SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
For the quarterly period ended June 30, 1996
OR
Transition report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Sunset and Salem Roads, Burlington, New Jersey 08016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
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As of June 30, 1996 there were issued and outstanding 2,602,694 shares and
2,467,593 shares, respectively of the registrant's Common Stock, par value $.10
per share.
FMS FINANCIAL CORPORATION AND SUBSIDIARY
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QUARTERLY REPORT ON FORM 10-Q
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JUNE 30, 1996
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TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
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Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1996 (unaudited) and December 31, 1995.......1
Consolidated Statements of Income (unaudited)
for the three and six month periods ended
June 30, 1996 and June 30, 1995 .....................2
Consolidated Statements of Cash Flows (unaudited)
for the six month periods ended June 30, 1996 and
June 30, 1995 ........................................3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 4 - 16
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings......................................17
Item 2 - Changes in Securities..................................17
Item 3 - Defaults Upon Senior Securities........................17
Item 4 - Submission of Matters to a Vote of Security Holders ...17
Item 5 - Other Information......................................17
Item 6 - Exhibits and Reports on Form 8-K.......................17
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, 1996 December 31,1995
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and amounts due from depository institutions $ 5,907,911 $ 9,804,770
Interest-bearing deposits 2,051 124,334
Short term funds 193,134 56,476
Total cash and cash equivalents 6,103,096 9,985,580
Investment securities held to maturity 60,054,103 43,564,913
Investment securities available for sale 28,525,631 22,767,981
Loans receivable - net 285,834,569 288,400,236
Mortgage-backed securities held to maturity 109,517,872 111,554,864
Accrued interest receivable:
Loans 1,766,811 1,749,652
Mortgage-backed securities 954,404 964,148
Investments 968,516 892,533
Federal Home Loan Bank stock 4,058,100 4,058,100
Real estate held for development - net 1,227,732 1,227,732
Real estate owned - net 799,092 668,792
Office properties and equipment - net 14,443,903 12,773,479
Deferred income taxes 1,141,795 897,443
Excess cost over fair value of net assets acquired 835,892 997,505
Prepaid expenses and other assets 1,246,991 553,944
Subordinated Debentures issue cost - net 464,483 493,157
TOTAL ASSETS $ 517,942,990 $ 501,550,059
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 433,581,637 $ 428,809,380
Advances from the Federal Home Loan Bank 34,300,000 24,500,000
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 149,453 182,444
Advances by borrowers for taxes and insurance 2,240,729 2,093,130
Accrued interest payable 914,783 888,456
Dividends payable 123,380 125,288
Other liabilities 2,306,412 1,898,861
Total liabilities 483,616,394 468,497,559
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 2,602,694 and 2,601,634, and shares outstanding 2,467,593 and
2,505,756 as of June 30, 1996 and December 31, 1995, respectively 260,269 260,163
Paid-in capital in excess of par 8,412,841 8,408,840
Unrealized loss on securities available for sale - net of deferred income taxes (202,229) (236,154)
Guarantee of employee stock ownership plan debt (149,453) (182,444)
Retained earnings - substantially restricted 27,818,806 25,951,864
Less: Treasury stock (135,101 and 95,878 shares, at cost, as of
June 30, 1996 and December 31, 1995, respectively) (1,813,638) (1,149,769)
Total stockholders' equity 34,326,596 33,052,500
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 517,942,990 $ 501,550,059
</TABLE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME: (UNAUDITED)
Interest income on:
Loans $ 5,810,982 $ 5,904,153 $ 11,634,346 $ 11,708,592
Mortgage-backed securities 1,785,738 2,072,342 3,625,661 4,108,469
Investments 1,430,865 744,846 2,614,211 1,348,738
Total interest income 9,027,585 8,721,341 17,874,218 17,165,799
INTEREST EXPENSE:
Interest expense on:
Deposits 3,960,018 3,991,190 7,945,467 7,681,904
Subordinated Debentures 264,338 264,335 528,674 520,339
Borrowings 438,595 152,433 845,317 257,585
Total interest expense 4,662,951 4,407,958 9,319,458 8,459,828
NET INTEREST INCOME 4,364,634 4,313,383 8,554,760 8,705,971
PROVISION FOR LOAN LOSSES 30,000 30,000 60,000 60,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,334,634 4,283,383 8,494,760 8,645,971
OTHER INCOME (EXPENSE):
Loan service charges and other fees 60,462 80,221 117,922 144,465
Gain on sale of loans 794 5,279 977 5,186
Gain on sale of investment securities 0 0 3,030 0
Real estate owned operations, net (43,975) (48,117) (89,253) (90,747)
Service charges on accounts 445,129 371,501 883,381 726,688
Other income 21,726 36,562 65,208 98,116
Total other income (expense) 484,136 445,446 981,265 883,708
OPERATING EXPENSES:
Salaries and employee benefits 1,786,276 1,554,390 3,452,248 3,142,942
Occupancy and equipment 610,467 485,747 1,232,516 978,308
Purchased services 228,618 272,416 439,666 524,841
Federal deposit insurance premiums 239,343 243,525 469,113 487,050
Professional fees 65,515 97,071 132,861 194,142
Advertising 7,050 6,789 13,387 13,038
Other 284,715 301,348 570,417 588,539
Total operating expenses 3,221,984 2,961,286 6,310,208 5,928,860
INCOME BEFORE INCOME TAXES 1,596,786 1,767,543 3,165,817 3,600,819
INCOME TAXES:
Current 656,993 739,357 1,315,534 1,407,284
Deferred (172,022) (100,684) (263,417) (99,788)
Total income taxes 484,971 638,673 1,052,117 1,307,496
NET INCOME $ 1,111,815 $ 1,128,870 $ 2,113,700 $ 2,293,323
EARNINGS PER COMMON SHARE: $ 0.44 $ 0.44 $ 0.83 $ 0.89
Weighted average common shares and
common stock equivalents outstanding 2,523,925 2,589,000 2,537,478 2,564,390
</TABLE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES: (Unaudited)
Net income $ 2,113,700 $ 2,293,323
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 60,000 60,000
Depreciation and amortization 843,774 769,025
Provision for real estate owned 66,000 78,677
Realized (gains) and losses on:
Sale of loans and loans held for sale (977) (5,186)
Sale of investments available for sale (3,030) 0
Disposal of fixed assets 2,960 3,836
Sale of real estate owned 0 (5,453)
Proceeds from sale of loans held for sale 0 150,874
Loans originated for sale 0 (150,000)
Increase in accrued interest receivable (83,398) (145,043)
(Increase) Decrease in prepaid expenses and other assets (448,631) 149,863
Increase in accrued interest payable 26,327 34,247
Increase (Decrease) in other liabilities 407,551 (350,030)
Deferred income taxes (263,419) (99,788)
Net cash provided by operating activities 2,720,857 2,784,345
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 264,596 361,477
Real estate owned 0 261,406
Proceeds from maturities of investment securities held to maturity 107,316,187 6,233,126
Proceeds from maturities of investment securities available for sale 8,226,414 0
Principal collected on mortgage-backed securities 16,831,877 9,521,904
Principal collected on longer-term loans, net 27,278,230 18,880,101
Longer-term loans originated or acquired, net (25,140,326) (21,367,353)
Purchase of investment securities and mortgage-backed securities held to maturity (135,420,906) (17,920,530)
Purchase of investment securities available for sale (17,344,730) (12,789,709)
Purchase of Federal Home Loan Bank stock 0 (329,700)
Purchase of office property and equipment (2,426,111) (822,524)
Net cash used by investing activities (20,414,769) (17,971,802)
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 3,391,509 (8,853,712)
Net increase in time deposits 1,380,748 4,938,934
Net increase in FHLB advances 9,800,000 14,930,000
Increase in advances from borrowers for taxes and insurance 147,599 225,757
Purchase of treasury stock (663,869) (249,219)
Dividends paid on common stock (248,666) (124,959)
Net proceeds from issuance of common stock 4,107 19,375
Net cash provided by financing activities 13,811,428 10,886,176
DECREASE IN CASH AND CASH EQUIVALENTS (3,882,484) (4,301,281)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,985,580 11,380,545
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,103,096 $ 7,079,264
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 9,293,131 $ 8,425,581
Income taxes 1,503,805 1,558,925
Non cash investing and financing activities:
Dividends declared and not paid at quarter end 123,380 124,966
Non-monetary transfers from loans to real estate acquired
through foreclosure 195,300 0
</TABLE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1995.
General
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FMS Financial Corporation ("the Corporation") is the parent company of Farmers &
Mechanics Bank ("the Bank"), its only subsidiary.
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation contain all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of FMS's financial
condition, results of operations and cash flows for the periods and dates
indicated. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the operating results for the full fiscal year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for FORM 10-Q, and therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles.
FINANCIAL CONDITION -
TOTAL ASSETS - at June 30, 1996 were $517.9 million as compared with total
assets at December 31, 1995 of $501.6 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased to $60.1 million at June 30,
1996 from $43.6 million at December 31, 1995 due to the purchase of $19.8
million in U.S. Government agency notes partially offset by the call of $10.6
million in U.S. Government agency notes and a $7.1 million increase in reverse
repurchase agreements. Investment securities held to maturity at June 30, 1996
consisted entirely of fixed rate securities. A comparison of cost and
approximate market values of investment securities held to maturity as of June
30, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
U. S. Gov't Agencies $ 43,280,471 $ 7,376 $ (1,316,091) $ 41,971,756 $ 34,086,243 $ 34,109,989
Reverse Repurchase 16,122,991 0 0 16,122,991 9,000,000 9,000,000
Municipal bonds 635,641 0 (741) 634,900 463,670 464,117
U. S. Treasury 15,000 0 (820) 14,180 15,000 14,000
Total $ 60,054,103 $ 7,376 $ (1,317,652) $ 58,743,827 $ 43,564,913 $ 43,588,106
</TABLE>
INVESTMENT SECURITIES AVAILABLE FOR SALE - increased to $28.5 million at June
30, 1996 from $22.8 million at December 31, 1995 as a result of the purchase of
$8 million of CMO's and $9.3 million of U.S. Government agency notes , partially
offset by the principal paydowns on CMO's of $3.0 million and the call of $7.3
million in U.S. Agency notes. Investment securities available for sale at June
30, 1996 consisted of $8.8 million in adjustable rate securities and $19.7
million in fixed rate securities. A comparison of cost and approximate market
values of investment securities available for sale as of June 30, 1996 and
December 31, 1995 follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
U. S. Gov't Agencies $ 9,998,370 $ 6,320 $ (70,940) $ 9,933,750 $ 8,000,000 $ 7,927,500
U. S. Treasury 1,988,583 0 (1,403) 1,987,180 1,979,408 1,980,000
CMO's 10,477,671 30,519 (134,280) 10,373,910 5,520,407 5,484,799
REMIC's 6,329,269 0 (193,518) 6,135,751 7,589,420 7,291,202
Common Stock 50,000 45,040 0 95,040 50,000 84,480
Total $ 28,843,893 $ 81,879 $ (400,141) $ 28,525,631 $ 23,139,235 $ 22,767,981
</TABLE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - decreased $2.6 million to $285.8
million at June 30, 1996 from $288.4 million at December 31, 1995. During the
six months ended June 30, 1996, approximately $27.3 million of principal was
collected on loans, which was partially offset by $25.1 million of originated
loans. The following tables set forth certain information concerning the loan
portfolio at the dates indicated. Table 1 shows loans receivable by major
categories. Table 2 shows past due impaired loans by major categories.
<TABLE>
<CAPTION>
Table 1 June 30, December 31,
Loans Receivable 1996 1995
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<S> <C> <C>
Mortgage loans ( 1-4 dwelling) $ 241,765,242 $ 249,278,288
Commercial real estate 37,169,663 34,721,212
Commercial construction 4,486,192 0
Construction loans 3,355,000 4,063,081
Consumer loans 4,252,200 4,336,346
Commercial business 1,892,436 1,779,051
Subtotal 292,920,733 294,177,978
Less:
Loans in process 3,198,447 1,947,301
Deferred loan fees 1,101,332 1,063,662
Allowance for possible
loan losses 2,786,385 2,766,779
Net Loans Receivable $ 285,834,569 $ 288,400,236
</TABLE>
<TABLE>
<CAPTION>
Table 2 June 30, December 31,
Impaired Loans 1996 1995
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<S> <C> <C>
Impaired loans - non-accrual:
Mortgage loans:
One-to-four family $ 2,004,716 $ 2,502,175
Commercial real estate 1,608,094 1,603,524
Consumer and other 4,323 6,133
Total impaired non-accrual loans $ 3,617,133 $ 4,111,832
Other impaired loans 343,736 353,736
Total impaired loans $ 3,960,869 $ 4,465,568
</TABLE>
At June 30, 1996, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS #114 and #118 totaled $4.0 million of which
$2.1 million related to loans that were individually measured for impairment
with a valuation allowance of $383 thousand and $1.9 million of loans that were
collectively measured for impairment with a valuation allowance of $99 thousand.
For the six months ended June 30, 1996, the average recorded investment in
impaired loans was approximately $4.4 million and the Bank recognized $85
thousand of interest income on impaired loans, all of which was recognized on
the cash basis. The Bank had $2.8 million in total reserves for possible loan
losses at June 30, 1996, representing approximately 77% of non-accrual loans and
1% of total loans.
As of June 30, 1996 the Bank had outstanding loan commitments of $24.3 million,
of which $4.0 million represented fixed rate loans and $20.3 million represented
variable rate loans. The Bank intends to fund these commitments through
scheduled amortization of loans and mortgage-backed securities, borrowings and
if required the sale of investment securities available for sale.
MORTGAGE-BACKED SECURITIES - decreased $2.0 million to $109.5 million at June
30, 1996 from $111.5 million at December 31, 1995. The decrease is the result
of $13.5 million in principal repayments, partially offset by purchases of $11.5
million during the period. Mortgage-backed securities at June 30, 1996 consisted
of $39.4 million in adjustable rate securities and $70.1 million in fixed rate
securities. Mortgage-backed securities at June 30, 1996 and December 31, 1995
are summarized below:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
<S> <C> <C> <C> <C> <C> <C>
GNMA $ 21,936,171 $ 311,765 $ (82,695) $ 22,165,241 $ 15,225,124 $ 15,651,030
FNMA 39,382,069 287,645 (617,371) 39,052,343 41,506,743 41,949,904
FHLMC 47,554,855 555,995 (242,219) 47,868,631 54,039,337 55,223,487
Private 644,777 0 (4,460) 640,317 783,660 780,379
Total $ 109,517,872 $ 1,155,405 $ (946,745) $ 109,726,532 $ 111,554,864 $ 113,604,800
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - remained stable at $1.2 million at June 30,
1996 from December 31, 1995. The Bank has ceased making any new investments in
real estate projects and has limited any additional investments to those
investments which are necessary to preserve and protect the existing assets so
that they may be liquidated as soon as practical. Management believes that
divestiture of its present land investments may take several years, depending on
market conditions. Management will continue to monitor the net realizable
value of its real estate investments. At June 30, 1996, the Bank's investment
in and advances to subsidiaries engaged in land development was fully deducted
from core, tangible, and risk-based capital.
REAL ESTATE OWNED - increased approximately $130 thousand to $799 thousand at
June 30, 1996 from $669 thousand at December 31, 1995. The increase is due to
one property acquired through foreclosure during the first six months of 1996.
Real estate owned at June 30, 1996 is comprised of (i) three residential,
single-family homes, two of which are located within the Bank's primary lending
area of Burlington County and one located in New Hampshire (ii) one condominium,
which is located in Burlington County (iii) 18 acres of land in Burlington, NJ,
which is zoned for the construction of 109 townhouses. The Bank is currently
seeking buyers for all of these properties.
ASSET CLASSIFICATIONS - are monitored by management on a regular basis.
Classified assets generally consist of assets which have possible credit risk
and/or have a sufficient degree of risk or potential weakness to warrant
management's close attention. Total classified assets decreased $450 thousand
during the six months ended June 30, 1996 resulting from a decrease in one-to-
four family and commercial loans of $497 thousand and $81 thousand,
respectively, partially offset by an increase in real estate owned of $130
thousand. The following table sets forth information with respect to the Bank's
classified assets at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $ 2,004,716 $ 2,502,175
Commercial real estate 4,165,692 4,246,887
Consumer and other 4,323 6,133
Total loans 6,174,731 6,755,195
Real estate held for development, net 1,227,732 1,227,732
Real Estate Owned, net 799,092 668,792
Total Substandard 8,201,555 8,651,719
Doubtful loans 0 0
Total Doubtful 0 0
TOTAL CLASSIFIED ASSETS $ 8,201,555 $ 8,651,719
</TABLE>
DEPOSITS - increased $4.8 million to $433.6 million at June 30, 1996 from $428.8
million at December 31, 1995 which was the result of increases in savings
accounts of $3.1 million, non-interest checking accounts of $2.3 million and
certificates of deposit of $1.4 million. These increases were partially offset
by a decrease of $1.5 million in money market account balances. Interest
credited to depositors accounts for the six months ended June 30, 1996 amounted
to $7.1 million. The following table sets forth certain information concerning
deposits at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest checking $30,969,392 7.14% 0.00% $28,678,611 6.69% 0.00%
NOW accounts 43,964,376 10.14% 1.52% 44,442,958 10.36% 1.52%
Savings accounts 71,774,149 16.55% 2.59% 68,710,447 16.02% 2.59%
Money market accounts 56,009,490 12.92% 2.65% 57,493,882 13.41% 2.66%
Certificates 230,864,230 53.25% 5.30% 229,483,482 53.52% 5.21%
Total Deposits $433,581,637 100.00% 3.77% $428,809,380 100.00% 3.81%
</TABLE>
BORROWINGS - at June 30, 1996 amounted to $44.4 million. Borrowings included
$10.0 million of 10% Subordinated Debentures, $34.3 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 5.88%, and $149 thousand
in the guarantee of Employee Stock Ownership Plan debt. At December 31, 1995
borrowings consisted of $10.0 million of 10% Subordinated Debentures, $24.5
million in Federal Home Loan Bank Advances with a weighted average interest rate
of 5.96% and $182 thousand in the guarantee of Employee Stock Ownership Plan
debt.
STOCKHOLDERS' EQUITY - increased $1.3 million to $34.3 million at June 30, 1996,
primarily as a result of net income for the six months and a reduction in the
guarantee of Employee Stock Ownership Plan debt partially offset by the purchase
of treasury stock and the payment of cash dividends to stockholders. Shares
outstanding at June 30, 1996 decreased to 2,467,593 shares from 2,505,756 shares
at December 31, 1995, as 39,223 shares were repurchased and stock options for
1,060 shares were exercised during the six months ended June 30, 1996. The book
value per share at June 30, 1996 was $13.91 as compared to $13.19 at December
31, 1995. Options to purchase 85,541 shares at June 30, 1996 of the Company's
common stock were outstanding to certain directors, officers and employees.
There are three (3) standards that the Bank must satisfy in order to meet its
capital requirements. The requirements include a leverage ratio of core capital
to adjusted total assets of 3.0 percent, a tangible capital standard expressed
as 1.5 percent of total adjusted assets, and a risk-based capital standard set
at 8.0 percent of risk-weighted assets. If the Bank is not in compliance with
applicable capital standards, the Office of Thrift Supervision (OTS) can
restrict the Bank's asset growth, require the submission of a capital plan, and
require compliance with a capital directive, which may include restrictions on
the payment of dividends and compensation, and other restrictions determined to
be appropriate by the OTS. At June 30, 1996 the Bank exceeds all three current
capital requirements as the Bank's core, tangible, and risk-based capital ratios
were 7.49%, 7.49%, and 16.16%, respectively.
RESULTS OF OPERATIONS -
GENERAL
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 the provision for loan losses and real estate owned, non-interest
income, such as gains (losses) on sales of loans and investments, service
charges and other fees. In addition to interest expense, the Bank incurs
operating expenses such as salaries and employee benefits, deposit insurance
premiums, depreciation, occupancy and equipment expense and purchased services
expense.
The Corporation recorded net income for the three months ended June 30, 1996 of
$1.11 million, or .44 cents per share as compared to $1.13 million, or .44 cents
per share for the comparable period in 1995. Earnings for the six months ended
June 30, 1996 were $2.11 million, or .83 cents per share as compared to $2.29
million, or .89 cents per share for the comparable period in 1995.
DISPARITY IN INSURANCE PREMIUMS
Currently, the Bank pays an insurance premium to the Federal Deposit Insurance
Corporation ("FDIC") equal to .23% of its total deposits. Federal law
requires that the FDIC maintain the reserve level of each of the Savings
Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF") at
1.25% of insured deposits. Reserves are funded through payments by insured
institutions of insurance premiums. The BIF reached this level during 1995.
The FDIC reduced the insurance premiums to a range between 0.0% 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 of BIF members places SAIF members, such as the Bank, at a material
competitive disadvantage to BIF members. A disparity in insurance premiums
between those required for SAIF members, such as the Bank, and BIF members
allows BIF members 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.
On August 2, 1996, both the U.S. House of Representatives and the U.S. Senate
passed the Small Business Job Protection Act of 1996. This bill will, if signed
by the President, among other things, equalize the taxation of thrifts and
banks. Previously, thrifts had been able to deduct a portion of their bad-debt
reserves set aside to cover potential loan losses ("bad-debt reserves").
Furthermore, the bill will repeal current law mandating recapture of thrifts'
bad debt reserves if they convert to banks. Bad debt reserves set aside through
1987 will not be taxed, however, any reserves taken since January 1, 1988 will
be taxed over a six year period beginning in 1997. Institutions can delay these
taxes for two years if they meet a residential-lending test. The Bank has $1.0
million of post 1987 bad-debt reserves subject to taxation. Any recapture of
the Bank's bad-debt reserves will have an adverse effect on net income.
EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average number of
shares and common equivalent shares outstanding during the first six months of
1996. Primary and fully diluted earnings per share include the dilutive effect
of unexercised stock options.
INTEREST RATE SPREAD
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities. Net
interest income is affected by (i) the spread between the yield earned on
interest earning assets and the interest rates paid on interest-bearing savings
deposits and borrowings (liabilities), and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's
interest rate spread varies over time because money fund accounts and other
flexible rate accounts have become significant sources of savings deposits.
Income from investment securities and mortgage-backed securities depends upon
the amount invested during the period and the yields earned on such securities.
The yield on loans receivable changes principally as a result of existing
mortgage loan repayments, adjustable rate loan adjustments, sales and the
interest rates and volume of new mortgage loans.
The following table sets forth the Corporation's weighted-average yields on its
interest-earning assets, weighted-average interest rates paid on its interest-
bearing liabilities and weighted-average interest rate spreads for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Weighted-Average Yields Earned on:
Loans, net 8.04 % 8.18% 8.03% 8.13%
Mortgage-Backed Securities 6.91 6.60 6.84 6.44
Investment Securities 6.40 6.30 6.28 6.24
Total Interest-Earning Assets 7.49 7.56 7.46 7.48
Weighted-Average Interest Rates Paid on:
Deposits 3.99 3.96 4.04 3.82
Borrowings 5.89 5.41 5.88 5.24
Subordinated Debentures 10.56 10.56 10.56 10.40
Total Interest-Bearing Liabilities 4.27 4.15 4.31 4.01
Weighted-Average Interest Rate Spread
for the Period 3.22 % 3.40% 3.16% 3.47%
</TABLE>
AVERAGE BALANCE OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table sets forth the Corporation's average balance of interest-
earning assets in comparison to its average balance of interest-bearing
liabilities during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
(In Thousands) (In Thousands)
Average Interest-Earning Assets:
Loans, net $ 289,068 $ 288,774 $ 289,660 $ 288,207
Mortgage-Backed Securities 103,396 125,550 105,960 127,635
Investment Securities 89,506 47,288 83,258 43,234
Total 481,970 461,612 478,878 459,076
Average Interest-Bearing Liabilities:
Deposits 396,764 403,054 393,741 402,309
Borrowings 29,790 11,303 28,762 9,856
Subordinated Debentures 10,000 10,000 10,000 10,000
Total 436,554 424,357 432,503 422,165
Excess of Interest-Earning Assets
over Interest-Bearing Liabilities $ 45,416 $ 37,255 $ 46,375 $ 36,911
</TABLE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Corporation's interest income and interest expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume, (ii) changes in rate and (iii) total changes in rate and
volume (the combined effect of changes in both volume and rate, not separately
identified, has been allocated to rate).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 compared to 1995 1996 compared to 1995
Increase (Decrease) due to: Increase (Decrease) due to:
Rate Volume Total Rate Volume Total
<S> <C> <C> <C> <C> <C> <C>
(In Thousands) (In Thousands)
Interest income:
Loans receivable $ (99) $ 6 $ (93) $(134) $ 59 $ (75)
Mortgage-backed securities 79 (366) (287) 216 (698) (482)
Investment securities 21 665 686 16 1,249 1,265
Total change - interest income 1 305 306 98 610 708
Interest expense:
Deposits 31 (62) (31) 427 (164) 263
Borrowings 36 250 286 93 495 588
Subordinated Debentures 0 0 0 8 0 8
Total change - interest expense 67 188 255 528 331 859
Net change in net interest income $ (66) $ 117 $ 51 $(430) $ 279 $ (151)
</TABLE>
NET INTEREST INCOME - for the three months and six months ended June 30, 1996
amounted to $4.3 million and $8.5 million, respectively an increase of $51
thousand for the three months ended June 30, 1996 and a decrease of $151
thousand for the six months ended June 30, 1996 as compared to the same periods
during 1995. The increase for the quarter ended June 30, 1996 was primarily due
to an increase in interest income for investments of $686 thousand partially
offset by a decrease in interest income for mortgage-backed securities of $287
thousand and loans receivable of $93 thousand. The increase in interest income
of investments was due to an increase in the average balance of the investment
securities portfolio to $89.5 million for the quarter ended June 30, 1996 from
$47.3 million for 1995, which resulted in an increase in interest income of $665
thousand. The increase in the average balance was due to the net purchases
during the quarter of $11.2 million of U.S. agency notes and $3.0 million of
fixed rate CMO securities. Interest income on mortgage-backed securities
decreased $366 thousand from a decrease in the average balance to $103.4 million
at June 30, 1996 from $125.5 million at June 30, 1995, partially offset by an
increase in interest income of $79 thousand due to a 31 basis point increase in
the average yield to 6.91% during the second quarter of 1996 from the average
yield of 6.60% in the second quarter of 1995.
Interest expense on borrowings increased by $286 thousand for the quarter ended
June 30, 1996 due to a $18.5 million increase in the average balance, primarily
the result of increased borrowings at the Federal Home Loan Bank. The average
rate on borrowings increased to 5.89% at June 30, 1996 from 5.41% over the same
period in 1995, resulting in an increase in interest income of $36 thousand.
The increase in interest income for the six months ended June 30, 1996 of $708
thousand was primarily due to an increase in interest income on investment
securities partially offset by a decrease in interest income on mortgage-backed
securities and loans. The increase in interest income on investment securities
during the six months ended June 30, 1996 of $1.3 million was primarily due to
an increase in the average balance to $83.3 million at June 30, 1996 from $43.2
million at June 30, 1995, principally from increases in reverse repurchase
agreements of $7.1 million, CMO's of $8.0 million and U. S. Agency notes of
$11.2 million. The decrease in interest income on mortgage-backed securities
during the six months ended June 30, 1996 of $482 thousand was the result of a
decrease in the average balance of mortgage-backed securities of $21.7 million
to $105.9 million at June 30, 1996 from $127.6 million at June 30, 1995,
primarily from $24.4 million in principal paydowns.
The increase in interest expense on borrowings of $588 thousand during the first
six months of 1996 was due to an increase in the average balance of borrowings
to $28.8 million at June 30, 1996 from $9.9 million at June 30, 1995 and an
increase in the average rate to 5.88% at June 30, 1996 from 5.24% at June 30,
1995. The increase in interest expense on deposits of $263 thousand was a result
of a 64 basis point increase in the average rate to 5.88% at June 30, 1996 from
5.24% at June 30, 1995, partially offset by a decrease in the average balance to
$393.7 million at June 30, 1996 from $402.3 million at June 30, 1995.
PROVISION FOR LOAN LOSSES - for the three month and six month periods ended June
30, 1996 remained stable at $30 thousand and $60 thousand, respectively
compared to the same periods in 1995. The determination of the allowance level
for loan losses is based on management's analysis of the risk characteristics of
various classifications of loans, previous loan loss experience, estimated fair
value of the underlying collateral and current economic conditions. Accordingly,
there can be no assurance that future provisions for loans losses will not
increase or be necessary.
REAL ESTATE OWNED OPERATIONS, NET - for the three and six month periods ended
June 30, 1996 totaled $44 thousand and $89 thousand, respectively compared to
$48 thousand and $91 thousand for the same periods in 1995. The decreases are
due to lower REO expenses incurred during the three and six months ended June
30, 1996 as a result of the sale of certain REO properties during 1995.
OPERATING EXPENSES - for the three and six month periods ended June 30, 1996
amounted to $3.2 million and $6.3 million, respectively, as compared to $3.0
million and $5.9 million for the same periods in 1995.
SALARIES AND EMPLOYEE BENEFITS - for the three and six month periods ended June
30, 1996 were $1.8 million and $3.5 million, respectively, as compared to $1.6
million and $3.1 million for the same periods in 1995. Full time equivalent
employees at June 30, 1996 were 238 as compared to 205 at June 30, 1995.
OCCUPANCY AND EQUIPMENT - for the three and six month periods ended June 30,
1996 amounted to $610 thousand and $1.2 million, respectively, as compared to
$486 thousand and $978 thousand for the same periods in 1995. The increases are
the result of additional depreciation and occupation expenses on three new
branches opened since the second quarter of 1995 as well as other facility
improvements and equipment additions between the three and six month periods
ended June 30, 1996 and June 30, 1995.
PURCHASED SERVICES - for the three and six month periods ended June 30, 1996
amounted to $229 thousand and $440 thousand, respectively, as compared to $272
thousand and $525 thousand for the same periods in 1995. The decreases are due
to lower processing costs as a result of check processing which was brought in-
house during October 1995.
FEDERAL INSURANCE PREMIUM - for the three and six month periods ended June 30,
1996 amounted to $239 thousand and $469 thousand, respectively, as compared to
$244 thousand and $487 thousand for the same periods in 1995. The decreases are
the result of a decline in the average balance of deposits during the three and
six month periods ended June 30, 1996 compared to the same periods in 1995.
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 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 June 30, 1996 the Bank had $34.3 million in advances from the
Federal Home Loan Bank of New York. While loan payments, maturing investments
and mortgage-backed securities are a 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
is also included in the 5% requirement. These levels are changed from time to
time by the regulators to reflect current economic conditions. The Bank has
generally maintained liquidity in excess of required levels. The Bank's
regulatory liquidity was 12.25% and 10.63%, respectively, at June 30, 1996, and
December 31, 1995, respectively, and its short-term liquidity was 6.34% and
4.75%, respectively, at such dates.
PART II. OTHER INFORMATION
----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Changes in Securities
------- ---------------------
None
Item 3: Defaults Upon Senior Securities
------- -------------------------------
None
Item 4: Submission of Matters to Vote of Security of Holders
------- ----------------------------------------------------
None
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: August 14, 1996 /s/ Craig W. Yates
------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1996 /s/ Channing L. Smith
---------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
Exhibit No. 11 Statement re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Income $1,111,815 $1,128,870 $2,113,700 $2,293,322
Weighted average common shares outstanding 2,467,578 2,527,012 2,480,692 2,503,256
Common stock equivalents due to dilutive effect of stock options 56,347 61,988 56,786 61,134
Total weighted average common shares and equivalents outstanding 2,523,925 2,589,000 2,537,478 2,564,390
Primary earnings per share $0.44 $0.44 $0.83 $0.89
Total weighted average common shares and equivalents outstanding 2,523,925 2,589,000 2,537,478 2,564,390
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 - 2,066 - 2,920
Total outstanding shares for fully diluted earnings per share computation 2,523,925 2,591,066 2,537,478 2,567,310
Fully diluted earnings per share $0.44 $0.44 $0.83 $0.89
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,908
<INT-BEARING-DEPOSITS> 195
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,526
<INVESTMENTS-CARRYING> 169,572
<INVESTMENTS-MARKET> 168,470
<LOANS> 289,034
<ALLOWANCE> 2,786
<TOTAL-ASSETS> 517,943
<DEPOSITS> 433,582
<SHORT-TERM> 3,279
<LIABILITIES-OTHER> 2,306
<LONG-TERM> 44,450
0
0
<COMMON> 260
<OTHER-SE> 34,066
<TOTAL-LIABILITIES-AND-EQUITY> 517,943
<INTEREST-LOAN> 11,634
<INTEREST-INVEST> 6,240
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,874
<INTEREST-DEPOSIT> 7,945
<INTEREST-EXPENSE> 9,319
<INTEREST-INCOME-NET> 8,555
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 6,399
<INCOME-PRETAX> 3,166
<INCOME-PRE-EXTRAORDINARY> 2,114
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,114
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 3.58
<LOANS-NON> 3,617
<LOANS-PAST> 0
<LOANS-TROUBLED> 909
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,767
<CHARGE-OFFS> 41
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2,786
<ALLOWANCE-DOMESTIC> 2,786
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,304
</TABLE>
