SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996
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 March 31 ,1996:
3,932,465 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,
March 31 ,1996 and
September 30, 1995 3
Consolidated Statements of Income,
three and six months ended March 31,
1996 and 1995 4
Consolidated Statements of Cash Flows,
six months ended March 30, 1996
and 1995 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)
March 31, September 30,
1996 1995
----------- ----------
(in thousands)
ASSETS
Cash on hand and in banks $ 14,046 $ 11,792
Investment securities available for sale 17,083 11,799
Investment securities, at cost 17,511 20,889
Federal Home Loan Bank stock, at cost 3,715 3,715
Loans receivable, net 496,296 461,648
Mortgage loans held for resale 8,225 67,219
Mortgage-backed securities, at cost 32,855 18,961
Accrued interest receivable 4,054 4,046
Office properties and equipment, net 10,523 10,523
Real estate owned 6,513 8,564
Cost in excess of fair value of net 2,249 2,349
assets acquired
Other assets 15,614 15,515
---------- ----------
$ 628,684 $ 637,020
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 557,629 $ 567,710
Borrowed money 23,429 23,105
Advance payments by borrowers for
taxes and insurance 2,267 3,253
Accrued expenses and other liabilities 2,345 1,360
---------- ----------
Total liabilities 585,670 595,428
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value,
2 million shares authorized;
none issued - -
Common stock, $.01 par value,
8 million shares authorized;
3,932,465 issued;
3,923,105 outstanding at 3/31/96;
3,915,865 issued;
3,906,505 outstanding at 12/31/95 39 39
Paid-in capital 21,199 20,949
Net unrealized loss on investment
securities available for sale (302) (89)
Retained income 22,078 20,693
---------- ----------
Total stockholders' equity 43,014 41,592
---------- ----------
$ 628,684 $ 637,020
========== ==========
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Income
(in thousands, except per share data)
Three months ended Six months ended
March 31, March 31,
(unaudited) (unaudited)
1996 1995 1996 1995
--------- --------- --------- ---------
Interest income:
Interest on mortgage loans $ 7,662 $ 8,039 $ 15,895 $ 15,530
Interest on consumer and
commercial loans 2,954 1,998 5,522 3,800
Interest on mortgage- backed
securities 514 311 877 630
Interest on investments
available for sale 215 117 431 224
Interest on investment securities 256 442 719 873
--------- --------- --------- ---------
Total interest income 11,601 10,907 23,444 21,057
--------- --------- --------- ---------
Interest expense:
Interest on deposits 5,474 4,971 11,302 9,297
Interest on borrowed money 247 267 356 522
--------- --------- --------- ---------
Total interest expense 5,721 5,238 11,658 9,819
--------- --------- --------- ---------
Net interest income 5,880 5,669 11,786 11,238
Provision for loan losses 900 300 1,200 500
--------- --------- --------- ---------
Net interest income after provision
for loan losses 4,980 5,369 10,586 10,738
--------- --------- --------- ---------
Other income:
Loan fees and other loan charges 3,151 824 4,966 1,524
Service charges on deposit accounts 432 439 887 862
Net gain on sales ofloans 127 5 1,054 6
Net gain (loss) on sales of
investments 26 1 136 (155)
Other 163 398 318 484
--------- --------- --------- ---------
Total other income 3,899 1,667 7,361 2,721
--------- --------- --------- ---------
Operating expenses:
Compensation and employee benefits 2,065 1,826 4,016 3,626
Premises and occupancy costs, net 608 552 1,175 1,035
Amortization of intangible assets 50 134 100 268
Loan expenses 3,918 1,018 6,205 1,828
Data processing 312 291 612 553
Advertising and promotion 203 201 405 402
Federal insurance premiums 332 322 628 607
Problem asset expenses, inclusive
of real estate owned write-downs 262 464 713 627
Other expenses 690 741 1,391 1,549
--------- --------- --------- ---------
Total operating expenses 8,440 5,549 15,245 10,495
--------- --------- --------- ---------
Income before income tax expense 439 1,487 2,702 2,964
Income tax expense 131 499 889 1,015
--------- --------- --------- ---------
Net income $ 308 $ 988 $ 1,813 $ 1,949
========= ========= ========= =========
Primary earnings per share
of common stock $ .08 .25 $ .45 $ .50
========= ========= ========= =========
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(in thousands)
Six months ended
March 31,
(unaudited)
1996 1995
--------- ---------
OPERATING ACTIVITIES
Net income $ 1,813 $ 1,949
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangible assets 100 267
Depreciation 607 483
Net amortization and (accretion) ofloan (114) (84)
fees and discounts
Net amortization and (accretion) of
investment premium and discount 10 (27)
Net amortization and (accretion) of MBS
premium and discount 36 23
Increase in interest receivable (8) (1,132)
Proceeds from loan sales 75,100 1,230
Origination of loans held for resale (15,052) (232)
Net gain on sale of real estate owned (11) -
Net gain on sale of loans (1,054) (6)
Net (gain) loss on sales of investments (136) 155
Provisions for losses on loans 400 200
Provision for write-downs of real estate
owned 1,200 500
(Increase) decrease in other assets (99) 791
Increase in other liabilities 985 35
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 63,777 $ 4,152
--------- ---------
INVESTING ACTIVITIES
Net increase in loans, receivable (36,760) (46,928)
Purchase of mortgage-backed securities (15,337) -
Principal payments on mortgage-backed
securities 1,433 1,514
Proceeds from dispositions of real estate
owned 2,688 1,196
Office properties and equipment
expenditures (607) (330)
Purchase of investment securities (7,564) (7,091)
Purchase of investment securities available
for sale (26,969) (415)
Proceeds from sale of investment securities
available for sale 30,044 7,677
Redemption of Federal Home Loan Bank stock - (710)
Proceeds from maturities of investment
securities 2,470 2,840
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES $(50,602) $(42,247)
--------- ---------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (10,081) 54,411
Dividends paid on common stock (428) (352)
Additional borrowings 324 -
Principal repayments of borrowings - (14,407)
Net (decrease) increase in advance payment
by borrowers for taxes and insurance (986) 424
Common stock issued 250 59
--------- ---------
NET CASH USED PROVIDED BY FINANCING ACTIVITIES $(10,921) $ 40,135
--------- ---------
Increase in cash and cash equivalents 2,254 2,040
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,792 14,137
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,046 $ 16,177
--------- ---------
CASH PAID DURING THE PERIOD FOR:
Interest 11,608 9,695
Income taxes 50 988
NON-CASH TRANSFERS:
Loans classified as Real Estate Owned 1,026 1,647
Transfer of Investment securities to
Investment securities available for sale 8,436 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
4,045,364 and 4,037,553 for the three and six months
ended March 31, 1996, respectively; and 3,934,281 and
3,926,162 for the three and six months ended March 31,
1995, respectively.
FIRST STATE FINANCIAL SERVICES, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
On April 30, 1996 the Board of Directors announced that it has
authorized, in principle, a strategic restructuring of the
operations of First State Financial Services, Inc. with the goal
of increasing profitability and substantially enhancing
shareholder value. Key elements of the envisioned plan which are
still being finalized are:
* To better utilize the existing branch network by
concentrating on the Bank's primary market areas in
Essex and Morris counties. Six branch offices outside
of the primary market area would be offered for sale.
* To liquidate a substantial dollar amount of
nonperforming assets by March 1997.
* To implement a comprehensive expense reduction
program and refocus the business of the restructured
company. A specialist will be engaged to assist
Michael J. Quigley, III, in these efforts.
* Upon completion of both the branch sales and asset
dispositions, to enter into a stock repurchase program.
Total assets of First State Financial Services, Inc. were $628.7
million at March 31, 1996. This is a net decrease of $8.3
million, or 1.31%, in total assets from September 30, 1995. The
net decrease was mainly attributable to the sale of $67.7 million
of mortgage loans, in the December quarter by First DeWitt Bank
("the Bank") from its mortgage loans held for resale account.
The cash generated from the mortgage loan sales was used to repay
brokered and other high yielding certificates of deposit, to fund
loans and to fund the purchase of investment securities. The Bank
continues to market a number of competitive loan products. The
Bank originated $50.0 million in mortgage loans, $25.4 million in
consumer loans, and $20.4 million in commercial loans since
September 30, 1995. Loans receivable increased $34.6 million
during the same period. Mortgage-backed securities increased
$13.9 million and investment securities available for sale
increased $5.3 million mainly because of outright purchases of
such securities. 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 used 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 $3.4 million decrease in investment
securities. The decrease in real estate owned is elaborated on
below. 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. Counsel for
the Bank informed management that on May 1, 1996 an order
allowing for payment of interim dividends to creditors was
entered and that all elements are established for a June 26, 1996
payment of the Bank's priority claim, providing no appeal is
filed within thirty days of the order.
Total liabilities were $585.7 million at December 31, 1995. This
is a decrease of $9.8 million, or 1.64%, in total liabilities
from September 30, 1995. The decrease was mainly due to a
reduction in deposits of $10.0 million. Cash generated from the
sale of mortgage loans, mentioned earlier, was used to repay
brokered and other high yield certificates of deposit.
Certificates of deposit, which include brokered deposits,
decreased $16.0 million from September 30, 1995.
The Bank announced that it plans to offer for sale six branch
offices (and one approved, unopened branch site) which are
outside the Bank's primary market area. Those branch offices had
deposits totaling $126.9 million at March 31, 1996. Total assets
will also be reduced in order to fund the sale of the branch
office deposits, mainly through the sale of loans and the sale of
office properties and equipment. Management anticipates that
sales offering brochures will be available to potential
purchasers in June, 1996.
Nonperforming assets, including current restructured loans, were
$31.2 million at March 31, 1996, compared to $23.2 million at
December 31, 1995 and $30.5 million at September 30, 1995. The
table below details the composition of these assets.
3/31/96 12/31/95 9/30/95
-------- --------- --------
(in thousands)
Nonaccrual loans $23,134 $15,572 $18,503
Real estate owned 6,513 6,047 8,564
Current restructured loans 1,575 1,581 3,476
-------- --------- --------
Total nonperforming assets $31,222 $23,200 $30,543
-------- --------- --------
The increase at March 31, 1996 was mainly attributable to ten
loans which were classified as nonaccrual during the quarter.
Included in this increase is a $3.1 million loan which was
carried as nonaccrual loan at September 30, 1995. The loan was
brought current in the December quarter. Factors indicating
doubtful collectibility on a timely basis on this loan appeared
to have been rectified, however, this loan again became over 90
days delinquent in the March quarter. 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 $546,000 for the
quarter ended March, 1996 and $849,000 for the period from
September 30, 1995 to March 31, 1996.
The allowance for loan losses totaled $6.6 million at March 31,
1996. An analysis of the allowance for loan losses follows:
Balance at September 30,1995 $6,081,000
Charge-offs:
Consumer loans 129,000
Mortgage loans 594,000
Commercial loans 13,000
Recoveries
Consumer loans 17,000
-----------
Net charge-offs 719,000
Additions charged to operations 1,200,000
-----------
Balance at March 31, 1996 $6,562,000
===========
Management closely monitors the loan portfolio and is
concentrating on workouts with the Bank's troubled loans and real
estate owned properties. The increased provision for loan losses
recognized during the quarter ended March 31, 1996, is directly
attributable to the increase in problem assets. 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. As
previously announced, the Board of Directors of First State has
authorized a strategic restructuring of the operations of the
company. A significant part of this restructuring involves the
liquidation of substantially all problem assets by March 31,
1997. Information essential to the ultimate determination of the
liquidation values, within this time frame, of all current
problem assets, is being obtained. Management recognizes that
significant additional provisions could be necessary once a
liquidation analysis of the problem assets has been completed.
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
$12.0 million in loans defined as impaired at March 31, 1996.
The total allowance associated with these loans totaled $2.2
million at March 31, 1996. 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 $6.5 million at March 31, 1996 compared
to $6.0 million at December 31, 1995, and $8.6 million at
September 30, 1995. The increase was due to the acquisition of
three properties through foreclosure proceedings. 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.
A key element of the Board of Directors plan to restructure the
operations of First State, mentioned earlier, is to liquidate a
substantial amount of nonperforming assets by March 31, 1997.
The Bank has recently contracted the services of an experienced
problem asset disposition expert to assist in this process.
Additional write-downs, depending upon the availability of
interested purchasers and the speed with which a sale can be
consummated, will be made as considered necessary to dispose of
the problem assets.
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 $10.1 million
during the six month period ended March 31, 1996. The decrease
consisted of $21.4 million in net withdrawals offset by $11.3
million in interest credited to deposit accounts. The decrease
was mainly due to the repayment of high interest rate
certificates of deposit as they matured. See the "Financial
Condition" section of this report for additional information.
Deposits increased $54.4 million during the same 1995 period.
The increase consisted of $45.1 million in net deposits along
with $9.3 million in interest credited to deposit accounts. The
Bank had a special promotion program to attract certificates of
deposit in the 1995 period. Borrowings were increased by
$324,000 million in the 1996 period compared to the net repayment
of $14.4 million in borrowings in the 1995 period.
Cash provided by operating activities amounted to $63.8 million
in the six month period ended March 31, 1996 compared to $4.2
million in the 1995 period. The 1996 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, to
fund loans, and to fund the purchase of securities. Loans
originated for resale totaled $15.1 million in the 1996 period
compared to $232,000 in the 1995 period.
In the investing activities section of the Statement of Cash
Flows, a net increase in loans receivable of $36.8 million is
reported for the six months ended March 31, 1996 compared to a
net increase of $46.9 million for the same 1995 period. Loans
originated totaled $95.8 million and $96.5 million in the 1996
and 1995 periods, respectively. 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 both from sale of investment securities
and from and maturity of securities totaled $32.5 million.
Principal repayments of mortgage-backed securities amounted to
$1.4 million. These funds along with funds from other sources
were utilized to purchase $15.3 million in mortgage-backed
securities and $34.5 million in investment securities, primarily
securities held for resale. See the "Financial Condition"
section of this report for additional information. In the 1995
quarter, the Bank received $7.7 million in cash from activities
in its investments held for sale accounts and $2.8 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 $2.7 million in the six month period ended
March 31, 1996 compared to $1.2 million in the same 1995 period.
At March 31, 1996 First State's liquid assets consisted of $14.0
million in cash on hand and in banks and $15.7 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 5.22%
at March 31, 1996. The Bank anticipates maintaining its
liquidity at or above the level required by regulatory agencies.
The Bank had $24.7 million in outstanding commitments to
originate loans, $3.5 million in commitments to sell loans, and
$42.8 million in unused lines of credit primarily available under
home equity credit and credit card lines at March 31, 1996. The
Bank had no material commitments for capital expenditures at that
date. 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 $18.1 million in borrowings against the line of credit at
March 31, 1996.
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 March 31, 1996 are as follows:
Capital
Capital Requirement Excess
Amount % Amount % Amount %
(Dollars in Thousands)
Tangible Capital $39,243 6.2% $ 9,431 1.5% $29,812 4.7%
Core Capital 39,243 6.2 18,862 3.0 20,381 3.2
Risk-based Capital 44,369 10.8 32,739 8.0 11,630 2.8
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"), with
$67.3 million of deposits at March 31, 1996 insured through the
Bank Insurance Fund (the "BIF"), the deposit insurance fund that
insures most commercial bank deposits.
The FDIC Board has reduced the insurance premium assessed on
deposits insured by the Bank Insurance Fund ("BIF"). The FDIC
reduced the BIF premiums from a range of 23 to 31 basis points,
which is the range of premiums currently paid on deposits insured
by the Savings Association Insurance Fund ("SAIF"), to a range of
0 to 31 basis points. The FDIC estimated that in excess of 90%
of the banks whose deposits are insured through the BIF would be
assessed at the lowest premium rate. Due to the reserve levels
of the SAIF, the FDIC has not proposed a reduction in the SAIF
insurance premiums, and it is not expected that, absent
legislative developments, the insurance premiums assessed on SAIF
deposits could be reduced until the end of the decade. The
deposits held by the Bank are primarily insured through the SAIF
and the reduction in BIF premiums, without a similar reduction in
SAIF premiums, places the Bank at a competitive disadvantage,
since BIF-insured institutions can either: (1) pass through to
depositors in the form of higher rates the reduction in deposit
premiums, which would cause the Bank to increase rates on its
deposits without an offsetting reduction in premium expense; (2)
increase BIF-insured institutions' profitability, which may not
be available to the Bank; or (3) a combination of both.
Management continues to monitor the situation and is working with
the various trade associations the Bank is affiliated with to
achieve equality in the insurance premium assessment.
Legislation has been proposed in Congress to recapitalize the
SAIF fund and possibly consolidate the BIF and SAIF funds. One
feature of this proposal calls for a special one-time assessment
on all SAIF-insured institutions of up to 80 basis points to
bring the SAIF fund up to its required level of capitalization.
It is assumed that after this assessment takes place, the on-
going level of insurance premium assessments for the SAIF-insured
institutions would be reduced to the same range as that of the
BIF-insured institutions. Based upon the Bank's deposit base at
March 31, 1996, the special assessment could cause a charge to
earnings of approximately $4.1 million, or $2.6 million net of
income taxes, while a reduction in the insurance premium
assessment rate from 23 basis points to 3 basis points would
reduce annual premium expenses by approximately $1.1 million, or
$716,000 net of income taxes. It is not known at this time when
and if this legislation will be approved and implemented.
Results of Operations
Comparison of Three Months Ended March 31, 1996 and March 31,
1995
First State recorded net income of $308,000, or $.08 per share,
for the quarter ended March 31, 1996 compared to a net income of
$988,000, or $.25 per share, for the same quarter in 1995. The
most significant factor contributing to the decrease in net
income during the 1996 quarter was the posting of loan loss
provisions. Loan loss provisions in the 1996 quarter were
$900,000 compared to $300,000 in the comparable 1995 quarter.
Total interest income increased $694,000 during the quarter ended
March 31, 1996 compared to the same period in 1995. The increase
in interest income was primarily due to the $956,000 increase in
interest on consumer and commercial loans and the $203,000
increase in interest on mortgage-backed securities. The
increases were mainly attributable to the increased average
balance of the loan and mortgage-backed security portfolios
outstanding. The average balance of consumer and commercial
loans outstanding was $100.5 million in the 1996 period compared
to $77.7 million in the 1995 period and the average balance of
the mortgage-backed security portfolio was $31.8 during the 1996
quarter compared to $17.5 million in the comparable 1995 quarter.
A serviced credit card portfolio, which is included in the
consumer loan category, is described and elaborated upon in the
"operating expenses" section of this report. The decrease of
$377,000 in interest on mortgage loans was mainly attributable to
the sale of $67.7 million of such loans in the December 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. The Bank
originated $23.5 million in mortgage loans during the quarter and
$50.0 million in mortgage loans in the six month period ended
March 31, 1996. 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. The yield on all loan
portfolios was 8.60% at March 31, 1996 compared to 8.38% at March
31, 1995. Interest income from the investment securities
portfolio decreased $186,000 during the 1996 quarter mainly
because of a decrease in the size of the portfolio. If
nonaccrual loans of $23.1 million at March 31, 1996 had been
current in accordance with their original terms, the Bank would
have realized additional interest income of approximately
$546,000 during the quarter ended March 31, 1996. The average
yield on loans and investments was 8.32% at March 31, 1996.
Total interest expense increased $483,000 in the quarter ended
March 31, 1996, compared to the same period in 1995. The increase
was mainly due to the $503,000 million increase in interest
expense on deposits and was attributable to the increased
deposits outstanding in the 1996 period. Average deposits
outstanding during the 1996 period were $543.3 million compared
to $530.3 million during the 1995 period. Management has been
decreasing the Bank's holdings of brokered certificates of
deposits. The average cost of deposits decreased to 4.02% at
March 31, 1996 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 $20,000 in the 1996 period. The average interest rate
on deposits and borrowed money was 4.09% at March 31, 1996.
Net interest income increased $211,000 during the quarter ended
March 31, 1996 compared to the same period in 1995. The interest
income and interest expense elements of the changes in net
interest income are described above.
Provisions for loan losses totaled $900,000 in the quarter ended
March 31, 1996 compared to $300,000 in the same 1995 quarter. The
related allowance for loan losses totaled $6.6 million at March
31, 1996. 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 $2.2 million in the quarter ended
March 31, 1996. The increased income is mainly attributable to a
$2.3 million increase in loan fees and other loan charges and a
$122,000 net gain on the sales of loans. The $2.3 million
increase in loan fees and other loan charges is directly
attributable to the credit card portfolio. 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. The sale of $6.4 million of
mortgage loans from the available for sale portfolio generated a
net gain on sales of loans of $127,000. Net gains on the sales
of investments totaled $26,000 in the 1996 quarter. First State
maintains an investment securities available for sale portfolio
and anticipates periodic gains on the sales of such securities.
The decrease in the "other" category of other income was mainly
due to the recording of a greater amount of cash surrender value
of insurance policies in the 1995 period.
Total operating expenses increased $2.9 million in the quarter
ended March 31, 1996 and was mainly attributable to the increase
in loan expenses. Substantially all of the increase in loan
expenses was due to the accounting for credit card expenses.
Details regarding First State's serviced credit card portfolio
are discussed separately below. The $239,000 increase in
compensation and employee benefits was mainly due to 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 $202,000 decrease in problem asset
expenses, inclusive of real estate owned writedowns was mainly
due to decrease in real estate owned. Real estate owned totaled
$6.5 million at March 31, 1996 compared to $10.3 million at March
31, 1995.
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. First State records all interest
income associated with the portfolio in the "Interest on consumer
and commercial loans" caption and all fees associated with
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 quarter ended March 31, 1996, and for the six-
month period ended March 31, 1996, are presented below.
3 Months 6 Months
Ended Ended
3/31/96 3/31/96
---------- ---------
(in thousands)
Income Statement Caption
Interest on consumer and commercial loans $ 1,297 $ 2,235
Loan fees and other loan charges 2,957 4,529
---------- ---------
Total credit card income 4,254 6,764
Loan expenses 3,963 6,265
---------- ---------
Net credit card income (pre tax) $ 291 $ 499
========== =========
Net credit card income (after tax) $ 178 $ 304
========== =========
The total credit card receivables outstanding that were serviced
by ACS totaled $36.7 million at March 31, 1996 and $25.9 million
at December 31, 1995.
Income tax expense of $131,000 incurred in the quarter ended
March 31, 1996 and income tax expense of $499,000 incurred in the
quarter ended March 31, 1995 was due to the generation of taxable
income.
Comparison of Six Months Ended March 31, 1996 and March 31, 1995
First State recorded net income of $1.8 million, or $.45 per
share, for the six month period ended March 31, 1996 compared to
net income of $1.9 million, or $.50, per share, for the same
period in 1995. The decrease of $136,000 in the 1996 period was
mainly attributable to increased provisions for loan losses.
Loan loss provisions in the 1996 quarter were $1.2 million
compared to $500,000 in the comparable 1995 quarter. The
increase in loan expenses is elaborated on the other expense
section of this report.
Total interest income increased $2.4 million during the six month
period ended March 31, 1996 compared to the same period in 1995.
The increase in interest income was primarily due to the $2.3
million increase in interest income on loans. Interest on
mortgage loans increased $365,000, interest on consumer and
commercial loans increased $1.7 million and interest on mortgage-
backed securities increased $247,000. The increases were mainly
attributable to the increased average balances of the loan and
mortgage-backed security portfolios outstanding. The average
balances of the loan portfolios totaled $488.0 million in the
1996 period compared to $464.0 million in the 1995 period and the
average balance of the mortgage-backed security portfolio was
$26.5 during the 1996 quarter compared to $17.9 million in the
comparable 1995 period. A serviced credit card portfolio, which
is included in the consumer loan category, is described and
elaborated upon in the "Comparison of Three Months Ended March
31, 1996--Results of Operations" section of this report. 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. The Bank originated $95.8 million in
loans during the six month period ended March 31, 1996. 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.
The yield on all loan portfolios was 8.60% at March 31, 1996
compared to 8.38% at March 31, 1995. The Bank's investment
securities available for sale portfolio, which approximated $17.1
million at March 31, 1996, generated an increase in interest
income of $207,000 over the 1995 period. If nonaccrual loans of
$23.1 million at March 31, 1996 had been current in accordance
with their original terms, the Bank would have realized
additional interest income of approximately $849,000 during the
six months ended March 31, 1996. The average yield on loans and
investments was 8.32% at March 31, 1996.
Total interest expense increased $1.8 million in the six month
period ended March 31, 1996, compared to the same period in 1995.
The increase was due to the $2.0 million increase in interest
expense on deposits and was attributable to the increased
deposits outstanding in the 1996 period. Average deposits
outstanding during the 1996 period were $546.6 million compared
to $513.0 million during the 1995 period. Management has been
decreasing the Bank's holdings of brokered certificates of
deposits. The average cost of deposits decreased to 4.02%% at
March 31, 1996 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 $166,000 in the 1996 period. The average interest rate
on deposits and borrowed money was 4.09% at March 31, 1996.
Net interest income increased $548,000 during the six month
period ended March 31, 1996 compared to the same period in 1995.
The interest income and interest expense elements of the changes
in net interest income are described above.
Provisions for loan losses totaled $1.2 million in the quarter
ended March 31, 1996 compared to $500,000 in the same 1995
quarter. The related allowance for loan losses totaled $6.6
million at March 31, 1996. 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 $4.6 million in the six month period
ended March 31, 1996. The increased income is mainly
attributable to a $3.4 million increase in loan fees and other
loan charges, a $1.0 million net gain on the sales of loans, and
a net gain on the sales of investments of $291,000. $3.4 million
of the increase in loan fees and other loan charges is directly
attributable to the credit card portfolio. 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 were previously discussed in the "Comparison of
Three Months Ended March 31, 1996 --Results of Operations"
section of this report. The sale of $74.2 million of mortgage
loans from the available for sale portfolio generated a net gain
on sales of loans of $1.1 million. Net gains on the sales of
investments totaled $136,000 in the 1996 period. First State
maintains an investment securities available for sale portfolio
and anticipates periodic gains on the sales of such securities.
Total operating expenses increased $4.8 million in the six month
period ended March 31, 1996. The increase is mainly attributable
to a $4.4 million increase in loan 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 In the
"Comparison of Three Months Ended March 31, 1996--Results of
Operations " section of this report. The $390,000 increase in
compensation and employee benefits was mainly due to 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.
Income tax expense of $889,000 incurred in the six month period
ended March 31, 1996 and income tax expense of $1.0 million
incurred in the six month period ended March 31, 1995 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
(a) An annual meeting of shareholders of First
State Financial Services, Inc. was held on January 17,
1996 (the "Meeting").
(b)---Patrick N. Ciccone, M.D., Walter J. Davis,
and Marie G. Martino were re-elected as directors by
the stockholders at the Meeting, and the following
directors continued in office following the Meeting:
Henry F. Albinson, Frank H. Bridge, Theodore F. Cox,
Michael J. Quigley, III, and Ralph M. Riefolo. There
were no broker non votes or abstentions.
The nominees for election as directed received the
following votes:
For Withheld
Patrick N. Ciccone, M.D. 2,974,236 15,569
Walter J. Davis 2,962,890 26,915
Marie G. Martino 2,974,236 15,569
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on form 8-K have been filed during
the quarter ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
First State Financial Services, Inc.
Dated: 05/15/96 By: /s/ Michael J. Quigley, III
--------------------------------
Michael J. Quigley,III
Chairman, President and
Chief Executive Officer
Dated: 05/15/96 By: /s/ Emil J. Butchko
--------------------------------
Emil J. Butchko
Senior Vice President
and Treasurer