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 March 31, 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 March 31, 1996 there were issued and outstanding 2,601,674 shares and
2,466,573 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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MARCH 31, 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
March 31, 1996 (unaudited) and December 31, 1995....1
Consolidated Statements of Income (unaudited)
for the three months ended
March 31, 1996 and March 31, 1995...................2
Consolidated Statements of Cash Flows (unaudited) for the
for the three months ended March 31, 1996
and March 31, 1995 .................................3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....4 - 14
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings.................................15
Item 2 - Changes in Securities.............................15
Item 3 - Defaults Upon Senior Securities...................15
Item 4 - Submission of Matters to a Vote of Security Holders..15
Item 5 - Other Information.................................15
Item 6 - Exhibits and Reports on Form 8-K..................15
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31,1996 December 31, 1995
(Unaudited)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $5,281,651 $9,804,770
Interest-bearing deposits 35,694 124,334
Short term funds 28,073 56,476
Total cash and cash equivalents 5,345,418 9,985,580
Investment securities held to maturity 62,854,213 43,564,913
Investment securities available for sale 20,826,653 22,767,981
Loans receivable - net 286,120,364 288,400,236
Mortgage-backed securities held to maturity 105,012,789 111,554,864
Accrued interest receivable:
Loans 1,770,636 1,749,652
Mortgage-backed securities 926,979 964,148
Investments 584,643 892,533
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 831,092 668,792
Office properties and equipment - net 12,866,902 12,773,479
Deferred income taxes 986,271 897,443
Excess cost over fair value of net assets acquired 916,698 997,505
Prepaid expenses and other assets 893,114 553,944
Subordinated Debentures issue cost - net 478,820 493,157
TOTAL ASSETS $505,700,424 $501,550,059
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $421,747,377 $428,809,380
Repurchase Agreements 1,990,000 0
Advances from the Federal Home Loan Bank 33,250,000 24,500,000
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 165,948 182,444
Advances by borrowers for taxes and insurance 2,169,266 2,093,130
Accrued interest payable 677,386 888,456
Dividends payable 123,379 125,288
Other liabilites 2,288,712 1,898,861
Total liabilities 472,412,068 468,497,559
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 2,601,674 and 2,601,634, and shares
outstanding 2,466,573 and 2,505,756 as of
March 31, 1996 and December 31, 1995, respectively 260,167 260,163
Paid-in capital in excess of par 8,408,991 8,408,840
Unrealized loss on securities available for (231,588) (236,154)
sale - net of deferred income taxes
Guarantee of employee stock ownership plan debt (165,948) (182,444)
Retained earnings - substantially restricted 26,830,372 25,951,864
Less: Treasury stock (135,101 and 95,878
shares, at cost, as of March 31, 1996 and
December 31, 1995, respectively) (1,813,638) (1,149,769)
Total stockholders' equity 33,288,356 33,052,500
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $505,700,424 $501,550,059
</TABLE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
1996 1995
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME:
Interest income on:
Loans $ 5,823,364 $ 5,804,439
Mortgage-backed securities 1,839,923 2,036,127
Investments 1,183,346 603,892
Total interest income 8,846,633 8,444,458
INTEREST EXPENSE:
Interest expense on:
Deposits 3,985,449 3,690,714
Subordinated Debentures 264,336 256,004
Borrowings 406,722 105,152
Total interest expense 4,656,507 4,051,870
NET INTEREST INCOME 4,190,126 4,392,588
PROVISION FOR LOAN LOSSES 30,000 30,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,160,126 4,362,588
OTHER INCOME (EXPENSE):
Loan service charges and other fees 57,460 64,244
Gain on sale of investment securities 3,030 0
Real estate owned operations, net (45,278) (42,630)
Service charges on accounts 438,252 355,187
Other income 43,665 61,461
Total other income (expense) 497,129 438,262
OPERATING EXPENSES:
Salaries and employee benefits 1,665,972 1,588,552
Occupancy and equipment 622,049 492,561
Purchased services 211,048 252,425
Federal deposit insurance premiums 229,770 243,525
Professional fees 67,346 97,071
Advertising 6,337 6,249
Other 285,702 287,191
Total operating expenses 3,088,224 2,967,574
INCOME BEFORE INCOME TAXES 1,569,031 1,833,276
INCOME TAXES:
Current 658,541 667,927
Deferred (91,395) 896
Total income taxes 567,146 668,823
NET INCOME $ 1,001,885 $ 1,164,453
EARNINGS PER COMMON SHARE: $ 0.39 $ 0.45
Weighted average common shares and
common stock equivalents outstanding 2,557,749 2,567,668
</TABLE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
1996 1995
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,001,885 $ 1,164,453
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 30,000 30,000
Depreciation and amortization 439,223 432,605
Provision for real estate owned 33,000 70,000
Realized (gains) and losses on:
Sale of loans and loans held for sale (182) (93)
Sale of investments available for sale (3,030) 0
Disposal and sale of fixed assets 1,814 0
Sale of real estate owned 0 (37,766)
Decrease in accrued interest receivable 324,075 139,657
(Increase) Decrease in prepaid expenses and other assets (324,833) 189,217
Decrease in accrued interest payable (211,070) (284,409)
Increase in other liabilities 389,851 469,693
Deferred income taxes (91,396) (61,435)
Net cash provided by operating activities 1,589,337 2,111,922
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 118,202 118,716
Real estate owned 0 217,395
Office property and equipment 0 3,836
Proceeds from maturities of investment securities held to maturity 47,443,432 0
Proceeds from maturities of investment securities available for sale 8,226,414 0
Principal collected on mortgage-backed securities 7,490,096 4,483,645
Principal collected on longer-term loans, net 12,626,787 7,810,942
Longer-term loans originated or acquired, net (10,643,466) (9,440,683)
Purchase of investment securities and mortgage-backed
securities held to maturity (66,730,867) (14,820)
Purchase of investment securities available for sale (7,353,575) 0
Purchase of Federal Home Loan Bank stock 0 (329,700)
Purchase of office property and equipment (371,653) (191,538)
Net cash (used) provided by investing (9,194,630) 2,657,793
activities
FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts (2,561,149) (7,004,117)
Net (decrease) increase in time deposits (4,500,854) 2,975,337
Net increase (decrease) in FHLB advances 8,750,000 (4,820,000)
Increase in Repurchase Agreements 1,990,000 0
Increase in advances from borrowers for taxes and insurance 76,136 149,296
Purchase of treasury stock (663,869) (248,411)
Dividends paid on common stock (125,288) 0
Net proceeds from issuance of common stock 155 18,600
Net cash provided (used) by financing 2,965,131 (8,929,295)
activities
DECREASE IN CASH AND CASH EQUIVALENTS (4,640,162) (4,159,580)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,985,580 11,380,545
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,345,418 $ 7,220,965
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 4,867,577 $ 4,336,279
Income taxes 302,228 208,743
Non cash investing and financing activities:
Dividends declared and not paid at quarter end 123,379 124,959
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 THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 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 March 31, 1996 were $505.7 million as compared with total
assets at December 31, 1995 of $501.6 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased to $62.8 million at March 31,
1996 from $43.6 million at December 31, 1995 due to the purchase of $14.1
million in Reverse Repurchase Agreements during the three month period.
Investment securities held to maturity at March 31, 1996 consisted entirely of
fixed rate securities. A comparison of cost and approximate market values of
investment securities held to maturity as of March 31, 1996 and December 31,
1995 follows:
<TABLE>
<CAPTION>
March 31, 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 $39,280,744 $5,110 $(620,609) $38,665,245 $34,086,243 $34,109,989
Reverse Repurchase 23,100,000 0 0 23,100,000 9,000,000 9,000,000
Municipal bonds 458,469 0 (111) 458,358 463,670 464,117
U. S. Treasury 15,000 0 (1,000) 14,000 15,000 14,000
Total $62,854,213 $5,110 $(621,720) $62,237,603 $43,564,913 $43,588,106
</TABLE>
INVESTMENT SECURITIES AVAILABLE FOR SALE - decreased to $20.8 million at March
31, 1996 from $22.8 million at December 31, 1995 as a result of the call of $8.2
million of U.S. Agencies available for sale as well as $1.0 million of
principal paydowns on CMO's and Remic's, partially offset by the purchase of
$5.0 million of CMO's and $2.3 million of U.S. Agency notes. Investment
securities available for sale at March 31, 1996 consisted of $8.9 million in
adjustable rate securities and $11.9 million in fixed rate securities. A
comparison of cost and approximate market values of investment securities
available for sale as of March 31, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
March 31, 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 $3,000,000 $ 0 $ (85,000) $ 2,915,000 $ 8,000,000 $ 7,927,500
U. S. Treasury 1,983,995 3,745 0 1,987,740 1,979,408 1,980,000
CMO's 9,748,542 17,954 (92,329) 9,674,167 5,520,407 5,484,799
REMIC's 6,408,236 0 (253,530) 6,154,706 7,589,420 7,291,202
Common Stock 50,000 45,040 0 95,040 50,000 84,480
Total $ 21,190,773 $66,739 $(430,859) $20,826,653 $23,139,235 $22,767,981
</TABLE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - decreased $2.3 million to $286.1
million at March 31, 1996 from $288.4 million at December 31, 1995. During the
three months ended March 31, 1996, approximately $12.6 million of principal was
collected on loans, which was partially offset by $10.6 million of loans
originated. 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
Loans Receivable March 31, 1996 December 31, 1995
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<S> <C> <C>
Mortgage loans ( 1-4 dwelling) $246,064,146 $249,278,288
Construction loans 2,194,002 4,063,081
Consumer loans 4,405,969 4,336,346
Commercial real estate 35,436,849 34,721,212
Commercial business 2,562,957 1,779,051
Subtotal 290,663,923 294,177,978
Less:
Loans in process 752,699 1,947,301
Deferred loan fees 1,034,942 1,063,662
Allowance for possible
loan losses 2,755,918 2,766,779
Net Loans Receivable $286,120,364 $288,400,236
</TABLE>
<TABLE>
<CAPTION>
Table 2
Impaired Loans March 31, 1996 December 31, 1995
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<S> <C> <C>
Impaired Loans-non-accrual:
Mortgage loans:
One-to-four family $2,467,480 $2,502,175
Commercial real estate 1,668,831 1,603,524
Consumer and other 5,699 6,133
Total impaired non-accrual loans $4,142,010 $4,111,832
Other impaired loans 349,736 353,736
Total impaired loans $4,491,746 $4,465,568
</TABLE>
At March 31, 1996, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS #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 $372 thousand and $2.5 million of loans
that were collectively measured for impairment with a valuation allowance of
$136 thousand. For the three months ended March 31, 1996, the average recorded
investment in impaired loans was approximately $4.5 million. The Bank recognized
$38 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 March 31, 1996, representing approximately 67% of non-accrual loans
and 1% of total loans.
As of March 31, 1996 the Bank had outstanding loan commitments of $24.0 million,
of which $3.0 million represented fixed rate loans and $21.0 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 $6.5 million to $105.0 million at March
31, 1996 from $111.5 million at December 31, 1995. The decrease is the result
of $6.4 million in principal repayments. Mortgage-backed securities at March 31,
1996 consisted of $42.7 million in adjustable rate securities and $62.3 million
in fixed rate securities. Mortgage-backed securities at March 31, 1996 and
December 31, 1995 are summarized below:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
Gross Gross Estimated Estimated
Amortized Unrealized Unreaized Market Amortized Market
Cost Gains Losses Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
GNMA $14,608,171 $377,921 $(32,335) $14,953,757 $15,225,124 $15,651,030
FNMA 39,194,019 357,574 (257,443) 39,294,150 41,506,743 41,949,904
FHLMC 50,511,069 1,012,461 (117,461) 51,406,069 54,039,337 55,223,487
Private 699,530 0 (28,754) 670,776 783,660 780,379
Total $105,012,789 $1,747,956 $(435,993) $106,324,752 $111,554,864 $113,604,800
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - remained stable at $1.2 million at March 31,
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 March 31, 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 $162 thousand to $831 thousand at
March 31, 1996 from $669 thousand at December 31, 1995. The increase is due to
one property acquired through foreclosure during the first three months of 1996.
Real estate owned at March 31, 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 $140 thousand
during the three months ended March 31, 1996 resulting from a decrease in
commercial and one-to-four family loans of $267 thousand and $35 thousand,
respectively, partially offset by an increase in real estate owned of $162
thousand. The following table sets forth information with respect to the Bank's
classified assets at the dates indicated:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $2,467,480 $2,502,175
Commercial real estate 3,979,950 4,246,887
Consumer and other 5,699 6,133
Total loans 6,453,129 6,755,195
Real estate held for development, net 1,227,732 1,227,732
Real Estate Owned, net 831,092 668,792
Total Substandard 8,511,953 8,651,719
Doubtful loans 0 0
Total Doubtful 0 0
TOTAL CLASSIFIED ASSETS $8,511,953 $8,651,719
</TABLE>
DEPOSITS - decreased $7.1 million to $421.7 million at March 31, 1996 from
$428.8 million at December 31, 1995 primarily due to a decline in certificates
of deposit of $4.5 million and the withdrawal of $3.0 million in checking
account balances. This decrease was partially offset by an increase of $2.0
million in savings accounts. Interest credited to depositors accounts for the
three months ended March 31, 1996 amounted to $4.0 million. The following table
set forth certain information concerning deposits at the dates indicated:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1996
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 $26,977,813 6.40% 0.00% $28,678,611 6.69% 0.00%
NOW accounts 43,085,723 10.22% 1.52% 44,442,958 10.36% 1.52%
Savings accounts 70,713,081 16.77% 2.59% 68,710,447 16.02% 2.59%
Money market 55,988,132 13.27% 2.65% 57,493,882 13.41% 2.66%
Certificates 224,982,628 53.34% 5.33% 229,483,482 53.52% 5.21%
Total Deposits $421,747,377 100.00% 3.81% $428,809,380 100.00% 3.81%
</TABLE>
BORROWINGS - at March 31, 1996 amounted to $45.4 million. Borrowings included
$10.0 million of 10% Subordinated Debentures, $33.2 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 5.88%, $2.0 million in
Repurchase Agreements with a rate of 5.60%, and $166 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 $236 thousand to $33.3 million at March 31,
1996, primarily as a result of net income for the three months and a reduction
in the guarantee of Employee Stock Ownership Plan debt partially offset by the
purchase of treasury stock. Shares outstanding at March 31, 1996 decreased to
2,466,573 shares from 2,505,756 shares at December 31, 1995, as 39,223 shares
were repurchased and 40 in stock options were exercised during the three months
ended March 31, 1996. At March 31, 1996 the book value per share was $13.50 as
compared to $13.19 at December 31, 1995. At March 31, 1996, options to purchase
94,283 shares of the Company's common stock were outstanding to directors,
certain officers and employees.
There are three (3) standards that a savings association must satisfy in order
to meet its capital requirements. The requirements include a leverage ratio of
core capital to adjusted total assets of 3.0 percent, a tangible capital
standard expressed as 1.5 percent of total adjusted assets, and a risk-based
capital standard set at 8.0 percent of risk-weighted assets. If a savings
association is not in compliance with applicable capital standards, the Office
of Thrift Supervision (OTS) can restrict the association's asset growth, require
the submission of a capital plan, and require compliance with a capital
directive, which may include restrictions on the payment of dividends and
compensation, and other restrictions determined to be appropriate by the OTS.
At March 31, 1996 the Bank exceeds all three current capital requirements as the
Bank's core, tangible, and risk-based capital ratios were 7.41%, 7.41%, and
15.62%, 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 March 31, 1996 of
$1.00 million, or 39 cents per share as compared to $1.16 million, or 45 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.
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 three 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 Bank's weighted-average yields on its
interest-earning assets, weighted-average interest rates paid on its interest-
bearing liabilities and weighted-average interest rate spreads for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Weighted-Average Yields Earned on:
Loans, net 8.02% 8.07%
Mortgage-Backed Securities 6.78 6.28
Investment Securities 6.22 6.33
Total Interest-Earning Assets 7.45 7.41
Weighted-Average Interest Rates Paid on:
Deposits 3.80 3.48
Borrowings 7.11 7.84
Total Interest-Bearing Liabilities 4.07 3.66
Weighted-Average Interest Rate Spread
for the Period 3.38% 3.75%
</TABLE>
AVERAGE BALANCE OF INTEREST-EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table sets forth the Bank's average balance of interest-earning
assets in comparison to its average balance of interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
(In Thousands)
<S> <C> <C>
Average Interest-Earning Assets
Earning Assets:
Loans, net $290,253 $287,646
Mortgage-Backed Securities 108,524 129,742
Investment Securities 76,018 38,141
Total 474,795 455,529
Average Interest-Bearing Liabilities
Deposits 419,908 423,863
Borrowings 37,732 18,421
Total 457,640 442,284
Excess of Interest-Earning Assets
over Interest-Bearing Liabilites $ 17,155 $ 13,245
</TABLE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest 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
March 31, 1996 compared to 1995
Increase (Decrease) due to:
Rate Volume Total
(In Thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable $(34) $ 53 $ 19
Mortgage-backed securities 137 (333) (196)
Investment securities (21) 600 579
Total change - interest income 82 320 402
Interest expense:
Deposits 328 (34) 294
Borrowings (68) 378 310
Total change - interest expense 260 344 604
Net change in net interest income $(178) $(24) $(202)
</TABLE>
NET INTEREST INCOME - the decrease in net interest income for the three months
ended March 31, 1996 of $202 thousand was primarily due to an increase in
interest expense of $604 thousand, partially offset by an increase in interest
income of $402 thousand. Interest income on investment securities increased
$579 thousand as a result of increases in the average balance of the investment
securities portfolio to $76.0 million at March 31, 1996 from $38.1 million at
March 31, 1995. This increase was due to the net purchases of $23.3 million of
U.S. Government Agency and Treasury Notes and $23.1 million of Reverse
Repurchase Agreements since March 31, 1995. Interest income on mortgage-backed
securities decreased a total of $196 thousand principally due to a decrease in
the average balance to $108.5 million at March 31, 1996 from $129.7 million at
March 31, 1995, which resulted in a volume decrease in interest income of $333
thousand. This was partially offset by an increase in the average yield on
mortgage-backed securities to 6.78% at March 31, 1996 from 6.28% at March 31,
1995, which resulted in an increase in income of $137 thousand from the change
in yields.
The increase in interest expense of $604 million was due to an increase in
interest expense on deposits and borrowings. The increased interest expense on
deposits of $294 thousand was due to an increase in the average rate by 32 basis
points to 3.80%, partially offset by a decline in the average balance of
deposits. The increase in interest expense on borrowings of $310 thousand was
primarily due to an increase in the average balance to $37.7 million at March
31, 1996 from $18.4 million at March 31, 1995. This is primarily the result of
increased borrowing at the Federal Home Loan Bank.
PROVISION FOR LOAN LOSSES - for the first quarter of 1996 remained stable at $30
thousand, compared to the first quarter of 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 first quarter of 1996 totaled $45
thousand of expense as compared to $43 thousand of expense for the same period
in 1995. The increase is primarily the result of lower rental income received
during the first quarter of 1996 due to the sale of certain properties which
were providing rental income during 1995.
OPERATING EXPENSES - for the first quarter of 1996 amounted to $3.1 million, as
compared to $3.0 million for the same period in 1995.
SALARIES AND EMPLOYEE BENEFITS - for the first quarter of 1996 were $1.7
million, as compared to $1.6 million for the same period in 1995. Full time
equivalent employees at March 31, 1996 were 214 as compared to 204 at March 31,
1995.
OCCUPANCY AND EQUIPMENT - for the first quarter of 1996 amounted to $622
thousand, as compared to $493 thousand for the same period of 1995. The increase
is the result of additional depreciation and occupation expenses on the new
branches opened since the first quarter of 1995 as well as other facility
improvements and equipment additions between the quarters ended March 31, 1995
and March 31, 1996.
PURCHASED SERVICES - for the first quarter of 1996 amounted to $211 thousand,
compared to $252 thousand for the same period in 1995. The decrease is due to
lower processing costs as a result of check processing which was brought in-
house during October 1995.
FEDERAL INSURANCE PREMIUM - amounted to $230 thousand in the first quarter of
1996, as compared to $243 thousand for the same period in 1995. The decrease is
the result of a decline in the average balance of deposits.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits, and other cash outflows in a cost effective manner. The Bank's
primary sources of funds are deposits and scheduled amortization and prepayments
of loan principal. To a lesser extent, the Bank obtains funds from sales and
maturities of mortgage-backed securities, investment securities, and short-term
investments and borrowings. During the past several years, the Bank has used
such funds primarily to meet ongoing commitments to fund maturing time deposits
and saving withdrawals, fund existing and continuing loan commitments and to
maintain liquidity. While loan payments, maturing investments and mortgage-
backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank's liquidity is also influenced by the level
of demand for funding loan originations.
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid investments", which include certain United States government
and federal agency obligations and other approved investments. Regulations
currently in effect require the Bank to maintain liquid assets of not less than
5% of its net withdrawable accounts plus short-term borrowings. Short-term
liquid assets must consist of not less than 1% of such accounts and borrowings,
which is also included in the 5% requirement. These levels are changed from
time to time by the OTS to reflect current economic conditions. The Bank has
generally maintained liquidity in excess of required levels. The Bank's
regulatory liquidity was 12.79% and 10.63%, respectively, at March 31, 1996, and
December 31, 1995, respectively, and its short-term liquidity was 7.56% 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
------- --------------------------------
None
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: May 14, 1996 /s/ Craig W. Yates
------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1996 /s/ Channing L. Smith
---------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
<TABLE>
<CAPTION>
Exhibit No. 11 Statement re: Computation of Per Share Earnings
3/31/96 3/31/95
<S> <C> <C>
Net Income $1,001,885 $1,164,453
Weighted average common shares outstanding 2,493,805 2,507,316
Common stock equivalents due to dilutive effect of stock options 63,944 60,352
Total weighted average common shares and equivalents outstanding 2,557,749 2,567,668
Primary earnings per share $.39 $.45
Total weighted average common shares and equivalents outstanding 2,557,749 2,567,668
Additional dilutive shares using the higher of the end of the
period market value or average market value for the period when
utilizing the treasury stock method regarding stock options 0 408
Total outstanding shares for fully diluted earnings per share
computation 2,557,749 2,568,076
Fully diluted earnings per share $.39 $.45
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,282
<INT-BEARING-DEPOSITS> 64
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,827
<INVESTMENTS-CARRYING> 167,867
<INVESTMENTS-MARKET> 168,563
<LOANS> 286,120
<ALLOWANCE> 2,756
<TOTAL-ASSETS> 505,700
<DEPOSITS> 421,747
<SHORT-TERM> 4,959
<LIABILITIES-OTHER> 2,289
<LONG-TERM> 43,416
<COMMON> 260
0
0
<OTHER-SE> 33,028
<TOTAL-LIABILITIES-AND-EQUITY> 505,700
<INTEREST-LOAN> 5,823
<INTEREST-INVEST> 3,023
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,846
<INTEREST-DEPOSIT> 3,985
<INTEREST-EXPENSE> 4,656
<INTEREST-INCOME-NET> 4,190
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 286
<INCOME-PRETAX> 1,569
<INCOME-PRE-EXTRAORDINARY> 1,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,002
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 3.54
<LOANS-NON> 4,142
<LOANS-PAST> 0
<LOANS-TROUBLED> 630
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,767
<CHARGE-OFFS> 41
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,756
<ALLOWANCE-DOMESTIC> 2,756
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,248
</TABLE>
