SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
For the quarterly period ended September 30, 1995
OR
Transition report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Sunset and Salem Roads, Burlington, New Jersey 08016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
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 reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
As of September 30, 1995 there were issued and outstanding 1,300,817 shares
and 1,252,878 shares, respectively of the registrant's Common Stock, par value
$.10 per share.
FMS FINANCIAL CORPORATION AND SUBSIDIARY
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QUARTERLY REPORT ON FORM 10-Q
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SEPTEMBER 30, 1995
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
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Item 1 - Financial Statements
Consolidated Statements of Financial Condition (unaudited)
as of September 30, 1995 and December 31, 1994 .....1
Consolidated Statements of Income (unaudited)
for the three and nine months ended
September 30, 1995 and September 30, 1994...........2
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1995
and September 30, 1994..............................3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ..4 - 15
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings............................16
Item 2 - Changes in Securities........................16
Item 3 - Defaults Upon Senior Securities..............16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 5 - Other Information............................16
Item 6 - Exhibits and Reports on Form 8-K.............16
<TABLE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
SEPTEMBER 30, 1995 December 31, 1994
<S> <C> <C>
ASSETS (UNAUDITED)
Cash and amounts due from depository institutions $ 2,555,733 $ 9,425,147
Interest-bearing deposits 36,936 582,744
Federal funds sold 600,000 1,300,000
Short term funds 14,048 72,654
Total cash and cash equivalents 3,206,717 11,380,545
Investment securities held to maturity 31,450,982 21,204,072
Investment securities available for sale 28,426,703 11,466,127
Loans receivable - net 287,813,917 283,259,831
Mortgage-backed securities held to maturity 118,317,365 131,872,980
Accrued interest receivable:
Loans 1,871,242 1,678,617
Mortgage-backed securities 1,001,497 1,028,201
Investments 650,473 366,287
Federal Home Loan Bank stock 4,058,100 3,728,400
Real estate held for development - net 1,427,732 1,427,732
Real estate owned - net 1,321,088 1,811,527
Office properties and equipment - net 11,772,348 10,688,190
Deferred income taxes 1,130,483 1,146,603
Excess cost over fair value of net assets acquired 1,078,312 1,320,731
Prepaid expenses and other assets 766,661 845,436
Subordinated Debentures issue cost - net 507,494 550,505
TOTAL ASSETS $ 494,801,114 $ 483,775,784
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Deposits $ 422,489,049 $ 429,430,814
Advances from the Federal Home Loan Bank 24,750,000 10,070,000
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 208,939 258,425
Advances by borrowers for taxes and insurance 1,989,613 2,105,281
Accrued interest payable 653,607 837,694
Dividends payable 125,288 0
Other liabilities 2,481,830 1,914,760
Total liabilities 462,698,326 454,616,974
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.10 par value 5,000,000 shares authorized; none issued
Common stock - $.10 par value 10,000,000 shares authorized; shares
issued 1,300,817 and 1,295,100, and shares outstanding 1,252,878 and
1,257,550 as of September 30, 1995 and December 31, 1994, respectively 130,082 129,510
Paid-in capital in excess of par 8,538,921 8,495,186
Unrealized loss on securities available for sale - net of
deferred income taxes (292,022) (415,872)
Guarantee of employee stock ownership plan debt (208,939) (258,425)
Dividends declared (125,288) 0
Retained earnings - substantially restricted 25,209,803 22,108,961
Less: Treasury Stock (47,939 and 37,550 shares, at cost, as of
September 30, 1995 and December 31, 1994, respectively) (1,149,769) (900,550)
Total stockholders' equity 32,102,788 29,158,810
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 494,801,114 $ 483,775,784
</TABLE>
<TABLE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and dividends on:
Loans $ 5,920,260 $ 5,659,114 $ 17,628,852 $ 16,444,800
Mortgage-backed securities 2,005,781 1,998,513 6,114,250 5,467,527
Investments 1,087,221 668,322 2,435,959 1,905,125
Total interest and dividend income 9,013,262 8,325,949 26,179,061 23,817,452
INTEREST EXPENSE:
Interest on deposits 4,131,025 3,696,023 11,812,929 10,824,070
Interest on subordinated debentures 264,338 186,505 784,677 186,505
Interest on borrowed money 395,586 78,949 653,171 251,986
Total interest expense 4,790,949 3,961,477 13,250,777 11,262,561
NET INTEREST AND DIVIDEND INCOME BEFORE
PROVISION FOR LOAN LOSSES 4,222,313 4,364,472 12,928,284 12,554,891
PROVISION FOR LOAN LOSSES 30,000 18,000 90,000 48,000
NET INTEREST AND DIVIDEND INCOME 4,192,313 4,346,472 12,838,284 12,506,891
OTHER INCOME (EXPENSE):
Loan service charges and other fees 69,298 86,331 213,763 223,545
Gain on sale of loans 3,233 2,258 8,419 15,182
Real estate owned operations, net (42,875) (66,492) (133,622) (204,707)
Service charges on accounts 388,598 288,141 1,115,286 800,031
Other income 39,898 59,587 138,014 193,601
Total other income (expense) 458,152 369,825 1,341,860 1,027,652
OPERATING EXPENSES:
Salaries and employee benefits 1,566,121 1,600,932 4,709,063 4,443,947
Occupancy and equipment 512,479 522,335 1,490,787 1,409,146
Purchased services 273,271 207,920 798,112 604,835
Federal deposit insurance premiums 241,893 250,763 728,943 771,433
Professional fees 96,508 92,727 290,650 267,666
Other 303,034 317,965 904,611 959,875
Total operating expenses 2,993,306 2,992,642 8,922,166 8,456,902
INCOME BEFORE INCOME TAXES 1,657,159 1,723,655 5,257,978 5,077,641
INCOME TAXES:
Current 631,343 613,650 2,038,627 1,736,293
Deferred (31,629) (38,242) (131,417) (9,059)
Total income taxes 599,714 575,408 1,907,210 1,727,234
NET INCOME $ 1,057,445 $ 1,148,247 $ 3,350,768 $ 3,350,407
EARNINGS PER COMMON SHARE:
NET INCOME $ 0.84 $ 0.86 $ 2.62 $ 2.51
Weighted average common shares and
common stock equivalents outstanding 1,284,270 1,332,932 1,280,740 1,332,608
</TABLE>
<TABLE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
FOR THE NINE MONTHS ENDED 1995 1994 (A)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,350,768 $ 3,350,407
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 90,000 48,000
Depreciation and amortization 1,189,168 1,297,108
Provision for real estate owned 291,012 79,250
Realized (gains) and losses on:
Sale of loans and loans held for sale (8,419) (15,181)
Disposal of fixed assets 3,836 0
Sale of investments available for sale 0 482
Sale of real estate owned (184,788) 56,954
Proceeds from sale of loans held for sale 150,874 571,965
Loans originated for sale (150,000) (519,164)
Increase in accrued interest receivable (450,107) (75,752)
Decrease (Increase) in prepaid expenses and other assets 121,786 (550,059)
(Decrease)/Increase in accrued interest payable (184,087) 185,426
Increase/(Decrease) in other liabilities 567,070 (644,501)
Deferred income taxes (53,485) (9,060)
Other 0 15,285
Net cash provided by operating activities 4,733,628 3,791,160
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 717,512 1,008,644
Real estate owned 440,742 725,272
Office property and equipment 0 265
Proceeds from maturities of investment and mortgage-backed
securities held to maturity 28,534,803 38,897,810
Proceeds from sale of investment available for sale 1,550,000 44,967
Principal collected on mortgage-backed securities 14,591,876 30,032,492
Principal collected on longer-term loans, net 28,777,012 37,620,014
Longer-term loans originated or acquired, net (34,027,907) (49,021,338)
Purchase of investments and mortgage-backed securities (38,763,614) (98,931,210)
Purchase of investments available for sale (19,786,398) (1,121,098)
Decrease in real estate held for development 0 25,575
Purchase of Federal Home Loan Bank stock (329,700) (240,800)
Purchase of office property and equipment (1,779,512) (1,965,174)
Cash received from branch purchase, net 0 29,975,526
Net cash used by investing activities (20,075,186) (12,949,055)
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and savings accounts (15,791,785) 1,781,507
Net increase (decrease) in time deposits 8,850,020 (7,481,247)
Net increase in FHLB advances 14,680,000 4,725,000
Net proceeds from issuance of 10% Subordinated Debentures 0 10,000,000
(Decrease)/Increase in advances from borrowers for taxes and insurance (115,668) 231,057
Purchase of treasury stock (249,219) 0
Dividends on common stock (249,925) 0
Net proceeds from issuance of common stock 44,307 24,025
Net cash provided by financing activities 7,167,730 9,280,342
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,173,828) 122,447
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,380,545 6,171,426
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,206,717 $ 6,293,873
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 13,434,864 $ 12,162,922
Income taxes 1,826,591 1,889,069
Non-monetary transfers from loans to real estate acquired
through foreclosure 56,527 1,055,443
<FN>
(a) Reclassified for comparative purposes
</TABLE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994.
General
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FMS Financial Corporation ("the Corporation") is the parent company of Farmers &
Mechanics Bank ("the Bank"), its only subsidiary.
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation contain all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of FMS's financial
condition, results of operations and cash flows for the periods and dates
indicated. The results of operations for the nine months ended September 30,
1995 are not necessarily indicative of the operating results for the full
fiscal year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for FORM 10-Q, and therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles.
During the first quarter of 1995, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 114 and 118 (SFAS 114 & 118)
"Accounting by Creditors for Impairment of a Loan" which generally applies to
all loans including all loans that are restructured as a troubled debt
restructuring involving a modification of terms. According to SFAS 114 &118,
impairment of a loan occurs when it is probable the Bank will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral dependent loans are measured for
impairment based on the fair value of the collateral. The adoption of SFAS 114 &
118 did not have a material impact on the financial position or results of
operations of the Corporation during the three and nine months ended September
30, 1995.
FINANCIAL CONDITION -
TOTAL ASSETS - at September 30, 1995 were $494.8 million as compared with total
assets at December 31, 1994 of $483.8 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased to $31.5 million at September
30, 1995 from $21.2 million at December 31, 1994 due to the purchase of $12.0
million in U.S. Agency notes during the nine month period. Investment securities
held to maturity at September 30, 1995 consisted of $3.0 million in adjustable
rate securities and $28.5 million in fixed rate securities. A comparison of cost
and approximate market values of investment securities held to maturity as of
September 30, 1995 and December 31, 1994 follows:
<TABLE>
Investments Held to Maturity
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<CAPTION> September 30, 1995 December 31, 1994
Gross Estimated Estimated
Unrealized Market Market
C o s t (Losses) Value C o s t Value
<S> <C> <C> <C> <C> <C>
U.S. Government:
Within one year $ 2,000,000 $ (21,200) $ 1,978,800 $ 0 $ 0
One to five years 13,987,828 (123,203) 13,864,625 17,972,902 16,937,218
Over five years 14,986,682 (16,182) 14,970,500 2,991,162 2,788,075
Municipal Bonds & Notes 476,472 (333) 476,139 240,008 235,445
Total $ 31,450,982 $ (160,918) $ 31,290,064 $ 21,204,072 $ 19,960,738
</TABLE>
INVESTMENT SECURITIES AVAILABLE FOR SALE - increased to $28.4 million at
September 30, 1995 from $11.5 million at December 31, 1994 as a result of the
purchase of $18.6 million in U.S. Agency notes and $1.2 million in
collateralized mortgage obligations. Investment securities available for sale
at September 30, 1995 consisted of $8.5 million in adjustable rate securities
and $19.9 million in fixed rate securities. A comparison of cost and approximate
market values of investment securities available for sale as of September 30,
1995 and December 31, 1994 follows:
<TABLE>
Investments Available for Sale
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<CAPTION> September 30, 1995 December 31, 1994
Gross Gross Estimated Estimated
Unrealized Unrealized Market Market
C o s t Gains (Losses) Value C o s t Value
<S> <C> <C> <C> <C> <C> <C>
C M O ' S $ 4,179,869 $ 13,219 $ (115,958)$ 4,077,130 $ 4,112,077 $ 3,863,060
R E M I C ' S 7,642,093 0 (382,295) 7,259,798 7,942,763 7,576,667
Common Stock 50,000 0 (23,600) 26,400 50,000 26,400
U.S. Agency Notes 17,000,000 63,375 0 17,063,375 0 0
Total $ 28,871,962 $ 76,594 $ (521,853)$ 28,426,703 $ 12,104,840 $ 11,466,127
</TABLE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - increased $4.5 million to $287.8
million at September 30, 1995 from $283.3 million at December 31, 1994. During
the nine months ended September 30, 1995, the Bank originated approximately
$34.0 million in loans, which was partially offset by $868 thousand in loans
sold in the secondary market and $28.8 million in principal payments collected
on loans in the portfolio. The following tables set forth certain information
concerning the loan portfolio at the dates indicated. Table 1 shows loans
receivable by major categories. Table 2 shows past due non-accrual loans by
major categories.
<TABLE>
<CAPTION>
Table 1 September 30, December 31,
1995 1994
<S> <C> <C>
Loans Receivable
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Mortgage loans ( 1-4 dwelling) $ 250,232,381 $ 245,874,184
Construction loans 4,312,400 5,699,500
Consumer loans 4,364,469 4,316,961
Commercial real estate 32,534,661 32,227,826
Commercial business 1,730,734 1,711,804
Subtotal 293,174,645 289,830,275
Less:
Loans in process 1,548,665 2,775,219
Deferred loan fees 1,077,880 1,173,713
Allowance for possible
loan losses 2,734,183 2,621,512
Net Loans Receivable $ 287,813,917 283,259,831
<CAPTION>
Table 2 September 30, December 31,
1995 1994
<S> <C> <C>
Non-Accrual Loans
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Loans accounted for on a
non-accrual basis:
Mortgage loans:
One-to-four family $ 1,953,818 $ 1,445,700
Commercial real estate 1,602,644 1,040,432
Consumer and other 30,963 469,064
Total non-accrual loans $ 3,587,425 $ 2,955,196
</TABLE>
At September 30, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $ 3.6 million with a
corresponding valuation allowance of $355 thousand. For the nine months ended
September 30, 1995, the average recorded investment in impaired loans was
approximately $3.4 million. The Bank recognized $188 thousand of interest income
on impaired loans, all of which was recognized on the cash basis. The Bank had
$2.7 million in total reserves for possible loan losses at September 30, 1995,
representing approximately 76% of non-performing loans and 1% of total loans.
As of September 30, 1995 the Bank had outstanding loan commitments of $7.1
million, of which $4.1 million represented fixed rate loans and $3.0 million
represented variable rate loans. The Bank intends to fund these commitments
through scheduled amortization of loans and mortgage-backed securities and if
required the sale of investment securities available for sale.
MORTGAGE-BACKED SECURITIES - decreased $13.6 million to $118.3 million at
September 30, 1995 from $131.9 million at December 31, 1994. The decrease is
due to $13.1 million in principle repayments. Mortgage-backed securities at
September 30, 1995 consisted of $49.4 million in adjustable rate securities and
$68.9 million in fixed rate securities. Mortgage-backed securities at September
30, 1995 and December 31, 1994 are summarized below:
<TABLE>
<CAPTION> September 30, 1995 December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains (Losses) Market Value Cost Market Value
<S> <C> <C> <C> <C> <C> <C>
GNMA $ 15,806,627 $ 378,870 $ (41,429) $ 16,144,068 $ 17,521,710 $ 16,851,299
FNMA 43,630,813 264,848 (295,855) 43,599,806 48,746,020 45,757,806
FHLMC 57,987,342 938,502 (109,698) 58,816,146 64,474,394 62,117,992
Private 892,583 0 (8,435) 884,148 1,130,856 1,098,926
Total $ 118,317,365 $ 1,582,220 $ (455,417) $ 119,444,168 $ 131,872,980 $ 125,826,023
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - remained stable at $1.4 million from December
31, 1994 to September 30, 1995. The Bank has ceased making any new investments
in real estate projects and has limited any additional investments to those
investments which are necessary to preserve and protect the existing assets so
that they may be liquidated as soon as practical. Management believes that
divestiture of its present land investments may take several years, depending on
market conditions. Management will continue to monitor the net realizable value
of its real estate investments. At September 30, 1995, the Bank's investment in
and advances to subsidiaries engaged in land development was fully deducted from
core, tangible, and risk-based capital.
REAL ESTATE OWNED - decreased approximately $490 thousand to $1.3 million at
September 30, 1995 from $1.8 million at December 31, 1994. The decrease is
primarily due to the sale of four properties during the first nine months of
1995. Real estate owned at September 30, 1995 is comprised of (i) three
residential, single-family homes, which are located within the Bank's primary
lending area of Burlington County, (ii) one small business building in
Burlington County zoned commercial, (iii) one condominium, which is located in
Burlington County, (iv) 18 acres of land in Burlington, NJ, which is zoned for
the construction of 109 townhouses and (v) approximately six acres of improved
land, with current approvals for a 20,000 square foot shopping center. The Bank
is currently seeking buyers for all of these properties.
ASSET CLASSIFICATIONS - are monitored by management on a regular basis.
Classified assets generally consist of assets which have possible credit risk
and/or have a sufficient degree of risk or potential weakness to warrant
management's close attention. Total classified assets increased $71 thousand
during the nine months ended September 30, 1995 primarily the result of an
increase in one-to-four family and commercial loans of $508 thousand and $491
thousand, respectively, partially offset by a decrease in classified consumer
and other loans and real estate owned of $438 thousand and $490 thousand,
respectively. The following table sets forth information with respect to the
Bank's classified assets at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $ 1,953,818 $ 1,445,700
Commercial real estate 4,255,119 3,763,729
Consumer and other 30,963 469,064
Total loans 6,239,900 5,678,493
Land, net 1,427,732 1,427,732
Real Estate Owned, net 1,321,088 1,811,527
Total Substandard 8,988,720 8,917,752
Doubtful loans 0 0
Total Doubtful 0 0
TOTAL CLASSIFIED ASSETS $ 8,988,720 $ 8,917,752
</TABLE>
DEPOSITS - decreased $6.9 million to $422.5 million at September 30, 1995 from
$429.4 million at December 31, 1994 primarily due to a decline in money market
accounts of $7.7 million and the withdrawal of $8.1 million in savings and
checking accounts. This decrease was partially offset by an increase in
certificates of deposit of $8.9 million. Interest credited to depositors
accounts for the nine months ended September 30, 1995 amounted to $10.6 million.
The following table set forth certain information concerning deposits at the
dates indicated:
<TABLE>
<CAPTION>
At September 30, At December 31,
1995 1994
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest checking $23,981,796 5.68% 0.00% $22,028,452 5.13% 0.00%
NOW accounts 40,931,069 9.69% 1.50% 49,291,426 11.48% 1.50%
Savings accounts 67,284,078 15.93% 2.58% 68,974,307 16.06% 2.78%
Money market accounts 56,946,457 13.48% 2.66% 64,641,000 15.05% 2.67%
Certificates 233,345,649 55.22% 5.15% 224,495,629 52.28% 4.44%
Total Deposits $422,489,049 100.00% 3.90% $429,430,814 100.00% 3.38%
</TABLE>
BORROWINGS - at September 30, 1995 amounted to $34.9 million. Borrowings were
comprised of $10.0 million of 10% Subordinated Debentures, $24.7 million in
Federal Home Loan Bank Advances with a weighted average interest rate of 5.95%,
and $209 thousand in the guarantee of Employee Stock Ownership Plan debt. At
December 31, 1994 the Bank also had $10.0 million of 10% Subordinated
Debentures, $10.1 million in Federal Home Loan Bank Advances with a weighted
average interest rate of 5.28% and $258 thousand in the guarantee of Employee
Stock Ownership Plan debt. The proceeds from additional advances from the
Federal Home Loan Bank at September 30, 1995 are intended for the expansion of
the Bank's operations and general corporate purposes.
STOCKHOLDERS' EQUITY - increased $3.0 million to $32.1 million at September 30,
1995, primarily as a result of net income for the nine months, and a reduction
in the guarantee of Employee Stock Ownership Plan debt partially offset by the
payment and accrual of cash dividends to stockholders of $375 thousand. Shares
outstanding at September 30, 1995 decreased to 1,252,878 shares from 1,257,550
shares at December 31, 1994, as 10,389 shares were repurchased and 5,717 in
stock options were exercised during the nine months ended September 30, 1995.
At September 30, 1995 the book value per share was $25.61 as compared $23.19 at
December 31, 1994. At September 30, 1995, options to purchase 42,012 shares of
the Company's common stock were outstanding to directors and certain officers.
There are three (3) standards that a savings association must satisfy in order
to meet its capital requirements. The requirements include a leverage ratio of
core capital to adjusted total assets of 3.0 percent, a tangible capital
standard expressed as 1.5 percent of total adjusted assets, and a risk-based
capital standard set at 8.0 percent of risk-weighted assets. If a savings
association is not in compliance with applicable capital standards, the Office
of Thrift Supervision (OTS) can restrict the association's asset growth, require
the submission of a capital plan, and require compliance with a capital
directive, which may include restrictions on the payment of dividends and
compensation, and other restrictions determined to be appropriate by the OTS.
At September 30, 1995 the Bank exceeds all three current capital requirements as
the Bank's core, tangible, and risk-based capital ratios were 7.20%, 7.20%, and
16.33%, respectively.
RESULTS OF OPERATIONS -
GENERAL
The Bank derives income primarily from interest income on loans, mortgage-backed
securities, investments, service charges and other fees. In addition to
interest expense, the Bank incurs operating expenses such as salaries and
employee benefits, deposit insurance premiums, occupancy and equipment expense,
and purchased services expense.
The Corporation recorded net income for the three months ended September 30,
1995 of $1.06 million, or 84 cents per share as compared to $1.15 million, or 86
cents per share for the comparable period in 1994. Earnings for the nine months
ended September 30, 1995 were $3.35 million or $2.62 per share as compared to
net income of $3.35 million or $2.51 per share for the comparable period in
1994.
DISPARITY IN INSURANCE PREMIUMS
Currently, the Bank pays an insurance premium to the Federal Deposit Insurance
Corporation ("FDIC") equal to .23% of its total deposits. Federal law
requires that the FDIC maintain the reserve level of each of the Savings
Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF") at 1.25%
of insured deposits. Reserves are funded through payments by insured
institutions of insurance premiums. The BIF reached this level during 1995.
The FDIC reduced the insurance premiums to a range between 0.04% and 0.31% for
members of BIF while maintaining the current range of between 0.23% and 0.31% of
deposits for members of SAIF. The reduction in insurance premiums of BIF members
places SAIF members, such as the Bank, at a material competitive disadvantage to
BIF members. A disparity in insurance premiums between those required for SAIF
members, such as the Bank, and BIF members allows BIF members to attract and
retain deposits at a lower effective cost than that of SAIF members. In the
event BIF members in the Bank's market area, as a result of the reduction in
insurance premiums, increase the rates paid on deposits, this could put
competitive pressure on the Bank to raise the interest rates paid on deposits
thus increasing its cost of funds and possibly reducing net interest income. An
increase in interest expense would also impair the Bank's ability to maintain
low operating costs. The resultant competitive disadvantage could result in the
Bank losing deposits to BIF members who have a lower cost of funds and are
therefore able to pay higher rates of interest on deposits. Although the Bank
has other sources of funds, these other sources may have higher costs than those
of deposits, resulting in lower net yields on loans originated using such funds.
Among other ideas under consideration for addressing this disparity is a
possible one-time assessment on thrift institutions sufficient to recapitalize
the SAIF to a level which would at least approach that of the BIF. While there
can be no assurance that this or any other idea for addressing the premium
disparity will in fact materialize, an assessment of this kind could have a
material adverse impact on the Bank's results of operations.
EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average number of
shares and common equivalent shares outstanding during the first nine months of
1995. Primary and fully diluted earnings per share include the dilutive effect
of unexercised stock options.
INTEREST RATE SPREAD
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities. Net
interest income is affected by (i) the spread between the yield earned on
interest earning assets and the interest rates paid on interest-bearing savings
deposits and borrowings (liabilities), and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's
interest rate spread varies over time because money fund accounts and other
flexible rate accounts have become significant sources of savings deposits.
Income from investment securities and mortgage-backed securities depends upon
the amount invested during the period and the yields earned on such securities.
The yield on loans receivable changes principally as a result of existing
mortgage loan repayments, adjustable rate loan adjustments, sales and the
interest rates and volume of new mortgage loans.
The following table sets forth the Bank's weighted-average yields on its
interest-earning assets, weighted-average interest rates paid on its interest-
bearing liabilities and weighted-average interest rate spreads for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Weighted-Average Yields Earned on:
Loans, net 8.17 % 8.03 % 8.14 % 7.88 %
Mortgage-Backed Securities 6.62 5.85 6.50 5.75
Investment Securities 6.52 5.82 6.35 5.33
Total Interest-Earning Assets 7.55 7.17 7.50 7.01
Weighted-Average Interest Rates Paid on:
Deposits 3.89 3.38 3.75 3.37
Borrowings 7.24 7.84 7.53 5.99
Total Interest-Bearing Liabilities 4.15 3.51 3.97 3.42
Weighted-Average Interest Rate Spread
for the Period 3.40 % 3.66 % 3.53 % 3.59 %
</TABLE>
AVERAGE BALANCE OF INTEREST-EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table sets forth the Bank's average balance of interest-earning
assets in comparison to its average balance of interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Average,Interest-Earning Assets: $ 289,931 $ 281,925 $ 288,792 $ 278,404
Mortgage-Backed Securities 121,175 136,686 125,463 126,875
Investment Securities 66,661 45,905 51,133 47,623
Total 477,767 464,516 465,388 452,902
Average Interest-Bearing Liabilities:
Deposit 425,279 437,707 419,952 428,722
Borrowings 36,487 13,522 25,456 9,750
Total 461,766 451,229 445,408 438,472
Excess of Interest-Earning Assets
over Interest-Bearing Liabilities $ 16,001 $ 13,287 $ 19,980 $ 14,430
</TABLE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest and dividend income and interest expense
during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior period rate), (ii)
changes in rate (change in rate multiplied by current period volume) and (iii)
total changes in rate and volume. The combined effect of changes in both volume
and rate, not separately identified, has been allocated to rate.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 compared to 1994 1995 compared to 1994
Increase (Decrease) due to: Increase (Decrease) due to:
Rate Volume Total Rate Volume Total
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 100 $ 161 $ 261 $ 570 $ 614 $ 1,184
Mortgage-backed securities 234 (227) 7 707 (61) 646
Investment securities 117 302 419 391 140 531
Total change - interest income 451 236 687 1,668 693 2,361
Interest expense:
Deposits 540 (105) 435 1,210 (221) 989
Borrowings (55) 449 394 294 705 999
Total change - interest expense 485 344 829 1,504 484 1,988
Net change in net interest income $ (34) $ (108) $ (142) $ 164 $ 209 $ 373
</TABLE>
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES - for the three months and
nine months ended September 30, 1995 amounted to $4.2 million and $12.9 million
respectively, a decrease of $142 thousand and an increase of $373 thousand over
the same periods in 1994. The decrease in interest income for the three months
ended September 30, 1995 was primarily due to an increase in interest expense on
deposits and borrowings. The average rate on deposits increased to 3.89% from
3.38% which resulted in an increase in expense of $540 thousand. The average
level of borrowings increased to $36.5 million from $13.5 million which resulted
in a volume increase in interest expense of $449 thousand. Partially offsetting
the increase in interest expense was in increase in interest income of $687
thousand. This increase was the result of an increase in the average balance of
investment securities to $66.7 million from $45.9 million which resulted in a
volume increase in interest income of $302 thousand. The yield on investment
securities increase to 6.52% from 5.82% which resulted in an increase in
investment income of $117 thousand. The increase in interest income of loans was
due to both an increase in the average yield and an increase in the average
volume of loans during the quarter. The average yield on loans increased to
8.17% for the quarter ended September 30, 1995 from 8.03% for 1994, which
resulted in an increase in interest income of $100 thousand. The $8.0 million
increase in the average volume of loans to $289.9 million resulted in an
increase in interest income of $161 thousand. The increase in interest income on
mortgage-backed securities during the quarter ended September 30, 1995 was the
result of an increase in the average yield almost completely offset by a decline
in the average volume of mortgage-backed securities. The increase in the average
yield on mortgage-backed securities resulted in an increase in interest income
of $234 thousand offset by the decrease in the average volume which decreased
interest income by $227 thousand.
The increase in net interest income for the nine months ended September 30, 1995
of $373 thousand was primarily due to an increase in interest income on loans,
investments and mortgage-backed securities of $2.4 million, partially offset by
an increase in interest expense on deposits and borrowings. The increase in
interest income on loans and investments during the nine months ended September
30, 1995 of $1.2 million and $531 thousand, respectively, was due to both an
increase in the average yield and an increase in the average balance. The
increase in interest income on mortgage-backed securities of $646 thousand was
due to an increase in the average yield partially offset by a decrease in the
average volume. The increase in interest expense of $2.0 million was due to an
increase in interest expense on deposits and borrowings. The increased interest
expense on deposits of $1.0 million was due to an increase in the average rate
partially offset by a decline in the average balance of deposits. The increase
in interest expense on borrowing of $1.0 million was due to increased borrowing
as well as an increase in the average rates.
PROVISION FOR LOAN LOSSES - for the third quarter of 1995 was $30 thousand,
compared to $18 thousand for the third quarter 1994. The total provision for
potential loan losses increased to $90 thousand for the nine months ended
September 30, 1995 from $48 thousand for the nine months ended September 30,
1994. The determination of the allowance level for loan losses is based on
management's analysis of the risk characteristics of various classifications of
loans, previous loan loss experience, estimated fair value of the underlying
collateral and current economic conditions. Accordingly, there can be no
assurance that future provisions for loans losses will not increase or be
necessary.
REAL ESTATE OWNED OPERATIONS, NET - for the nine months ended September 30, 1995
totaled $133 thousand of expense as compared to $204 thousand of expense for the
same period in 1994. The decrease is primarily due to the gain on the sale of
three real estate properties totaling $217 thousand during the first nine months
of 1995.
OPERATING EXPENSES
Total operating expenses for the three and nine months period ended September
30, 1995 amounted to $3.0 million and $8.9 million, respectively, as compared to
$3.0 million and $8.5 million for the same period in 1994.
SALARIES AND EMPLOYEE BENEFITS - for the three and nine months ended September
30, 1995 were $1.6 million and $4.7 million, respectively, as compared to $1.6
million and $4.4 million for the same period in 1994. Full time equivalent
employees at September 30, 1995 were 211 as compared to 196 at September 30,
1994.
OCCUPANCY AND EQUIPMENT - for the three and nine months ended September 30, 1995
were $512 thousand and $1.5 million, respectively, as compared to $522 thousand
and $1.4 million for the same period of 1994. The increase is primarily due to
additional depreciation and occupation expenses associated with three additional
branch facilities opened during 1994 and one branch facility opened in 1995.
PURCHASED SERVICES - for the three and nine months ended September 30, 1995
were $273 thousand and $798 thousand, respectively, compared to $208 thousand
and $605 thousand for the same period in 1994. The increase is primarily the
result of increased processing costs due to higher transaction volumes during
the year.
FEDERAL INSURANCE PREMIUM - for the three and nine months ended September 30,
1995 were $242 thousand and $729 thousand, respectively, as compared to $251
thousand and $771 thousand for the same period in 1994. The decrease is due to
a decline in the insurance premium during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits, and other cash outflows in a cost effective manner. The Bank's
primary sources of funds are deposits and scheduled amortization and prepayments
of loan principal. To a lesser extent, the Bank obtains funds from sales and
maturities of mortgage-backed securities, investment securities, and short-term
investments and borrowings. During the past several years, the Bank has used
such funds primarily to meet ongoing commitments to fund maturing time deposits
and saving withdrawals, fund existing and continuing loan commitments and to
maintain liquidity. While loan payments, maturing investments and mortgage-
backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank's liquidity is also influenced by the
level of demand for funding loan originations.
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid investments", which include certain United States government
and federal agency obligations and other approved investments. Regulations
currently in effect require the Bank to maintain liquid assets of not less than
5% of its net withdrawable accounts plus short-term borrowings. Short-term
liquid assets must consist of not less than 1% of such accounts and borrowings,
which is also included in the 5% requirement. These levels are changed from
time to time by the OTS to reflect current economic conditions. The Bank has
generally maintained liquidity in excess of required levels. The Bank's
regulatory liquidity was 11.48% and 8.11%, respectively, at September 30, 1995,
and December 31, 1994, respectively, and its short-term liquidity was 1.76% and
2.71%, respectively, at such dates.
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Changes in Securities
------- ---------------------
None
Item 3: Defaults Upon Senior Securities
------- -------------------------------
None
Item 4: Submission of Matters to Vote of Security of Holders
------------------------------------------------------------
None
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
None
S I G N A T U R E
Pursuant to the requirements 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.
FMS FINANCIAL CORPORATION
Date: November 8, 1995 /s/ Craig W. Yates
------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 1995 /s/ Channing L. Smith
---------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<TABLE>
EXHIBIT NO. 11 STATEMENT RE: COMPUTATION OF PER SHARE
EARNINGS
<CAPTION>
9/30/95 12/31/94
------- --------
<S> <C> <C>
Net Income $3,350,768 $4,455,455
Weighted average common shares outstanding 1,251,920 1,287,969
Common stock equivalents due to dilutive effect of stock
options 28,820 37,348
Total weighted average common shares and equivalents
outstanding 1,280,740 1,325,317
Primary earnings per share $2.62 $3.36
Total weighted average common shares and equivalents
outstanding 1,280,740 1,325,317
Additional dilutive shares using the higher of the end of
period market
value or average market value for the period when utilizing
the treasury 3,174 125
stock method regarding stock options
Total outstanding shares for fully diluted earnings per share
computation 1,283,914 1,325,442
Fully diluted earnings per share $2.61 $3.36
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from FMS
Financial Corporation 9/30/95 Form 10-Q and is qualified in its entirety by
reference to such filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,555,733
<INT-BEARING-DEPOSITS> 36,936
<FED-FUNDS-SOLD> 600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,426,703
<INVESTMENTS-CARRYING> 153,826,447
<INVESTMENTS-MARKET> 154,792,332
<LOANS> 285,079,734
<ALLOWANCE> 2,734,183
<TOTAL-ASSETS> 494,801,114
<DEPOSITS> 422,489,049
<SHORT-TERM> 1,208,939
<LIABILITIES-OTHER> 2,481,830
<LONG-TERM> 33,750,000
<COMMON> 130,082
0
0
<OTHER-SE> 31,972,706
<TOTAL-LIABILITIES-AND-EQUITY> 494,801,114
<INTEREST-LOAN> 17,628,852
<INTEREST-INVEST> 8,550,209
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,179,061
<INTEREST-DEPOSIT> 11,812,929
<INTEREST-EXPENSE> 1,437,848
<INTEREST-INCOME-NET> 12,928,284
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 904,611
<INCOME-PRETAX> 5,257,978
<INCOME-PRE-EXTRAORDINARY> 5,257,978
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,350,768
<EPS-PRIMARY> 2.62
<EPS-DILUTED> 2.61
<YIELD-ACTUAL> 7.5
<LOANS-NON> 3,587,425
<LOANS-PAST> 0
<LOANS-TROUBLED> 608,842
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,621,512
<CHARGE-OFFS> (17,222)
<RECOVERIES> 39,893
<ALLOWANCE-CLOSE> 2,734,183
<ALLOWANCE-DOMESTIC> 2,734,183
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,417,010
</TABLE>
