SAIF-assessable
deposits held at March 31, 1995, as adjusted under the Funds Act. For the
Bank, the special assessment on the deposits held on March 31, 1995,
amounted to $1.3 million (before giving effect to any tax benefits).
The Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or
to achieve the designated reserve ratio of 1.25%, except on those of its
member institutions that are not classified as "well capitalized" or that
have been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. The Bank has not been so classified
by the FDIC or the OTS. In view of the re-capitalization of the SAIF, the
FDIC proposed on October 8, 1996, a reduction in the assessment rate for
SAIF-assessable deposits for periods beginning on October 1, 1996. The
proposed assessment rates would range from 0% to 0.27% of deposits.
In addition, the Funds Act expanded the assessment base for the
payment on the bonds ("FICO bonds") issued in the late 1980s by the
Financing Corporation to re-capitalize the now defunct Federal Savings and
Loan Insurance Corporation. Beginning January 1, 1997, the deposits of
both BIF and SAIF insured institutions will be assessed for the payments on
the FICO bonds. Until December 31, 1999, or such earlier date on which the
last savings association ceases to exist, the rate of assessment for BIF
assessable deposits shall be one-fifth of the rate imposed on SAIF-
assessable deposits. It has been estimated that the rates of assessment
for the payments on the FICO bonds will be 0.0129% for BIF-assessable
deposits and 0.0644% for SAIF-assessable deposits beginning January 1,
1997.
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, 1996, 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, 1996 of $3.4 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,
1996, dividends from the FHLB-NY to the Bank amounted to $241,000. 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
acquirer's home state on terms no more restrictive than those imposed by
the target state on the acquirer. 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.
State. 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 14 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, one in 1993 and two in 1996.
Personnel
At September 30, 1996, the Holding Company and subsidiaries had
approximately 196 employees, including approximately 62 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, 1996, 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, financial condition, and liquidity of the
Company and Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5 - Market for Registrants Common Equity and Related Stockholder
Matters
The information contained on page 45 of the 1996 Annual Report under
the caption "Market Information for Common Stock" is incorporated herein by
reference. Information regarding dividend restrictions contained on page
40 of the 1996 Annual Report under the caption "(16) Stockholder's Equity
and Regulatory Matters" of the notes to the consolidated financial
statements is also incorporated herein by reference.
Item 6 - Selected Financial Data
The information contained on page 4 of the 1996 Annual Report under
the caption "Selected Consolidated Financial and Other Data" is
incorporated herein by reference.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
The information contained on pages 5 through 15 of the 1996 Annual
Report under the caption "Management's Discussion and Analysis" is
incorporated herein by reference.
Item 8 - Financial Statements and Supplementary Data
The Financial Statements and the Report of Independent Auditors'
Report appearing on pages 16 through 44 of the 1996 Annual Report are
incorporated herein by reference.
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, 1996 Position Held
Michael J. Quigley, III 56 Chairman, President and Chief
Executive Officer
First State Financial Services,Inc.
Chairman, President and Chief
Executive Officer
First DeWitt Bank.
Emil J. Butchko 61 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 54 Vice President, First State
Financial Services, Inc.
Sr. Vice President, First DeWitt
Bank.
Robert H. Blum 48 Vice President, First DeWitt Bank.
Joseph J Burghardt 61 Vice President, First Dewitt Bank.
Alan M. Chadrjian 40 Vice President, First DeWitt Bank.
John M. Fields, Jr. 33 Vice President and Principal
Accounting Officer,
First State Financial Services,Inc.
Vice President and Controller,
First DeWitt Bank.
John H. Isemann 54 Vice President, First State
Financial Services, Inc.
Vice President, First DeWitt Bank.
Richard O Lindsey 56 Vice President, First Dewitt Bank.
Marie G. Martino 55 Secretary, First State Financial
Services, Inc.
Vice President and Secretary, First
DeWitt Bank.
Henrik Tvedt, Jr. 35 Vice President, First DeWitt Bank.
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, 1996
- Consolidated Balance Sheets at September 30, 1996 and 1995
- Consolidated Statements of Operations for each of the years in the
three-year period ended September 30, 1996
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three-year period ended September 30, 1996
- Consolidated Statements of Cash Flows for each of the years in the
three year period ended September 30, 1996
- 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)
10.6 Special Termination Agreements between the Bank and the
Holding Company and Messrs. Fields and Lindsey
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, 1996
Exhibit 10.6 Special Termination Agreements between the Bank and the
Holding Company and Messrs. Fields and Lindsey
SPECIAL TERMINATION AGREEMENT
This AGREEMENT is made effective as of September 20, 1995,
by and between First State Financial Services, Inc. (the
"Company"), a corporation organized under the laws of the State
of Delaware, with its office at 1120 Bloomfield Avenue, West
Caldwell, New Jersey, and John M. Fields, Jr. ("Executive"). The
term "Bank" refers to First DeWitt Bank, the wholly-owned
subsidiary of the Company.
WHEREAS, the Company recognizes the substantial contribution
Executive has made to the Company and the Bank and wishes to
provide him with further incentive by protecting his position
therewith for the period and under the circumstances provided in
this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to
serve in the position of Vice President and Controller of the
Bank, a position of substantial responsibility;
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and
conditions hereinafter provided, the parties hereto agree as
follows:
1. TERM OF AGREEMENT.
The term of this Agreement shall be deemed to have commenced
as of the date first above written and shall continue for a
period of thirty-six (36) full calendar months thereafter.
Commencing on the first anniversary date of this Agreement and
continuing at each anniversary date thereafter, the Agreement
shall renew for an additional year such that the remaining term
shall be three (3) years unless written notice is provided to
Executive at least ten (10) days and not more than twenty (20)
days prior to any such anniversary date, in which event this
Agreement shall cease at the end of thirty-six (36) months
following such anniversary date. Prior to the written notice
period for nonrenewal, the Board of Directors of the Holding
Company ("Board") will conduct an evaluation of the Executive for
purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's
meeting.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the
Company (as herein defined) followed at any time during the term
of this Agreement by the voluntary or involuntary termination of
Executive's employment by the Bank or the Company, other than for
Cause, as defined in Section 2(c) hereof, the provisions of
Section 3 shall apply. Upon the occurrence of a Change in
Control, Executive shall have the right to elect to voluntarily
terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or
benefits, or relocation of his principal place of employment by
more than 30 miles from its location immediately prior to the
Change in Control.
(b) A "Change in Control" of the Bank or the Company shall
mean a change in control of a nature that: (i) would be required
to be reported in response to Item 1(a) of the current report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); or (ii) results in a Change in Control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933
and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date
hereof (provided that in applying the definition of change in
control as set forth under the rules and regulations of the OTS,
the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation, such a Change in Control shall be
deemed to have occurred at such time as (a) any "person" (as the
term is used in Section 13(d) and 14(d) of the Exchange Act) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities, or
makes an offer to purchase securities, of the Company
representing 20% or more of the combined voting power of the
Company's outstanding securities, except for any securities
purchased by an employee stock ownership plan established by the
Company or the Bank and approved by the Incumbent Board (as
defined below); or (b) individuals who constitute the Board of
Directors of the Company on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent
to the date hereof whose election was approved by a vote of at
least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Company's
stockholders was approved by the Company's Nominating Committee,
shall be, for purposes of this clause (b), considered as though
he were a member of the Incumbent Board; or (c) a plan of
reorganization, merger, consolidation or sale of all or
substantially all the assets of the Bank or Company or similar
transaction occurs in which the Bank or the Company is not the
resulting entity; or (d) a proxy statement shall be distributed
soliciting proxies from stockholders of the Company, seeking
stockholder approval of a plan of reorganization, merger or
consolidation of the Company or Bank with one or more
corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities
not issued by the Bank or the Company shall be distributed; or
(e) a tender offer is made for 20% or more of the voting
securities of the Bank or Company then outstanding.
(c) Executive shall not have the right to receive
termination benefits pursuant to Section 3 hereof upon
Termination of Cause. The term "Termination for Cause" shall
mean termination upon intentional failure to perform stated
duties, personal dishonesty which results in loss to the Company
or one of its affiliates, willful violation of any law, rule,
regulation (other than traffic violations or similar offenses) or
final cease and desist order which results in substantial loss to
the Company or one of its affiliates, or any material breach of
this Agreement. For purposes of the Section, no act, or the
failure to act, on Executive's part shall be "willful" or
"intentional" unless done, or omitted to be done, not in good
faith and without reasonable belief that the action or omission
was in the best interest of the Company or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed
to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the
members of the Board at a meeting of the Board called and held
for that purpose (after reasonable notice to Executive and an
opportunity for him, together with counsel, to be heard before
the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Any stock
options or limited rights granted to the Executive under any
stock option plan or any unvested awards granted under any other
stock benefit plan of the Bank, the Company or any subsidiary
thereof, shall become null and void effective upon Executive's
receipt of Notice of Termination for Cause pursuant to Section 4
hereof and shall not be exercisable by Executive at any time
subsequent to such Termination for Cause, unless it is determined
in arbitration pursuant to Section 4 hereof that Cause for the
termination of Executive did not exist.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at
any time during the term of this Agreement by the voluntary or
involuntary termination of the Executive's employment, other than
for Termination for Cause, the Company shall be obligated to pay
Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case my be,
as severance pay or liquidated damages, or both, a sum equal to
three (3) times the average of the Executive's three preceding
years' annual base salary from the Bank and the Company, which
base salary shall exclude bonuses, but which shall include any
salary deferred by the Executive (under a 401(k) or similar plan)
for such years. At the election of the Executive, which election
is to be made within thirty (30) days of the date of this
Agreement, and during the month of January in each year, and
which election is irrevocable for the calendar year in which it
is made, such payment may be made in a lump sum or paid in equal
monthly installments during the thirty-six (36) months following
the Executive's termination. In the event that no election is
made, payment to the Executive will be made on a monthly basis
during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank
or the Company followed at any time during the term of this
Agreement by the Executive's voluntary or involuntary termination
of employment, other than for Termination for Cause, the Company
shall cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by
the Bank for the Executive prior to his severance. Such coverage
and payments shall cease upon expiration of thirty-six (36)
months after termination of employment.
(c) Notwithstanding the preceding paragraphs of this
Section 3, in the event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive under said paragraph (the
"Termination Benefits") would be deemed to include an
"excess parachute payment" under Section 280G of the
Internal Revenue Code of 1986 (the "Code") or any
successor thereto, and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to three (3) times Executive's "base amount," as
determined in accordance with said Section 280G, and
the Non-Triggering Amount would be greater than the
aggregate value of the Termination Benefits (without
such reduction) minus the amount of tax required to be
paid by Executive thereon by Section 4999 of the Code,
then the Termination Benefits shall be reduced to the
Non-Triggering Amount. The allocation of the reduction
required by the preceding paragraphs of this Section 3
shall be determined by the Executive.
4. NOTICE OF TERMINATION
Any purported termination by the Company, or by the
Executive, shall be communicated by Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate the
specific termination provision in this Agreement relied upon and
shall set forth in detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment
under the provision so indicated. "Date of Termination" shall
mean the date specified in the Notice of Termination (which, in
the case of a Termination for Cause, shall not be less than
thirty (30) days from the date such Notice of Termination is
given). If within thirty (30) days after any Notice of
Termination for Cause is given, the Executive notifies the
Company that a dispute exists concerning the termination, the
Date of Termination shall be the date on which the dispute is
finally determined, either by written agreement of the parties,
by a binding arbitration award, and provided further that the
Date of Termination shall be extended by a notice of dispute only
if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the
Company will continue to pay the Executive his full compensation
in effect when the notice giving rise to the dispute was given
(including, but not limited to, annual base salary) and continue
him as a participant in all compensation, benefit and insurance
plans in which he was participating when the notice of dispute
was given, until the dispute is finally resolved in accordance
with the Agreement. Amounts and benefits paid under this Section
pending resolution of the dispute in arbitration shall be offset
against any amounts and benefits that are determined to be due
Executive under this Agreement as a result of the termination of
his employment.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments
provided in this Agreement shall be paid in cash or check from
the general funds of the Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the
parties hereto and supersedes any prior agreement between the
Company and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring
to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject
to receiving fewer benefits than those available to him without
reference to this Agreement.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge,
pledge, or hypothecation, or to execution, attachment, levy, or
similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action
shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the
benefit of, Executive, the Company and their respective
successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by
an instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed
to have been waived, nor shall there be any estoppel against the
enforcement of any provision of this Agreement, except by written
instrument of the party charged with such waiver or estoppel. No
such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate
only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or
as to any act other than that specifically waived.
9. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any
part of any provision, is held invalid, such invalidity shall not
affect any other provision of this Agreement or any part of such
provision not held so invalid, and each such other provision and
part thereof shall to the full extent consistent with law
continue in full force and effect.
10. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included
solely for convenience of reference and shall not control the
meaning or interpretation of any of the provisions of this
Agreement.
11. GOVERNING LAW.
The validity, interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of
Delaware, unless otherwise specified herein.
12. ARBITRATION.
Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators sitting in a
location selected by the employee within fifty (50) miles from
West Caldwell, New Jersey, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having
jurisdiction; provided, however, that Executive shall be entitled
to seek specific performance of his right to be paid until the
Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
13. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to
this Agreement shall be paid or reimbursed by the Company if
Executive is successful pursuant to arbitration or settlement.
14. INDEMNIFICATION.
The Company shall provide the Executive (including his
heirs, executors and administrators) with coverage under a
standard directors' and officers' liability insurance policy at
its expense, and shall indemnify the Executive (and his heirs,
executors and administrators) to the fullest extent permitted
under Delaware law and as provided in the Company's certificate
of incorporation against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action,
suit or proceeding in which he may be involved by reason of his
having been a director or officer at the time of incurring such
expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
15. SIGNATURES.
IN WITNESS WHEREOF, First State Financial Services, Inc. has
caused this Agreement to be executed by its duly authorized
officer, and Executive has signed this Agreement, on the 20th day
of September, 1995.
ATTEST: FIRST STATE FINANCIAL SERVICES,INC.
/s/Emil J. Butchko
- ---------------------------
BY: /s/Michael J. Quigley, III
--------------------------------------
WITNESS:
/s/Emil J. Butchko /s/John M. Fields, Jr.
- ---------------------------- --------------------------------------
Executive
Seal
SPECIAL TERMINATION AGREEMENT
This AGREEMENT is made effective as of 2nd day of June,
1995, by and between FIRST DEWITT BANK, a federally chartered
stock savings bank (the "Bank"), and RICHARD O. LINDSEY
("Executive"). Any reference to "Company" herein shall mean
FIRST STATE FINANCIAL SERVICES, INC. or any successor thereto.
WHEREAS, the Bank recognizes the substantial contribution
Executive has made to the Bank and wishes to protect his position
therewith for the period provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to
serve in the position of Vice President and Controller of the
Bank, a position of substantial responsibility;
NOW, THEREFORE, in consideration of the contribution of
Executive, and upon the other terms and conditions hereinafter
provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced
as of the date first above written and shall continue for a
period of thirty-six (36) full calendar months thereafter.
Commencing on the first anniversary date of this Agreement and
continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an
additional year. The Board will conduct a performance evaluation
of the Executive for purposes of determining whether to extend
the Agreement, and the results thereof shall be included in the
minutes of the Board's meeting. If Executive is also a director
then he shall abstain from any and all voting with respect to the
extension of the term of such Executive's Agreement.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control of the
Company (as herein defined) of the Bank or the Company followed
at any time during the term of this Agreement by the voluntary
(as provided in the next sentence) or involuntary termination of
Executive's employment, other than for Cause, as defined in
Section 2(c) hereof, the provisions of Section 3 shall apply.
Upon the occurrence of a Change in Control, Executive shall have
the right to elect to voluntarily terminate his employment at any
time during the term of this Agreement following any demotion,
loss of title, office or significant authority, reduction in his
annual compensation or benefits, or relocation of his principal
place of employment by more than 30 miles from its location
immediately prior to the Change in Control.
(b) A "Change in Control" of the Bank or the Company shall
mean an event of a nature that: (i) would be required to be
reported in response to Item 1(a) of the current report on Form 8-
K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); or (ii) results in a Change in Control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933
and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date
hereof ;or (iii) without limitation, such a Change in Control
shall be deemed to have occurred at such time as (a) any "Person"
(as the term is used in Section 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-
3 under the Exchange Act), directly or indirectly, of securities
of the Bank or the Company representing 25% or more of the Bank's
or the Company's outstanding securities, except for any
securities of the Bank purchased by the Company in connection
with the conversion of the Bank to the stock form and any
securities purchased by the Bank's employee stock ownership plan
and trust; or (b) individuals who constitute the Board on the
date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election
was approved by a vote of at least two-thirds of the directors
comprising the Incumbent Board or whose nomination for election
by the Company's stockholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a
member of the Incumbent Board; or (c) a plan of reorganization,
merger, consolidation, sale of all or substantially all the
assets of the Bank or Company or similar transaction in which the
Bank or the Company is not the resulting entity occurs and which
the Incumbent Board does not approve of or consent to; or (d) a
proxy statement soliciting proxies from stockholders of the
Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or Bank or
similar transaction with one or more corporations as a result of
which the outstanding shares of the class of securities then
subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the
Bank or the Company shall be distributed and proxies approving
such plan or reorganization, merger or consolidation of the
Company or Bank are received and voted; or (e) a tender offer is
made for 25% or more of the outstanding securities of the Bank or
Company and shareholders owning beneficially or of record 25% or
more of the outstanding securities of the Bank or Company have
tendered or offered to sell their shares pursuant to such tender
offer and such tendered shares have been accepted by the tender
offeror.
(c) Executive shall not have the right to receive
termination benefits pursuant to Section 3 hereof upon
Termination of Cause. The term "Termination for Cause" shall
mean termination because of the Executive's intentional failure
to perform stated duties, personal dishonesty, incompetence,
willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation
(other than traffic violations or similar offenses) or final
cease and desist order, or any material breach of any material
provision of this Agreement. In determining incompetence, the
acts or omissions shall be measured against standards generally
prevailing in the savings institution industry. Notwithstanding
the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the members of
the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive
was guilty of conduct justifying Termination for Cause and
specifying the particulars thereof in detail. The Executive
shall not have the right to receive compensation or other
benefits for any period after Termination of Cause.
3. TERMINATION
(a) Upon the occurrence of a Change in Control, followed at
any time during the term of this Agreement by the voluntary or
involuntary termination of the Executive's employment, other than
for Termination for Cause, the Bank shall be obligated to pay the
Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case my be,
as severance pay, a sum equal to the average of the five
preceding years' annual base salary, including bonuses and any
other cash compensation paid or accrued by the Bank for the
benefit of the Executive during such years, and the amount of any
benefits received pursuant to any employee benefit plans on
behalf of the Executive maintained by the Bank during such years,
excluding benefits continued pursuant to (b) below. In the event
the Executive was not employed by the Bank for five years at the
time of the Change in Control, the sum shall equal the annualized
average of the portion of such period during which the Executive
performed services for the Bank. In the event of a short taxable
year or period of less than a full year, the compensation paid or
accrued for the Executive during such period shall be annualized
before applying the above formula. At the election of the
Executive, or his estate, as the case may be, which election is
to be made on an annual basis during the month of January of each
year (and which election is irrevocable for such year; and
provided that the first election may be made within thirty days
of the execution of this Agreement), such payment may be made in
a lump sum or paid in equal monthly installments during the
twelve (12) months following the Executive's termination. In the
event that no election is made, payment to the Executive will be
made on a monthly basis during the remaining term of this
Agreement.
(b) Upon the occurrence of a Change in Control of the Bank
or the Company followed at any time during the term of this
Agreement by the Executive's voluntary or involuntary termination
of employment, other than for Termination for Cause, the Bank
shall cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by
the Bank for the Executive prior to his severance. Such coverage
and payments shall cease upon expiration of twelve (12) months.
(c) Upon the occurrence of a Change in Control, the
Executive will have such rights as specified in any option plan
or restricted stock plan or any other employee benefit plan in
which the Executive was a participant, with respect to options,
restricted stock and/or any other rights, as may have been
granted to the Executive under such plans.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by the
Executive shall be communicated by Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate the
specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in
the Notice of Termination (which, in the case of a Termination
for Cause, shall not be immediate). Except as to termination for
Cause, or otherwise as set forth in paragraph (c), in no event
shall the Date of Termination be less than 30 days from the date
Notice of Termination was given.
(c) If, within thirty (30) days after any Notice of
Termination is given, the party receiving such Notice of
Termination notifies the other party that a dispute exists
concerning the termination, except upon the voluntary termination
by the Executive in which case the date of termination shall be
the date specified in the Notice, the Date of Termination shall
be the date on which the dispute is finally determined, either by
mutual written agreement of the parties, by a binding arbitration
award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal there from having
expired and no appeal having been perfected) and provided further
that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such
dispute, the Bank will continue to pay the Executive his full
compensation in effect when the notice giving rise to the dispute
was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and
insurance plans in which he was participating when the notice of
dispute was given, until the earlier of 120 days from the date of
the Notice of Termination or the date upon which the dispute is
finally resolved in accordance with this Agreement. Amounts paid
under this Section pending resolution in arbitration shall offset
against and reduce any amounts determined to be due Executive
under this Agreement. Notwithstanding the foregoing, no
compensation or benefits shall be paid to the Executive in the
event the Executive is Terminated for Cause. In the event that
such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in the Executive's favor, the
Executive shall be entitled to receive all compensation and
benefits which accrued for up to a period of nine months after
the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments
provided in this Agreement shall be paid in cash or check from
the general funds of the Bank.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the
parties hereto and supersedes any prior agreement between the
Bank and Executive, except that this Agreement shall not affect
or operate to reduce any benefit or compensation inuring to
Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject
to receiving fewer benefits than those available to him without
reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge,
pledge, or hypothecation, or to execution, attachment, levy, or
similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action
shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the
benefit of, Executive, the Bank and their respective successors
and assigns.
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by
an instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed
to have been waived, nor shall there be any estoppel against the
enforcement of any provision of this Agreement, except by written
instrument of the party charged with such waiver or estoppel. No
such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate
only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or
as to any act other than that specifically waived.
9. MISCELLANEOUS PROVISIONS
(a) The Bank's Board of Directors may terminate the
Executive's employment at any time. Executive shall not have the
right to receive compensation or other benefits for any period
after Termination for Cause as defined in Section 2(c)
hereinabove.
(b) If the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) (12 USC
1818(e)(3)) or 8(g) (12 USC 1818(g)) of the Federal Deposit
Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's obligations
under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (i) pay the
Executive all or part of the compensation withheld while their
contract obligations were suspended and (ii) reinstate (in whole
or in part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e) (12 USC 1818(e)) or
8 (g) (12 USC 1818(g)) of the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the effective date of the order,
buy vested rights of the contracting parties shall not be
affected.
(d) If the Bank is in default as defined in Section 3(x)
(12 USC 1813 (x)(1)) of the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting
parties.
(e) All obligations of the Bank under this contract shall
be terminated, except to the extent determined that continuation
of the contract is necessary for the continued operation of the
Bank, (i) by the Director, at the time the Resolution Trust
Corporation or Federal Deposit Insurance Corporation ("FDIC")
enters into an agreement to provide assistance to or on behalf of
the Bank; or (ii) by the Office of Thrift Supervision ("OTS") at
the time the OTS or its District Director approves a supervisory
merger to resolve problems related to the operations of the Bank
or when the Bank is determined by the OTS or FDIC to be in an
unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 USC Section 1828(k) and any regulations
promulgated thereunder.
10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any
part of any provision, is held invalid, such invalidity shall not
affect any other provision of this Agreement or any part of such
provision not held so invalid, and each such other provision and
part thereof shall to the full extent consistent with law
continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included
solely for convenience of reference and shall not control the
meaning or interpretation of any of the provisions of this
Agreement.
12. GOVERNING LAW
The validity, interpretation, performance and enforcement of
this Agreement shall be governed in accordance with New Jersey
law, except to the extent superseded by Federal law, as now or
hereafter in effect.
13. ARBITRATION
Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators sitting in a
location selected by the employee within fifty (50) miles from
the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having
jurisdiction; provided, however, that subject to Sections 2(c)
and 4(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under
or in connection with this Agreement.
14. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to
this Agreement shall be paid or reimbursed by the Bank if
Executive is successful on the merits pursuant to a legal
judgment, arbitration or settlement.
15. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs,
executors and administrators) with coverage under a standard
directors' and officers' liability insurance policy at its
expense, and shall indemnify the Executive (and his heirs,
executors and administrators) to the fullest extent permitted
under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred
by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having
been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring
such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements. No
indemnification shall be paid that would violate 12 US 1828(k) or
any regulations promulgated thereunder, or 121 C.F.R. 545.121.
16. SUCCESSOR TO THE BANK
This Agreement shall be binding on the Bank and any
successor or assignee, whether direct or indirect, by purchase,
merger, consolidation or otherwise, to all or substantially all
the business or assets of the Bank, in the same manner and to the
same extent that the Bank would be required to perform if no such
succession or assignment had taken place.
17. SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be
executed by its duly authorized officer, and Executive has signed
this Agreement, on the date first above written.
ATTEST: FIRST DEWITT BANK
/s/Emil J. Butchko
- ------------------------ By:/s/Michael J. Quigley, III
-----------------------------------
Michael J. Quigley, III,
President and Chief
Executive Officer
WITNESS:
/s/Emil J. Butchko
- --------------------------
By:/s/Richard O. Lindsey
-----------------------------------
Richard O. Lindsey
Seal
FIRST STATE FINANCIAL SERVICES, INC.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Form 10-K
September 30, 1996
Exhibit 11. Statement re: Computation of Per Share Earnings
Year ended Year ended Year ended
September September September
30,1996 30,1995 30,1994
(In thousands, except per share amounts)
Net income (loss) ($5,649) $3,998 $3,501
Average primary common
shares outstanding 4,043 3,963 3,847
Primary earnings per
share ($1.40) $1.01 $0.91
Average fully diluted
common shares outstanding(1) 4,050 3,995 3,885
Fully diluted earnings ($1.39) $1.00 $0.90
per share
(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.
FIRST STATE FINANCIAL SERVICES, INC.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Form 10-K
September 30, 1996
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, 1996
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 26,1996, relating to the consolidated balance sheets of First
State Financial Services, Inc. and subsidiary as of September 30, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1996, which report appears in the September 30,
1996 annual report on Form 10-K.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
December 19, 1996
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.
/s/Michael J. Quigley, III Chairman of the Board of Directors,
- ----------------------------- President and Chief Executive
Michael J. Quigley, III Officer
/s/Emil J. Butchko Vice President and Chief Financial
- ----------------------------- Officer
Emil J. Butchko
/s/ John M. Fields, Jr Vice President and Principal
- ----------------------------- Accounting Officer
John M. Fields, Jr.
/s/Henry F. Albinson Director /s/Frank H. Bridge Director
- ----------------------------- ----------------------
Henry F. Albinson Frank H. Bridge
/s/June D. Castano Director /s/Patrick N. Ciccone Director
- ----------------------------- ----------------------
June D. Castano Patrick N. Ciccone
/s/Theodore F. Cox Director /s/Walter J. Davis Director
- ----------------------------- ----------------------
Theodore F. Cox Walter J. Davis
/s/Marie G. Martino Director /s/Ralph M. Riefolo Director
- ----------------------------- ----------------------
Marie G. Martino Ralph M. Riefolo
Dated December 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,874
<INT-BEARING-DEPOSITS> 521
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,466
<INVESTMENTS-CARRYING> 59,071
<INVESTMENTS-MARKET> 58,319
<LOANS> 490,037
<ALLOWANCE> 12,284
<TOTAL-ASSETS> 610,417
<DEPOSITS> 554,320
<SHORT-TERM> 600
<LIABILITIES-OTHER> 14,933
<LONG-TERM> 5,328
<COMMON> 39
0
0
<OTHER-SE> 35,197
<TOTAL-LIABILITIES-AND-EQUITY> 610,417
<INTEREST-LOAN> 58,453
<INTEREST-INVEST> 4,377
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 62,830
<INTEREST-DEPOSIT> 22,965
<INTEREST-EXPENSE> 24,054
<INTEREST-INCOME-NET> 25,185
<LOAN-LOSSES> 8,900
<SECURITIES-GAINS> 69
<EXPENSE-OTHER> 2,851
<INCOME-PRETAX> (7,257)
<INCOME-PRE-EXTRAORDINARY> (5,649)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,649)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
<YIELD-ACTUAL> 8.56
<LOANS-NON> 19,859
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,416
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,082
<CHARGE-OFFS> 2,839
<RECOVERIES> 141
<ALLOWANCE-CLOSE> 12,284
<ALLOWANCE-DOMESTIC> 6,341
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,943
</TABLE>
