SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________ to ______________________
Commission File Number: 0-17353
FMS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Sunset and Salem Roads, Burlington, New Jersey 08016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
---------------
Securities registered pursuant to Section 12(b) of the Act: None
---------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
Based on the closing sales price of $17.00 per share of the registrant's
common stock on March 1, 1996, as reported on the Nasdaq National Market System
the aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $42.6 million. On such date, 2,505,796 shares of
the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1995. (Parts II and IV)
2. Portions of Proxy Statement for the 1996 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Business
General
The Corporation. FMS Financial Corporation (the "Corporation") was
incorporated under the laws of the State of New Jersey on September 1, 1988 for
the purpose of becoming a savings and loan holding company. On December 21,
1988, the Corporation acquired all of the common stock of Farmers' and
Mechanics' Savings Bank, SLA, now known as Farmers and Mechanics Bank (the
"Bank" or "Farmers and Mechanics") following the Bank's conversion from a New
Jersey chartered mutual to a New Jersey chartered stock savings institution.
Prior to the acquisition of all of the outstanding stock of the Bank, the
Corporation had no assets or liabilities and engaged in no business activities.
Subsequent to the acquisition of Farmers and Mechanics, the Corporation engaged
in no significant activity other than holding the stock of the Bank and
operating a savings and loan business through the Bank, and the issuance in
July, 1994 of 10% subordinated debentures due 2004 in the aggregate principal
amount of $10 million. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the Bank
and its subsidiaries.
The Corporation's executive offices are located at Sunset and Salem Roads,
Burlington, New Jersey. Its telephone number is (609) 386-2400.
The Bank. Farmers and Mechanics commenced operations in 1871 under the
name Farmers and Mechanics Building and Loan Association. The Bank became a
member of the Federal Home Loan Bank ("FHLB") System and has had its savings
deposits federally insured by the Savings Association Insurance Fund ("SAIF"),
and its predecessor the Federal Savings and Loan Insurance Corporation
("FSLIC"), since 1952. The Bank is subject to regulation by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). See
"Regulation." Effective October 26, 1994, the Bank changed its name to Farmers
and Mechanics Bank. The name change was approved by the Bank's Board of
Directors, the Corporation and the OTS. The Bank conducts its business through
its main administrative office and sixteen branch offices located throughout
Burlington County, New Jersey. At December 31, 1995, the Bank's total assets,
deposits and stockholders' equity amounted to $501 million, $429 million and $39
million, respectively.
Farmers and Mechanics is primarily engaged in the business of attracting
deposits from the general public and originating loans which are secured by
residential real estate. To a lesser extent, the Bank also originates consumer,
commercial real estate and construction loans and invests in U.S. government
securities and mortgage-related securities.
Farmers and Mechanics considers its primary market area for savings
deposits to be Burlington County, New Jersey, while its primary market for
lending activities consists of Burlington County, and, to a lesser extent, other
regions of southern New Jersey.
Lending Activities
General. The principal lending activity of the Bank has been the
origination of conventional fixed-rate and adjustable-rate mortgage loans for
the purpose of financing or refinancing one-to four- family residential
properties. To a lesser extent, the Bank also originates commercial real estate,
<PAGE>
consumer, construction and commercial business loans. As of December 31, 1995,
97.93% of the Bank's loans were real estate loans, of which 84.74% consisted of
loans secured by mortgages on one-to four-family residential properties of which
0.70% were insured or guaranteed real estate loans, 1.47% were consumer loans,
and 0.60% were commercial business loans. Such percentages have been calculated
before the deduction of loans in process, deferred loan fees and loan loss
reserves. See "--Analysis of Loan Portfolio".
The Bank also sells fixed-rate loans in the secondary mortgage market and
has in the past purchased adjustable-rate loans.
2
<PAGE>
Analysis of Loan Portfolio
The following table sets forth the composition of the Bank's loan
portfolio and mortgage-backed and related securities portfolio in dollar amounts
and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ -----
Carrying Percent Carrying Percent Carrying Percent Carrying Percent Carrying Percent
Value of Total Value of Total Value of Total Value of Total Value of Total
------ ------ -------- ---- ------- ------ ------- ------ ------- ------
(Dollars In Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $249,278 84.74% $245,874 84.83% $237,382 86.03% $222,178 85.08% $199,766 83.23%
Commercial real
estate 34,721 11.81 32,228 11.12 28,892 10.47 29,136 11.38 25,409 10.58
Construction...... 4,063 1.38 5,699 1.97 4,157 1.51 2,760 1.06 4,200 1.75
------- ------- ------- ------- -------
Total mortgage
loans 288,062 283,801 270,431 254,074 229,375
Consumer and other loans:
Consumer.......... 4,337 1.47 4,317 1.49 4,119 1.49 4,234 1.62 6,740 2.81
Commercial business 1,779 0.60 1,712 0.59 1,377 0.50 2,248 0.86 3,903 1.63
------ ------- ------- ------ -------
Total consumer
and other loans 6,116 6,029 5,496 6,482 10,643
------ ------- ------- ------- -------
Total loans... 294,178 100.00% 289,830 100.00% 275,927 100.00% 260,556 100.00% 240,018 100.00%
====== ====== ====== ====== ======
Less:
Unearned discount, premium,
loans in process,
deferred loan fees, net.. (3,011) (3,949) (4,114) (3,187) (4,857)
Allowance for loan
losses.......... (2,767) (2,621) (2,589) (2,380) (1,839)
------ -------- ------- ------- -------
Total loans, net $288,400 $283,260 $269,224 $254,989 $233,322
======= ======= ======= ======= =======
Mortgage-backed securities
held to maturity and
available for sale:
FHLMC............. $54,039 43.47% $64,474 44.99% $56,258 43.77% $52,602 41.68% $50,368 46.80%
FNMA.............. 41,507 33.38 48,746 34.01 36,533 28.42 32,617 25.84 23,574 21.90
GNMA.............. 15,225 12.25 17,522 12.23 16,879 13.13 15,425 12.22 10,973 10.19
Real estate investment
mortgage conduit 7,291 5.86 7,577 5.29 10,187 7.93 12,564 9.96 12,945 12.03
Collateralized mortgage
obligations..... 5,485 4.41 3,863 2.69 6,485 5.05 10,474 8.30 9,772 9.08
Mortgage pass throughs 784 0.63 1,131 0.79 2,190 1.70 2,525 2.00 -- --
------ ------ -------- ---- ------- ------ ------- ------ ------- ------
Total mortgage-backed
and related securities $124,331 100.00% $143,313 100.00% $128,532 100.00% $126,207 100.00% $107,632 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
3
<PAGE>
The following table sets forth the Bank's loan originations and loan and
mortgage-backed and related securities purchases, sales and principal payments
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In Thousands)
Total loans receivable (gross):
<S> <C> <C> <C> <C> <C>
At beginning of period.................. $289,830 $275,926 $260,556 $240,018 $254,388
Mortgage loans originated:
One-to four-family.................... 34,775 52,902 87,061 88,468 33,103
Commercial real estate................ 7,144 6,806 6,509 10,902 7,112
Construction.......................... 2,925 3,516 -- 125 1,120
------- ------- --------- ------- -------
Total mortgage loans originated..... 44,844 63,224 93,570 99,495 41,335
Mortgage and consumer loans purchased:
One to four family.................... -- -- -- 8,072 --
Consumer.............................. -- 127 -- -- --
---------- ------ ---------- ---------- ----------
Total mortgage and consumer loans purchased -- 127 -- 8,072 --
Total mortgage loans originated and purchased 44,844 63,351 93,570 107,567 41,335
Consumer loans originated................. 1,048 475 834 710 1,067
Transfer of mortgage loans to real estate owned (57) (1,091) (362) (619) (1,650)
Sale of loans............................. (1,118) (1,739) (12,362) (23,125) (10,771)
Principal repayments...................... (40,369) (47,092) (66,310) (63,995) (44,351)
------- ------- ------- ------- -------
Total loans receivable at end of period... $294,178 $289,830 $275,926 $260,556 $240,018
======= ======= ======= ======= =======
Mortgage backed securities:
At beginning of period.................... $131,873 $128,532 $126,207 $107,632 $ 67,985
Mortgage backed securities purchased...... -- 51,051 54,697 49,827 59,138
Mortgage backed securities sold........... -- -- -- (1,000) (9,426)
Amortization and repayments............... (20,318) (31,039) (52,372) (30,252) (10,065)
Reclass of collateralized mortgage obligations
to investments available for sale....... -- (16,671) -- -- --
---------- ------- ---------- ---------- ----------
At end of period (1)...................... $111,555 $131,873 $128,532 $126,207 $107,632
======= ======= ======= ======= =======
</TABLE>
- -------------------
(1) Consists of held to maturity portfolio and excludes available for sale
securities.
4
<PAGE>
Residential Loans. The primary lending activity of the Bank has been the
origination of conventional mortgage loans to enable borrowers to purchase
existing homes, refinance existing mortgage loans or construct new homes. The
Bank generally originates mortgage loans with terms of 15 to 30 years, amortized
on a monthly basis, with principal and interest due each month. Typically,
residential real estate loans remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option.
Regulations permit thrift institutions to make home loans on which the
interest rate, loan balance or term to maturity may be adjusted, provided that
the adjustments are tied to specified indices. The Bank presently offers
mortgage loans that adjust every year after an initial fixed term of one, two,
five or seven years, at an interest rate higher than the corresponding U.S.
Treasury Security Index. The interest rates on these mortgages adjust annually
after the one, two, five or seven year anniversary date of the loan with an
interest rate adjustment cap of 1.5% per year and not to exceed 11.5% over the
life of the loan. At December 31, 1995, adjustable-rate residential first
mortgage loans amounted to $69.9 million, or 23.8% of the Bank's total loan
portfolio.
Fixed-rate mortgage loans are underwritten according to Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") guidelines. The Bank sells fixed-rate loans in the secondary market
from time to time when such sales are consistent with the Bank's asset/liability
management goals and can be achieved on terms favorable to the Bank. The Bank
generally charges a higher interest rate on such loans if the property is not
owner-occupied. At December 31, 1995, $151.6 million or 51.5% of the Bank's
total loan portfolio, consisted of long-term fixed-rate first mortgage loans.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on owner-occupied residential mortgage loans to 90% of the lesser of the
appraised value or purchase price, with the condition that private mortgage
insurance is required on loans with loan-to-value ratios in excess of 80%.
Mortgage loans on investment properties are made by the Bank at loan-to-value
ratios up to 70%. The loan-to-value ratio, maturity and other provisions of the
loans made by the Bank have generally reflected the policy of making less than
the maximum loan permissible under applicable regulations, in accordance with
established lending practices, market conditions and underwriting standards
maintained by the Bank. The Bank requires title, fire and casualty insurance on
all properties securing real estate loans made by the Bank.
The Bank actively solicits and originates home equity loans and home
equity reserve lines of credit secured by the equity in the borrower's primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust based upon the prime rate.
At December 31, 1995, the Bank had home equity loans in the amount of $12.6
million or 4.3% of its total loan portfolio. Also at December 31, 1995, the Bank
had approved $34.3 million in home equity lines of credit, of which $15.1
million was outstanding.
Construction Loans. The Bank originates loans to finance the construction
of one-to four-family dwellings or commercial real estate. Generally, the Bank
only makes interim construction loans to individuals if it also makes the
permanent mortgage loan on the property. Construction loans to builders are
generally made only if the Bank makes the permanent mortgage loan or if the
builder has a contract for sale and the purchaser has received a permanent
mortgage commitment. At December 31, 1995, the Bank's construction loans
amounted to $2.1 million, net of loans in process.
5
<PAGE>
Interim construction loans to builders generally have terms of up to 18
months and interest rates which adjust at a positive spread over the prime
interest rate. Construction loans to build single family residences are
available with the interest rate tied to the prime rate. The loans are available
to borrowers who qualify for a permanent loan or have a commitment from another
lender for the permanent mortgage loan to pay the construction loan.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
Commercial Real Estate Loans. Loans secured by commercial real estate
(e.g., shopping centers, medical buildings, retail offices) and multi-family
dwelling units (e.g., apartment projects with more than four units), constituted
$34.7 million, or 11.8%, of the Bank's total loan portfolio at December 31,
1995. Commercial real estate loans and multi-family residential loans have been
made in amounts up to $2.3 million, with most of such loans ranging in size from
$100,000 to $1.0 million. Permanent loans on commercial properties are generally
originated in amounts up to 75% of the appraised value of the property. The
Bank's permanent commercial real estate loans are secured by improved property
such as office buildings, retail stores, warehouse and other non-residential
buildings, most of which are located in the Bank's primary market area.
Commercial real estate loans and multi-family residential loans are generally
made at rates which adjust at a positive spread over the prime interest rate or
are balloon loans which mature in three to five years with principal
amortization for a period of up to 25 years.
Loans secured by commercial real estate are generally larger and involve a
greater degree of risk than one-to four-family residential mortgage loans. Of
primary concern in commercial and multi-family real estate lending is the
borrower's credit worthiness and the feasibility and cash flow potential of the
project. Loans secured by income properties are generally larger and involve
greater risks than residential mortgage loans because payments on loans secured
by income properties are often dependent on successful operation or management
of the properties. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. In order to monitor cash flows on income
properties, the Bank requires borrowers and loan guarantors, if any, to provide
annual financial statements and rent rolls on commercial real estate loans. At
December 31, 1995, the five largest commercial real estate loans totalled $6.8
million with no single loan larger than $2.3 million. All such loans were
current and were performing in accordance with their terms and the property
securing such loans in the Bank's market area.
Consumer. Regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of the institution's assets.
Consumer loans generally bear higher interest rates than residential mortgage
loans, but they also involve a higher risk of default.
The Bank makes various types of secured and unsecured consumer loans
including education loans, lines of credit, automobile loans (new and used) and
loans secured by deposit accounts. As of December 31, 1995, consumer loans
totalled $4.3 million, or 1.5% of the Bank's total loan portfolio.
6
<PAGE>
Consumer loans generally have terms of six months to 5 years, some of which are
at fixed rates and some of which have rates that adjust periodically.
The Bank intends to continue to emphasize the origination of consumer
loans. The Bank believes that the shorter term and the normally higher interest
rates available on various types of consumer loans have been helpful in
maintaining a profitable spread between the Bank's average loan yield and its
cost of funds.
Consumer loans are advantageous to the Bank because of their interest rate
sensitivity, but they also involve more credit risk than residential mortgage
loans because of the higher potential of defaults and the difficulties involved
in disposing of the collateral, if any.
Commercial Business Loans. The Bank's portfolio of commercial business
loans amounted to $1.8 million, or 0.6% of the Bank's total loan portfolio, at
December 31, 1995. These commercial business loans are underwritten on the basis
of the borrower's ability to service such debt from income. The Bank's
commercial business loans are generally made to small and mid-sized companies
located within the Bank's primary lending area. In most cases, the Bank requires
additional collateral of equipment, chattel or other assets before making a
commercial business loan.
Loan Originations, Purchases and Sales. In the past, the Bank has retained
in its portfolio most of the loans it originates. However, the Bank's general
policy is to originate fixed-rate mortgage loans under terms, conditions and
documentation which permit sale to the FHLMC, FNMA, or other investors in the
secondary market. Adjustable-rate mortgage loans are generally not originated
under terms and conditions that would permit their sale in the secondary
mortgage market to FHLMC or FNMA. From time to time, the Bank's policy has been
to sell the majority of its fixed-rate mortgage loan originations. Gains or
losses on such sales may occur. This policy was established to reduce the Bank's
vulnerability to rapid interest rate movements and to provide a source of
funding for ongoing commitments. Fixed-rate mortgages designated for sale are
accounted for separately and are carried at the lower of cost or market on a
monthly basis in accordance with applicable accounting rules. At December 31,
1995, the Bank had no loans available-for-sale. The Bank continually monitors
the loan inventory and its commitments.
Loan Commitments. The Bank issues loan origination commitments to real
estate developers and qualified borrowers primarily for the construction,
purchase and refinancing of residential real estate and commercial real estate.
Such commitments are made on specified terms and conditions, including in most
cases the payment of a non-refundable commitment fee based on a percentage of
the amount of committed funds. At December 31, 1995, the Bank had outstanding
loan origination commitments of approximately $25.7 million.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank receives loan origination fees or "points" for originating loans. Loan
points are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for origination of the loan. The Bank's loan origination
fees generally range from 2% to 3% on conventional residential mortgages and 1%
to 2% on commercial real estate loans. All loan origination fees net of
incremental direct loan origination costs, are deferred and amortized over the
contractual life of the related loans.
The Bank recognizes other fees and service charges on loans. Other fees
and service charges consist of late fees, loan service fees, fees collected with
a change in borrower or other loan modifica-
7
<PAGE>
tions. The Bank recognized other fees and service charges on loans of $157
thousand for the year ended December 31, 1995 and $179 thousand for the year
ended December 31, 1994.
Residential Mortgage Loan Servicing. The Bank services loans retained in
its portfolio and loans which were originated by the Bank and resold through the
secondary mortgage market with the servicing rights to those loans retained by
the Bank. The loan servicing activities of the Bank include collecting and
remitting loan payments, holding escrow funds for the payment of real estate
taxes and insurance premiums and generally administering the loans. Under the
loan servicing contracts, the Bank receives servicing fees that are withheld
from the monthly payments made to investors. The servicing spreads on loans
serviced are usually based on the unpaid principal balance of the loan being
serviced and typically range from .25 percent to .375 percent per annum of
declining principal balance on the loans. At December 31, 1995, the Bank
serviced for others 736 loans with an outstanding aggregate balance of $34.4
million. Loan servicing income for the years ended December 31, 1995, and 1994,
was $113 thousand and $132 thousand, respectively.
Collection Procedures. The Bank's collection procedures provide that a
late charge will be assessed after a loan is 15 days delinquent. When a loan is
more than 30 days delinquent, the borrower will be contacted by mail or phone
and payment requested. If the delinquency continues, subsequent efforts will be
made to contact the delinquent borrower. In certain instances, the Bank may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs. If the loan continues in a
delinquent status for 90 days or more, the Bank generally will initiate
foreclosure proceedings.
Non-Performing Loans. Loans are generally placed on non-accrual status
when either principal or interest is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Impaired Loans. The Bank considers all non-accrual loans as well as any
loans in which it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement as
impaired. Small balances of homogeneous loans such as delinquent residential
mortgages and delinquent consumer installment loans are collectively measured
for impairment and a reserve is established based on historical loss data.
Certain larger balance impaired loans and other impaired loans are reviewed
individually and reserves are established based on a discounted cash flow
analysis or as a practical expedient, the underlying collateral value. Interest
income on impaired loans is recognized on a cash basis.
8
<PAGE>
The following table sets forth information regarding impaired loans,
troubled debt restructured and real estate owned assets by the Bank at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
Impaired loans - non-accrual:
Mortgage loans:
<S> <C> <C> <C> <C> <C>
One-to four-family............. $2,502 $1,446 $3,395 $2,780 $ 2,070
Commercial real estate......... 1,604 1,040 1,266 1,261 662
Consumer and other............. 6 469 13 571 604
------- ------ ------ ------ ------
Total impaired non-accrual loans $4,112 $2,955 $4,674 $4,612 $ 3,336
===== ===== ===== ===== ======
Other impaired loans............. 354 -- -- -- --
Troubled debt restructuring...... $634(1) $1,143 $ 663 $ 642 $ 938
Real estate owned, net........... 669 1,812 1,624 1,714 3,791
Other non-performing assets...... 1,228 1,428 1,453 2,203 3,117
----- ----- ----- ----- ------
Total non-performing assets...... $6,997 $7,338 $8,414 $9,171 $11,182
===== ===== ===== ===== ======
Total non-accrual loans to net loans 1.43% 1.04% 1.74% 1.81% 1.47%
==== ==== ==== ==== ====
Total non-accrual loans to
total assets 0.82% 0.61% 1.05% 1.07% 0.86%
==== ==== ==== ==== ====
Total non-performing assets to total
assets 1.39% 1.52% 1.89% 2.12% 2.84%
==== ==== ==== ==== ====
</TABLE>
(1) Loans restructured prior to SFAS Nos. 114 and 118 effective date and
performing in accordance with the terms of the restructuring agreement.
Classified Assets. Classified assets generally consist of assets which
have possible credit risk and/or have sufficient degree of risk or potential
weakness to warrant management's close attention. Each asset is assigned a
quality rating based on management's best judgement concerning the degree of
risk and the likelihood of repayment or orderly liquidation. Quality ratings are
divided into the following groups: Pass and Special Mention (unclassified),
Substandard, Doubtful and Loss.
An asset classified Substandard is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Assets so classified have well-defined weakness or weaknesses. An asset
classified Substandard has shown an inability or unwillingness on the part of
the borrower and/or guarantors to meet their obligations or the collateral
securing the obligation has deteriorated in some condition. Such assets have a
well-defined weakness that points to the distinct possibility that the Bank will
not be paid back in a timely fashion and it may require legal action to effect
payment.
An asset classified Doubtful has all the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. The possibility of a
loss on a Doubtful asset is high. However, due to important and reasonably
specific pending factors, which may work to strengthen (or weaken) the asset,
its classification as an estimated loss is deferred until its more exact status
can be determined.
An asset classified Loss is considered uncollectible and of such little
value that its continuance as an asset, without establishment of a specific
valuation allowance or charge-off, is not warranted. This classification does
not necessarily mean that an asset has absolutely no recovery or salvage value;
but
9
<PAGE>
rather, it is not practical or desirable to defer writing off a basically
worthless asset even though partial recovery may be effected in the future.
Federal regulations require that each insured institution classify its own
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS and FDIC examiners have authority to identify problem
assets and, if appropriate, classify them. Assets classified as Substandard or
Doubtful require the institution to establish general allowances for loan
losses. If an asset or portion thereof is classified Loss, the insured
institution must either establish specified allowances for loan losses in the
amount of 100 percent of the portion of the asset classified Loss, or charge off
such amount. General loss allowances established to cover possible losses
related to assets classified Substandard or Doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. OTS and FDIC
examiners may disagree with the insured institution's classification and amounts
reserved.
10
<PAGE>
The following table sets forth information with respect to the Bank's
classified assets for the periods indicated. The Bank had no assets classified
as Loss for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ -----
(In Thousands)
Classified Assets:
Substandard Loans:
<S> <C> <C> <C> <C> <C>
One- to four-family......... $2,502 $1,446 $3,395 $2,234 $2,203
Commercial real estate...... 4,247 3,763 5,503 5,782 5,961
Consumer and other.......... 6 469 13 415 215
------- ------ ------ ------ ------
Total loans............... 6,755 5,678 8,911 8,431 8,379
----- ------ ------ ------ ------
Real Estate held for development,
net ...................... 1,228 1,428 1,453 2,203 3,117
Real estate owned, net....... 669 1,812 1,624 1,714 3,791
------ ------ ------ ------ ------
Total Substandard........... $8,652 $ 8,918 $11,988 $12,348 $15,287
===== ====== ====== ====== ======
Doubtful loans.............. $ -- $ -- $ -- $ 625 $ 535
------- -------- --------- ------- -------
Total Doubtful.............. $ -- $ -- $ -- $ 625 $ 535
======= ======== ========= ======= =======
Total Classified Assets....... $8,652 $ 8,918 $11,988 $12,973 $15,822
===== ====== ====== ====== ======
</TABLE>
At December 31, 1995, the Bank's non-performing loans consisted primarily
of loans secured by residential and commercial real estate. The largest
non-performing loan consisted of a loan in the amount of $775 thousand secured
by a first mortgage on a commercial real estate property operating as a wine and
spirits/delicatessen.
For a full explanation of the Bank's assets classified as Substandard at
December 31, 1995, see "--Subsidiary and Land Development Activities".
Real Estate Owned. The Bank's real estate owned classified as Substandard
at December 31, 1995, consisted of properties valued at $982 thousand, gross.
These properties are carried at the lower of book value or fair market value
less estimated costs to sell and are analyzed by management on a periodic basis.
The real estate owned is comprised of (i) two residential single family homes
with a net book value of $126 thousand, (ii) 18 acres of land, with a net book
value of $818 thousand, which is zoned for the construction of 109 townhouses,
and (iii) a condominium with a net book value of $38 thousand. See "--Provision
for Loan and Real Estate Losses."
Provision for Loan and Real Estate Losses. A provision for loan losses is
charged to operations based on management's evaluation of the risk inherent in
its loan portfolio in relation to the level of the allowance for loan losses and
changes in the nature and volume of its loan activity. For the year ended
December 31, 1995, the Bank charged $120 thousand and $354 thousand, to
operations as a provision for losses on loans and real estate owned,
respectively.
The Bank provides valuation reserves for anticipated losses on loans and
real estate when management determines that a significant decline in the value
of the collateral has occurred, as a result of which, the value of the
collateral is less than the amount of the unpaid principal of the related loan
plus
11
<PAGE>
estimated costs of acquisition and sale. In addition, the Bank also provides
reserves based on the dollar amount and type of collateral securing its loans,
in order to protect against unanticipated losses. Although management believes
that it uses the best information available to make such determinations, future
adjustments to reserves may be necessary, and net income could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations. At December 31, 1995, the Bank had an
allowance for loan losses of $2.8 million. In 1995, the Bank charged off $120
thousand in the allowance for losses on real estate owned, resulting in an
allowance of $313 thousand as of December 31, 1995.
As a result of the decline in real estate market values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions, undertaken as a part of the examination of the
institutions by the FDIC, OTS or other federal or state regulators. The results
of recent examinations of other depository institutions indicate that these
regulators may be applying more conservative criteria in evaluating real estate
market values. While the Bank believes it had established its existing allowance
for loan losses in accordance with Generally Accepted Accounting Principles
("GAAP") at December 31, 1995, there can be no assurance that regulators, when
reviewing the Bank's loan portfolio in the future, will not request the Bank to
significantly increase its allowance for loan losses, thereby adversely
impacting the Bank's financial condition and earnings. The Bank's most recent
regulatory examination was completed in January 1995. No further additions to
the allowance for loan losses were required as a result of the examination.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,622 $2,589 $2,380 $1,839 $ 992
Loans charged-off:
One-to four-family.......... (13) (44) -- (18) (510)
Commercial real estate...... -- -- -- -- --
Construction................ -- -- -- -- --
Consumer.................... (6) (37) (8) (6) (35)
Commercial business......... -- (38) -- (95) --
----- ------ ----- ------ ----
Total charge-offs......... (19) (119) (8) (119) (545)
Recoveries.................... 44 86 15 8 21
----- ---- ---- ----- -----
Net loans charged-off......... 25 (33) 7 (111) (524)
----- ----- ---- ------ ------
Provision for possible loan losses 120 66 202 652 1,371
----- ----- ----- ----- -----
Balance at end of period...... $2,767 $2,622 $2,589 $2,380 $1,839
===== ===== ===== ===== =====
Ratio of net charge-offs to
average loans outstanding
during the period 0.009% 0.012% (0.003%) 0.046% 0.217%
</TABLE>
12
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable for the periods indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowances to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ -----
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Allowance for (Dollars in Thousands)
Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family...... $1,718(1) 84.74% $1,656 84.83% $1,613 86.00% $ 927 85.08% $ 385 83.23%
Commercial real estate.. 819(2) 11.81 757 11.12 757 10.47 897 11.38 876 10.58
Construction............ 21 1.38 29 1.97 13 1.51 10 1.06 37 1.75
Consumer and other...... 68(1) 1.47 70 1.49 66 1.52 286 1.62 219 2.81
Commercial business..... 141(2) 0.60 110 0.59 140 0.50 260 0.86 322 1.63
------ ------- ----- ------- ----- ------- ----- ------- ----- -------
Total allowance for
loan losses $2,767 100.00% $2,622 100.00% $2,589 100.00% $2,380 100.00% $1,839 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Includes reserves for impaired loans collectively measured for impairment
of residential real estate and consumer loans of $144 thousand and
$6 thousand, respectively.
(2) Includes reserves for impaired loans individually measured for impairment
of commercial real estate and commercial business of $241 thousand and
$109 thousand, respectively.
13
<PAGE>
Changes in the allowance for losses on real estate owned are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
------ ------ ------ ----- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.. $ 79 $ -- $ -- $ 16 $ --
Provisions charged to operations 354 158 29 729 481
Charge-offs................... (120) (79) (29) (745) (465)
Recoveries.................... -- -- -- -- --
--- ---- --- --- ---
Balance at end of year...... $313 $ 79 $ -- $ -- $ 16
=== ==== ==== === ===
</TABLE>
Mortgage-Backed Securities
The Bank purchases mortgage-backed securities guaranteed by the Government
National Mortgage Association ("GNMA") and the FNMA and participation
certificates issued by the FHLMC. GNMA mortgage-backed securities are
certificates issued and backed by the GNMA and are secured by interests in pools
of mortgages which are fully insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veterans' Administration ("VA"). FHLMC
mortgage-backed securities are participation certificates issued and guaranteed
by the FHLMC and secured by interests in pools of conventional mortgages
originated by financial institutions. At December 31, 1995, these
mortgage-backed securities held to maturity, consisting of GNMA, FHLMC, FNMA,
and private pass-through certificates amounted to $111.5 million or 22.2% of
total assets.
Investment Activities
Farmers and Mechanics investment policy is to ensure safety and soundness,
provide and maintain the liquidity ratios required under regulations of the OTS,
optimize the Bank's return on investments, provide low-risk, high-quality
assets, manage the overall interest rate sensitivity of the portfolio and serve
as a vehicle to absorb excess funds when loan demand is low and to infuse funds
when loan demand is high. The amount of the Bank's investment portfolio at any
time will depend in part upon the Bank's loan origination volume and the
availability of attractive long-term investments. Investment decisions are based
on a thorough analysis of each investment to determine quality, prospects for
yield and appreciation and any inherent risks. See "Regulation."
At December 31, 1995, Farmers and Mechanics had an investment portfolio of
$66.3 million, of which $22.8 million was available for sale, consisting
primarily of U.S. Government securities and obligations of U.S. Government
agencies. For more information on the Bank's investment activities see Notes 2
and 3 of the Notes to the Consolidated Financial Statements. Other investment
activities of the Bank, which are not reported as part of the Bank's investment
portfolio, include an investment of $4.1 million in FHLB stock, which is
required as part of its membership in the Federal Home Loan Bank system (see
"--Regulation -- Federal Home Loan Bank System"), and $181 thousand in interest
bearing deposits and overnight investments.
14
<PAGE>
The following table sets forth the carrying value and market value of the
Bank's investment securities and securities available for sale, FHLB stock, and
interest bearing deposits and overnight investments at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993
------ ------ -----
Estimated Estimated Estimated
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
------- ------- ------- ------- ------- -------
(In Thousands)
Investment securities held to maturity:
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency securities $34,086 $34,110 $20,964 $19,726 $17,044 $17,078
Reverse Repurchase Agreements....... 9,000 9,000 -- -- -- --
Municipal bonds..................... 464 464 240 235 106 107
U.S. Treasuries..................... 15 14 -- -- -- --
Investment securities available for sale:
U.S. Agencies....................... 7,928 7,928 -- -- -- --
U.S. Treasuries..................... 1,980 1,980 -- -- -- --
REMIC's............................. 7,291 7,291 7,577 7,577 -- --
CMO's............................... 5,485 5,485 3,863 3,863 -- --
ARM mutual fund .................... -- -- -- -- 3,513 3,513
Common Stock........................ 84 84 26 26 26 26
------- ------- ------- ------- ------- -------
Total investment securities..... 66,333 66,356 32,670 31,427 20,689 20,724
------ ------ ------ ------ ------- ------
Federal Home Loan Bank of New York
stock............................. 4,058 4,058 3,728 3,728 3,488 3,488
Interest bearing deposits and overnight
investments....................... 181 181 1,955 1,955 528 528
------ ------ ------ ------ ------- ------
Total investments................ $70,572 $70,595 $38,353 $37,110 $ 24,705 $24,740
====== ====== ====== ====== ======= ======
</TABLE>
15
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment securities at
December 31, 1995.
<TABLE>
<CAPTION>
More than
One Year or Less One to Five Years Five to Ten Years Ten Years Total Investment Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
------- ------- ------- ------- ------- ------- ----- ----- ------- ------- -------
Investment securities held to (Dollars in Thousands)
maturity:
U.S. government and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
agency obligations $2,000 4.80% $8,999 5.39% $14,591 7.26% $8,496 7.50% $34,086 $34,110 6.68%
Municipal Bond..... 360 4.08 104 5.09 -- -- -- -- 464 464 4.30
Reverse Repurchase
Agreements........ 9,000 6.07 -- -- -- -- -- -- 9,000 9,000 6.07
U.S. Treasuries.... -- -- 15 3.50 -- -- -- -- 15 14 3.50
MBS................ -- -- 9,490 7.36 12,140 7.78 89,925 7.11 111,555 113,605 7.21
Investment securities
available for sale:
Common stock....... 84 -- -- -- -- -- -- -- 84 84 --
U.S. Government.... -- -- 4,907 5.19 5,000 7.25 -- -- 9,907 9,907 6.22
CMOs............... 229 4.59 2,186 6.42 -- -- 3,070 5.50 5,485 5,485 5.83
REMICs............. -- -- -- -- -- -- 7,291 5.86 7,291 7,291 5.86
------ ---- -------- ------ ------- ------ ----- ------ ------ ----- ----
Total............ $11,673 5.72% $25,701 6.16% $31,731 7.46% $108,782 7.01% $177,887 $179,960 6.89%
====== ==== ====== ==== ====== ==== ======= ==== ======= ======= ====
</TABLE>
16
<PAGE>
Subsidiary and Land Development Activities
Farmers and Mechanics is generally permitted to invest an amount equal to
3% of its total assets in subsidiary service corporations with at least 1% of
that investment in community reinvestment activities. Under such 3% limitation,
at December 31, 1995, Farmers and Mechanics was authorized to invest up to
approximately $15.0 million in the stock of or loans to its subsidiary service
corporations. As of December 31, 1995, the net book value of the Bank's
investment in stock, unsecured loans, and conforming loans in its subsidiaries
was $1.2 million, all of which had been invested in the Bank's wholly owned
subsidiary corporations, which were organized to engage in real estate
development activities.
Under FIRREA, savings associations are required to deduct from capital an
increasing percentage of their investments in, and extensions of credit to,
service corporations engaged in activities which are not permissible for
national banks. The real estate development activities of the Bank's service
corporation are not permissible for national banks, as promulgated by FIRREA.
Absent the approval of a request for an additional time period over which to
phase-in the deduction, the deduction rose to 100% on July 1, 1994. At December
31, 1995, the Bank's investment in and advances to subsidiaries engaged in
non-permissible activities amounted to $1.2 million of which $1.2 million was
deducted from tangible, core and risk-based capital.
Real estate held for development represents a high degree of credit risk
because of the relatively long period of time needed to obtain necessary
developmental approvals and the uncertainty of future market conditions. During
recent periods, conditions in the real estate market deteriorated as a result of
unfavorable interest rates, the general unavailability of credit, a slow down in
home sales and construction, and a surplus of available real estate. These
conditions have contributed to many project failures throughout the industry and
have reduced the demand for land. As a result, property values have declined and
substantial losses have been incurred by many institutions. During the year
ended December 31, 1995, and 1994, the Bank recorded provisions for losses on
real estate held for development totalling $200 thousand and $0, respectively.
There can be no assurance that conditions in the economy or real estate market
will not deteriorate further.
The Board of Directors of Land Financial Services, Inc., a wholly owned
subsidiary of the Bank, passed a resolution in February 1991 to cease all new
direct real estate investment activities. In addition, the Board further
resolved that there shall be no new real estate investment in connection with
existing assets except those investments which are necessary to preserve and
protect the existing assets so that such assets can be liquidated as soon as
practical. Management believes that divesture of its present land investment may
take several years, depending on market conditions.
Deposit Activities and Other Sources of Funds
General. Deposits are the major source of Farmers and Mechanics funds for
lending and other investment purposes. In addition to deposits, Farmers and
Mechanics derives funds from loan principal and interest repayments and
prepayments, principal and interest payments on mortgage-backed securities and
other investment securities, advances from the FHLB of New York and other
borrowings (see "Borrowings" below). Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer term
basis for general business purposes.
17
<PAGE>
Deposits. Deposits are attracted from within the Bank's primary market
area of Burlington County, New Jersey, through the offering of a broad selection
of deposit instruments including regular NOW accounts, Super NOW accounts, money
market accounts, regular passbook accounts, certificates of deposit and IRA
accounts. Deposit account terms vary, according to the minimum balance required,
the time periods the funds must remain on deposit and the interest rate, among
other factors. The Bank is a member of an automated teller machine network.
The Bank regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. The
Bank does not have any brokered deposits and has no present intention to accept
or solicit such deposits.
Certificates of Deposit Maturity Schedule. The following table sets forth
the amount and maturities of the Bank's certificates of deposit at December 31,
1995.
<TABLE>
<CAPTION>
Less than 1 to 2 to After
1 year 2 years 3 years 3 years Total
-------- ------- ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00%............ $ 16,554 $ 13 $ -- $ -- $ 16,567
4.01 - 6.00%............ 91,518 20,572 11,824 18,033 141,947
6.01 - 8.00%............ 34,559 8,724 2,429 21,315 67,027
8.01 - 10.00%........... 658 188 1,081 1,902 3,829
10.01 - 12.00%........... 51 3 -- 59 113
--------- -------- -------- -------- --------
Total............... $143,340 $29,500 $15,334 $41,309 $229,483
======= ====== ====== ====== =======
</TABLE>
Certificates of Deposit in Excess of $100,000. The following table
indicates the amount of the Bank's certificates of deposit of $100,000 or more
by time remaining until maturity as of December 31, 1995.
Maturity Period of Deposits Certificates of
Deposit
---------------
(In Thousands)
Three months or less............................. $ 3,608
Three through six months......................... 2,755
Six through twelve months........................ 2,778
Over twelve months............................... 6,483
------
Total....................................... $15,624
======
18
<PAGE>
Deposit Rate. The following table sets forth the distribution of the
Bank's deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993
------ ------ -----
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- -------- ------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and regular savings $66,798 15.93% 2.54% $66,608 15.52% 2.50% $ 57,781 14.19% 2.71%
NOW checking accounts..... 63,607 15.17 1.11 60,226 14.03 1.09 49,545 12.17 1.48
Money market deposit accounts 58,990 14.06 2.66 71,423 16.64 2.67 71,609 17.59 2.88
Certificates of deposit... 229,103 54.63 5.21 221,990 51.70 4.44 219,454 53.89 5.06
Surrogate statement....... 896 0.21 6.10 9,094 2.11 4.81 8,795 2.16 4.89
------- ------- ------- -------- ------ ------ -------- ------ -----
Total Deposits.......... $419,394 100.00% 3.81% $429,341 100.00% 3.39% $407,184 100.00% 3.91%
======= ====== ====== ======= ====== ====== ======= ====== =====
</TABLE>
19
<PAGE>
Borrowings. Savings deposits are the primary source of funds for Farmers
and Mechanics lending and investment activities and for its general business
purposes. From time to time, however, the Bank has relied upon other borrowings
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.
The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, Farmers and Mechanics is required to own capital stock in the FHLB of
New York and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally, securities
which are obligations of, or guaranteed by, the United States), provided certain
standards related to credit worthiness have been met. Under its current credit
policies, the FHLB of New York limits advances to 30% of a member's assets. At
December 31, 1995, the Bank had $24.5 million in FHLB advances outstanding at a
weighted-average interest rate of 5.96%. The advances are collateralized by FHLB
stock and certain first mortgage loans.
On July 28, 1994 the Corporation issued $10 million of 10% Subordinated
Debentures (the "Debentures") due 2004. Interest is payable on the Debentures
semi-annually on February 1 and August 1 of each year. The Corporation made its
first interest payment on the Debentures on February 1, 1995. The Corporation
used the proceeds for expansion of the Corporation's operations through branch
acquisitions and general corporate purposes. The Debentures were issued under an
Indenture which provides that the Corporation cannot declare or pay dividends
on, or purchase, redeem or acquire for value its capital stock, return any
capital to holders of capital stock as such, or make any distribution of assets
to capital stockholders as such, unless, from and after the date of any such
dividend declaration or the date of any such purchase, redemption, payment or
distribution specified above, the Corporation retains at all times cash, cash
equivalents (as determined in accordance with generally accepted accounting
principles) or marketable securities (with a market value as measured on the
applicable Declaration Date or Redemption Date) in an amount sufficient to cover
the two consecutive semi-annual interest payments that will be due and payable.
Personnel
As of December 31, 1995, the Corporation, including its subsidiaries, had
143 full-time employees and 99 part-time employees. The employees are not
represented by a collective bargaining unit. Management believes its
relationship with its employees is good.
Competition
The Bank faces strong competition in its attraction of savings deposits
and in the origination of real estate loans. Its most direct competition for
savings deposits has historically come from other thrift institutions and
commercial banks located in Burlington County and the contiguous counties. The
Bank's competition for real estate loans is principally from other thrift
institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers, and home builders. The Bank competes for
deposits by offering depositors a wide variety of savings accounts, checking
accounts, convenient office locations, tax-deferred retirement programs and
other miscellaneous services.
20
<PAGE>
Regulation
Set forth below is a brief description of certain laws which are related
to the regulation of the Bank and the Corporation. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Corporation
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for
stockholders of the Corporation.
Restrictions on Acquisitions. If the Corporation acquires control of
another savings institution as a separate subsidiary (other than a financially
troubled institution acquired pursuant to special provisions of the Federal
Deposit Insurance Act), the Corporation would become a multiple savings and loan
holding company whose activities and those of its subsidiaries (other than the
Bank or any other savings association) would become subject to restrictions
under the Home Owners' Loan Act ("HOLA"). No such multiple savings and loan
holding company or subsidiary thereof that is not a savings association may
commence, or continue for more than 180 days after becoming a multiple savings
and loan holding company or subsidiary thereof, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or an escrow business; (iii)
holding or managing properties used or occupied by a subsidiary savings
association; or (iv) acting as a trustee under deeds of trust. In addition,
unless prohibited or limited by the OTS, such a multiple savings and loan
holding company may engage in non-banking activities permissible for bank
holding companies, including, but not limited to, investment advice, leasing,
underwriting credit insurance, management consulting services, and securities
brokerage activities, as the Federal Reserve Board determines under section
4(c)(8) of the Bank Holding Company Act of 1956 ("BHCA"), and may engage in
those activities authorized by the OTS. Such a multiple savings and loan holding
company must obtain prior OTS approval before it may engage in any particular
activity permissible for bank holding companies under section 4(c)(8) of the
BHCA.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control" as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
21
<PAGE>
Payment of Dividends. The Corporation's principal source of income is
dividends to the extent declared and paid by the Bank. Therefore, restrictions
on the Bank's ability to pay dividends may impact on the Corporation's ability
to pay dividends to stockholders.
Regulation of the Bank
General. As a federally-chartered, SAIF-insured savings bank, the Bank is
subject to extensive regulation by the OTS and the FDIC. Lending activities and
other investments must comply with various federal statutory and regulatory
requirements. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Corporation, the Bank and
their operations.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") imposes a number of mandatory supervisory measures on savings
associations, such as the Bank. The FDICIA requires financial institutions to
take certain actions relating to their internal operations, including: providing
annual reports on financial condition and management to the appropriate federal
banking regulators; having an annual independent audit of financial statements
performed by an independent public accountant; and establishing an independent
audit committee comprised solely of outside directors. The FDICIA also imposes
certain operational and managerial standards on financial institutions relating
to internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits. The FDICIA also
requires the FDIC to assess deposit insurance premiums based on risk. It is
anticipated that the Bank will be subject to certain additional FDICIA
requirements in fiscal year 1996.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). FIRREA gives the FDIC the authority to suspend the deposit
insurance of any savings association without tangible capital. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially, the institution fails to enter into and remain in compliance with an
approved capital plan or the institution is operating in an unsafe or unsound
manner.
22
<PAGE>
Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. This
risk classification is based on an institution's capital group and supervisory
subgroup assignment. In addition, the FDIC is authorized to increase such
deposit insurance rates, on a semi-annual basis, if it determines that the
reserve ratio of the SAIF will be less than the designated reserve ratio of
1.25% of SAIF-insured deposits. In setting these increased assessments, the FDIC
must seek to restore and preserve the ratio to that designated reserve level, or
such higher reserve ratio as established by the FDIC. In addition, under the
FDICIA, the FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the U.S. Treasury or for any other reason deemed necessary by the
FDIC. The Bank's federal deposit insurance premium expense for the year ended
December 31, 1995, amounted to $974 thousand.
In August 1995, the FDIC lowered the insurance premium for members of the
BIF, primarily commercial banks, to a range of between 0.04% and 0.31% of
deposits. In November 1995, the FDIC again lowered BIF premiums further whereby
most BIF-insured institutions would pay only the statutory minimum of $2
thousand annually. This reduction in insurance premiums for BIF members could
place SAIF members, primarily savings associations, such as the Bank, at a
material competitive disadvantage to BIF members and, for the reasons set forth
below, could have a material adverse effect on the results of operations and
financial condition of the Bank in future periods.
The disparity in insurance premiums between those required for the Bank
and BIF members could allow BIF members to attract and retain deposits at a
lower effective cost than that possible for the Bank and put competitive
pressure on the Bank to raise its interest rates paid on deposits thus
increasing its cost of funds and possibly reducing net interest income. 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.
Several alternatives to mitigate the effect of the BIF/SAIF insurance
premium disparity have recently been proposed by the U.S. Congress, federal
regulators, industry lobbyists and the Administration. One plan that has gained
support of several sponsors would require all SAIF member institutions,
including the Bank, to pay a one-time fee of approximately 85 basis points on
the amount of deposits held by the member institution to recapitalize the SAIF.
If an 85 basis point (0.85%) assessment was effected, based on deposits as of
March 31, 1995, the Bank's pro rata share would amount to $2.3 million after
taxes. If the Bank is required to pay the proposed special assessment, future
deposit insurance premiums are expected to be reduced from 0.23% to
approximately 0.06%. Based upon the Bank's deposits as of December 31, 1995, the
Savings Bank's deposit insurance expense would decrease by approximately $460
thousand per year after taxes. Management of the Bank is unable to predict
whether this proposal or any similar proposal will be enacted or whether ongoing
SAIF premiums will be reduced to a level comparable to that of BIF premiums.
Examination Fees. In addition to federal deposit insurance premiums,
savings institutions like the Bank are required by OTS regulations to pay
assessments to the OTS to fund the operations of the
23
<PAGE>
OTS. The general assessment is paid on a semi-annual basis and is computed
based on total assets of the institution, including subsidiaries.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to 3% of
total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of
total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained income), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, plus purchased mortgage servicing rights valued at the lower of
90% of fair market value, 90% of original cost or 100% of the current amortized
book value as determined under GAAP, and qualifying supervisory goodwill, less
nonqualifying intangible assets.
The OTS leverage ratio regulation establishes a core capital ratio of at
least 3% for those savings associations in the strongest financial and
managerial condition based on the "CAMEL" rating system currently in use by the
OTS. Those savings associations receiving a CAMEL rating of "1", the best
possible rating on a scale of 1 to 5, are required to maintain a ratio of core
capital to adjusted total assets of 3%. All other savings associations are
required to maintain minimum core capital of at least 4% of total adjusted
assets, with a maximum core capital ratio requirement 5%. In determining the
required minimum core capital ratio, the OTS will assess the quality of risk
management and the level of risk in each savings association on a case-by-case
basis. The OTS did not indicate in the proposed regulation the standards it will
use in establishing the appropriate core capital requirement for savings
associations not rated "1" under the CAMEL rating system. At December 31, 1995,
the Savings Bank's ratio of core capital to total adjusted assets was 7.38%.
The OTS regulations also require savings associations to deduct from
capital, for purposes of meeting the leverage tangible and risk-based capital
requirements, their investments in and loans to a subsidiary engaged in
activities not permissible for a national bank ("nonconforming subsidiaries") in
increasing amounts until fully deducted after June 30, 1994 (or June 30, 1996 if
the OTS specifically permits such extended period). At December 31, 1995, the
Bank had $1.2 million invested in nonconforming subsidiaries all of which was
deducted from the Bank's regulatory capital.
On January 20, 1993, the OTS issued a statement imposing certain
limitations on the inclusion of net deferred tax assets calculated under FAS 109
in regulatory capital. Deferred tax assets that are dependent on future taxable
income or the institution's tax planning strategies may only be counted as a
component of Tier 1 capital to the extent they do not exceed the lesser of: (i)
10% of Tier 1 capital, or (ii) the amount of such benefits which may be realized
based on one year's projected earnings.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the allowance for loan losses. Allowance
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
24
<PAGE>
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
OTS Regulations set forth the methodology for calculating an interest rate
risk ("IRR") component which is added to the risk-based capital requirements for
OTS regulated thrift institutions. Under the Regulations, savings associations
with a greater than "normal" level of interest rate exposure will be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirement. Specifically, interest rate exposure will be measured as
the decline in net portfolio value due to a 200 basis point decrease in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure which is defined as two percent of the estimated
economic value of its assets.
Prompt Corrective Action. The FDICIA also establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of capitalization. Under the OTS final
rule implementing the prompt corrective action provisions, an institution shall
be deemed to be (i) "well capitalized" if it has total risk-based capital of
10.0% or more, has a Tier I risk-based capital ratio (core or leverage capital
to risk-weighted assets) of 6.0% or more, has a leverage capital of 5.0% or more
and is not subject to any order or final capital directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I
risked-based ratio of 4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a leverage capital ratio that is less than 4.0% (3.0% in certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. In addition, under certain
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Corporation, and the OTS has the authority under
its supervisory powers to prohibit the payment of dividends to the Corporation.
In addition, the Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Bank below the amount required for the liquidation account established pursuant
to the Bank's Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision
25
<PAGE>
can, after prior notice but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year, or (ii)
75% of its net income over the most recent four quarter period. Any additional
capital distributions require prior regulatory approval. As of December 31,
1995, the Bank was a Tier 1 institution. In the event the Bank's capital fell
below its fully phased-in requirement or the OTS notified it that it was in need
of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Finally, under the FDICIA, a savings association is prohibited from making
a capital distribution if, after making the distribution, the savings
association would be "undercapitalized".
Qualified Thrift Lender Test. HOLA requires savings institutions to meet a
QTL test. If the Bank maintains an appropriate level of Qualified Thrift
Investments (primarily residential mortgages and related investments, including
certain mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full borrowing privileges from the FHLB of New York.
The required percentage of QTIs is 65% of portfolio assets (defined as all
assets minus intangible assets, property used by the institution in conducting
its business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. The method for measuring compliance with the QTL test is on a
monthly basis in nine out of every 12 months. As of December 31, 1995, the Bank
was in compliance with its QTL requirement with 83.69% of its assets invested in
QTIs.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The Bank received an "Outstanding" rating as a result of
its last evaluation in October 1995.
Loans-to-One Borrower. Under the HOLA, as amended, savings institutions
are subject to the national bank limits on loans-to-one borrower. Generally, a
savings association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the association's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. The Bank does not have any loans to one borrower which
exceed these limits.
Transactions With Related Parties. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
transactions with non-affiliates. In addition, certain of these transactions are
restricted to
26
<PAGE>
a percentage of the Bank's capital. Affiliates of the Bank include the
Corporation and any company which would be under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of any affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as such entities such persons control are currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. OTS regulations, with the exception
of minor variations, apply Regulation O to savings associations.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. The Bank's liquidity ratio equalled 10.63% at December 31,
1995.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term U.S. Government obligations), and long-term assets (e.g., U.S.
Government obligations of more than one and less than five years and state
agency obligations with a minimum term of 18 months). The regulations governing
liquidity requirements include as liquid assets debt securities hedged with
forward commitments obtained from, or debt securities subject to repurchase
agreements with, members of the Association of Primary Dealers in the United
States Government Securities or banks whose accounts are insured by the FDIC,
debt securities directly hedged with a short financial future position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of the securities. FIRREA also
authorized the OTS to designate as liquid assets certain mortgage-related
securities with less than one year to maturity. Short-term liquid assets
currently must constitute at least 1% of an association's average daily balance
of net withdrawable deposit accounts and current borrowings. Monetary penalties
may be imposed upon associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1995, the Bank had $4.1 million in
FHLB stock, which was in compliance with this requirement.
The FHLB is required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions
27
<PAGE>
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. For the year ended December 31, 1995, dividends paid by the
FHLB of New York to the Bank totalled $308 thousand.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at December 31, 1995.
Item 2. Properties
The following table sets forth the location of the Bank's offices, the net
book value of each facility, including furniture, fixtures and equipment, as
well as certain additional information relating to these offices as of December
31, 1995. The net book value of the Bank's investment in office property and
equipment, including electronic data processing equipment, totalled $12.8
million at December 31, 1995.
<TABLE>
<CAPTION>
Year Facility
Opened or Square
Acquired Total Net Book Footage of Owned/
in Merger Investment Value(1) Building Leased
----------- ---------- -------- ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Burlington Township........... 1962 $4,214 $1,695 6,624 Owned
Administrative Building
811 Sunset Road & Salem Road
Burlington, NJ 08016
Burlington Township........... 1992 2,195 1,903 24,315 Owned
Administrative Building
3 Sunset Road & Route 541
Burlington, NJ 08016
Burlington Township Branch.... 1984 1,264 883 3,512 Owned
809 Sunset Road & Salem Road
Burlington, NJ 08016
City of Burlington Branch..... 1958 372 150 3,575 Owned
352 High Street
Burlington, NJ 08016
Medford Lakes Branch.......... 1967 533 194 1,848 Owned
Lakes Shopping Center
712 Stokes Road
Medford, NJ 08055
Moorestown Branch............. 1979 1,057 624 5,473 Owned
53 East Main Street
Moorestown, NJ 08057
28
<PAGE>
Edgewater Park Branch......... 1975 778 585 2,600 Owned
1149 Cooper Street & Elm Street
Edgewater, NJ 08010
Mt. Laurel Branch............. 1973 1,800 1,198 4,700 Owned
4522 Church Road & Church Street
Mt. Laurel, NJ 08054
Lumberton Branch.............. 1991 787 584 2,856 Leased (2)
Lumberton Plaza
1636-61 Route 38
Lumberton, NJ 08048
Willingboro Branch............ 1991 416 357 1,617 Owned
399 Charleston Road & JFK Way
Willingboro, NJ 08046
Medford Branch................ 1991 114 44 2,500 Leased
Taunton Forge Shopping Center
200 Tuckerton Road & Taunton Road
Medford, NJ 08055
Southampton Branch............ 1992 657 558 2,250 Owned
1841 Route 70 & Red Lion Circle
Southampton, NJ 08088
Eastampton Branch............. 1994 571 498 2,266 Owned
1191 Woodlane Road
Eastampton, NJ 08060
Willingboro East Branch....... 1994 626 549 3,200 Owned
611 Beverly-Rancocas Road
Willingboro, NJ 08046
Willingboro West Branch....... 1994 402 381 3,100 Owned
1 Rose Street & Beverly-Rancocas Road
Willingboro, NJ 08046
Delran Branch................. 1995(5) 604 596 2,891 Owned
3002 North Route 130
Delran, NJ 08075
Bordentown Branch............. 1995(6) 404 404 3,600 Owned
335 Farnsworth Avenue
Bordentown, NJ 08505
Voorhees Land................. 1990 373 373 N/A Owned
Evesham Road & Main Street
Voorhees, NJ 08043
Cinnaminson Building.......... 1994(3) 498 498 32,200 Owned
2601 & 2603 Route 130
Cinnaminson, NJ 08077
29
<PAGE>
Medford 541 Land.............. 1994(4) 262 262 N/A Owned
7 Wilkins Station Road
Medford, NJ 08055
Cinnaminson Land.............. 1995(7) 170 170 N/A Owned
1703 Highland Avenue
Cinnaminson, NJ 08077
Medford 541-2 Land............ 1995(8) 267 267 N/A Owned
Church Road & Route 541
Medford, NJ 08055
Total..................... $18,364 $12,773
====== ======
<FN>
(1) As of December 31, 1995. Represents the net book value of land,
building, furniture, fixtures and equipment owned by the Bank.
(2) Lease expires August 20, 2021.
(3) Purchased in April 1994, a future location for retail banking.
(4) Medford 541 land purchased in September 1994, will be put up for sale in
lieu of another parcel of land.
(5) Branch opened in July 1995.
(6) Purchased in November 1995. Branch opened in February 1996.
(7) Purchased in June 1995 and is a future location for retail banking.
(8) Purchased in October 1995 and is a future location for retail banking.
</FN>
</TABLE>
Item 3. Legal Proceedings
The Bank is periodically involved as a plaintiff or defendant in various
legal actions, such as actions to enforce liens, condemnation proceedings on
properties in which the Bank holds mortgage interests, matters involving the
making and servicing of mortgage loans and other matters incident to the Bank's
business. In the opinion of management, none of these actions individually or in
the aggregate is believed to be material to the financial condition or business
of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1995.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Stock Market
Information" in the Corporation's Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1995 (the "Annual Report") is incorporated herein by
reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Financial Highlights" in
the Annual Report is incorporated herein by reference.
30
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Corporation's financial statements are listed in Item 14 herein are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1996 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
The executive officers of the Corporation are as follows:
Name Age(1) Position
Charles B. Yates.......... 56 Chairman of the Board
Craig W. Yates............ 53 President and Chief Executive Officer
Channing L. Smith......... 52 Vice President and Chief Financial
Officer
James E. Igo.............. 39 Senior Vice President and Mortgage
Officer
Thomas M. Topley.......... 35 Senior Vice President and Corporate
Secretary
(1) At December 31, 1995.
The principal office of each executive officer is set forth below.
31
<PAGE>
Charles B. Yates is Chairman of the Board of the Corporation and the Bank.
Mr. Yates has been a private investor for seven years. He previously was
president of Yates Industries, Inc., a New York Stock Exchange listed
manufacturing company from 1967 to 1982. He was also Vice Chairman of Square D
Corporation from 1982 to 1983 and served as Assemblyman and State Senator in the
New Jersey Legislature from 1972 to 1982.
Craig W. Yates serves as President and Chief Executive Officer. He became
a director of the Bank in January 1990 and President of the Corporation and the
Bank on December 31, 1990. For the previous five years, Mr. Yates was a private
investor. In his capacity as President, Mr. Yates is responsible for the
operations of the Corporation pursuant to the policies and procedures adopted by
the Board of Directors.
Channing L. Smith serves as Vice President and Chief Financial Officer
since October 1994. In this capacity he is responsible for the management of the
accounting, treasury, investment, data processing, loan servicing and human
resources of the Bank. From April 1994 to October 1994, he served as controller.
From January 1990 to April 1993 he served as corporate Controller for Circuit
Foil USA.
James E. Igo has served as Vice President and Senior Mortgage Lending
Officer since November 1991. In that capacity he is responsible for overall loan
production, credit quality, product development and the creation of lending
policies and procedures. From September 1990 to November 1991, he served as the
Vice President, Commercial Lending. Prior to 1990, Mr. Igo was Senior Vice
President and Senior Lending Officer for a commercial bank.
Thomas M. Topley has served as Vice President of Operations since April
1993 and as Corporate Secretary since April 1992. In that capacity, he is
responsible for corporate records, retail branch administration, and accounting
operations. From June 1990 to April 1993, Mr. Topley served as Vice President
and Controller for the Bank.
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I --
Election of Directors Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and Principal
Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" of the Proxy Statement.
32
<PAGE>
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the registrant.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K*
(a) The following documents are filed as part of this report:
1. The following financial statements and the report of
independent auditors of the Registrant included in the
Registrants 1995 Annual Report to Stockholders are
incorporated herein by reference and also in Item 8 hereof.
(a) Report of Coopers & Lybrand L.L.P.
(b) Consolidated Statements of Financial
Condition as of December 31, 1995 and 1994
(c) Consolidated Statements of Operations for the
years ended December 31, 1995, 1994 and 1993
(d) Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1994 and 1993
(e) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1995, 1994 and
1993
(f) Notes to Consolidated Financial Statements
2. No financial statement schedules are provided herein because
the required information is either not applicable or not
required or is shown in the consolidated financial statements
or in the notes thereto.
3. Exhibits
3.1 Certificate of Incorporation (Incorporated by reference
to the Registrant's Form S-1 Registration Statement
No. 33-24340).
3.2 Bylaws (Incorporated by reference to the Registrant's
Form S-1 Registration Statement No. 33-24340).
33
<PAGE>
4 Agreement to furnish copy to Securities and Exchange
Commission upon request of Indenture dated July 28,
1994, relating to 10% Subordinated Debentures due 2004
in aggregate principal amount of $10 million.
(Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1994).
10.1 Stock Option and Incentive Plan (Incorporated by
reference to the Registrant's Form S-8 Registration
Statement No. 33-24340).
11 Statement regarding computation of per share earnings.
13 Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1995.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
(b) No Reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this Report.
- -------------------
* Incorporated by reference from the Registrant's 1995 Annual Report to
Stockholders attached hereto as Exhibit 13.
34
<PAGE>
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.
FMS FINANCIAL CORPORATION
Date: March 29, 1996 By: /s/ Craig W. Yates
-------------------------- -------------------
Craig W. Yates, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Dated
/s/ Charles B. Yates March 29, 1996
- ----------------------------- --------------------
Charles B. Yates
Chairman of the Board
/s/ Craig W. Yates March 29 , 1996
- ---------------------------- --------------------
Craig W. Yates
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ George J. Barber March 29, 1996
- ---------------------------- --------------------
George J. Barber, Director
/s/ Channing L. Smith March 29, 1996
- ---------------------------- --------------------
Channing L. Smith
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Robert N. Garrison, Director
/s/ Wayne H. Page March 29, 1996
- ---------------------------- --------------------
Wayne H. Page, Director
/s/ James C. Lignana March 29, 1996
- ---------------------------- --------------------
James C. Lignana, Director
/s/ Dominic W. Flamini March 29, 1996
- ---------------------------- --------------------
Dominic W. Flamini, Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
3.1 Certificate of Incorporation (Incorporated
by reference to the Registrant's Form S-1
Registration Statement No. 33-24340).
3.2 Bylaws (Incorporated by reference to the
Registrant's Form S-1 Registration Statement
No. 33-24340).
4 Agreement to furnish copy to Securities and Exchange Commission upon
request of Indenture dated July 28, 1994, relating to 10% Subordinated
Debentures due 2004 in aggregate principal amount of $10 million.
(Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.1 Stock Option and Incentive Plan (Incorporated
by reference to the Registrant's Form S-8
Registration Statement No. 33-24340).
11 Statement regarding computation of per share earnings.
13 Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1995.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
Exhibit No. 11 Statement re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income.............................................. $4,343,404 $4,455,455 $4,214,648
Weighted average common shares outstanding.............. 2,504,322 2,575,938 2,579,518
Common stock equivalents due to dilutive effect of
stock options......................................... 60,844 74,696 79,928
Total weighted average common shares and
equivalents outstanding............................... 2,565,166 2,650,634 2,659,446
Primary earnings per share.............................. $ 1.69 $ 1.68 $ 1.58
Total weighted average common shares and equivalents
outstanding 2,565,166 2,650,634 2,659,446
Additional dilutive shares using the higher of the
end of period market value or average market value
for the period when utilizing the treasury stock
method regarding stock options........................ 4,578 250 2,128
Total outstanding shares for fully diluted earnings
per share computation 2,569,774 2,650,884 2,661,574
Fully diluted earnings per share........................ $ 1.69 $ 1.68 $ 1.58
</TABLE>
EXHIBIT 13
CORPORATE PROFILE
FMS Financial Corporation is the holding company for Farmers & Mechanics Bank.
Farmers & Mechanics Bank, with total assets of $502 million, is the largest
thrift institution headquartered in its primary market area of Burlington
County, New Jersey.
Founded in Burlington City in 1871 under the name of Farmers' and Mechanics'
Building and Loan Association, the Bank operates sixteen banking offices in
Burlington County, New Jersey.
The daily stock quotation for FMS Financial Corporation is listed in the
Nasdaq National Market System published in The Wall Street Journal, the
Philadelphia Inquirer and other leading newspapers under the trading symbol of
FMCO.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FINANCIAL CONDITION (IN THOUSANDS)
DECEMBER 31, 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets $501,550 $483,776 $445,029 $432,072 $397,642
Loans receivable and loans held for sale, net 288,400 283,260 269,264 254,989 233,322
Deposits 428,809 429,431 406,017 402,172 360,897
Stockholders' equity 33,053 29,159 25,906 21,582 19,769
OPERATIONS: (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Interest income $35,201 $32,270 $31,510 $31,836 $33,194
Interest expense 18,041 15,336 16,100 18,854 23,571
Net interest income 17,160 16,934 15,410 12,982 9,623
Net income 4,343 4,455 4,215 1,752 523
Earnings per common share (a) 1.69 1.68 1.63 0.68 0.20
Dividends declared per common share (a) 0.20 0 0 0 0
Weighted average common shares and common
stock equivalents outstanding (a) 2,565 2,651 2,580 2,574 2,574
OTHER SELECTED DATA:
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Net interest rate spread 3.49% 3.64% 3.49% 3.24% 2.63%
Net interest margin 3.66 3.72 3.62 3.36 2.71
Return on average assets 0.89 0.94 0.96 0.43 0.14
Return on average equity 14.00 16.01 17.80 8.20 2.69
Dividend payout ratio (a) 11.83 0.00 0.00 0.00 0.00
Equity-to-asset ratio 6.59 6.03 5.82 4.99 4.97
<FN>
(a) Earnings and dividends per common share and weighted average common
shares and common stock equivalents outstanding amounts have been restated to
reflect a two-for-one stock split announced in November 1995.
</FN>
</TABLE>
<PAGE>
To our Shareholders:
We are pleased to report continued strong earnings for 1995. Net interest
income increased modestly over 1994, in a period of generally declining interest
rates during the year. After-tax income for the year decreased slightly in
dollar amount as compared with 1994, but showed a small per-share earnings
increase (of one cent per share) for 1995, due to the lower number of shares
outstanding at year-end.
As a milestone in the bank's growth as a community lending institution, it
should be noted that the bank's assets at the end of 1995 exceeded $500 million
for the first time in the bank's 125 year history. Also, with two additional
branch offices brought on-stream in 1995 (in Willingboro and Delran, NJ),
Farmers and Mechanics Bank had 14 banking offices in operations at year-end
1995. Two more branch locations will be up and running (Bordentown City and
Route 541 Burlington) by the time you are reading this report in April 1996. We
continue to believe that there are fine growth opportunities in the communities
we serve, and we plan to continue our efforts to develop additional branch
locations as circumstances permit.
Our ability to grow as a community banking organization is a direct
function of the bank's capital base as reported in the balance sheet. We are
pleased to report that Farmers and Mechanics Bank and its holding company
parent FMS Financial Corporation have registered continuing significant growth
in stockholders' equity over the past several years, rising from less than $20
million at the end of 1991, to just over $33 million at the end of 1995. At
December 31, 1995, the Bank's regulatory, tangible and core capital was 7.38% of
total assets, with risk-based capital at 16.17% of risk weighted assets. Both
figures leave substantial latitude for future growth in the Bank's lending ad
deposit-generating activities.
We continue to believe that the future is bright for community banking. We
think that a community institution with a good branch system, and friendly
efficient service can compete very effectively with the larger commercial banks.
We believe that good local banking requires an ability to understand and respond
quickly to local needs. We are convinced that the public is better served when
they can visit and discuss their important banking problems and needs with the
top officers of the Bank without leaving their local area. We intend to continue
to do our very best to meet the banking and financial services needs of the
communities we serve.
Once again, we want to express our appreciation for the loyalty of our
customers, the dedicated efforts of our staff, and the support of our
shareholders in building the continued success of this institution.
Sincerely,
/s/Craig W. Yates /s/Charles B. Yates
Craig W. Yates Charles B. Yates
President Chairman
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
FMS Financial Corporation ("the Corporation") is the parent company of
Farmers & Mechanics Bank ("the Bank"), its only subsidiary. Earnings of the
Corporation are primarily dependent on the earnings of the Bank as the
Corporation has engaged in no significant operations of its own. Accordingly,
the earnings of the Corporation are largely dependent on the receipt of earnings
from the Bank in the form of dividends.
The earnings of the Bank depend primarily on its net interest income. Net
interest income is affected by: (i) the volume of interest-earning assets and
interest-bearing liabilities (see `Rate/Volume Analysis"), (ii) rates of
interest earned on interest-earning assets and rates paid on interest-bearing
liabilities and (iii) the difference ("interest rate spread") between average
rates of interest earned on interest-earning assets and average rates paid on
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
The Bank also derives income from service charges on customer deposit
accounts and fees on loans. In addition to interest expense, the Bank incurs
operating expenses such as salaries and employee benefits, deposit insurance
premiums, depreciation, property maintenance and advertising.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread which can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing
`GAP", provides an indication of the extent to which an institution's interest
rate spread will be affected by changes in interest rates over a period of time.
A GAP is considered positive when the amount of interest-rate sensitive assets
maturing or repricing over a specified period of time exceeds the amount of
interest-rate sensitive liabilities maturing or repricing within that period and
is considered negative when the amount of interest-rate sensitive liabilities
maturing or repricing over a specified period of time exceeds the amount of
interest-rate sensitive assets maturing or repricing within that period.
Generally, during a period of rising interest rates, a negative GAP within a
given period of time would adversely affect net interest income, while a
positive GAP within such period of time may result in an increase in net
interest income; during a period of falling interest rates, a negative GAP
within a given period of time may result in an increase in net interest income
while a positive GAP within such period of time may have the opposite effect.
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1995, which are
expected to reprice or mature in each of the future time periods shown. The
amount of assets or liabilities shown which reprice or mature during a
particular period were determined by the contractual terms or assumed decay
rates of the asset or liability. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-backed securities, and
assumes that adjustable rate mortgage loans will reprice at contractual
repricing intervals. There has been no adjustment for the impact of future loan
commitments and loans in process.
<TABLE>
<CAPTION>
FARMERS & MECHANICS BANK 3 MONTHS 3 MONTHS 1 TO 3 3 TO 5 OVER 5
GAP TABLE OR LESS TO 1 YEAR YEARS YEARS YEARS TOTAL
(DOLLARS IN THOUSANDS)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Investment securities $ 18,267 $ 5,693 $ 7,376 $ 6,553 $ 32,683 $ 70,572
Loans 53,558 44,765 70,153 47,239 75,452 291,167
Mortage-backed securities 33,753 31,921 23,294 11,420 11,167 111,555
------- ------- ------- ------- ------ -------
Total 105,578 82,379 100,823 65,212 119,302 473,294
------- ------- ------- ------- ------- -------
Interest-bearing
liabilities:
Now, Super Now, Passbook
and Club accounts 7,001 14,015 29,311 20,384 42,442 113,153
Money market accounts 5,186 13,007 21,325 10,069 7,907 57,494
Certificates of Deposit 45,412 98,503 44,338 40,238 992 229,483
Borrowings 432 750 12,000 10,000 5,544 28,726
------- ------- ------- ------- ----- -------
Total 58,031 126,275 106,974 80,691 56,885 428,856
------- ------- ------- ------- ------ -------
Interest Rate Sensitivity $ 47,547 $ (43,896) $ (6,151) $ (15,479) $ 62,417 $ 44,438
GAP ========== =========== ========= ========= ========= =========
Cumulative Interest Rate $ 47,547 $ 3,651 $ (2,500) $ (17,979) $ 44,438
Sensitivity GAP ========== =========== ========== ========= ==========
Ratio of Interest Rate
Sensitive Assets to Interest
Rate Sensitive Liabilities 181.93% 65.24% 94.25% 80.82% 209.72% 110.36%
====== ===== ===== ===== ====== ======
RATIO OF CUMULATIVE GAP TO 9.49% 0.73% -0.50% -3.59% 8.87%
TOTAL BANK ASSETS ==== ==== ==== ==== ====
</TABLE>
<PAGE>
The Bank's analysis of its interest-rate sensitivity incorporates certain
assumptions concerning the amortization of loans and other interest-earning
assets and the repricing characteristics of deposits. The Bank has made the
following assumptions in calculating the values on the GAP table: adjustable-
rate mortgage loans have a constant prepayment rate of 20%; fixed-rate mortgage
loans have a prepayment rate that is constant through time at 14%; commercial
loans fixed and adjustable rates have a constant prepayment rate of 12%;
consumer loans have a prepayment rate that is constant over time at 16%;
mortgage-backed securities and CMO/REMIC's have a prepayment rate that is
constant over time at 15% and 10%, respectively. Core savings and NOW checking
deposits have a decay rate of 17% which is based on OTS assumption rates from
industry experience; money market deposits have a decay rate through time
ranging from 74% almost immediately to 31% after one year. The interest-rate
sensitivity of the Bank's assets and liabilities illustrated in the table could
vary substantially if different assumptions were used or if actual experience
differs from the assumptions used.
The table indicates the time period in which interest-earning assets and
interest bearing liabilities will mature or reprice in accordance with their
contractual terms or assumed decay rates, as applicable. However, this table
does not necessarily indicate the impact of general interest rate movements on
the Bank's net interest income because the repricing of various
categories of assets and liabilities is discretionary and is subject
to competition and other pressures. As a result, various assets and liabilities
indicated as repricing within the same period may in fact reprice at different
times and at different rate levels.
The Bank measures its interest rate risk (IRR) using the OTS's net
portfolio value (NPV) method. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts. An institution's IRR is measured as the change to its NPV as a result
of a hypothetical 200 basis point change in market interest rates. Based on this
analysis at December 31, 1995, the Bank would experience a 187 basis point
decrease in its NPV as a percent of assets if rates rise by 200 basis points in
comparison to a flat rate scenario and a 48 basis point increase in NPV if rates
decline 200 basis points.
RESULTS OF OPERATIONS
Net Interest Income
The earnings of the Bank depend primarily upon the level of net interest
income, which is the difference between interest earned on its interest-earning
assets, such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits and borrowings. Net interest income is a function
of the interest rate spread, which is the difference between the weighted
average yield earned on interest-earning assets and the weighted average rate
paid on interest-bearing liabilities, as well as the average balance of
interest-earning assets as compared to interest-bearing liabilities. Net income
is also affected by non-interest income, such as gains (losses) on sales of
loans and investments, provision for loan losses and real estate owned, service
charges and other fees, and operating expenses.
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average rates paid on liabilities for the periods indicated. Such yields and
rates are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods presented.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND YIELDS/RATES
YEARS ENDED DECEMBER 31,
1995 1994 1993
--------------------------------- ------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
(DOLLARS IN THOUSANDS)
Interest-earning
assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $289,665 $ 23,572 8.14% $ 280,041 $ 22,241 7.94% $ 267,040 $ 22,150 8.29%
receivable
Mortgage-backed 122,838 8,034 6.54% 128,775 7,492 5.82% 129,530 7,910 6.11%
securities
Investment 55,798 3,595 6.44% 46,591 2,536 5.44% 29,473 1,450 4.92%
securities ------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-
earning assets 468,301 35,201 7.52% 455,407 32,269 7.09% 426,043 31,510 7.39%
------- ------ ---- ------- ------ ---- ------- ------ ----
Interest-bearing
liabilities:
Deposits 419,394 15,961 3.81% 429,341 14,539 3.39% 407,184 15,906 3.91%
Borrowings 27,889 2,080 7.46% 15,091 796 5.27% 5,453 194 3.56%
------ ----- ---- ------ --- ---- ----- --- ----
Total interest-
bearing liabilities $447,283 18,041 4.03% $444,432 15,335 3.45% $412,637 16,100 3.90%
======== ------ ---- ======== ------ ---- ======== ------ ----
Net interest income $ 17,160 $ 16,934 $ 15,410
========= ========== ==========
Interest rate spread 3.49% 3.64% 3.49%
==== ==== ====
Net yield on average
interest-earning assets 3.66% 3.72% 3.62%
==== ==== ====
Ratio of average
interest-earning assets to
average interest-bearing 104.70% 102.47% 103.25%
liabilities ====== ====== ======
</TABLE>
<PAGE>
RATE VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of the Corporation for 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; (ii) changes in rates; (iii) total change in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). Because average balances on loans include non-
performing loans which reduce the computed yield, a higher level of non-
performing loans affects both the changes due to volume and rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 VS. 1994 1994 VS. 1993
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
RATE VOLUME TOTAL RATE VOLUME TOTAL
------ ---- ----- ------ ----- ------
(IN THOUSANDS)
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 567 $ 764 $ 1,331 $ (986) $ 1,078 $ 92
Mortgage-backed securities 887 (346) 541 (372) (46) (418)
Investment securities 558 501 1,059 243 842 1,085
------ ---- ----- ------ ----- ------
Total change - interest income 2,012 919 2,931 (1,115) 1,874 759
------ ---- ----- ------ ----- ------
Interest expense:
Deposits 1,759 (337) 1,422 (2,233) 866 (1,367)
Borrowings 610 674 1,284 259 343 602
------ ---- ----- ------ ----- ------
Total change - interest expense 2,369 337 2,706 (1,974) 1,209 (765)
------ ---- ----- ------ ----- ------
Net change in net interest income $ (357) $ 582 $ 225 $ 859 $ 665 $ 1,524
====== ===== ====== ====== ======= =======
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
generally require the measurement of financial position and operating results in
terms of historical dollars (except investments available for sale), without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
ACCOUNTING STANDARDS CHANGE
Effective January 1, 1994, the Corporation adopted Financial Accounting
Standards No. 115 (SFAS No. 115), `Accounting for Certain Investments in Debt
and Equity Securities'. The effect of adopting SFAS No. 115 resulted in an
unrealized holding loss of $615 thousand for investments available for sale.
The impact on stockholders' equity, net of tax, was $392 thousand. The adoption
of SFAS No. 115 had no effect on net income.
During the first quarter of 1995, the Corporation adopted the provisions of
Statement of Financial Accounting Standards Nos. 114 and 118 (SFAS Nos. 114 and
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 Nos. 114
and 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 cash flows discounted at the historical effective interest
rate, except that collateral dependent loans may be measured for impairment
based on the fair value of collateral. The adoption of SFAS Nos. 114 and 118 did
not have a material impact on the financial position or results of operations of
the Corporation during the year ended December 31, 1995.
In May 1995, the FASB issued Financial Accounting Standards No. 122 (SFAS
No. 122) `Accounting for Mortgage Servicing Rights". This pronouncement
requires entities which sell or securitize loans and retain the mortgage
servicing rights to allocate the total cost of the mortgage loans to the
mortgage servicing rights and the loans (without the mortgage servicing rights)
based on their fair values if it is practicable to estimate those fair values.
Any cost allocated to mortgage servicing rights should be recognized as a
separate asset and amortized over the period of estimated net servicing income.
It is
<PAGE>
anticipated that the adoption of SFAS No. 122 during 1996, will not have a
material impact on the financial position or results of operations of the
Corporation due to the Bank's limited volume of loan sales.
In October 1995, the FASB issued Financial Accounting Standards No. 123
(SFAS No. 123) `Accounting for Stock-Based Compensation". This statement
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for their employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method. Entities electing to remain with their current
accounting method must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. This
statement is effective for the fiscal year ending December 31, 1996. It is the
intent of the Bank to continue with its current method of accounting for stock
based compensation as prescribed by APB opinion No. 25, `Accounting for Stock
Issued to Employees'.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1995 AND 1994.
Net Income
The Corporation and its subsidiary recorded net income of $4.3 million for
the year ended December 31, 1995, or $1.69 per share as compared to net income
of $4.5 million, or $1.68 per share for the year ended December 31, 1994. Net
interest income was $17.2 million in 1995 compared to $16.9 million in 1994.
Provisions for loan losses in 1995 was $120 thousand compared to $66 thousand in
1994. Other income totaled $1.7 million in 1995 compared to $1.3 million for
the same period in 1994. Total operating expenses for the year ended December
31, 1995 were $11.9 million compared to $11.4 million in the previous year.
During 1995, the Corporation declared dividends which totaled $.20 per share
which resulted in a dividend payout ratio of 11.83% during 1995. The ability of
the Corporation to pay dividends to shareholders is directly dependent upon the
ability of the Bank to pay dividends to the Corporation. See Stockholders'
equity footnote.
Interest Income
Total interest income increased $2.9 million to $35.2 million in 1995 from
$32.3 million in 1994. The increase is attributable to increases in interest
income on loans, investment securities and mortgage-backed securities of $1.3
million, $1.1 million and $541 thousand, respectively.
The increase in interest income on loans was due to an increase in the
average volume of loans of $9.6 million, primarily due to an increase in the
average balance of fixed rate mortgages, adjustable rate mortgage loans and
commercial loans of $5.7 million, $3.7 million and $1.9 million, respectively,
which resulted in an increase in interest income of $764 thousand. The increase
in interest income was also the result of an increase of 20 basis points in the
average yield on the loan portfolio. The average yield on the portfolio
increased to 8.14% during 1995 from 7.94% during 1994 which resulted in an
increase of $567 thousand of interest income.
Interest income on investment securities increased $1.1 million to $3.6
million during 1995. The increase was the result of a $9.2 million increase in
the average balance of investments to $55.8 million during 1995 from $46.6
million during 1994 as well as an increase in the average yield on the
investments. The increase in the average balance of the portfolio was due to the
purchase of $18.5 million of U.S. Government Agency notes and $2.8 million of
collateralized mortgage obligations during the year. The increase in the
average balance of investment securities resulted in an increase in interest
income of $501 thousand. The average yield increased to 6.44% during 1995 from
5.44% during 1994 which resulted in an increase in interest income of $558
thousand.
Interest income on mortgage-backed securities increased $541 thousand to
$8.0 million during 1995. The increase was due to an increase in the average
yield of these securities to 6.54% during 1995 from 5.82% during 1994, which
resulted in a $887 thousand increase in interest income. This increase was
partially offset by a decrease in the average balance of the portfolio. The
average balance of mortgage-backed securities declined $5.9 million to $122.8
million due to principal paydowns of $19.8 million during the year, which
resulted in a decrease in interest income of $346 thousand.
Interest Expense
Total interest expense increased $2.7 million to $18.0 million in 1995 from
$15.3 million in 1994. The increase in interest expense was due to both an
increase in interest expense on deposits as well as borrowings.
Interest expense on deposits increased $1.4 million to $15.9 million during
1995 from $14.5 million during 1994. The average rate on deposits increased 42
basis points to 3.81% during 1995 from 3.39% during 1994, resulting in an
increase in interest expense of $1.8 million. This increase was partially offset
by a decline in the average balance of deposits of $9.9 million to $419.4
million during 1995, resulting in a decrease in interest expense of $337
thousand. This was primarily due to a decline in the average balance of money
market accounts of $12.4 million, partially offset by an increase in the average
balance of certificates of deposit of $7.1 million during 1995.
Interest expense on borrowings increased $1.3 million to $2.1 million in 1995
from $796 thousand in 1994. This increase was due to an increase in the average
balance of borrowings as well as an increase in the average rate. The average
balance of borrowing increased to $27.9 million in 1995 from $15.1 million in
1994, resulting in a $674 thousand increase in interest expense due to volume.
This was the result of an $11 million increase in the average balance of
advances from the Federal Home Loan Bank during the year. The average rate on
borrowing increased to 7.46% during 1995 from 5.27% during 1994, resulting in a
$610 thousand increase in interest expense due to rate.
<PAGE>
Provision For Loan Losses
The provision for loan losses increased $54 thousand to $120 thousand during
1995 from $66 thousand in 1994. The determination of the allowance level for
loan losses is based on management's analysis of risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying collateral and current economic conditions.
Other Income (Expense)
Other income from operations was $1.7 million in 1995 compared with $1.3
million in 1994.
Loss from real estate held for development of $200 thousand was the result
of an additional provision to the valuation allowance. The allowance level was
adjusted in 1995 based on management's analysis of the current market conditions
relating to the two remaining land development properties.
Real estate owned operations, net in 1995 resulted in a loss of $92
thousand, which was comprised of $35 thousand in real estate owned operating
expenses, $234 thousand of provisions for loss on real estate and $177 thousand
of realized gains on the sale of real estate owned properties.
Service charges collected on depositors' accounts increased $431 thousand
to $1.5 million in 1995 from $1.1 million in 1994. The increase is the result
of additional retail banking fees due to higher transaction volume during the
year.
Operating Expenses
Total operating expenses increased $563 thousand to $11.9 million in 1995
from $11.4 million in 1994. The increase in operating expenses was primarily
due to the addition of one branch to the Bank's branch network during the year.
Salaries and benefits increased $339 thousand to $6.3 million in 1995 from
$5.9 million in 1994. The increase was due to additional staff in the new
branch opened during the year as well as an increase in administrative staffing.
Average full time equivalent employees during 1995 were 209 as compared to 196
during 1994.
Occupancy and equipment increased $131 thousand to $2.1 million in 1995
from $1.9 million in 1994. This increase is due to additional depreciation and
occupancy expenses on a new branch opened in 1995, as well as other facility and
equipment additions and improvements during the year.
Purchased services increased $176 thousand to $1.0 million in 1995 from
$846 thousand in 1994 which includes an increase in MAC charges of $85 thousand
as well as an increase in DDA processing of $11 thousand due to higher
transaction volume during the year.
Federal deposit insurance premiums decreased to $974 thousand in 1995 from
$1.0 million in 1994. The decrease is due to a decline in the average deposits
of the Bank as well as a full year of the lowered FDIC rate of $.23 per $100
which was changed during the last six months of 1994.
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 0.0% 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. As a result, most BIF insured institutions will
pay only the statutory minimum of $2,000 annually. The reduction in insurance
premiums for 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 in the Bank's market area, as a result of the reduction in
insurance premiums, to 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. 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. A one-time assessment on
thrift institutions sufficient to recapitalize the SAIF to a level which would
at least approach that of the BIF has received the support of several sponsors.
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 and financial
position.
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
Net Income
The Corporation and its subsidiary recorded net income of $4.5 million for
the year ended December 31, 1994, or $1.68 per share as compared to net income
of $4.2 million, or $1.63 per share for the year ended December 31, 1993. Net
interest income before provision for loan losses was $16.9 million in 1994
compared to $15.4 million in 1993. Provisions for loan losses in 1994 was $66
thousand compared to $202 thousand in 1993. Other income totaled $1.3 million
in 1994 compared to $1.2 million for the same period in 1993. Total operating
expenses for the year ended December 31, 1994 were $11.4 million compared to
$9.7 million in the previous year.
Interest Income
Total interest income increased $759 thousand to $32.3 million in 1994 from
$31.5 million in 1993. The increase is attributable to increases in interest
income on investment securities and loans of $1.1 million and $92 thousand,
respectively. These increases were partially offset by a decrease in interest
income on mortgage-backed securities of $418 thousand.
The increase in interest income on investments was due to an increase in
the average volume of investments, primarily U.S. Government Agency notes as
well as an increase in the average interest rate earned. The average volume of
investment securities increased to $46.6 million in 1994 from $29.5 million in
1993, resulting in an increase in interest income of $842 thousand due to
changes in volume. The average interest rate earned on investment securities
increased to 5.44% in 1994 from 4.92% in 1993, resulting in an increase in
interest income of $243 thousand due to changes in interest rates.
The increase in interest income on loans was due to an increase in the
average volume of loans, partially offset by a decline in the average rate
received on loans. The average volume of loans increased to $280.0 million in
1994 from $267.0 million in 1993, resulting in a $1.1 million increase in
interest income due to changes in volume. The average earning interest rates
received on loans declined to 7.94% in 1994 from 8.29% in 1993, resulting in a
decrease of $986 thousand in interest income on loans due to changes in rates.
The decrease in interest income on mortgage-backed securities was due to a
decrease in the average earning interest rate received on mortgage-backed
securities, as well as a decrease in the average volume of mortgage-backed
securities. The weighted average rate on mortgage-backed securities declined
to 5.82% in 1994 from 6.11% in 1993, resulting in a $372 thousand decline in
interest income due to changes in rates. The average volume of mortgage-backed
securities decreased to $128.8 million in 1994 from $129.5 million in 1993,
resulting in a $46 thousand decrease in interest income due to changes in
volume.
Interest Expense
Total interest expense decreased $765 thousand to $15.3 million in 1994
from $16.1 million in 1993. The decline in interest expense is due to a decline
in the weighted average rate paid on deposits partially offset by an increase in
the average volume of deposits.
During the period the average interest rate paid on deposits declined to
3.39% in 1994 from an average rate of 3.91% in 1993, resulting in a $2.2 million
decrease in interest expense on deposits due to changes in rates. Partially
offsetting the decline in rates was an increase in the average volume of
deposits which increased to $429.3 million in 1994 from an average balance of
$407.2 million in 1993, resulting in a $866 thousand increase in interest
expense due to changes in volume. The increase in the average deposits is
primarily due to the purchase of deposits during the year totaling approximately
$39.3 million.
Interest expense on borrowings increased $602 thousand to $796 thousand in
1994 from $194 thousand in 1993. This increase is due to an increase in the
average balance of borrowings to $15.1 million in 1994 from $5.5 million in
1993, resulting in a $343 thousand increase in interest expense due to volume.
This increase is the result of the issuance of $10.0 million of subordinated
debentures by the Corporation during 1994.
On July 28, 1994, the Corporation issued $10 million principal amount of
10% subordinated debentures (the `Debentures") in an underwritten public
offering. The Debentures were issued in denominations of $1,000 and integral
multiples thereof. Interest is payable on the Debentures semi-annually on
February 1 and August 1 of each year. The Corporation made its first interest
payment on the Debentures on February 1, 1995.
The Debentures are not redeemable prior to August 1, 1997. Thereafter, the
Debentures are redeemable at any time by the Corporation, in whole or in part,
on not less than 30 days notice, at fixed redemption prices, together with
accrued interest to the redemption date.
The Debentures were issued pursuant to an Indenture dated as of July 28,
1994. In accordance with the Indenture, the Corporation may not declare or pay
a dividend, or purchase or redeem, or otherwise acquire for value, any of its
capital stock, or return any capital to holders of its capital stock, or make
any distribution of assets to holders of its capital stock unless from and after
the date of any such transaction the Corporation retains at all times cash, cash
equivalents or marketable securities in an amount not less than the aggregate
amount of two consecutive semi-annual interest payments that will be due and
payable on the Debentures following such transaction (the `Cash Retention").
In determining the minimum amount of the Cash Retention, the Corporation must
deduct the amount of each semi-annual interest payment made on the Debentures
following the proposed declaration or redemption, as the case may be.
<PAGE>
Provision For Loan Losses
The provision for loan losses decreased $136 thousand to $66 thousand during
1994 from $202 thousand in 1993. The determination of the allowance level for
loan losses is based on management's analysis of risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying collateral and current economic conditions.
Other Income (Expense)
Total operating income was $1.3 million in 1994 compared with $1.2 million
in 1993.
Service charges collected on depositors' accounts increased $225 thousand
to $1.1 million in 1994 from $863 thousand in 1993. The increase is the result
of additional retail banking fees due to a higher average customer deposit base
during the year.
Loss on sale of investment securities is due to a $122 thousand loss on the
sale of the ARM mutual funds during the year.
Real estate owned operations, net in 1994 resulted in a loss of $259
thousand, which was comprised of $90 thousand in real estate owned operating
expenses, $79 thousand of provisions for loss on real estate and $90 thousand of
realized losses on the sale of real estate owned properties.
Operating Expenses
Total operating expenses increased $1.7 million to $11.4 million in 1994
from $9.7 million in 1993. The increase in operating expenses was primarily due
to the addition of three branches to the Bank's branch network during the year.
Salaries and benefits increased $1.1 million to $5.9 million in 1994 from
$4.8 million in 1993. The increase was due to additional staff in the three new
branches opened during the year as well as an increase in administrative
staffing. Average full time equivalent employees increased to 196 during 1994
from 168 during 1993. The increase also resulted from the $129 thousand of
expense related to the issuance and exercise of stock appreciation rights during
the year.
Occupancy and equipment increased $345 thousand to $1.9 million in
1994 from $1.6 million in 1993. This increase is primarily due to additional
depreciation and occupancy expenses on the new branches opened during the year.
Purchased services decreased $84 thousand to $846 thousand in 1994
from $930 thousand in 1993 due primarily to lower processing costs incurred from
a change in the Bank's check processors during the year.
Federal deposit insurance premiums decreased to $1.02 million in 1994 from
$1.07 million in 1993. The decrease is due to a decline in the insurance
premium, partially offset by higher average deposits during the year.
Professional fees increased $56 thousand to $363 thousand in 1994 from $307
thousand in 1993. This increase is primarily due to an increase in audit and
examination fees of $51 thousand the year.
Other operating expenses increased to $1.2 million during 1994 from $1.0
million in 1993. This increase is primarily due to an increase in amortization
expense of $183 thousand, resulting from the $1.4 million in premiums paid on
deposits acquired 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. The Bank also obtains funds from the sale and maturity of
investment securities and short-term investments as well as the maturity of
mortgage-backed securities and funds provided by operations. During the past
several years, the Bank has used such funds primarily to meet its ongoing
commitments to fund maturing time deposits and savings withdrawals, to fund
existing and continuing loan commitments and to maintain liquidity. While the
Bank has been able to fund its operations internally during recent periods, it
has periodically supplemented its liquidity needs with advances from the FHLB of
New York. At December 31, 1995 the Bank had $24.5 million in advances from the
Federal Home Loan Bank of New York. While loan payments, maturing investments
and mortgage-backed securities are relatively predictable sources 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 securities and other approved investments.
Regulations currently in effect require the Bank to maintain liquid assets of
not less than 5% of its withdrawable accounts plus short-term borrowings.
Short-term liquid assets must consist of not less than 1% of such accounts and
borrowings, which amount is also included in the 5% requirement. These levels
are changed from time to time by the regulators to reflect the current economic
conditions. The Bank has generally maintained liquidity in excess of required
levels. The Bank's regulatory liquidity and short-term liquidity was 10.63% and
4.75%, respectively, at December 31, 1995.
<PAGE>
The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 31, 1996 is approximately $143.3 million. To the
extent these deposits do not remain at the Bank upon maturity, the Bank believes
it can replace these funds with deposits, FHLB advances or outside borrowings.
It has been the Bank's experience that a substantial portion of such maturing
deposits remain with the Bank.
At December 31, 1995, the Bank had loan commitments outstanding of $25.7
million, of which $2.6 million were for fixed-rate loans and $23.1 million were
for adjustable-rate loans. Funds required to fulfill the commitments are
derived primarily from loan repayments, net deposit inflows or, when
appropriate, borrowings.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") the Bank must have core capital equal to 3% of assets, which
1.5% must be tangible capital, excluding goodwill. FIRREA also established
risk-based capital standards. In measuring the Bank's compliance with FIRREA
capital standards, the Bank must deduct from its regulatory capital calculation
investments in, and advances to, subsidiaries engaged in activities not
permissible for national banks. At December 31, 1995, the Bank exceeded all
three regulatory capital levels required under FIRREA. At December 31, 1995,
the Bank's regulatory tangible and core capital was $36.8 million or 7.38% of
total bank assets and risk-based capital was $39.2 million or 16.17% of risk-
weighted assets.
The Bank holds a substantial component of its investment portfolio in mortgage-
backed securities and collateralized mortgage obligations (collectively,
`MBS"). At the end of 1995, the total investment in MBS amounted to $124.3
million, or 68% of total investments. These are instruments collateralized by
pools of residential and commercial mortgages, which return interest and
principal payments to the investor. Approximately 89% of the Bank's MBS
holdings are U.S. Government Agency securities (GNMA, FNMA, and FHLMC), which
carry either a direct government or a quasi-government guarantee and are rated
AAA in terms of quality. The Bank also owns non-agency MBS, issued by major
financial institutions, which are rated AAA and AA. MBS are generally very
liquid issues with major brokerage houses providing ready markets. However, MBS
are subject to prepayment and extension risk which can adversely affect their
yield and expected maturity.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)
The following table presents summarized quarterly data for 1995 and 1994:
1ST 2ND 3RD 4TH TOTAL
1995 QUARTER QUARTER QUARTER QUARTER YEAR
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total interest income $ 8,444 $ 8,721 $ 9,013 $ 9,023 $ 35,201
Total interest expense 4,052 4,408 4,791 4,790 18,041
------------ ------------ ------------ ------------ ------------
Net interest income 4,392 4,313 4,222 4,233 17,160
Provision for loan losses 30 30 30 30 120
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 4,362 4,283 4,192 4,203 17,040
Total other income 438 446 458 348 1,690
Total operating expenses 2,967 2,961 2,993 2,995 11,916
------------ ------------ ------------ ------------ ------------
Income before income taxes 1,833 1,768 1,657 1,556 6,814
Federal and state income taxes 669 639 600 563 2,471
------------ ------------ ------------ ------------ ------------
Net income $ 1,164 $ 1,129 $ 1,057 $ 993 $ 4,343
============ ============ ============ ============ ============
Earnings per common share (a) $ 0.45 $ 0.44 $ 0.42 $ 0.38 $ 1.69
============ ============ ============ ============ ============
1ST 2ND 3RD 4TH TOTAL
1994 QUARTER QUARTER QUARTER QUARTER YEAR
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income $ 7,513 $ 7,978 $ 8,326 $ 8,452 $ 32,269
Total interest expense 3,525 3,776 3,961 4,073 15,335
------------ ------------ ------------ ------------ ------------
Net interest income 3,988 4,202 4,365 4,379 16,934
Provision for loan losses 12 18 18 18 66
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 3,976 4,184 4,347 4,361 16,868
Total other income 285 373 370 247 1,275
Total operating expenses 2,530 2,934 2,993 2,896 11,353
------------ ------------ ------------ ------------ ------------
Income before income taxes 1,731 1,623 1,724 1,712 6,790
Federal and state income taxes 606 546 576 607 2,335
------------ ------------ ------------ ------------ ------------
Net income $ 1,125 $ 1,077 $ 1,148 $ 1,105 $ 4,455
============ ============ ============ ============ ============
Earnings per common share (a) $ 0.42 $ 0.40 $ 0.43 $ 0.43 $ 1.68
============ ============ ============ ============ ============
<FN>
(a) Earning per common share and weighted average common shares outstanding
have been restated to reflect a two-for-one stock split announced in November
1995.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 1994
------------- -------------
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 9,804,770 $ 9,425,147
Interest-bearing Deposits 124,334 582,744
Federal funds sold 0 1,300,000
Short term funds 56,476 72,654
------------- -------------
Total cash and cash equivalents 9,985,580 11,380,545
Investment securities held to maturity 43,564,913 21,204,072
Investment securities available for sale 22,767,981 11,466,127
Loans receivable - net 288,400,236 283,259,831
Mortgage-backed securities held to maturity 111,554,864 131,872,980
Accrued interest receivable:
Loans 1,749,652 1,678,617
Mortgage-backed securities 964,148 1,028,201
Investments 892,533 366,287
Federal Home Loan Bank stock 4,058,100 3,728,400
Real estate held for development - net 1,227,732 1,427,732
Real estate owned - net 668,792 1,811,527
Office properties and equipment - net 12,773,479 10,688,190
Deferred income taxes 897,443 1,146,603
Excess cost over fair value of net assets acquired 997,505 1,320,731
Prepaid expenses and other assets 553,944 845,436
Subordinated Debentures issue cost - net 493,157 550,505
------------- -------------
TOTAL ASSETS $ 501,550,059 $ 483,775,784
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 428,809,380 $ 429,430,814
Advances from the Federal Home Loan Bank 24,500,000 10,070,000
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 182,444 258,425
Advances by borrowers for taxes and insurance 2,093,130 2,105,281
Accrued interest payable 888,456 837,694
Dividends payable 125,288 0
Other liabilities 1,898,861 1,914,760
------------- -------------
Total liabilities 468,497,559 454,616,974
------------- -------------
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 2,601,634
and 1,295,100, and shares outstanding 2,505,756 and
1,257,550 as of December 31, 1995 and 1994,
respectively 260,163 129,510
Paid-in capital in excess of par 8,408,840 8,495,186
Unrealized loss on securities available for sale - (236,154) (415,872)
net of deferred income taxes
Guarantee of employee stock ownership plan debt (182,444) (258,425)
Retained earnings - substantially restricted 25,951,864 22,108,961
Less: Treasury stock (95,878 and 37,550 shares,
at cost, as of December 31, 1995 and 1994,
respectively) (1,149,769) (900,550)
------------- -------------
Total stockholders' equity 33,052,500 29,158,810
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 501,550,059 $ 483,775,784
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 1994 1993
-------------- -------------- --------------
INTEREST INCOME:
Interest income on:
<S> <C> <C> <C>
Loans $ 23,572,092 $ 22,241,502 $ 22,149,620
Mortgage-backed securities 8,033,982 7,492,533 7,909,658
Investments 3,594,867 2,535,568 1,450,619
-------------- -------------- --------------
Total interest income 35,200,941 32,269,603 31,509,897
-------------- -------------- --------------
INTEREST EXPENSE:
Interest expense on:
Deposits 15,961,110 14,539,097 15,905,872
Subordinated Debentures 1,049,015 456,306 0
Borrowings 1,031,043 339,840 194,478
-------------- -------------- --------------
Total interest expense 18,041,168 15,335,243 16,100,350
-------------- -------------- --------------
NET INTEREST INCOME 17,159,773 16,934,360 15,409,547
PROVISION FOR LOAN LOSSES 120,000 66,000 202,000
-------------- -------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,039,773 16,868,360 15,207,547
-------------- -------------- --------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 269,977 319,192 296,558
Gain on sale of loans 8,836 14,728 256,441
(Loss) Gain on sale of investment securities 0 (121,609) 62,268
Loss from real estate held for development (200,000) 0 (400,000)
Real estate owned operations, net (91,986) (258,685) (124,314)
Service charges on depositors' accounts 1,519,078 1,087,928 863,201
Other income 184,687 233,172 211,625
-------------- -------------- --------------
Total other income (expense) 1,690,592 1,274,726 1,165,779
-------------- -------------- --------------
OPERATING EXPENSES:
Salaries and employee benefits 6,285,898 5,947,270 4,758,460
Occupancy and equipment 2,053,513 1,922,159 1,577,083
Purchased services 1,021,442 845,537 930,371
Federal deposit insurance premium 973,503 1,022,196 1,069,961
Professional fees 367,160 363,347 307,260
Advertising 25,250 24,104 28,715
Other 1,189,114 1,227,855 1,011,358
-------------- -------------- --------------
Total operating expenses 11,915,880 11,352,468 9,683,208
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES AND 6,814,485 6,790,618 6,690,118
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES
INCOME TAXES:
Current 2,526,805 2,076,887 2,417,650
Deferred (55,724) 258,276 17,820
-------------- -------------- --------------
Total income taxes 2,471,081 2,335,163 2,435,470
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLES 4,343,404 4,455,455 4,254,648
Cumulative effect of change in
accounting principles, net of tax 0 0 (40,000)
-------------- -------------- --------------
NET INCOME $ 4,343,404 $ 4,455,455 $ 4,214,648
============== ============== ==============
EARNINGS PER COMMON SHARE*:
Income before cumulative effect of change
in accounting principles $1.69 $1.68 $1.65
Cumulative effect of change in accounting
principles, net of tax 0.00 0.00 (0.02)
---- ---- -----
NET INCOME $1.69 $1.68 $1.63
===== ===== =====
Weighted average common shares and
common stock equivalents outstanding* 2,565,166 2,650,634 2,579,518
========= ========= =========
<FN>
* Earnings per common share and weighted average common shares and common
stock equivalents outstanding have been restated to reflect a two-for-one stock
split announced in November 1995.
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 1994 1993
---------------- --------------- ---------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 4,343,404 $ 4,455,455 $ 4,214,648
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 120,000 66,000 202,000
Depreciation and amortization 1,622,710 1,735,995 1,210,907
Provision for real estate owned 354,453 157,526 29,321
Provision for real estate held for 200,000 0 400,000
development
Realized (gains) and losses on:
Sale of loans and loans held for sale (8,836) (14,728) (256,441)
Sale of investments available for sale 0 121,609 (39,750)
Disposal and sale of fixed assets 3,836 265 3,489
Sale of real estate owned (177,197) 90,204 (28,809)
Proceeds from sale of loans held for
sale 257,989 571,966 12,103,092
Loans originated for sale (254,000) (519,164) (11,887,193)
Increase in accrued interest receivable (533,227) (171,288) (285,608)
Decrease (Increase) in prepaid expenses 348,840 (210,871) 490,949
and other assets
Increase (Decrease) in accrued interest
payable 50,762 480,227 (67,381)
Decrease in other liabilities (15,899) (600,518) (1,526,354)
Deferred income taxes (55,724) 258,276 (442,183)
Other 75,981 80,108 47,801
---------------- --------------- ---------------
Net cash provided by operating
activities 6,333,092 6,501,062 4,168,488
---------------- --------------- ---------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 868,725 1,182,050 534,077
Real estate held for development 0 0 452,939
Real estate owned 1,022,006 641,754 445,353
Office property and equipment 0 0 83,117
Proceeds from maturities of investment
securities held to maturity 35,549,229 51,749,025 13,285,033
Proceeds from maturities of investment
securities available for sale 13,767,144 3,527,118 12,000,000
Principal collected on mortgage-backed
securities 21,454,381 35,831,645 51,560,074
Principal collected on longer-term loans,net 40,393,832 47,098,661 66,259,189
Longer-term loans originated or acquired,net (46,373,552) (63,052,814) (81,172,809)
Purchase of investment securities and
mortgage-backed securities held to maturity (62,865,500) (106,872,825) (73,061,636)
Purchase of investment securities
available for sale (21,317,509) (1,136,497) (6,202,655)
Increase (Decrease) in real estate held
for development 0 25,575 (103,406)
Purchase of Federal Home Loan Bank stock (329,700) (240,800) (406,000)
Purchase of office property and equipment (3,037,422) (2,314,663) (1,122,038)
Cash received from branch purchase, net 0 37,423,277 0
---------------- --------------- ---------------
Net cash used (provided) by investing
activities (20,868,366) 3,861,506 (17,448,762)
---------------- --------------- ---------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits
and savings accounts (5,609,287) (6,649,839) 18,777,333
Net increase (decrease) in time deposits 4,987,853 (9,254,006) (14,932,462)
Net increase in FHLB advances 14,430,000 2,070,000 6,500,000
Principal repayment of employee stock
ownership plan debt (75,981) (65,981) (70,319)
Net proceeds from issuance of 10%
Subordinated Debentures 0 9,426,522 0
Decrease (Increase) in advances from
borrowers for taxes and insurance (12,151) 196,380 (47,467)
Purchase of treasury stock (249,219) (900,550) 0
Dividends paid on common stock (375,213) 0 0
Net proceeds from issuance of common stock 44,307 24,025 38,750
---------------- --------------- --------------
Net cash provided (used) by financing
activities 13,140,309 (5,153,449) 10,265,835
---------------- --------------- --------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,394,965) 5,209,119 (3,014,439)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 11,380,545 6,171,426 9,185,865
---------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,985,580 $ 11,380,545 $ 6,171,426
================= =============== ===============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances
and other borrowings $ 17,990,406 $ 14,855,016 $ 16,167,731
Income taxes 2,503,591 2,212,593 2,273,587
Non cash investing and financing
activities:
Deposits acquired in connection
with branch acquisition 0 39,317,734 0
Assets acquired in connection
with branch acquisition 0 510,403 0
Transfer of securities to available for
sale during FASB 115 suspension period 4,979,408 0 0
Dividends declared and not paid at
year end 125,288 0 0
Non-monetary transfers from loans to
real estate acquired through foreclosure 56,527 1,090,740 361,573
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED GUARANTEE OF
PAID-IN LOSS ON EMPLOYEE RETAINED
CAPITAL SECURITIES STOCK EARNINGS- TOTAL
COMMON IN EXCESS AVAILABLE OWNERSHIP SUBSTANTIALLY TREASURY STOCKHOLDERS'
STOCK OF PAR FOR SALE, NET PLAN DEBT RESTRICTED STOCK EQUITY
--------- ---------- ------------- --------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 $ 128,700 $ 8,433,221 $ (23,600) $ (394,725) $ 13,438,858 $ 0 $ 21,582,454
Net Income 4,214,648 4,214,648
Decrease in guarantee of employee
stock ownership plan debt 70,319 70,319
Exercise of stock options 500 38,250 38,750
--------- ---------- -------- --------- ------------- ---------- -------------
Balances at December 31, 1993 129,200 8,471,471 (23,600) (324,406) 17,653,506 0 25,906,171
Net Income 4,455,455 4,455,455
Increase in unrealized loss on
securities available for sale,net (392,272) (392,272)
Decrease in guarantee of employee
stock ownership plan debt 65,981 65,981
Exercise of stock options 310 23,715 24,025
Purchase of common stock (900,550) (900,550)
--------- ----------- -------- --------- ------------- ---------- -------------
Balances at December 31, 1994 129,510 8,495,186 (415,872) (258,425) 22,108,961 (900,550) 29,158,810
Net Income 4,343,404 4,343,404
Dividends declared (500,501) (500,501)
Decrease in unrealized loss on
securities available for sale,net 179,718 179,718
Decrease in guarantee of employee
stock ownership plan debt 75,981 75,981
Exercise of stock options 572 43,735 44,307
Purchase of common stock (249,219) (249,219)
Two-for-one stock split 130,081 (130,081) 0
--------- ----------- -------- --------- ------------ ---------- -------------
Balances at December 31, 1995 $260,163 $ 8,408,840 $(236,154) $(182,444) $ 25,951,864 $(1,149,769) $33,052,500
======== =========== ========= ========= ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles. The consolidated financial statements
include the accounts of FMS Financial Corporation ("the Corporation"), Farmers
& Mechanics Bank, and its wholly-owned subsidiaries ("the Bank"). Material
intercompany accounts and transactions have been eliminated in consolidation.
REGULATORY AUTHORITIES
The regulatory agency overseeing savings associations is the Office of
Thrift Supervision ("OTS") and the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC").
At periodic intervals, both the OTS and the FDIC routinely examine the
Corporation as part of their legally prescribed oversight of the savings and
loan industry. Based on these examinations, the regulators can direct that the
Corporation's financial statements be adjusted in accordance with their
findings. In addition, the Corporation is subject to regulations of the
Securities and Exchange Commission ("SEC").
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits with an original maturity of 90 days or
less, money market funds and federal funds sold. Cash and cash equivalents
exclude repurchase agreements which are generally classified as investments held
to maturity. Generally, federal funds are purchased and sold for one-day
periods. The Bank is required to maintain certain average reserve balances as
established by the Federal Home Loan Bank. The amount of those balances for the
reserve computation periods which include December 31, 1995 and 1994 were $3.2
million and $3.3 million, respectively. These requirements were satisfied
through the balance of vault cash and a balance at the Federal Home Loan Bank.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
During 1994, the Corporation adopted Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), `Accounting for Certain Investments in Debt
and Equity Securities"which required the classification of investments into
three categories, as applicable; trading, available for sale or held to
maturity. Upon the adoption of SFAS No. 115 on January 1, 1994, the Corporation
categorized selected investments and mortgage-backed securities that are part of
the Corporation's asset/liability management strategy and that may be sold in
response to changes in interest rates, prepayments and similar factors, as
available for sale. Investments classified as available for sale are reported
at the current market value with net unrealized gains and losses, net of
applicable deferred tax effects, added to or deducted from the Corporation's
total stockholders' equity. Gains and losses on the sale of investment
securities are recognized utilizing the specific identification method.
Investment and mortgage-backed securities classified as held to maturity
are recorded at cost, adjusted for amortization of premiums or accretion of
discounts over the term of the security. Premiums and discounts are amortized
using a method which in total approximates the interest method over the
remaining contractual life of the security. The Corporation has the intent and
ability to hold these securities to maturity.
REVERSE REPURCHASE AGREEMENTS
The Bank invests excess funds in reverse repurchase agreements.
Generally, the maturity date of the reverse repurchase agreement is less than 90
days. Due to the short-term nature of the agreement, the Bank does not take
possession of the securities; instead it is held in safekeeping by the Bank's
agent. The carrying value of the agreements approximates fair market value
because of the short maturity of the investment and the Bank believes that it is
not exposed to any significant risk on its investments in reverse repurchase
agreements.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
An allowance for possible loan losses is maintained at a level that
management considers adequate to provide for potential losses based upon the
portfolio's past loss experience, current economic conditions and other relevant
factors. When collection of a loan's principal balance or portion thereof is
considered doubtful, management charges the allowance for possible loan losses
based on their assessment of the loan's underlying collateral, if collateral
dependent or present value of estimated future cash flows, and the borrower's
financial condition. While management uses the best information available to
make evaluations about the adequacy of the allowance for loan losses, future
adjustments to the allowance may be necessary if conditions differ substantially
from the assumptions used in making evaluations.
LOANS HELD FOR SALE
The Bank sells selected fixed-rate residential mortgage loans, without
recourse, to provide additional funds for lending and to restructure the loan
portfolio to improve interest rate risk. These loans are carried at the lower of
cost or market value, determined on a net aggregate basis.
<PAGE>
INTEREST ON LOANS
The Bank recognizes interest on loans when earned. Generally, the Bank
does not recognize interest on loans three months or more delinquent. Such
interest ultimately collected is credited to income in the period of recovery.
REAL ESTATE OWNED
Real estate owned consists of properties acquired by or in-lieu of
foreclosure. These assets are carried at the lower of cost or estimated fair
value at the time the loan is foreclosed less estimated cost to sell. The
amounts recoverable from real estate owned could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the control of the Bank. Costs to improve the
property are capitalized, whereas costs of holding the property are charged to
expense.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets. The costs of maintenance and repairs are expensed as they are incurred
and renewals and improvements are capitalized.
DEFERRED LOAN FEES
The Bank defers all loan fees and related direct loan origination costs.
Deferred loan fees and costs are generally amortized as a yield adjustment over
the life of the loan using the interest method.
LOANS SERVICED FOR OTHERS
Servicing loans for others generally consists of collecting mortgage
payments, disbursing payments to investors and processing foreclosures. Loan
servicing income is recorded upon receipt and includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. The total amount of loans being serviced for the benefit of others was
$34.4 million and $38.3 million at December 31, 1995 and 1994, respectively.
Loan servicing fee income was approximately $113 thousand, $132 thousand and
$163 thousand for the years ended December 31, 1995, 1994 and 1993,
respectively.
REAL ESTATE HELD FOR DEVELOPMENT
Real estate held for development is carried at cost not to exceed net
realizable value. Net realizable value is determined based on a discounted
estimate of the fair market value.
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess cost over the fair value of assets acquired is being amortized
over a five year period using the straight-line method.
INCOME TAXES
Effective January 1, 1993, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109) `Accounting
for Income Taxes'. The adoption of SFAS No. 109 required a change from the
deferred method under Accounting Principles Board Opinion No. 11 to the asset
and liability method of accounting for income taxes. The asset liability
method, requires that deferred tax assets and liabilities be measured based on a
tax rate convention under which the reversal of temporary differences, including
operating loss and tax credit carry forwards, are expected to be taxed. SFAS
No. 109 also requires that deferred tax assets be reduced by a valuation
allowance, if it is probable that some portion or all of the deferred tax assets
will not be realized. The Corporation did not restate its prior year's
financial statements in conjunction with the adoption of SFAS No. 109. The
cumulative effect of the adoption of SFAS No. 109 was to increase net deferred
income taxes by $275 thousand, which was credited to earnings in the first
quarter of 1993 as a cumulative effect of change in accounting principle.
The Corporation computes its taxable income for both financial reporting
and federal tax purposes on the accrual basis. The Corporation reports certain
items of income and expense in its consolidated financial statements in periods
different from those in which such items enter into the determination of taxable
income. In conformity with generally accepted accounting principles, the
Corporation provides for the tax effects of such timing differences in its
consolidated financial statements, subject to the deferred tax asset
realizability provisions of SFAS No. 109. These differences between pretax
accounting income and taxable income for return purposes consist primarily of
the calculations for bad debt deductions, real estate losses, depreciation,
recognition of income and expenses associated with loan origination, profit
recognition on discounted mortgages and securities income.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1993, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 106, `Employers' Accounting for Post-
retirement Benefits Other Than Pensions', (SFAS No. 106). SFAS No. 106 changed
the practice of accounting for post-retirement health care benefits from a cash
basis to an accrual basis whereby, during the years that the employee renders
service, the expected cost of providing those benefits to an employee will be
recorded. The accumulated post-retirement benefit obligation as of January 1,
1993 of $500 thousand was charged in the first quarter of 1993 as a cumulative
effect of change in accounting principle, net of an income tax benefit of $185
thousand.
RECLASSIFICATIONS
Certain items in the 1994 and 1993 consolidated financial statements have
been reclassified to conform with the presentation in the 1995 consolidated
financial statements.
<PAGE>
EARNINGS PER COMMON SHARE
Earnings per common share and weighted average common shares outstanding
and common stock equivalents have been retroactively restated to reflect the
increased number of common shares resulting from a two-for-one stock split that
was announced in November 1995 and paid to shareholders on January 12, 1996. A
total of 1,300,817 additional shares were issued in conjunction with the stock
split. The par value of the Corporation's stock remained unchanged. As a result,
$130,081 was transferred from paid-in capital in excess of par to common stock.
During 1995 and 1994, earnings per share was based on dividing net income by the
weighted average number of common shares outstanding plus the shares that would
be outstanding assuming the exercise of dilutive stock options, all of which are
considered to be common stock equivalents. During 1993, common stock
equivalents did not have a material dilutive effect on the earnings per share
calculation. The weighted average shares and common stock equivalents
outstanding for the year ended December 31, 1995 and 1994 totaled 2,565,166 and
2,650,634, respectively, and the weighted average shares outstanding totaled
2,579,518 for the year ended December 31, 1993.
NEW ACCOUNTING PRONOUNCEMENTS
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, `Accounting for Mortgage Servicing Rights", which is effective for
the Corporation beginning January 1, 1996. The statement requires the
recognition of separate assets relating to the rights to service mortgage loans
for others based on their fair value if it is practicable to estimate the value.
The statement applies prospectively to transactions entered into in 1996,
therefore there will be no cumulative effect upon adoption of this statement.
This statement is not expected to have a significant effect on the financial
position or results of operations of the Corporation.
In October 1995, the FASB issued SFAS No. 123, `Accounting for Stock-Based
Compensation', which is effective for the Corporation beginning January 1,
1996. SFAS No. 123 provides an alternative method of accounting for stock-based
compensation arrangements, based on fair value of the stock-based compensation
determined by an option pricing model utilizing various assumptions regarding
the underlying attributes of the options and the Company's stock, rather than
the existing method of accounting for stock-based compensation which is provided
in Accounting Practices Bulletin Opinion No. 25, `Accounting for Stock Issued
to Employees"(APB 25). The FASB encourages entities to adopt the fair value
based method, but does not require the adoption of this method. For those
entities that continue to apply APB 25, pro forma disclosure of the effects, if
adopted, of SFAS No. 123 on net income and earning per share would be required
in the 1996 financial statements. The Corporation will continue to apply APB 25
and therefore, there will be no impact on the financial position and results of
operations.
<PAGE>
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and estimated market value of investment
securities held to maturity at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
U.S. Gov't Agencies $ 34,086,243 $ 64,656 $ (40,910) $ 34,109,989
Reverse Repurchase 9,000,000 0 0 9,000,000
Municipal bonds 463,670 447 0 464,117
U.S. Treasury 15,000 0 (1,000) 14,000
------------ ---------- --------- ------------
Total $ 43,564,913 $ 65,103 $ (41,910) $ 43,588,106
============ ========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
COST LOSSES VALUE
------------ ---------- -------------
<S> <C> <C> <C>
U.S. Gov't Agencies $ 18,988,006 $ (1,157,896) $ 17,830,110
U.S. Treasury 1,976,058 (80,875) 1,895,183
Municipal bonds 240,008 (4,563) 235,445
------------ ------------ ------------
Total $ 21,204,072 $ (1,243,334) $ 19,960,738
============ ============ ============
</TABLE>
The amortized cost and estimated market value of investments held to
maturity at December 31, 1995, by contractual maturity are shown in the
following table. Expected maturities may differ as borrowers have the right to
call certain obligations.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
AMORTIZED ESTIMATED
COST MARKET VALUE
------------ -------------
<S> <C> <C>
Due one year or less $ 11,360,099 $ 11,352,799
Due one to five years 9,116,962 9,102,647
Due five to ten years 14,591,370 14,625,160
Due after ten years 8,496,482 8,507,500
------------ -------------
$ 43,564,913 $ 43,588,106
============ =============
</TABLE>
During 1995, the Financial Accounting Standards Board permitted a one-time
opportunity for institutions to reassess the appropriateness of the designations
of all securities. The Bank used this opportunity to reassess its assets and
liability management and reclassified various investments totaling $5.0 million
from held to maturity to available for sale. This reclassification resulted in
an unrealized loss of $70 thousand for investments available for sale. The
impact on stockholder's equity was a net of tax decrease of $45 thousand. At
December 31, 1995 the Bank had purchased $9.0 million of reverse repurchase
agreements with Merrill Lynch Mortgage Capital, Inc with an average maturity of
7 days and an average rate of 6.08%. At December 31, 1995, neither a disposal,
nor conditions that could lead to a decision not to hold these remaining
securities to maturity, were reasonably foreseen.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of investment securities
available for sale at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ --------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Gov't Agencies $ 8,000,000 $ 0 $ (72,500) $ 7,927,500
U.S. Treasury 1,979,408 592 0 1,980,000
CMO's 5,520,407 13,179 (48,787) 5,484,799
REMIC'S 7,589,420 0 (298,218) 7,291,202
Common Stock 50,000 34,480 0 84,480
------------ --------- ---------- ------------
Total $ 23,139,235 $ 48,251 $ (419,505) $ 22,767,981
============ ========= ========== ============
</TABLE>
DECEMBER 31, 1994
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
COST LOSSES VALUE
------------ ----------- -----------
CMO'S $ 4,112,077 $ (249,017) $ 3,863,060
REMIC'S 7,942,763 (366,096) 7,576,667
Common Stock 50,000 (23,600) 26,400
------------ ----------- -----------
Total $ 12,104,840 $ (638,713) $ 11,466,127
============ =========== ============
The amortized cost and estimated market value of investments available for
sale at December 31, 1995, by contractual maturity are shown in the following
table. Expected maturities may differ as borrowers have the right to call or
prepay certain obligations. CMO's and REMIC's are shown separately due to the
amortization an prepayment of principal occurring throughout the life of these
instruments.
DECEMBER 31, 1995
AMORTIZED ESTIMATED
COST MARKET VALUE
------------ -----------
Due one year or less $ 0 $ 0
Due one to five years 4,979,408 4,907,500
Due five to ten years 5,000,000 5,000,000
CMO's 5,520,407 5,484,799
REMIC's 7,589,420 7,291,202
Common stock 50,000 84,480
------------ -----------
$ 23,139,235 $ 22,767,981
============= ============
During 1995, there were no sales of investment securities available for
sale. During 1994, the ARM mutual funds were sold which resulted in a $122
thousand loss. In 1993, there were $40 thousand in gross realized gains and no
realized losses on sales of investment securities available for sale.
<PAGE>
4. LOANS RECEIVABLE
Loans receivable at December 31, 1995 and 1994 consist of the following:
1995 1994
------------- -------------
Mortgage Loans $ 249,278,288 $ 245,874,184
Construction Loans 4,063,081 5,699,500
Consumer Loans 4,336,346 4,316,961
Commercial Real Estate 34,721,212 32,227,826
Commercial Business 1,779,051 1,711,804
------------- -------------
Subtotal 294,177,978 289,830,275
Less:
Loans in process 1,947,301 2,775,219
Deferred loan fees 1,063,662 1,173,713
Allowance for
possible loan losses 2,766,779 2,621,512
------------- -------------
Total loans
receivable, net $ 288,400,236 $ 283,259,831
============= =============
The Corporation adopted SFAS Nos. 114 and 118, `Accounting by Creditors for
Impairment of a Loan"during the first quarter of 1995. At December 31, 1995
the recorded investment in loans for which impairment has been recognized in
accordance with SFAS Nos. 114 and 118 totaled $4.5 million, of which $2.0
million related to loans that were individually measured for impairment with a
valuation allowance of $350 thousand and $2.5 million of loans that were
collectively measured for impairment with a valuation allowance of $150
thousand. For the year ended December 31, 1995, the average recorded investment
in impaired loans was approximately $3.6 million. The Corporation recognized
$259 thousand of interest on impaired loans, all of which is recognized on the
cash basis.
Loans which are 90 days delinquent as to principal and interest are placed
on a non-accrual status and all previously accrued interest is reversed. The
principal amount of non-accrual loans at December 31, 1995 and 1994 was $4.1
million and $3.0 million, respectively. Interest income on non-accrual loans
that would have been recorded in 1995 under the original terms of such loans was
$232 thousand, and the interest income actually recognized in 1995 for such
loans was $186 thousand. Interest income on non-accrual loans that would have
been recorded in 1994 under the original terms of such loans was $186 thousand,
and the actual interest income recognized in 1994 for such loans was $46
thousand.
The Bank originates and purchases both adjustable and fixed interest rate
loans. At December 31, 1995, the composition of these loans is as follows:
Maturing
Maturing from 1997
during through Maturing
1996 2000 after 2000 Total
(In Thousands) -------- -------- ---------- ----------
Mortgage Loans (1-4 $ 1,075 $ 11,704 $ 236,499 $ 249,278
dwelling)
Construction Loans 4,063 0 0 4,063
Consumer Loans 1,331 1,254 1,752 4,337
Commercial Real Estate 11,899 15,154 7,668 34,721
Commercial Business 1,245 328 206 1,779
-------- --------- ---------- ----------
Total $ 19,613 $ 28,440 $ 246,125 $ 294,178
======== ========= ========== ==========
Interest sensitivity
on the above loans:
Loans with
predetermined rates $ 18,720 $ 25,959 $ 160,986 $ 205,665
Loans with
adjustable or
floating rates 893 2,481 85,139 88,513
-------- --------- ---------- ----------
Total $ 19,613 $ 28,440 $ 246,125 $ 294,178
========= ========= ========== ==========
Construction, commercial and land loans are generally indexed to the prime
rate plus a percentage (generally 1% to 2%). The adjustable rate mortgage loans
have interest rate adjustment limitations and are generally indexed to the 1
year U.S. Treasury note rate. Future market factors may affect the correlation
of the interest rate adjustment with the rates the Bank pays on the short-term
deposits that have been primarily utilized to fund these loans.
Changes in the allowance for possible loan losses are as follows:
YEARS ENDED DECEMBER 31,
1995 1994 1993
----------- ----------- -----------
Balance at beginning of year $ 2,621,512 $ 2,588,660 $ 2,380,227
Provision charged to
operations 120,000 66,000 202,000
Charge-offs (18,475) (119,625) (8,851)
Recoveries 43,742 86,477 15,284
----------- ----------- -----------
Balance at end year end $ 2,766,779 $ 2,621,512 $ 2,588,660
=========== =========== ===========
<PAGE>
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at December 31, 1995 and 1994
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- ---------- --------- -------------
<S> <C> <C> <C> <C>
GNMA $ 15,225,124 $ 426,254 $ (348) $ 15,651,030
FNMA 41,506,743 549,696 (106,535) 41,949,904
FHLMC 54,039,337 1,233,442 (49,292) 55,223,487
PRIVATE 783,660 1,196 (4,477) 780,379
------------- ---------- --------- -------------
TOTAL $ 111,554,864 $ 2,210,588 $ (160,652) $ 113,604,800
============= =========== ========== =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
GNMA $ 17,521,710 $ 41,718 $ (712,129) $ 16,851,299
FNMA 48,746,020 7,373 (2,995,587) 45,757,806
FHLMC 64,474,394 75,317 (2,431,719) 62,117,992
Private 1,130,856 0 (31,930) 1,098,926
------------- ---------- ------------- -------------
Total $ 131,872,980 $ 124,408 $ (6,171,365) $ 125,826,023
============= ========= ============ =============
</TABLE>
The Bank has the intent and ability to hold these securities to maturity.
At December 31, 1995, neither a disposal, nor a condition that could lead to a
decision not to hold these securities to maturity were reasonably foreseen.
Mortgage-backed securities of $1.1 million and $1.2 million were to secure
public funds on deposit at December 31, 1995 and 1994, respectively.
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1995 and 1994 are
summarized by major classification, as follows:
DECEMBER 31,
1995 1994
------------ ------------
Land, buildings and improvements $ 12,351,961 $ 10,322,305
Furniture and equipment 3,032,286 2,334,884
Computers 2,979,324 2,690,052
------------ ------------
Total 18,363,571 15,347,241
Less accumulated depreciation (5,590,092) (4,659,051)
------------ ------------
Net Office properties and
equipment $ 12,773,479 $ 10,688,190
============ ============
7. REAL ESTATE HELD FOR DEVELOPMENT
The Bank, through its wholly-owned subsidiary, Land Financial Services,
Inc., has entered into several real estate investments. Real estate held for
development is carried at the lower of cost or estimated net realizable value.
Intercompany loans from the Bank are the primary sources of funding and have
been eliminated in consolidation. Such investments in real estate at December
31, 1995 and 1994, are summarized as follows:
DECEMBER 31,
1995 1994
----------- -----------
Real Estate held for development $ 4,898,782 $ 4,898,782
Valuation allowance (3,671,050) (3,471,050)
----------- -----------
Net $ 1,227,732 $ 1,427,732
=========== ===========
During 1995, the Bank recorded an additional $200 thousand provision on the
real estate held for development. The losses were reflected as a charge to
income in the other income section of the consolidated statements of operations.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the Bank is required to deduct from capital its investments
in and advances to subsidiaries engaged in activities not permissible for
national banks (i.e. real estate development).
8. REAL ESTATE OWNED
Real estate owned, net at December 31, 1995 and 1994 totaled $669 thousand
and $1.8 million, respectively, which were acquired through deeds in lieu of
foreclosure. Changes in allowance for real estate owned is as follows:
YEARS ENDED DECEMBER 31,
1995 1994 1993
--------- --------- ---------
Balance at beginning of year $ 79,000 $ 0 $ 0
Provisions charged to operations 354,453 157,526 29,321
Charge-offs (120,261) (78,526) (29,321)
Recoveries 0 0 0
--------- --------- ---------
Balance at end of year $ 313,192 $ 79,000 $ 0
========= ========= =========
<PAGE>
9. DEPOSITS
Deposits at December 31, 1995 and 1994 consisted of the following major
classifications and weighted average rates:
DECEMBER 31, 1995
WEIGHTED PERCENT
AVERAGE RATE AMOUNT OF TOTAL
------------ -------------- --------
Non-interest checking 0.00% $ 28,678,611 6.69%
NOW accounts 1.52 44,442,958 10.36
Savings accounts 2.59 68,710,447 16.02
Money market accounts 2.66 57,493,882 13.41
Certificates 5.21 229,483,482 53.52
---- -------------- ------
Total 3.81% $ 428,809,380 100.00%
==== ============= ======
DECEMBER 31, 1994
WEIGHTED PERCENT
AVERAGE RATE AMOUNT OF TOTAL
------------ -------------- --------
Non-interest checking 0.00% $ 22,028,452 5.13%
NOW accounts 1.50 49,291,426 11.48
Savings accounts 2.78 68,974,307 16.06
Money market accounts 2.67 64,641,000 15.05
Certificates 4.44 224,495,629 52.28
---- ----------- -----
Total 3.38% $ 429,430,814 100.00%
==== ============== ======
A summary of certificates by maturity at December 31, 1995 are as follows:
YEAR ENDED DECEMBER 31, AMOUNT
-------------
1996 $ 143,340,146
1997 29,499,652
1998 15,334,324
Thereafter 41,309,360
-------------
Total $ 229,483,482
=============
A summary of interest expense on deposits is as follows:
YEARS ENDED DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
NOW accounts $ 704,815 $ 657,628 $ 734,144
Savings accounts 1,750,873 2,102,620 1,997,299
Money market accounts 1,571,079 1,913,044 2,065,121
Certificates 11,934,343 9,865,805 11,109,308
------------ ------------ ------------
Total interest expense $ 15,961,110 $ 14,539,097 $ 15,905,872
============ ============ ============
10. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1995, the Bank had advances from the Federal Home Loan Bank
of New York ("FHLB") in the amount of $24.5 million with a weighted average
interest rate of 5.96%. The advances scheduled to mature are as follows: $5.0
million maturing June 1997, $5.0 million maturing June 1998, $3.0 million
maturing October 1998, $10.0 million maturing June 2000, and $1.5 million
maturing October 2007. At December 31, 1995, the Bank had an unused credit line
with the FHLB of $24.8 million. Advances from FHLB at December 31, 1994 totaled
$10.1 million with a weighted average interest rate of 5.28%. Advances are
collateralized by FHLB stock and certain first mortgage loans.
11. SUBORDINATED DEBENTURES
The Corporation completed the issuance of $10.0 million of Subordinated
Debentures in a public offering on July 28, 1994. The Debentures are unsecured,
bear interest at a rate of 10% per annum and mature on July 28, 2004. Interest
payments are due semiannually on February 1 and August 1 commencing February 1,
1995. The Debentures are redeemable, in whole or in part, at any time at the
option of the Corporation at specified redemption prices, except that the
debentures may not be redeemed prior to August 1, 1997. The net proceeds from
the sale of the Debentures totaled $9.4 million and were used for the expansion
of the Bank's operations through branch acquisitions and general corporate
purposes. The Corporation is required to retain at all times cash, cash
equivalents or marketable securities in an amount not less than the aggregate
amount of two consecutive semi-annual interest payments that will be due and
payable on the Debentures following such declaration date or redemption date.
12. INCOME TAXES
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standard No. 109, `Accounting for Income Taxes" (SFAS No. 109).
SFAS No. 109 incorporates a balance sheet approach to deferred income tax
accounting. Under this asset and liability method, deferred tax assets and
liabilities are established for the temporary differences between accounting
bases and tax bases of the Corporations' assets and liabilities at the tax rates
expected to be in effect when the temporary differences are realized or settled.
Management believes the existing net deductible temporary differences which give
rise to the net deferred income tax assets are realizable on a more likely than
not basis.
<PAGE>
The temporary differences that gives rise to significant portions of
deferred tax assets and deferred tax liability are as follows:
DECEMBER 31,
1995 1994
---------- ----------
Deferred income tax assets:
Allowance for possible loan losses $ 448,273 $ 549,355
Real estate losses 286,597 264,129
Deferred loan fees, net 54,262 80,175
Compensation and pension liability 60,869 59,227
Amortization of deposit premium 116,338 87,721
Post retirement benefits 185,000 185,000
Capitalized interest 466,821 393,957
Unrealized (gain) loss on investments (12,758) 222,841
Other 85,654 60,786
---------- -----------
Gross deferred tax assets 1,691,056 1,903,191
Valuation allowance (289,588) (289,588)
---------- -----------
1,401,468 1,613,603
Deferred income tax liabilities:
Prepaid deposit insurance premium 170,029 179,161
Depreciation 333,996 287,839
---------- -----------
Gross deferred tax liabilities: 504,025 467,000
---------- -----------
Deferred income tax assets, net $ 897,443 $ 1,146,603
========== ===========
There was no change in the valuation allowance for the year ended December
31, 1995. The net change in the valuation allowance for the year ended December
31, 1994 was a decrease of $235 thousand. This change resulted from a
reassessment of the realizability of the existing net deductible temporary
differences which give rise to the net deferred income tax assets.
The following represents the components of income tax expense for the years
ended December 31, 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current Federal tax provision $ 2,305,857 $ 1,880,325 $ 2,196,495
Current State tax provision 220,948 196,562 221,155
----------- ----------- -----------
Total Current provision 2,526,805 2,076,887 2,417,650
----------- ----------- -----------
Deferred Federal tax
provision (benefit) (51,078) 234,892 15,446
Deferred State tax
provision (benefit) (4,646) 23,384 2,374
----------- ----------- -----------
Total Deferred provision (benefit) (55,724) 258,276 17,820
----------- ----------- -----------
Total $ 2,471,081 $ 2,335,163 $ 2,435,470
=========== =========== ===========
</TABLE>
The Bank is permitted under the Internal Revenue Code ("Code") to deduct
an annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. The Corporation's deductions in 1995, 1994 and
1993 were based upon the percentage of taxable income method as defined by the
Code. The bad debt deduction under this method equals 8% of taxable income
determined, without regard to that deduction, and with certain adjustments.
A deferred tax liability has not been recognized for the base year reserve
used for purposes of calculating the tax bad debt deduction because it is
management's belief that this reserve will not reverse in the foreseeable
future. The cumulative amount of the temporary difference related to this base
year reserve is $6.3 million. The unrecognized deferred tax liability related
to this amount is $2.4 million. A deferred tax liability has been recognized
for the portion of the tax bad debt reserve which arose in 1988 and subsequent
years.
The Corporation's provision for income taxes differs from that computed by
applying the statutory federal income tax rate to income before taxes as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 2,316,925 34.00% $ 2,308,810 34.00% $ 2,274,640 34.00%
Increase (Decrease) from:
State income taxes, net
of federal income tax
benefit 142,759 2.09% 145,164 2.14% 147,529 2.21%
Change in valuation
allowance 0 0.00% (234,701) (3.46%) 0 0.00%
Other 11,397 0.17% 115,890 1.71% 13,301 0.19%
----------- ----- ----------- ----- ---------- -----
Total $ 2,471,081 36.26% $ 2,335,163 34.39% $ 2,435,470 36.40%
=========== ===== =========== ===== ========== =====
</TABLE>
<PAGE>
13. LEASES
The Bank leases a building and land to operate two branches and certain
equipment under noncancelable leases which expire over the next 25 years. These
leases generally provide for the payment of taxes and maintenance by the lessee.
Most of these operating leases provide the Bank with the option to renew the
lease after the initial lease term. Future minimum rental payments under
existing leases as of December 31, 1995 are as follows:
FISCAL YEAR AMOUNT
-----------
1996 $ 104,922
1997 70,016
1998 53,349
1999 53,349
2000 and beyond 1,084,761
-----------
Total $ 1,366,397
===========
The leases for the buildings contain cost of living adjustments based on
changes in the consumer price index. The minimum lease payments shown above
include base rentals exclusive of any future adjustments. Total rent expense
for all operating leases amounted to $104 thousand, $97 thousand and $114
thousand for fiscal years 1995, 1994 and 1993, respectively.
14. STOCKHOLDERS' EQUITY
On December 14, 1988, the Bank converted to a state chartered stock Savings
Bank and simultaneously formed FMS Financial Corporation. At the time of
conversion, eligible deposit account holders were granted priority in the
unlikely event of a future liquidation of the Bank. The special reserve has
been decreased to the extent that the balances of eligible account holders were
reduced at annual determination dates.
The ability of the Corporation to pay dividends to stockholders is directly
dependent upon the ability of the Bank to pay dividends to the Corporation. OTS
regulations restrict the ability of the Bank to pay dividends to the Corporation
if such dividends reduce the net worth of the Bank below the amount required in
the special reserve account and based on the Bank's net income and capital
position. Furthermore, income appropriated to bad debt reserves and deducted
for federal income tax purposes cannot be used to pay dividends without payment
of federal income taxes on the amount of such income removed from reserves for
such purposes at the then current income tax rate.
At December 31, 1995, the Bank exceeded all three regulatory capital
levels required under FIRREA. At December 31, 1995, the Bank's regulatory
tangible and core capital was $36.8 million or 7.38% of total bank assets and
risk-based capital was $39.2 million or 16.17% of risk-weighted assets.
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles ("GAAP") to regulatory capital at December 31,
1995:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------ ------------ ------------
<S> <C> <C> <C>
GAAP Capital $ 38,807,320 $ 38,807,320 $ 38,807,320
Add:
Unrealized loss
on investments AFS 236,154 236,154 236,154
Less:
Subsidiary investments not
eligible (1,246,907) (1,246,907) (1,246,907)
Goodwill (997,505) (997,505) (997,505)
Supplementary qualifying
capital item:
General valuation allowance 0 0 2,449,606
------------ ------------ ------------
Regulatory capital
computed 36,799,062 36,799,062 39,248,668
Minimum regulatory
capital requirement 7,483,207 14,840,127 19,416,997
------------ ------------ ------------
Regulatory capital
excess $ 29,315,855 $ 21,958,935 $ 19,831,671
============ ============ ============
</TABLE>
15. PENSION PLAN
The Bank has a defined benefit pension plan for active employees. Net
pension expense was $279 thousand, $239 thousand and $234 thousand for years
ended 1995, 1994 and 1993, respectively. The components of net pension cost are
as follows:
YEARS ENDED DECEMBER 31,
1995 1994 1993
------- ------- --------
Service Cost $ 253,640 $ 218,797 $ 195,048
Interest Cost 163,002 146,491 137,283
Return on Assets (616,173) (39,613) (202,156)
Net Amortization
and Deferral 478,773 (86,277) 104,291
--------- --------- ---------
Net periodic
pension cost $ 279,242 $ 239,398 $ 234,466
========= ========== =========
<PAGE>
The following table presents a reconciliation of the funded status of the
defined benefit pension plan at December 31, 1995 and 1994:
December 31,
1995 1994
----------- -----------
Actuarial present value of benefit obligation:
Vested $ 2,084,446 $ 2,044,193
Nonvested 176,264 186,713
----------- -----------
Accumulted benefit obligation 2,260,710 2,230,906
Projected benefit obligation 2,941,106 2,766,250
Fair value of plan assets 3,194,912 2,583,831
----------- -----------
Excess (Deficit) of plan assets over
projected benefit obligation 253,806 (182,419)
Unrecognized net (gain) loss (225,225) 83,443
Unrecognized prior service cost 94,542 101,435
Unrecognized net transition obligation 255,287 286,193
----------- -----------
Prepaid pension liability included in the
consolidated balance sheets $ 378,410 $ 288,652
========== ==========
Actuarial assumptions used in determining pension cost are as follows:
YEARS ENDED DECEMBER 31,
1995 1994 1993
----- ----- -----
Discount rate for benefit obligation 6.00% 6.00% 6.00%
Rate of increase in compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of return on
plan assets 7.00% 7.00% 7.00%
In addition to providing pension plan benefits, the Bank provides certain
health care and life insurance benefits to certain retired employees. The
Corporation adopted Statement of Financial Accounting Standards No. 106,
`Employer Accounting for Post Retirement Benefits other than Pensions" (SFAS
No. 106) in the first quarter of 1993. SFAS No. 106 requires that the expected
cost of such benefits be actuarially determined and accrued ratably from the
date of hire to the date the employee is fully eligible to receive benefits.
The accumulated post-retirement benefit obligation is not funded but is
reflected in the statement of financial condition as a liability. Prior to the
adoption of SFAS No. 106, post-retirement benefit costs were recorded on the pay
as you go basis.
The net periodic post-retirement benefit cost includes the following
components:
DECEMBER 31,
1995 1994
-------- ---------
Service Cost $ 0 $ 0
Interest Cost 42,258 38,881
Amortization of prior service cost (1,521) 0
Amortization of (gain)/loss (9,045) 0
-------- ---------
Net periodic post-retirement
benefit cost $ 31,692 $ 38,881
======== =========
The assumed discount rate used in the calculation for net periodic post-
retirement benefit cost was 8.25% and 6.75% for 1995 and 1994, respectively.
The assumed health care cost trend rate for 1995 was 8% and was graded down in
1% increments per year to an ultimate rate of 5% per year. The impact of a 1%
increase in the assumed health care cost trend for each future year would be as
follows:
December 31, 1995
-----------------
Accumulated post-retirement obligation at year end $527,642
Service Cost $0
Interest Cost $45,589
The following table summarizes the amounts recognized in the Bank's balance
sheet:
DECEMBER 31,
1995 1994
-------- --------
Accumulated post-retirement
benefit obligation $ (485,073) $ (514,492)
Unrecognized prior service cost (98,832) 0
Unrecognized net gain (106,555) (195,488)
---------- ----------
Accrued post-retirement benefit
cost $ (690,460) $ (709,980)
========== ==========
The assumed discount rate used in the calculation for the accumulated post-
retirement benefit obligation as of December 31, 1995 and 1994 was 7.0% and
8.25%, respectively.
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available,
fair values are based on assumptions including future cash flows and discount
rates. Accordingly, the fair value estimates cannot be substantiated, may not
be realized, and do not represent the underlying value of the Corporation.
The Corporation uses the following methods and assumptions to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS: The carrying value is a reasonable estimate of fair
value.
INVESTMENT SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE: For
investment securities with a quoted market price, fair value is equal to quoted
market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other
homogeneous categories of loans such as residential mortgages and consumer
loans, fair value is estimated based on discounting the estimated future cash
flows using the current rates at which similar loans would be made to borrowers
with similar collateral and credit ratings and for similar remaining maturities.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair
value is the amount payable on demand at the reporting date. For certificates
of deposits, fair value is estimated using the rates currently offered for
deposits of similar remaining maturities.
SUBORDINATED DEBENTURES: Fair value is estimated using the quoted average of
the broker bid and asked price at year end.
OTHER BORROWINGS: Fair value is estimated using a discounted cash flow
analysis.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: For commitments and
standby letters of credit expiring within 90 days or with a variable rate, the
settlement amount is a reasonable estimate of fair value. For commitments and
standby letters of credit expiring beyond 90 days or with a fixed rate, the fair
value is the present value of the obligations based on current loan rates.
At December 31, 1995 and December 31, 1994, the carrying amount and the
estimated fair value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
-------------- ------------- -------------- -------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,985,580 $ 9,985,580 $ 11,380,545 $ 11,380,545
Investment securities held
to maturity and investment
securities available for sale 66,332,894 66,356,087 32,670,199 31,426,865
Mortgage-backed securities 111,554,864 113,604,800 131,872,980 125,826,023
FHLB Stock 4,058,100 4,058,100 3,728,400 3,728,400
Loans, net of unearned income 291,167,015 297,704,000 285,881,343 268,724,526
Less: Allowance for possible loan losses (2,766,779) 0 (2,621,512) 0
Net loan receivable $ 288,400,236 $ 297,704,000 $ 283,259,831 $ 268,724,526
Financial liabilities:
Deposits
NOW, passbook, and money market accounts 199,325,898 199,325,898 204,935,185 204,935,185
Certificates 229,483,482 229,200,000 224,495,629 215,074,154
Subordinated debentures 10,000,000 10,150,000 10,000,000 10,000,000
Other borrowings 24,682,444 24,866,000 10,328,425 9,647,350
Off-balance sheet financial
instruments:
Commitments to extend credit 25,686,791 25,686,791 31,811,675 31,811,675
Standby letters of credit 935,673 935,673 1,104,051 1,104,051
</TABLE>
<PAGE>
17. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT ("FDICIA")
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted into law on December 19, 1991. The statute includes a
number of additional supervisory measures. The additional supervisory powers
and regulations mandated by FDICIA include a `Prompt Corrective Action"
program that permits regulators to take increasingly harsh action against
associations that fail to meet certain new capital-based requirements. Various
other sections of FDICIA impose substantial new audit and reporting
requirements.
FDICIA also requires each regulatory agency to institute non-capital safety
and soundness standards for each institution it regulates by August 1, 1993.
These standards must cover (1) internal controls, (2) loan documentation, (3)
credit underwriting, (4) interest rate exposure, (5) asset growth, (6)
compensation, fees and benefits paid to employees, officers and directors, (7)
operational and managerial standards, and (8) asset quality, earnings and stock
valuation standards for preserving a minimum ratio of market value to book value
for publicly traded shares (if feasible). Many of the regulations required by
FDICIA have been promulgated by federal regulators. It is anticipated that the
Bank will be subject to certain additional FDICIA requirements in fiscal year
1996.
As of December 31, 1995 management of the Bank believes that it is in
compliance with the regulations adopted pursuant to FDICIA.
18. COMMITMENTS AND CONTINGENCIES
The Bank has outstanding loan commitments of $25.7 million as of December
31, 1995. Of these commitments outstanding, the breakdown between fixed and
variable rate loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
FIXED VARIABLE
RATE RATE TOTAL
----------- ------------ ------------
Commitments to:
<S> <C> <C> <C>
fund loans $ 2,586,478 $ 1,348,350 $ 3,934,828
Unused lines:
Construction 0 1,947,301 1,947,301
Equity line of credit loans 0 19,804,662 19,804,662
----------- ------------ ------------
$ 2,586,478 $ 23,100,313 $ 25,686,791
=========== ============ ============
</TABLE>
In addition to outstanding loan commitments, the Bank as of December 31,
1995,issued $936 thousand in standby letters of credit to guarantee performance
of a customer to a third party.
Commitments and standby letters of credit are issued in accordance with the
same loan policies and underwriting standards as settled loans. Since some
commitments and standby letters of credit are expected to expire without being
drawn down, these amounts do not necessarily represent future cash requirements.
19. LITIGATION
A lawsuit was filed against the Corporation and the Bank in December, 1992,
in connection with an employment and severance agreement the Corporation had
entered into with its former President. Another lawsuit was filed in January,
1993, against Peter's Passion, Inc., a wholly-owned land development subsidiary
of the Bank. A settlement of both suits was reached and provided for the
Company to contribute $340 thousand to the settlement. Such an amount was
reserved in the financial statements at December 31, 1993 and was paid during
1994. There are no significant pending legal proceedings which will have a
material impact on the Bank's financial position or results of operations at
December 31, 1995.
20. LOANS TO OFFICERS AND DIRECTORS
In the past, the Bank has followed a policy of granting mortgage loans to
directors, officers and employees for the purpose of purchasing or refinancing
such person's primary residence at preferential rates. The officers, directors
and employees were not charged a loan origination fee, but were charged for the
reimbursable costs of underwriting the loan. Such a rate discount remains in
effect for the time the person remains employed by the Bank. If the employment
is terminated, the rate discount ceases from that date of termination. Under
the Financial Institutions Reform, Recovery and Enforcement Act of 1989, loans
made to officers and directors must be on substantially the same terms as
offered in comparable transactions with non-affiliated parties. The Bank's loan
policy is to comply with these requirements. Loans to other employees may still
be made on preferential terms. At December 31, 1995 and 1994, loans made to
directors and executive officers whose indebtedness exceed $60 thousand amounted
to $904 thousand and $1.1 million, respectively. During 1995 and 1994 there
were no new loans to these individuals and repayments totaled $191 thousand and
$121 thousand, respectively.
21. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion to stock form, the Corporation
established an Employee Stock Ownership Plan ("ESOP"), which purchased
approximately $660 thousand worth of common stock. In order to make the
purchase, the ESOP borrowed approximately $660 thousand on December 8, 1988 from
a commercial bank. The debt, which accrues interest at 80% of the commercial
bank's base rate, has been guaranteed by the Corporation, and is payable and
expensed in ten annual installments of approximately $66 thousand. Additional
principal payments may be made from cash dividends paid on the unallocated ESOP
shares.
Annual contributions to the ESOP are made in amounts determined by the
Board of Directors. Because the Corporation's loan guarantee represents a
commitment either to make future contributions to the ESOP or to make the
principal payments when due, the guarantee has been reflected as a liability,
and an offsetting charge equivalent to the future contributions to be made has
been reflected as a reduction of stockholders' equity in the accompanying
consolidated statements of financial condition.
<PAGE>
22. STOCK OPTIONS
The Corporation has established a stock compensation plan (the `Plan")
for executive officers and other selected employees of the Corporation. The
Plan consists of incentive stock options intended to qualify under Section 422A
of the Internal Revenue Code of 1986. These stock options may be surrendered
and stock appreciation rights may be granted in their place, with the approval
of the Corporation.
At total of 115,642 shares of authorized but unissued common stock of the
Corporation has been reserved for future issuance under the Plan. The option
price per share for options granted may not be less than the fair market value
of the common stock on the date of grant. Options must be exercised within ten
years of the date of grant.
Stock options of 95,823, 100,958 and 123,758 shares were outstanding and
exercisable at December 31, 1995, 1994 and 1993, respectively, at exercise
prices equal to the fair market value of the Common Stock on the date of grant
of such options. Options for 11,435, 6,200 and 10,000 shares were exercised
during the years ended December 31, 1995, 1994 and 1993, respectively. Options
for 12,000 shares were granted during 1995 at an exercise price equal to the
market price at the date of grant of $16.00 per share. All options previously
granted have an exercise price equal to $3.875. No options were granted during
1994 and 1993. Stock appreciation rights of 5,700 and 16,600 were issued and
exercised during 1995 and 1994, respectively. No stock appreciation rights were
issued or exercised during 1993.
23. RISKS AND UNCERTAINTIES
The earnings of the Corporation depend on the earnings of the Bank. The
earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest earning assets,
such as loans and investments and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations of the
Bank are subject to risks and uncertainties surrounding its exposure to changes
in the interest rate environment.
Most of the Bank's lending activity is with customers located within
southern New Jersey. Generally, the loans are secured by real estate consisting
of single family residential properties. While this represents a concentration
of credit risk, the credit losses arising from this type of lending compares
favorably with the Bank's credit loss experience on its portfolio as a whole.
The ultimate repayment of these loans is dependent to a certain degree on the
local economy and real estate market.
The financial statements of the Corporation are prepared in conformity with
generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the
allowance for possible loan losses and carrying values of real estate owned and
real estate held for development. Consideration is given to a variety of factors
in establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. Since the allowance for
possible loan losses and carrying value of real estate assets and real estate
held for development is dependent, to a great extent, on the general economy and
other conditions that may be beyond the Bank's control, it is at least
reasonably possible that the estimates of the allowance for possible loan losses
and the carrying values of the real estate assets could differ materially in the
near term.
During 1995, Congress began consideration of a recapitalization plan for
the Savings Association Insurance Fund (SAIF). The proposed plan provides all
SAIF member institutions, such as the Bank, to pay a one-time fee of
approximately 85 basis points on the amount of deposits held by the member
institution to recapitalize the SAIF. If the assessment was effected, based on
deposits as of March 31, 1995, the Bank's pro rata share would amount to
approximately $2.3 million after taxes. If the Bank is required to pay the
proposed special assessment, future deposit insurance premiums are expected to
be reduced from .23% to .06%. Management of the Bank is unable to predict
whether this proposal or any similar proposal will be enacted or whether ongoing
SAIF premiums will be reduced to a level comparable to that of BIF premiums.
24. SUBSEQUENT EVENTS
On November 28, 1995, the Board of Directors of the Corporation declared a
two-for-one stock split and a cash dividend of $.05 per share, both of which are
payable on January 12, 1996 to shareholders of record on January 2, 1996. All
references in the financial statements to number of shares, per share amounts,
stock options and market prices of the Corporation's common stock have been
retroactively restated to reflect the increased number of common shares
outstanding.
On February 28, 1996, the Board of Directors of the Corporation declared a
$.05 per share cash dividend which is payable on April 15, 1996 to shareholders
of record on April 2, 1996.
During March 1996, the Corporation repurchased 39,223 shares of its Common
Stock for a total purchase price of approximately $664 thousand in privately
negotiated transactions.
<PAGE>
25. PARENT COMPANY FINANCIAL INFORMATION
The financial statements for FMS Financial Corporation are as follows:
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION STATEMENTS OF
FINANCIAL CONDITION DECEMBER 31,
1995 1994
------------ -------------
ASSETS:
<S> <C> <C>
Cash $ 81,827 $ 1,000,000
Investment in subsidiary 40,339,762 35,428,504
Investment securities 1,000,000 0
Intercompany receivable-net 3,043,996 2,814,519
Subordinated Debentures issue cost-net 493,157 550,505
Other 168,157 57,040
------------ -------------
TOTAL ASSETS $ 45,126,899 $ 39,850,568
============ ============
LIABILITIES:
10% Subordinated Debentures due 2004 $ 10,000,000 $ 10,000,000
Guarantee of employee stock ownership plan debt 182,444 258,425
Dividends payable 125,288 0
Accrued interest payable 416,667 433,333
------------ -------------
TOTAL LIABILITIES $ 10,724,399 $ 10,691,758
------------ -------------
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 2,601,634 and
1,295,100 and shares outstanding 2,505,756 and
1,257,550 as of December 31, 1995 and 1994,
respectively 260,163 129,510
Paid-in capital in excess of par 8,408,840 8,495,186
Unrealized loss on securities available for
sale, net of deferred income taxes (236,154) (415,872)
Guarantee of employee stock ownership plan debt (182,444) (258,425)
Retained earnings - substantially restricted 27,301,864 22,108,961
Less:Treasury Stock (95,878 and 37,550 shares, at cost
at December 31, 1995 and 1994, respectively) (1,149,769) (900,550)
------------ -------------
Total stockholders' equity 34,402,500 29,158,810
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,126,899 $ 39,850,568
============ =============
</TABLE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Intercompany interest income $ 537,030 $ 288,546 $ 0
Interest expense (1,049,013) (456,306) 0
Equity in undistributed income of subsidiary 4,687,233 4,566,175 4,254,648
------------ ------------ ------------
Income before taxes 4,175,250 4,398,415 4,254,648
Income tax benefit 168,154 57,040 0
Cumulative effect of accounting changes 0 0 (40,000)
------------ ------------ ------------
NET INCOME $ 4,343,404 $ 4,455,455 $ 4,214,648
============ ============ ============
</TABLE>
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION STATEMENTS OF
CASH FLOWS
FOR YEARS ENDED DECEMBER 31,
1995 1994 1993
----------- ----------- -----------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 4,343,404 $ 4,455,455 $ 4,214,648
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of the subidiary (4,687,233) (4,566,175) (4,214,648)
Amortization of bond issue costs 57,347 22,973 0
(Decrease) Increase in interest payable (16,666) 433,333 0
(Increase) Decrease in intercompany receivable, net (229,477) 792,981 0
Other operating activities (35,135) 32,542 31,569
----------- ----------- -----------
Net cash (used) provided by operating activities (567,760) 1,171,109 31,569
INVESTING ACTIVITIES
Purchase of marketable security (1,000,000) 0 0
----------- ----------- -----------
Net cash used by investing activities (1,000,000) 0 0
FINANCING ACTIVITIES
Net proceeds from issuance of 10% subordinated debentures 0 9,426,522 0
Purchase of treasury stock (249,219) (900,550) 0
Cash dividends received from subsidiary 1,350,000 0 0
Investment in subsidiary (44,307) (5,047,625) 0
Intercompany note receivable 0 (3,607,500) 0
Cash dividends paid on common stock (375,213) 0 0
Principal repayment of employee stock (75,981) (65,981) (70,319)
ownership plan debt
Proceeds from issuance of stock 44,307 24,025 38,750
----------- ----------- -----------
Net cash provided (used) by financing activities 649,587 (171,109) (31,569)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVLALENTS (918,173) 1,000,000 0
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,000,000 0 0
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 81,827 $ 1,000,000 $ 0
============ ============ ===========
</TABLE>
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FMS FINANCIAL CORPORATION:
We have audited the accompanying consolidated statements of financial condition
of FMS Financial Corporation and subsidiary as of December 31, 1995 and 1994,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the consolidated financial position of FMS
Financial Corporation and subsidiary as of December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation
changed its method of accounting for investment securities in 1994 and its
method of accounting for income taxes and post-retirement benefits other than
pensions in 1993.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 9, 1996
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING
The 1996 Annual Shareholders' Meeting of FMS Financial Corporation will be
held at 10:00 a.m., Friday, April 26, 1996 at the Riverton Country Club,
Highland Avenue off of Route 130, Cinnaminson, New Jersey.
STOCK MARKET INFORMATION
The common stock of FMS Financial Corporation is traded over-the-counter
and is listed on the Nasdaq National Market System under the symbol `FMCO".
Daily quotations are included in the Nasdaq National Market stock tables
published in the Wall Street Journal and other leading newspapers.
The number of record holders of common stock of the Corporation as of March
1, 1996 was approximately 828, not including those shares registered in names of
various investment brokers held in account for their customers.
The following table sets forth the range of closing common bid prices, as
reported by Nasdaq, for the periods ended December 31, 1995 and 1994:
1995
QUARTER ENDED HIGH LOW
------ ------
MARCH 31, $12.25 $11.25
JUNE 30, $13.28 $11.50
SEPTEMBER 30, $16.50 $13.50
DECEMBER 31, $17.00 $16.25
1994
QUARTER ENDED HIGH LOW
------ ------
March 31, $11.50 $10.50
June 30, $11.50 $10.50
September 30, $12.00 $10.50
December 31, $12.50 $11.25
The Corporation's sole operating assets are derived from its subsidiary,
Farmers & Mechanics Bank. Consequently, the ability of the Corporation to
accumulate cash for payment of cash dividends to stockholders is directly
dependent upon the ability of the Bank to pay dividends to the Corporation.
There are regulatory limitations on the ability of the Bank to pay cash
dividends to the Corporation which could, in turn, be used by the Corporation to
pay cash dividends to its stockholders. Interest on savings accounts must be
paid by the Bank prior to payment of dividends on the common stock.
Additionally, the Corporation must pay interest to holders of its debentures
before payment of cash dividends to its stockholders. Under the regulations of
the OTS, the Bank is not permitted to pay dividends on its stock if its
regulatory capital would be reduced below the amount required for the
liquidation account established in connection with its mutual-to-stock
conversion. The Bank will not be permitted to pay dividends on its capital
stock if its regulatory capital would be reduced below the regulatory capital
requirements prescribed for institutions regulated by the OTS. Further, income
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used to pay cash dividends without the payments of federal income
taxes on the amount of such income removed from reserves for such purpose at the
then current income tax rate.
The Bank's ability to pay dividends or make other capital distributions to
the Corporation is also governed by OTS regulations. Under these regulations,
`capital distributions" are defined as cash dividends, payments by savings
associations to repurchase or otherwise acquire its shares, payments to
shareholders of another entity in a cash-out merger, and other distributions
charged against capital. An institution that has regulatory capital that is at
least equal to its fully phased-in capital requirement and that has not been
notified that it `is in need of more than normal supervision," is a Tier 1
institution. A Tier 1 institution is permitted under OTS regulations, after
prior notice to (and no objection by) the OTS, to make capital distributions
during a calendar year up to 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its `surplus capital
ratio', which is the percentage by which the ratio of its regulatory capital to
assets exceeds the ratio of its fully phased-in capital requirement to assets at
the beginning of the calendar year. As of December 31, 1995 the Bank was a Tier
1 institution and had available $13.9 million for dividends to the Corporation,
subject to nonobjection by the OTS. It is not likely that the Corporation would
request a dividend of that magnitude.
The Corporation is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, although the source of such dividends
is dependent upon dividends received by it from the Bank. The Corporation is
subject, however, to the requirements of New Jersey law, which permits the
Corporation to pay dividends in cash or shares out of the Corporation's surplus,
defined as the excess of net assets of the Corporation over stated capital.
<PAGE>
BOARD OF DIRECTORS
CHARLES B. YATES
Chairman of the Board
WAYNE H. PAGE
Vice Chairman
GEORGE J. BARBER
DOMINIC W. FLAMINI
ROBERT N. GARRISON
JAMES C. LIGNANA
CRAIG W. YATES
DIRECTORS EMERITUS
ADOLPH N. BRIGHT
KAREN S. OLEKSA
HILYARD S. SIMPKINS
BANK OFFICERS
CHARLES B. YATES*
Chairman of the Board
CRAIG W. YATES*
President
JAMES E. IGO*
Sr. Vice President and Chief Lending Officer
CHANNING L. SMITH*
Vice President and Chief Financial Officer
THOMAS M. TOPLEY*
Sr. Vice President of Operations and
Corporate Secretary
DOUGLAS B. HALEY
Vice President, Consumer Lending
KAREN R. KOENIG
Vice President, Branch Operations
NANCY L. PARKER
Vice President, Human Resources
PETER S. SCHOENFELD
Vice President, Investments
KAREN D. SHINN
Vice President, Operations
CINDY S. WERTZ
Vice President, Loan Servicing
JOHN P. BISHOP
Internal Auditor
STEVEN A. RYAN
Compliance Officer
MICHAEL J. HAGELGANS
Assistant Vice President, Commercial Lending
MARCELLA F. HATCHER*
Assistant Secretary
* Officers of Bank and Holding Company
<PAGE>
MARKET MAKERS
The following companies were making a market in the Corporation's common stock
at December 31, 1995:
HERZOG, HEINE, GEDULD, INC. ROBERT W. BAIRD & CO., INC.
26 Broadway 4300 W. Cypress Street
First Floor Tampa, FL 33607
New York, NY 10004 (813) 877-4000
(212) 908-4000
MERRILL LYNCH, PIERCE, FENNER RYAN BECK & CO.
& SMITH, INC. 80 Main St.
World Financial Center W. Orange, NJ 07052
250 Vesey Street (201) 325-3000
New York, NY 10281
(212) 449-1000
FORM 10-K AND OTHER FINANCIAL INQUIRIES
The Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, as filed with the Securities and Exchange Commission will be furnished
to shareholders of the Corporation upon written request without charge.
Shareholders, analysts and others seeking this and other requests for
information relating to stock, annual shareholders' meeting and related matters
on FMS Financial Corporation, should contact the Corporate Secretary at the
Administrative Offices.
TRANSFER AGENT AND REGISTRAR AUDITORS
American Stock Transfer and Trust Company Coopers & Lybrand L.L.P.
40 Wall Street 2400 Eleven Penn Center
New York, NY 10005 Philadelphia, PA 19103
SPECIAL COUNSEL
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
<PAGE>
OFFICE LOCATIONS
EXECUTIVE AND ADMINISTRATIVE OFFICES
3 Sunset Road and 811 Sunset Road
Burlington NJ 08016
(609) 386-2400
MAIN BRANCH
3 Sunset Road & Route 541
Burlington, NJ 08016
(609) 386-2400
BURLINGTON TOWNSHIP
809 Sunset Road
Burlington, NJ 08016
(609) 387-1150
BURLINGTON CITY
352 High Street
Burlington, NJ 08016
(609) 386-4643
BORDENTOWN
335 Farnsworth Ave.
Bordentown. NJ 08505
(609) 291-8200
DELRAN
3002 Route 130 North
Delran, NJ 08075
(609) 764-3740
EASTAMPTON
1191 Woodlane Road
Eastampton, NJ 08060
(609) 261-6400
EDGEWATER PARK
1149 Cooper Street
Edgewater Park, NJ 08010
(609) 387-0046
LUMBERTON
1636-61 Route 38 & Eayrestown Road
Lumberton, NJ 08048
(609) 267-6811
MEDFORD
200 Tuckerton Road
Medford, NJ 08055
(609) 596-4300
MEDFORD LAKES
712 Stokes Road
Medford, NJ 08055
(609) 654-6373
MOORESTOWN
53 East Main Street
Moorestown, NJ 08057
(609) 235-0544
MOUNT LAUREL
4522 Church Road
Mount Laurel, NJ 08054
(609) 235-4445
SOUTHAMPTON
1841 Route 70
Southampton, NJ 08088
(609) 859-2700
WILLINGBORO
399 Charleston Road
Willingboro, NJ 08046
(609) 877-2888
WILLINGBORO EAST
611 Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 871-4900
WILLINGBORO WEST
1 Rose Street & Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 835-4700
EXHIBIT 21
Subsidiaries of the Registrant(1)
State of Percentage
Incorporation Ownership
------------- ----------
Farmers and Mechanics Bank United States 100%
FMS Financial Services, Inc.(2) New Jersey 100%
Land Financial Services, Inc.(2) New Jersey 100%
First Plunge, Inc. (3) New Jersey 100%
Fishpond, Inc. (3) New Jersey 100%
Angell Ayes, Inc. (3) New Jersey 100%
Peter's Passion, Inc. (3) New Jersey 100%
Atlantic Adventures, Inc.(3) New Jersey 100%
(1) The operations of the subsidiaries are included in the consolidated
financial statements contained in the Annual Report to Stockholders
attached as Exhibit 13 to the Form 10-K.
(2) Subsidiary of Farmers and Mechanics Bank.
(3) Subsidiary of Land Financial Services, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of FMS Financial Corporation on Form S-8 (File No. 33-24340) of our dated
February 9, 1996 on our audits of the consolidated financial statements of FMS
Financial Corporation and subsidiary as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995, which report is
incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,805
<INT-BEARING-DEPOSITS> 181
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,768
<INVESTMENTS-CARRYING> 155,120
<INVESTMENTS-MARKET> 157,193
<LOANS> 288,400
<ALLOWANCE> 2,767
<TOTAL-ASSETS> 501,550
<DEPOSITS> 428,809
<SHORT-TERM> 3,106
<LIABILITIES-OTHER> 1,899
<LONG-TERM> 34,682
0
0
<COMMON> 260
<OTHER-SE> 32,794
<TOTAL-LIABILITIES-AND-EQUITY> 501,550
<INTEREST-LOAN> 23,572
<INTEREST-INVEST> 11,629
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 35,201
<INTEREST-DEPOSIT> 15,961
<INTEREST-EXPENSE> 18,041
<INTEREST-INCOME-NET> 17,160
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,226
<INCOME-PRETAX> 6,814
<INCOME-PRE-EXTRAORDINARY> 4,343
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,343
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.69
<YIELD-ACTUAL> 3.66
<LOANS-NON> 4,112
<LOANS-PAST> 0
<LOANS-TROUBLED> 988
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,622
<CHARGE-OFFS> 19
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 2,767
<ALLOWANCE-DOMESTIC> 2,767
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,267
</TABLE>
