SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1995
Commission File Number 0-16329
First State Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
22-2823506
(I.R.S. Employer Identification Number)
1120 Bloomfield Avenue, CN 2449, West Caldwell, New Jersey 07007-2449
(Address of principal executive offices)
(201) 575-5800
(Registrant's telephone number, including area code)
N/A
Former name, former address, and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's class of
common stock at December 31, 1995: 3,889,405 shares of common stock, par
value $.01.
FIRST STATE FINANCIAL SERVICES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets,
December 31, 1995 and
September 30, 1995 3
Consolidated Statements of Income,
three months ended December 31,
1995 and 1994 4
Consolidated Statements of Cash Flows,
three months ended December 31, 1995
and 1994 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION 20
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
(unaudited)
December September
31, 30,
1995 1995
----------- ----------
(in thousands)
ASSETS
Cash on hand and in banks $ 14,304 $ 11,792
Federal Funds - -
Investment securities available for sale 13,981 11,799
Investment securities, at cost 11,016 20,889
Federal Home Loan Bank stock, at cost 3,715 3,715
Loans receivable, net 479,264 461,648
Mortgage loans held for resale 6,168 67,219
Mortgage-backed securities, at cost 30,730 18,961
Accrued interest receivable 3,855 4,046
Office properties and equipment, net 10,656 10,523
Real estate owned 6,047 8,564
Cost in excess of fair value of net 2,299 2,349
assets acquired
Other assets 15,234 15,515
---------- ----------
$ 597,269 $ 637,020
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 538,626 $ 567,710
Borrowed money 12,330 23,105
Advance payments by borrowers for
taxes and insurance 2,017 3,253
Accrued expenses and other liabilities 1,294 1,360
---------- ----------
Total liabilities 554,267 595,428
Stockholders' Equity:
Preferred stock, $.01 par value,
2 million shares authorized;
none issued - -
Common stock, $.01 par value,
8 million shares authorized;
3,898,765 issued;
3,889,405 outstanding at 12/31/95; 39
3,883,765 issued;
3,874,405 outstanding at 9/30/95 39
Paid-in capital 21,031 20,949
Net unrealized loss on investment
securities available for sale (52) (89)
Retained income 21,984 20,693
---------- ----------
Total stockholders' equity 43,002 41,592
---------- ----------
$ 597,269 $ 637,020
---------- ----------
---------- ----------
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Income
(in thousands, except per share data)
Three months ended
December 31,
(unaudited)
1995 1994
--------- ----------
Interest income:
Interest on mortgage loans $ 8,233 $ 7,491
Interest on consumer and commercial
loans 2,568 1,802
Interest on mortgage-backed
securities 363 319
Interest on investments available
for sale 216 107
Interest on investment securities 463 431
--------- ----------
Total interest income 11,843 10,150
--------- ----------
Interest expense:
Interest on deposits 5,828 4,326
Interest on borrowed money 109 255
--------- ----------
Total interest expense 5,937 4,581
--------- ----------
Net interest income 5,906 5,569
Provision for loan losses 300 200
--------- ----------
Net interest income after provision for
loan losses 5,606 5,369
--------- ----------
Other income:
Loan fees and other loan charges 1,815 700
Service charges on deposit accounts 455 423
Net gain on sales of loans 927 1
Net gain (loss) on sales of
investments 110 (156)
Other 155 86
--------- ----------
Total other income 3,462 1,054
--------- ----------
Operating expenses:
Compensation and employee benefits 1,951 1,800
Premises and occupancy costs, net 567 483
Amortization of intangible assets 50 134
Loan expenses 2,287 810
Data processing 300 262
Advertising and promotion 202 201
Federal insurance premiums 296 285
Problem asset expenses, inclusive of
real estate owned write-downs 451 163
Other expenses 701 808
--------- ----------
Total operating expenses 6,805 4,946
--------- ----------
Income before income tax expense 2,263 1,477
Income tax expense 758 516
--------- ----------
Net income $ 1,505 $ 961
--------- ----------
--------- ----------
Primary earnings per share of common
stock $ 0.37 $ 0.25
--------- ----------
--------- ----------
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(in thousands)
Three months ended
December 31,
(unaudited)
1995 1994
---------- ----------
OPERATING ACTIVITIES
Net income $1,505 $ 961
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangible assets 50 134
Depreciation 304 231
Net amortization and accretion of loan fees
and discounts (59) 32
Net amortization and accretion of
investment premium and discount 19 (16)
Net amortization and accretion of MBS
premium and discount 3 6
Decrease (increase) in interest receivable 191 (389)
Proceeds from loan sales 68,673 523
Origination of loans held for resale (6,695) (212)
Net gain on sale of real estate owned (11) -
Net gain on sale of loans (927) (1)
Net (gain) loss on sales of investments (110) 156
Provisions for losses on loans 300 200
Provision for write-downs of real estate
owned 300 -
Decrease in other assets 281 1,547
(Decrease) increase in other liabilities (66) 38
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 63,758 3,210
---------- ----------
INVESTING ACTIVITIES
Net increase in loans, receivable (18,022) (25,660)
Purchase of mortgage-backed securities (13,570) -
Proceeds from sales of mortgage-backed
securities 1,179 -
Principal payments on mortgage-backed
securities 619 956
Proceeds from dispositions of real estate
owned 2,393 549
Office properties and equipment
expenditures (437) (171)
Purchase of investment securities - (2,322)
Purchase of investment securities available
for sale (10,352) -
Proceeds from sale of investment securities
available for sale 16,780 7,671
Proceeds from maturities of investment
securities 1,391 1,515
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (20,019) (17,462)
---------- ----------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (29,084) 26,224
Dividends paid on common stock (214) (159)
Principal repayments of borrowings (10,775) (15,157)
Net decrease in advance payment by
borrowers for taxes and insurance (1,236) (175)
Common stock issued 82 59
---------- ----------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (41,227) 10,792
---------- ----------
Increase (decrease) in cash and cash
equivalents 2,512 (3,460)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 11,792 14,137
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,304 $10,677
---------- ----------
CASH PAID DURING THE PERIOD FOR:
Interest $ 6,210 $ 4,627
Income taxes $ 50 $ 495
NON-CASH TRANSFERS:
Loans classified as Real Estate Owned $ 165 $ 106
Transfer of Investment securities to
Investment securities available for sale $ 8,463 $ 2,300
Reclassification of Loans, receivable to
Mortgage loans held for resale - $ 758
FIRST STATE FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
1. Presentation of Statements
In the opinion of management the accompanying unaudited
consolidated financial statements contain all
adjustments (all which were normal recurring accruals)
necessary for a fair presentation. The results of
operations for the interim period are not necessarily
indicative of the results which may be expected for the
entire year.
First State Financial Services, Inc. is the holding
company for First DeWitt Bank, its principal wholly-
owned subsidiary. Audited consolidated financial
statements for the year ended September 30, 1995 were
filed with the Securities and Exchange Commission.
2. Earnings Per Share
Earnings per share was calculated for each period by
dividing the net income for the period by the average
number of primary shares outstanding over the period.
The actual average primary shares outstanding were
4,021,761 for the three months ended December 31, 1995,
and 3,917,358 for the three months ended December 31,
1994.
FIRST STATE FINANCIAL SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Total assets of First State Financial Services, Inc. were $597.3
million at December 31, 1995. This is a decrease of $39.8
million, or 6.24%, in total assets from September 30, 1995. The
principal decreases in assets were in mortgage loans held for
resale of $61.1 million, in investment securities of $9.9 million
and in real estate owned of $2.5 million. First DeWitt Bank
("the Bank") sold $67.7 million in mortgage loans, categorized as
mortgage loans held for resale, for a net gain on sales of
$927,000. The cash generated from the sales was principally used
to repay maturing brokered and other high yielding certificates
of deposit and also to repay borrowings. The Financial
Accounting Standards Board created a one-time window enabling
banks to reallocate their investment securities between their
Available-for-Sale and their Held-to-Maturity accounts without
tainting their total portfolios. The Bank took this opportunity
to restructure fixed rate securities into adjustable rate
mortgage-backed securities, to sell poor performing securities
and to improve the overall yield of its portfolios. The
portfolio restructuring was the principal reason for the $9.9
million decrease in investment securities. The decrease in real
estate owned is elaborated on below.
The principal increases in assets were increases in net loans
receivable of $17.6 million, in investment securities available
for sale of $2.2 million, in mortgage-backed securities of $11.8
million and in cash on hand and in banks of $2.5 million. The
increase in loans receivable was mainly due to the continued
aggressive marketing of a number of competitive loan products.
The Bank originated $26.5 million in mortgage loans, $9.2 million
in consumer loans, and $10.8 million in commercial loans since
September 30, 1995. The increase in investment securities
available for sale was mainly attributable to the securities
portfolio restructuring mentioned above. The increase in
mortgage-backed securities was mainly due to outright purchases
of such securities. The increase in cash on hand and in banks
was mainly due to the increase in volume of check clearances.
Cash on hand and in banks included approximately $3.0 million of
funds in Nationar Bank ("Nationar") for funds cleared by that
correspondent institution. On February 6, 1995, the Acting
Superintendent of Banks of the State of New York ("the
Superintendent") took possession of the business assets of
Nationar for purposes of an orderly liquidation of their affairs.
First DeWitt has received $4.7 million from Nationar for check
clearances and believes that, as a preferred creditor, the
remaining $3.0 million balance will be received in the near
future. First DeWitt's proof of claim for $3.0 million has been
accepted and approved by the superintendent. First DeWitt's
status as a preferred creditor was concurred with by counsel for
the Superintendent.
Total liabilities were $554.3 million at December 31, 1995. This
is a decrease of $41.2 million, or 6.91%, in total liabilities
from September 30, 1995. The decrease was mainly due to a
reduction in deposits of $29.1 million and a reduction in
borrowed money of $10.8 million. Cash generated from the sale of
$67.7 million in mortgage loans, mentioned earlier, was used to
repay borrowings and also to repay brokered and other high yield
certificates of deposit as they matured. Jumbo certificates of
deposit, which include brokered deposits, decreased $45.2 million
from September 30, 1995. The decrease in deposits due to jumbo
certificates was partially offset by new deposits of $10.2
million received in a branch office opened in October 1995 and
also from a $5.6 million increase in checking deposits.
Management anticipates that the deposit restructure detailed
above will decrease overall cost of funds on a prospective basis.
Nonperforming assets, including current restructured loans,
decreased to $23.2 million at December 31, 1995 from $30.5
million at September 30, 1995. The table below details the
composition of these assets.
12/31/95 9/30/95
(in thousands)
Nonaccrual loans $15,572 $18,503
Real estate owned 6,047 8,564
Current restructured loans 1,581 3,476
-------- --------
Total nonperforming assets $23,200 $30,543
-------- --------
-------- --------
When a loan becomes 90 days or more past due or the collection of
interest becomes uncertain, the accrual of income is
discontinued. These loans are classified as nonaccrual and
interest income is only recognized subsequently in the period
collected. Loans are returned to an accrual status when all past
due amounts have been collected and factors indicating doubtful
collectibility on a timely basis no longer exist. If nonaccrual
loans had been current in accordance with their original terms,
the Bank would have realized additional interest income of
approximately $300,000 for the period from September 30, 1995 to
December 31, 1995.
The allowance for loan losses totaled $5.7 million at December
31, 1995. An analysis of the allowance for loan losses follows:
Balance at September 30, 1995 $6,081,000
Charge-offs:
Consumer loans 123,000
Mortgage loans 594,000
Recoveries:
Consumer loans 12,000
-----------
Net charge-offs 705,000
Additions charged to operations 300,000
-----------
Balance at December 31, 1995 $5,676,000
-----------
-----------
Management closely monitors the loan portfolio and is
concentrating on workouts with the Bank's troubled loans and real
estate owned properties. The Bank's loan review committee
analyzes the loan portfolio on a quarterly basis for
classification of problem and potentially problem loans. The
loan review committee also reviews the allocation of loss
reserves to loans. Management believes that the present
allowance for loan losses is adequate in light of management's
assessment of the risk inherent in the portfolio. However, while
management uses its best judgment in providing for possible loan
losses, management recognizes that additional problems could
develop and that future adjustments may be necessary.
In May 1993 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for the Impairment of a Loan."
SFAS No. 114 was amended by SFAS No. 118 in October 1994. SFAS
No. 114, as amended, prescribes the recognition criteria for loan
impairment and the measurement methods for certain impaired loans
whose terms are modified in troubled debt restructurings. The
Bank adopted SFAS No. 114, as amended, effective October 1, 1995,
and the adoption has not had a material impact on the
consolidated financial statements. As a result of the adoption of
SFAS 114, as amended, the Bank had a recorded investment of
$7.7 million in loans defined as impaired at December 31, 1995.
The total allowance associated with these loans totaled $1.4
million at December 31, 1995. The loans classified as impaired
in accordance with SFAS 114 were classified as such due
management's belief that it was probable that all amounts due
according to the contractual terms of the loans would not be
collected in full. In conjunction with the adoption, the Bank
chose to not to recognize interest income on impaired loans and
instead recognize the net entire change in net present value of
impaired loans as bad-debt expense.
Real estate owned totaled $6.0 million at December 31, 1995
compared to $8.6 million at September 30, 1995. The decrease was
mainly due to the sales of two properties. Real estate owned is
carried on the Bank's books at fair value less estimated costs to
sell the property. Management recognizes that future adjustments
may be necessary if the real estate values decline.
Liquidity and Capital Resources
First State's principal sources of funds are funds provided from
operations and dividends received from subsidiaries. The Bank's
principal sources of funds are deposits; scheduled loan
amortization payments; sales and prepayments of loan principal;
sales and repayments of mortgage-backed securities, sales and
maturities of investment securities and short-term investments;
borrowings and funds provided from operations.
The financing activities section of the Consolidated Statement of
Cash Flows reflects a net decrease in deposits of $29.1 million
during the quarter ended December 31, 1995. The decrease
consisted of $34.9 million in net withdrawals offset by $5.8
million in interest credited to deposit accounts. The decrease
was mainly due to the repayment of jumbo high interest rate
certificates of deposit as they matured. See the "Financial
Condition" section of this report for additional information.
Deposits increased $26.2 million during the same 1994 quarter.
The increase consisted of $21.9 million in net deposits along
with $4.3 million in interest credited to deposit accounts. The
Bank reduced borrowings by $10.8 million in the 1995 period
compared to the net repayment of $15.2 million in borrowings in
the 1994 period.
Cash provided by operating activities amounted to $63.8 million
in the quarter ended December 31, 1995 compared to $3.2 million
in the 1994 period. The 1995 activity was mainly attributable to
the sale of mortgage loans from the Bank's mortgage loans held
for resale accounts. The proceeds from the sales were primarily
used to repay certificates of deposit as they matured and also to
repay borrowings.
In the investing activities section of the Statement of Cash
Flows, a net increase in loans receivable of $18.0 million is
reported for the quarter ended December 31, 1995 compared to a
net increase of $25.7 million for the same 1994 period. Loans
originated in the 1995 quarter totaled $46.5 million. Loan
amortization, repayments and proceeds from sales of loans
provided funds for the origination of loans. The Bank actively
markets several competitive loan programs and has successfully
utilized the services of loan solicitors for the origination of
mortgage loans. Cash generated from the sale and maturity of
investment securities totaled $18.2 million, and cash generated
from mortgage-backed securities sales and repayments totaled $1.8
million in the 1995 quarter. The funds received were reinvested
in investment securities held for resale of $10.4 million and
mortgage-backed securities of $13.5 million. See the "Financial
Condition" section of this report for additional information. In
the 1994 quarter, the Bank received $7.7 million in cash from
activities in its investments held for sale accounts and $1.5
million from maturities of investments. The cash proceeds were
mainly reinvested in short term notes of local municipalities.
Cash funds received from the disposition of real estate owned
properties amounted to $2.4 million in the quarter ended
December 31, 1995 compared to $549,000 in the same 1994 period.
At December 31, 1995 First State's liquid assets consisted of
$14.3 million in cash on hand and in banks and $21.2 million in
securities which qualify as liquid assets for Office of Thrift
Supervision (OTS) regulatory requirements. The cash balances
will be used in normal operations. First DeWitt is required to
maintain minimum levels of liquid assets as defined by the OTS
regulations, such as United States Government and federal agency
securities. This requirement, which may be varied by the OTS, is
based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 5.00%. The Bank's ratio was 6.41%
at December 31, 1995. The Bank anticipates maintaining its
liquidity at or above the level required by regulatory agencies.
The Bank had $15.3 million in outstanding commitments to
originate loans, $28.8 million in commitments to sell loans, and
$35.5 million in unused lines of credit primarily available under
home equity loan credit lines at December 31, 1995. The Bank had
no material commitments for capital expenditures at that date.
The vast majority of the commitments to sell loans are best-
effort commitments with no negative impact if the commitments are
not filled in their entirety. Management intends to fund the
loan commitments from internal operations and available liquid
assets. Any shortfall in obtaining the funds internally will be
satisfied by additional borrowings. As a member of the Federal
Home Loan Bank (FHLB) system, the Bank may borrow from the FHLB
of New York. The Bank maintains a $60.4 million line of credit
with the FHLB. The Bank had $12.3 million in borrowings against
the line of credit at December 31, 1995.
The Bank's capital exceeds all regulatory requirements and is
categorized as "well capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 definitions. The
regulatory capital requirements and First DeWitt Bank's capital
position as of December 31, 1995 are as follows:
Capital
Capital Requirement Excess
Amount % Amount % Amount %
(Dollars in Thousands)
Tangible Capital $38,892 6.5% $ 8,975 1.5% $29,917 5.0%
Core Capital 38,892 6.5 17,949 3.0 20,943 3.5
Risk-based Capital 43,741 11.3 31,006 8.0 12,735 3.3
The OTS has proposed an increase in the core capital requirement
from the current 3% to a level that is expected to be between 4%
and 5%.
The deposits of the Bank are insured by the FDIC primarily
through the Savings Association Insurance Fund ("SAIF") ($64.1
million of deposits at December 31, 1995 were insured through the
Bank Insurance Fund [the "BIF"], the deposit insurance fund that
insures most commercial bank deposits). Both the SAIF and the
BIF are statutorily required to be recapitalized to a level equal
to 1.25% of insured deposits. Members of the SAIF are currently
paying average deposit insurance premiums of between 24 and 25
basis points per $100 of insured deposits. While the BIF has
reached the required reserve ratio, the SAIF is not expected to
be recapitalized until 2002 at the earliest.
On August 8, 1995, the FDIC established a new assessment rate
schedule of 4 to 31 basis points for BIF members beginning on or
about June 30, 1995. Under the new assessment rate schedule,
approximately 92% of BIF members will pay the lowest assessment
rate of 4 basis points. With respect to SAIF member
institutions, the FDIC determined to retain the existing
assessment rate schedule of 23 to 31 basis points per $100 of
insured deposits. In announcing the assessment reduction for BIF
deposits, the FDIC noted that the premium differential may have
adverse consequences for SAIF members, including reduced earnings
and an impaired ability to raise funds in the capital markets.
Moreover, the FDIC has announced that for the six-month period
commencing January 1, 1996, no insurance assessment will be
levied with respect to an estimated 90% of the banks that are
members of BIF.
Legislation is pending in Congress to recapitalize the SAIF by a
one-time charge to SAIF-insured institutions of approximately
$.85 to $.90 for every $100 of assessable deposits, and to
eventually merge the SAIF with the BIF. If the Bank were subject
to a special assessment of $.85 for every $100 of assessable
deposits, the Bank would be required to pay approximately $4.0
million, or $2.5 million net of income taxes, based upon its
deposits at December 31, 1995.
Results of Operations
Comparison of Three Months Ended December 31, 1995 and
December 31, 1994
First State recorded net income of $1.5 million, or $.37 per
share, for the quarter ended December 31, 1995 compared to a net
income of $961,000, or $.25 per share, for the same quarter in
1994. The most significant contribution to the net income
improvement in the 1995 period was net gains on the sale of loans
of $927,000. Net interest income increased $337,000 in the 1995
quarter; other income, exclusive of net gains on the sales of
loans, increased $1.5 million; and operating expenses increased
$1.9 million in the same period.
Total interest income increased $1.7 million during the quarter
ended December 31, 1995 compared to the same period in 1994. The
increase in interest income was primarily due to the $742,000
increase in interest on mortgage loans and the increase in
interest on consumer and commercial loans of $766,000. The
increases were mainly attributable to the increased average
balance of the loan portfolios outstanding in the 1995 period and
also to the increased average yield of the portfolios. The
average balance of loans outstanding was $483.5 million in the
1995 period compared to $453.2 million in the 1994 period. The
average yield of the loan portfolios was 8.61% at December 31,
1995 compared to 8.07% at December 31, 1994. Interest income
from the investment securities portfolio and also from the
investment securities available for sale increased $109,000
during the 1995 quarter. The Bank primarily invests its funds in
loans and intends to continue to be active in originating loans
both for its own portfolio and also for sale to others. Long-
term, fixed-rate loans are mainly originated with the intent of
selling the loans to others. Adjustable-rate and shorter term
fixed-rate loans are mainly originated for the loan portfolio.
If nonaccrual loans of $15.6 million at December 31, 1995 had
been current in accordance with their original terms, the Bank
would have realized additional interest income of approximately
$300,000 during the quarter ended December 31, 1995. The average
yield on loans and investments was 8.37% at December 31, 1995.
Total interest expense increased $1.4 million (or 29.6%) in the
quarter ended December 31, 1995, compared to the same period in
1994. The increase was mainly due to the $1.5 million increase
in interest expense on deposits and was attributable to the
increased average balance of total deposits outstanding in the
1995 period and also to increased interest rates paid on
deposits. The increased interest rates paid on deposits
reflected the increases in general market interest rates.
Average deposits outstanding during the 1995 period were $549.9
million compared to $496.1 million during the 1994 period. The
average interest rate on deposits was 4.17% at December 31, 1995
compared to 3.52% at December 31, 1994. Proceeds from the sales
of mortgage loans during the 1995 quarter were used to repay high-
rate certificates, mainly jumbo certificates, and also to repay
borrowings. Jumbo certificates were reduced by $45.2 million
during the quarter. The average cost of deposits decreased to
4.17% at December 31, 1995 from 4.27% at September 30, 1995.
Management anticipates that the changes in the deposit portfolio
will continue to have a favorable effect on overall cost of
funds. The Bank will continue to offer deposit programs that are
competitively priced to attract new deposits as well as retain
savings of existing depositors. Interest on borrowed money
decreased $146,000 in the 1995 period. The average interest rate
on deposits and borrowed money was 4.20% at December 31, 1995.
Net interest income increased $337,000 during the quarter ended
December 31, 1995 compared to the same period in 1994. The
interest income and interest expense elements of the changes in
net interest income are described above.
Provisions for loan losses totaled $300,000 in the quarter ended
December 31, 1995 compared to $200,000 in the same 1994 quarter.
The related allowance for loan losses totaled $5.7 million and
was 36.5% of nonaccrual loans at December 31, 1995. Substantially
all of the nonaccrual loans are secured by first mortgage liens
on real property. See "Financial Condition" section for
information regarding factors which influence management's
judgment in determining the amount of additions to the loan loss
allowance. Although management considers the allowance for loan
losses to be adequate, management recognizes that additional
problems could develop and lead to additional loss provisions and
asset write-downs.
Total other income increased $2.4 million in the quarter ended
December 31, 1995. The increased income is mainly attributable
to a $1.1 million increase in loan fees and other loan charges, a
$926,000 net gain on the sales of loans, and a $266,000 net gain
on sales of investments. First State obtained a serviced credit
card portfolio through the merger with Ocean Independent Bank in
October 1994. The effect of the accounting for the credit card
portfolio has caused increases in the areas of consumer loan
interest, loan fees and other loan charges, and loan expenses.
Details regarding First State's serviced credit card portfolio
are discussed below; however, the increase in loan fees and other
loan charges is directly attributable to the credit card
portfolio. The sale of $67.7 million of mortgage loans from the
available-for-sale portfolio generated a net gain on sales of
loans of $927,000. On October 1, 1995, the Corporation adopted
SFAS No. 122, "Accounting for Mortgage Servicing Rights." This
statement requires the recognition of mortgage servicing rights
as an asset when a mortgage loan is sold or securitized and
servicing is retained. The statement also requires the
Corporation to measure the impairment of the servicing rights
based on the difference between the carrying amount of the
servicing rights and their current value. The adoption of SFAS
No. 122 had a material effect on the gain recognized in
connection with the sale detailed above. The Corporation
recorded an asset of $472,000, during the quarter ended December
31, 1995, in connection with loan sales recorded in accordance
with SFAS No. 122. It is anticipated that the volume of mortgage
loan sales and corresponding gains on the sales will be
considerably less going forward. Net gains on the sales of
investments totaled $110,000 in the 1995 quarter compared to a
loss of $156,000 in the 1994 quarter. The loss in 1994 was
mainly attributable to the sale of several of Ocean Independent
Bank's investment securities at time of merger. First State
maintains an investment securities available-for-sale portfolio
of approximately $14.0 million and anticipates periodic gains on
the sales of such securities. The securitites in the available-
for-sale are subject to the accounting requirements of SFAS No.
115 (previously adopted) and are adjusted to market value with
the resulting offset reported in the equity section of the
financial statements.
Total operating expenses increased $1.9 million in the quarter
ended December 31, 1995. The increase is principally
attributable to a $1.5 million increase in loan expenses, a
$151,000 increase in compensation and employee benefits, and a
$288,000 increase in problem asset expenses. Substantially all
of the increase in loan expenses was attributable to the
accounting for credit card expenses. Details regarding First
State's serviced credit card portfolio are discussed separately
below. The $151,000 increase in compensation and employee
benefits was mainly due to the continually rising cost of
employee benefits, a cost of living increase, and the employment
of personnel to staff the new branch office opened in October
1995. The $288,000 increase in problem asset expenses, inclusive
of real estate owned write-downs was mainly due to write-downs on
properties disposed of during the quarter. The "other expenses"
category was greater in the 1994 quarter mainly because of costs
incurred with the acquisition of Ocean Independent Bank.
The Corporation acquired a serviced credit card portfolio through
the acquisition of Ocean Independent Bank in October 1994. The
arrangement with the servicer of the portfolio, Applied Card
Systems (ACS) of Wilmington, Delaware, provides the Corporation
with a guaranteed net return based on the outstanding receivables
associated with the serviced portfolio. The return that is
guaranteed to the Corporation is net of all costs, including
credit loss and cost of funds. The size of the credit card
portfolio subject to this arrangement may be reduced by ACS after
providing First State with certain notices. First State records
all interest income associated with the portfolio in the
"Interest on consumer and commercial loans" caption, and all fees
associated with the portfolio are recorded in the "Loan fees and
other loan charges" caption. The difference between the amounts
received for the two captions above and the net return guaranteed
to the Corporation is considered "credit card expenses" that
represent the fees paid to ACS for their servicing of the
portfolio. This amount is recorded in the "Loan expenses"
caption. The Corporation's business with ACS has expanded, and
this growth has caused an increase in all three income statement
captions. The detail effects of the serviced credit card
portfolio on the income statement for the quarters ended December
31, 1995 and 1994, and the year ended September 30, 1995, are
presented below.
3 Months 12 Months 3 Months
Ended Ended Ended
12/31/95 9/30/95 12/31/94
(in thousands)
Income Statement Caption
Interest on consumer and
commercial loans $ 1,048 $ 2,265 $ 402
Loan fees and other loan charges 1,572 2,991 519
-------- -------- --------
Total credit card income 2,620 5,256 921
Loan expenses 2,274 4,469 792
-------- -------- --------
Net credit card income (pre tax) $ 346 $ 787 $ 129
-------- -------- --------
-------- -------- --------
Net credit card income (after tax) $ 211 $ 480 $ 79
-------- -------- --------
-------- -------- --------
The total credit card receivables outstanding that were serviced
by ACS totaled $25.9 million, $19.7 million and $11.9 million at
December 31, 1995, September 30, 1995, and December 31, 1994,
respectively.
Income tax expense of $758,000 incurred in the quarter ended
December 31, 1995 and income tax expense of $516,000 incurred in
the quarter ended December 31, 1994 was due to the generation of
taxable income.
PART II. OTHER INFORMATION
FIRST STATE FINANCIAL SERVICES, INC.
Item 1. Legal Proceedings
The company is not engaged in any legal
proceedings of a material nature at the present time.
From time to time, First DeWitt is a party to legal
proceedings within the normal course of business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K have been filed
during the quarter ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
First State Financial Services, Inc.
Dated: 02/14/96 By: Michael J. Quigley, III
--------------------------
Michael J. Quigley, III
Chairman, President and
Chief Executive Officer
Dated: 02/14/96 By: Emil J. Butchko
--------------------------
Emil J. Butchko
Senior Vice President
and Treasurer