SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
For the quarterly period ended September 30, 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
- ---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Sunset and Salem Roads, Burlington, New Jersey 08016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- ---
As of September 30, 1996 there were issued and outstanding 2,602,864 shares
and 2,467,763 shares, respectively of the registrant's Common Stock, par value
$.10 per share.
<PAGE>1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
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QUARTERLY REPORT ON FORM 10-Q
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SEPTEMBER 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
September 30, 1996 (unaudited) and December 31, 1995........1
Consolidated Statements of Income (unaudited)
for the three and nine month periods ended
September 30, 1996 and September 30, 1995...................2
Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1996
and September 30, 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
<PAGE>2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 December 31, 1995
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and amounts due from depository institutions $ 3,075,633 $ 9,804,770
Interest-bearing deposits 89,925 124,334
Federal funds sold 500,000 0
Short term funds 47,377 56,476
Total cash and cash equivalents 3,712,935 9,985,580
Investment securities held to maturity 46,354,893 43,564,913
Investment securities available for sale 28,654,192 22,767,981
Loans receivable - net 303,162,472 288,400,236
Mortgage-backed securities held to maturity 109,276,466 111,554,864
Accrued interest receivable:
Loans 1,888,223 1,749,652
Mortgage-backed securities 933,743 964,148
Investments 842,736 892,533
Federal Home Loan Bank stock 3,620,600 4,058,100
Real estate held for development - net 1,227,732 1,227,732
Real estate owned - net 732,190 668,792
Office properties and equipment - net 14,419,633 12,773,479
Deferred income taxes 1,401,146 897,443
Excess cost over fair value of net assets acquired 755,085 997,505
Prepaid expenses and other assets 1,107,315 553,944
Subordinated Debentures issue cost - net 450,146 493,157
TOTAL ASSETS $ 518,539,507 $ 501,550,059
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 438,702,154 $ 428,809,380
Advances from the Federal Home Loan Bank 28,750,000 24,500,000
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 132,958 182,444
Advances by borrowers for taxes and insurance 2,044,773 2,093,130
Accrued interest payable 649,630 888,456
Dividends payable 123,388 125,288
Other liabilities 4,310,252 1,898,861
Total liabilities 484,713,155 468,497,559
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 2,602,864 and 2,601,634, and shares outstanding 2,467,763 and
2,505,756 as of September 30, 1996 and December 31, 1995, respectively 260,286 260,163
Paid-in capital in excess of par 8,413,482 8,408,840
Unrealized loss on securities available for sale - net of deferred income taxes (126,414) (236,154)
Guarantee of employee stock ownership plan debt (132,958) (182,444)
Retained earnings - substantially restricted 27,225,594 25,951,864
Less: Treasury stock (135,101 and 95,878 shares, at cost, as of
September 30, 1996 and December 31, 1995, respectively) (1,813,638) (1,149,769)
Total stockholders' equity 33,826,352 33,052,500
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 518,539,507 $ 501,550,059
</TABLE>
<PAGE>3
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME: (UNAUDITED)
Interest income on:
Loans $ 5,969,092 $ 5,920,260 $ 17,603,438 $ 17,628,852
Mortgage-backed securities 1,954,922 2,005,781 5,580,583 6,114,250
Investments 1,490,492 1,087,221 4,104,703 2,435,959
Total interest income 9,414,506 9,013,262 27,288,724 26,179,061
INTEREST EXPENSE:
Interest expense on:
Deposits 4,114,686 4,131,025 12,060,153 11,812,929
Subordinated Debentures 264,336 264,338 793,010 784,677
Borrowings 454,636 395,586 1,299,953 653,171
Total interest expense 4,833,658 4,790,949 14,153,116 13,250,777
NET INTEREST INCOME 4,580,848 4,222,313 13,135,608 12,928,284
PROVISION FOR LOAN LOSSES 30,000 30,000 90,000 90,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,550,848 4,192,313 13,045,608 12,838,284
OTHER INCOME (EXPENSE):
Loan service charges and other fees 51,132 69,298 169,054 213,763
Gain on sale of loans 3,610 3,233 4,587 8,419
Gain on sale of investment securities 0 0 3,030 0
Real estate owned operations, net (45,314) (42,875) (134,567) (133,622)
Service charges on accounts 501,723 388,598 1,385,104 1,115,286
Other income 90,541 39,898 155,749 138,014
Total other income (expense) 601,692 458,152 1,582,957 1,341,860
OPERATING EXPENSES:
Salaries and employee benefits 1,786,922 1,566,121 5,239,170 4,709,063
Occupancy and equipment 635,259 512,479 1,867,775 1,490,787
Purchased services 241,423 273,271 681,089 798,112
Federal deposit insurance premiums 235,554 241,893 704,667 728,943
SAIF recapitalization assessment 2,720,765 0 2,720,765 0
Professional fees 70,119 96,508 202,980 290,650
Advertising 10,627 6,111 24,014 19,150
Other 306,684 296,923 877,101 885,461
Total operating expenses 6,007,353 2,993,306 12,317,561 8,922,166
INCOME (LOSS) BEFORE INCOME TAXES (854,813) 1,657,159 2,311,004 5,257,978
INCOME TAXES:
Current (23,683) 631,343 1,291,851 2,038,627
Deferred (361,306) (31,629) (624,723) (131,417)
Total income taxes (384,989) 599,714 667,128 1,907,210
NET INCOME (LOSS) $ (469,824) $ 1,057,445 $ 1,643,876 $ 3,350,768
EARNINGS (LOSS) PER COMMON SHARE: $ (0.19) $ 0.41 $ 0.65 $ 1.31
Weighted average common shares and
common stock equivalents outstanding 2,532,198 2,568,540 2,530,032 2,561,480
</TABLE>
<PAGE>4
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES: (Unaudited)
Net income $ 1,643,876 $ 3,350,768
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 90,000 90,000
Depreciation and amortization 1,221,825 1,189,168
Provision for real estate owned 101,608 291,012
Realized (gains) and losses on:
Sale of loans and loans held for sale (4,587) (8,419)
Sale of investments available for sale (3,030) 0
Disposal of fixed assets 6,230 3,836
Sale of real estate owned (2,608) (184,788)
Proceeds from sale of loans held for sale 0 150,874
Loans originated for sale 0 (150,000)
Increase in accrued interest receivable (58,369) (450,107)
(Increase) Decrease in prepaid expenses and other assets (294,618) 121,786
Decrease in accrued interest payable (238,826) (184,087)
Increase in other liabilities 2,411,391 567,070
Deferred income taxes (565,379) (53,485)
Net cash provided by operating activities 4,307,513 4,733,628
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 630,531 717,512
Real estate owned 254,435 440,742
Office property and equipment 1,500 0
Proceeds from maturities of investment securities held to maturity 140,966,318 28,534,803
Proceeds from maturities and sales of investment securities available for sale 9,226,415 1,550,000
Principal collected on mortgage-backed securities 25,689,031 14,591,876
Principal collected on longer-term loans, net 40,307,584 28,777,012
Longer-term loans originated or acquired, net (56,075,846) (34,027,907)
Purchase of investment securities and mortgage-backed securities held to maturity (161,262,646) (38,763,614)
Purchase of investment securities available for sale (21,158,580) (19,786,398)
Redemption (Purchase) of Federal Home Loan Bank stock 437,500 (329,700)
Purchase of office property and equipment (2,659,667) (1,779,512)
Net cash used by investing activities (23,643,425) (20,075,186)
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 6,882,497 (15,791,785)
Net increase in time deposits 3,010,277 8,850,020
Net increase in FHLB advances 4,250,000 14,680,000
Decrease in advances from borrowers for taxes and insurance (48,357) (115,668)
Purchase of treasury stock (663,869) (249,219)
Dividends paid on common stock (372,046) (249,925)
Net proceeds from issuance of common stock 4,765 44,307
Net cash provided by financing activities 13,063,267 7,167,730
DECREASE IN CASH AND CASH EQUIVALENTS (6,272,645) (8,173,828)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,985,580 11,380,545
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,712,935 $ 3,206,717
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 14,391,942 $ 13,434,864
Income taxes 1,647,476 1,826,591
Non cash investing and financing activities:
Dividends declared and not paid at quarter end 123,388 125,288
Non-monetary transfers from loans to real estate acquired
through foreclosure 416,833 56,527
</TABLE>
<PAGE>5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 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 nine months ended September 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.
<PAGE>6
FINANCIAL CONDITION -
TOTAL ASSETS - at September 30, 1996 were $518.5 million as compared with total
assets at December 31, 1995 of $501.6 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased to $46.4 million at September
30, 1996 from $43.6 million at December 31, 1995 due to the purchase of $21.8
million in U.S. Government agency notes partially offset by the redemption of
$10.6 million in U.S. Government agency notes and a $6.7 million decrease in
reverse repurchase agreements. Investment securities held to maturity at
September 30, 1996 consisted entirely of fixed rate securities. A comparison of
cost and approximate market values of investment securities held to maturity as
of September 30, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
September 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 $ 43,283,737 $ 11,205 $ (996,005) $ 42,298,937 $ 34,086,243 $ 34,109,989
Reverse Repurchase 2,300,000 0 0 2,300,000 9,000,000 9,000,000
Municipal bonds 756,156 3,129 0 759,285 463,670 464,117
U. S. Treasury 15,000 0 (1,000) 14,000 15,000 14,000
Total $ 46,354,893 $ 14,334 $ (997,005) $ 45,372,222 $ 43,564,913 $ 43,588,106
</TABLE>
INVESTMENT SECURITIES AVAILABLE FOR SALE - increased to $28.7 million at
September 30, 1996 from $22.8 million at December 31, 1995 from the purchase of
$12.3 million of U.S. Government agency notes and $8.8 million of CMO's,
partially offset by the call of $8.3 million in U.S. Agency notes and principal
paydowns on CMO's and REMIC's of $5.8 million and $425 thousand, respectively.
Investment securities available for sale at September 30, 1996 consisted of
$20.2 million in fixed rate securities and $8.5 million in adjustable rate
securities. A comparison of cost and approximate market values of investment
securities available for sale as of September 30, 1996 and December 31, 1995
follows:
<TABLE>
<CAPTION>
September 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 $ 11,998,673 $ 28,306 $ (35,417) $ 11,991,562 $ 8,000,000 $ 7,927,500
U. S. Treasury 1,993,170 910 0 1,994,080 1,979,408 1,980,000
CMO's 8,572,944 28,012 (75,801) 8,525,155 5,520,407 5,484,799
REMIC's 6,239,241 0 (197,222) 6,042,019 7,589,420 7,291,202
Common Stock 50,000 51,376 0 101,376 50,000 84,480
Total $ 28,854,028 $ 108,604 $(308,440) $ 28,654,192 $ 23,139,235 $ 22,767,981
</TABLE>
<PAGE>7
LOANS RECEIVABLE AND LOANS HELD FOR SALE - increased $14.8 million to $303.2
million at September 30, 1996 from $288.4 million at December 31, 1995. The
Bank purchased $14.5 million of adjustable rate mortgage loans during the third
quarter of 1996 with an average yield of 7.18%. These loans were purchased from
First Tennessee Bank and are residential loans on properties primarily located
within the Bank's lending area of Burlington County. During the nine months
ended September 30, 1996, approximately $56.1 million of loans were originated
and acquired which were partially offset by $40.3 million of principal collected
on 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 September 30, December 31,
Loans Receivable 1996 1995
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<S> <C> <C>
Mortgage loans ( 1-4 dwelling) $ 257,183,991 $ 249,278,288
Commercial real estate 37,090,947 34,721,212
Commercial construction 4,386,192 0
Construction loans 5,648,622 4,063,081
Consumer loans 4,055,661 4,336,346
Commercial business 1,548,317 1,779,051
Subtotal 309,913,730 294,177,978
Less:
Loans in process 2,880,093 1,947,301
Deferred loan fees 1,101,577 1,063,662
Allowance for possible
loan losses 2,769,588 2,766,779
Net Loans Receivable $ 303,162,472 $ 288,400,236
Table 2 September 30, December 31,
Impaired Loans 1996 1995
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Impaired loans - non-accrual:
Mortgage loans:
One-to-four family $ 2,142,674 $ 2,502,175
Commercial real estate 1,430,108 1,603,524
Consumer and other 4,113 6,133
Total impaired non-accrual loans $ 3,576,895 $ 4,111,832
Other impaired loans 0 353,736
Total impaired loans $ 3,576,895 $ 4,465,568
</TABLE>
At September 30, 1996, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS #114 and #118 totaled $3.6 million of
which $1.6 million related to loans that were individually measured for
impairment with a valuation allowance of $266 thousand and $2.0 million of loans
that were collectively measured for impairment with a valuation allowance of
$106 thousand. For the nine months ended September 30, 1996, the average
recorded investment in impaired loans was approximately $4.2 million and the
Bank recognized $188 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 September 30, 1996, representing approximately 78%
of non-accrual loans and .90% of total loans.
<PAGE>8
As of September 30, 1996 the Bank had outstanding loan commitments of $26.0
million, of which $5.3 million represented fixed rate loans and $20.7 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 $2.2 million to $109.3 million at
September 30, 1996 from $111.5 million at December 31, 1995. The decrease is
the result of $19.6 million in principal repayments, partially offset by
purchases of $17.4 million during the period. Mortgage-backed securities at
September 30, 1996 consisted of $72.3 million in fixed rate securities and $37.0
million in adjustable rate securities. Mortgage-backed securities at September
30, 1996 and December 31, 1995 are summarized below:
<TABLE>
<CAPTION>
September 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 $ 23,950,037 $ 414,771 $ 40,492 $ 24,405,300 $ 15,225,124 $ 15,651,030
FNMA 39,301,645 234,888 (354,438) 39,182,095 41,506,743 41,949,904
FHLMC 45,422,861 689,877 (150,861) 45,961,877 54,039,337 55,223,487
Private 601,923 4,461 0 606,384 783,660 780,379
Total $ 109,276,466 $ 1,343,997 $ (464,807) $ 110,155,656 $ 111,554,864 $ 113,604,800
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - remained stable at $1.2 million at September
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 September 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 $63 thousand to $732 thousand at
September 30, 1996 from $669 thousand at December 31, 1995. The increase is due
to four properties acquired through foreclosure or deed in lieu of foreclosure,
partially offset by the sale of two properties during the first nine months of
1996. Real estate owned at September 30, 1996 is comprised of (i) two
residential, single-family homes, one is located within the Bank's primary
lending area of Burlington County and one is located in Trenton, NJ, (ii) two
condominiums, which are located in Burlington County, (iii) one commercial
condominium located in Burlington County and (iv) approximately 19 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.
<PAGE>9
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 $570 thousand
during the nine months ended September 30, 1996 resulting from a decrease in
classified one-to-four family, loans of $360 thousand and commercial loans of
$272 thousand, partially offset by an increase in real estate owned of $63
thousand. The following table sets forth information with respect to the Bank's
classified assets at the dated indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $2,142,674 $2,502,175
Commercial real estate 3,974,829 4,246,887
Consumer and other 4,113 6,133
Total loans 6,121,616 6,755,195
Real estate held for development, net 1,227,732 1,227,732
Real Estate Owned, net 732,190 668,792
Total Substandard 8,081,538 8,651,719
Doubtful loans 0 0
Total Doubtful 0 0
TOTAL CLASSIFIED ASSETS $8,081,538 $8,651,719
</TABLE>
DEPOSITS - increased $9.9 million to $438.7 million at September 30, 1996 from
$428.8 million at December 31, 1995 which was the result of increases in non-
interest checking accounts of $7.0 million, certificates of deposit of $3.0
million and savings accounts of $939 thousand, partially offset by a decrease in
money market accounts of $719 thousand and in NOW accounts of $334 thousand.
Interest credited to depositors accounts for the nine months ended September 30,
1996 amounted to $10.8 million. The following table sets forth certain
information concerning deposits at the dates indicated:
<TABLE>
<CAPTION>
September 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 $ 35,675,327 8.13% 0.00% $ 28,678,611 6.69% 0.00%
NOW accounts 44,109,163 10.05% 1.62% 44,442,958 10.36% 1.52%
Savings accounts 69,649,263 15.88% 2.56% 68,710,447 16.02% 2.59%
Money market accounts 56,774,642 12.94% 2.60% 57,493,882 13.41% 2.66%
Certificates 232,493,759 53.00% 5.30% 229,483,482 53.52% 5.21%
Total Deposits $438,702,154 100.00% 3.76% $428,809,380 100.00% 3.81%
</TABLE>
<PAGE>10
BORROWINGS - at September 30, 1996 amounted to $38.9 million. Borrowings
included $10.0 million of 10% Subordinated Debentures, $28.8 million in Federal
Home Loan Bank Advances with a weighted average interest rate of 5.94% and $133
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 $774 thousand to $33.8 million at September 30,
1996, primarily as a result of net income for nine months of $1.6 million, a
reduction in the unrealized loss on securities available for sale of $110
thousand and a reduction in the guarantee of Employee Stock Ownership Plan debt
of $49 thousand, partially offset by the purchase of $664 thousand of treasury
stock and payment of cash dividends to stockholders of $370 thousand. Shares
outstanding at September 30, 1996 decreased to 2,467,763 shares from 2,505,756
shares at December 31, 1995, as 39,223 shares were repurchased and stock options
for 1,230 shares were exercised during the nine months ended September 30, 1996.
The book value per share at September 30, 1996 was $13.71 as compared to $13.19
at December 31, 1995. Options to purchase 82,371 shares at September 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 September 30, 1996 the Bank exceeds all three
current capital requirements as the Bank's core, tangible, and risk-based
capital ratios were 7.29%, 7.29%, and 16.11%, 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 a net loss for the three months ended September 30,
1996 of $470 thousand, or .19 cents per share as compared to the net income of
$1.1 million, or .41 cents per share for the comparable period in 1995. The net
loss was a result of the SAIF recapitalization assessment of $2.7 million during
the quarter ended September 30, 1996. Earnings for the nine months ended
September 30, 1996 were $1.6 million, or .65 cents per share as compared to $3.4
million, or $1.31 per share for the comparable period in 1995.
<PAGE>11
EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average number of
shares and common equivalent shares outstanding during the first nine months of
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 market 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Weighted-Average Yields Earned on:
Loans, net 8.04% 8.17% 8.07% 8.14%
Mortgage-Backed Securities 7.10 6.62 6.93 6.50
Investment Securities 6.76 6.52 6.43 6.35
Total Interest-Earning Assets 7.60 7.55 7.53 7.50
Weighted-Average Interest Rates Paid on:
Deposits 3.75 3.89 3.76 3.75
Borrowings 5.99 5.97 5.92 5.63
Subordinated Debentures 10.56 10.56 10.56 10.47
Total Interest-Bearing Liabilities 4.03 4.15 4.05 3.97
Weighted-Average Interest Rate Spread
for the Period 3.57% 3.40% 3.48% 3.53%
</TABLE>
<PAGE>12
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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
(In Thousands) (In Thousands)
Average Interest-Earning Assets:
Loans, net $ 297,028 $ 289,931 $ 290,823 $ 288,792
Mortgage-Backed Securities 110,098 121,175 107,348 125,463
Investment Securities 88,199 66,661 85,088 51,133
Total 495,325 477,767 483,259 465,388
Average Interest-Bearing Liabilities:
Deposits 439,089 425,279 427,154 419,952
Borrowings 30,403 26,487 29,313 15,456
Subordinated Debentures 10,000 10,000 10,000 10,000
Total 479,492 461,766 466,467 445,408
Excess of Interest-Earning Assets
over Interest-Bearing Liabilities $ 15,833 $ 16,001 $ 16,792 $ 19,980
</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 Nine Months Ended
September 30, September 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 $ (96) $ 145 $ 49 $ (150) $ 124 $ (26)
Mortgage-backed securities 132 (183) (51) 349 (883) (534)
Investment securities 51 352 403 51 1,618 1,669
Total change - interest income 87 314 401 250 859 1,109
Interest expense:
Deposits (150) 134 (16) 44 203 247
Borrowings 0 59 59 63 585 648
Subordinated Debentures 0 0 0 7 0 7
Total change - interest expense (150) 193 43 114 788 902
Net change in net interest income $ 237 $ 121 $ 358 $ 136 $ 71 $ 207
</TABLE>
<PAGE>13
NET INTEREST INCOME - for the three months and nine months ended September 30,
1996 amounted to $4.6 million and $13.1 million, respectively, an increase of
$358 thousand and $207 thousand compared to the same period in 1995. The
increase for the quarter ended September 30, 1996 was primarily due to an
increase in interest income for investments of $403 thousand and loans
receivable of $49 thousand partially offset by a decrease in interest income for
mortgage-backed securities of $51 thousand.
The increase in interest income of investments was due to an increase in the
average balance of the investment securities portfolio of $21.5 million to $88.2
million for the quarter ended September 30, 1996 from $66.7 million for same
period in 1995, which resulted in an increase in interest income of $352
thousand. The average balance increase was due to the net purchases during the
quarter of $5 million of U.S. agency notes and $19.2 million of reverse
repurchase agreements.
Interest income on loans increased $49 thousand during the quarter ended
September 30, 1996. The increase is due to the purchase of $14.5 million of
adjustable rate mortgage loans during the third quarter of 1996 with an average
yield of 7.18%, which resulted in a volume increase of interest income of $145
thousand. The interest income volume increase was partially offset by a $96
thousand average yield decrease as the yield on the loan portfolio decreased to
8.04% for the quarter ended September 30, 1996 from 8.17% at September 30, 1995.
Interest income on mortgage-backed securities decreased $51 thousand from a
decrease in the average balance to $110.1 million at September 30, 1996 from
$121.2 million at September 30, 1995, partially offset by an increase in
interest income of $132 thousand due to a 48 basis point increase in the average
yield to 7.10% during the third quarter of 1996 from the average yield of 6.62%
in the third quarter of 1995.
Interest expense on borrowings increased by $59 thousand for the quarter ended
September 30, 1996 primarily due to a $3.9 million increase in the average
balance from increased borrowings at the Federal Home Loan Bank.
The increase in interest income for the nine months ended September 30, 1996 of
$207 thousand was primarily the result of 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 nine months ended September 30, 1996 of $1.7
million was primarily due to an increase in the average balance to $85.1 million
at September 30, 1996 from $51.1 million at September 30, 1995, principally from
the net purchases in U.S. Agency notes of $7.2 million, CMO's of $4.4 million,
and reverse repurchase agreements of $2.3 million. The decrease in interest
income on mortgage-backed securities during the nine months ended September 30,
1996 of $534 thousand was the result of a decrease in the average balance of
mortgage-backed securities of $18.1 million to $107.3 million at September 30,
1996 from $125.5 million at September 30, 1995, due to $19.5 million of
principal paydowns during the nine months ended September 30, 1996.
The increase in interest expense on borrowings of $648 thousand during the first
nine months of 1996 was due to an increase in the average balance of borrowings
to $29.3 million at September 30, 1996 from $15.5 million at September 30, 1995
which resulted in an increase in interest expense of $585 thousand as well as an
increase in the average rate to 5.92% at September 30, 1996 from 5.63% at
September 30, 1995. The increase in interest expense on deposits of $247
thousand was a result of a increase in the average balance to $427.2 million at
September 30, 1996 from $419.2 million at September 30, 1995 which resulted in
an increase in interest expense of $223 thousand.
<PAGE>14
PROVISION FOR LOAN LOSSES - for the three month and nine month periods ended
September 30, 1996 remained stable at $30 thousand and $90 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 loan losses will not increase or be necessary.
REAL ESTATE OWNED OPERATIONS, NET - for the three and nine month periods ended
September 30, 1996 totaled $45 thousand and $135 thousand, respectively compared
to $43 thousand and $134 thousand for the same periods in 1995.
OPERATING EXPENSES - for the three and nine month periods ended September 30,
1996 amounted to $6.0 million and $12.3 million, respectively, as compared to
$3.0 million and $8.9 million for the same periods in 1995. The increase is the
result of the SAIF recapitalization of $2.7 million during the quarter ended
September 30, 1996.
SALARIES AND EMPLOYEE BENEFITS - for the three and nine month periods ended
September 30, 1996 were $1.8 million and $5.2 million, respectively, as compared
to $1.6 million and $4.7 million for the same periods in 1995. Full time
equivalent employees at September 30, 1996 were 250 as compared to 211 at
September 30, 1995.
OCCUPANCY AND EQUIPMENT - for the three and nine month periods ended September
30, 1996 amounted to $635 thousand and $1.9 million, respectively, as compared
to $512 thousand and $1.5 million for the same periods in 1995. Three new
branches were opened since the third quarter of 1995 which resulted in
additional depreciation and occupation expenses as well as other facility
improvements and equipment additions which were incurred between the three and
nine month periods ended September 30, 1996 and September 30, 1995.
PURCHASED SERVICES - for the three and nine month periods ended September 30,
1996 amounted to $241 thousand and $681 thousand, respectively, as compared to
$273 thousand and $798 thousand for the same periods in 1995. The decreases are
due to lower processing costs as a result bringing our check processing in-house
during October 1995.
SAIF RECAPITALIZATION ASSESSMENT - the recently enacted Deposit Insurance Fund
Act of 1996 calls for a special assessment on the Savings Association Insurance
Fund's ("SAIF'') assessable deposits to capitalize the SAIF. The special
assessment of $2.7 million was charged to operating expenses during the quarter
ended September 30, 1996 and will be paid on November 27, 1996.
SUBSEQUENT EVENTS - on October 25, 1996, the Corporation repurchased 13,227
shares of its Common Stock for a purchase price of approximately $213 thousand
in a single, privately negotiated transaction.
<PAGE>15
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 September 30, 1996 the Bank had $28.8 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 origination's.
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 8.06% and 10.63%, respectively, at September 30, 1996,
and December 31, 1995, respectively, and its short-term liquidity was 2.22% and
4.75%, respectively, at such dates.
<PAGE>16
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
<PAGE>17
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: November 14, 1996 /s/ Craig W. Yates
------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1996 /s/ Channing L. Smith
---------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>18
EXHIBIT NO. 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Income ($469,824) $1,057,445 $1,643,876 $3,350,768
Weighted average common shares outstanding 2,467,058 2,504,986 2,476,114 2,503,840
Common stock equivalents due to dilutive effect of stock options 65,140 63,554 53,918 57,640
Total weighted average common shares and equivalents outstanding 2,532,198 2,568,540 2,530,032 2,561,480
Primary earnings per share ($0.19) $0.41 $0.65 $1.31
Total weighted average common shares and equivalents outstanding 2,532,198 2,568,540 2,530,032 2,561,480
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 - 434 - 6,348
Total outstanding shares for fully diluted earnings per share computation 2,532,198 2,568,974 2,530,032 2,567,828
Fully diluted earnings per share ($0.19) $0.41 $0.65 $1.30
<PAGE>19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3076
<INT-BEARING-DEPOSITS> 137
<FED-FUNDS-SOLD> 500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28654
<INVESTMENTS-CARRYING> 155631
<INVESTMENTS-MARKET> 155528
<LOANS> 305932
<ALLOWANCE> 2770
<TOTAL-ASSETS> 518540
<DEPOSITS> 438702
<SHORT-TERM> 2818
<LIABILITIES-OTHER> 4310
<LONG-TERM> 38884
0
0
<COMMON> 260
<OTHER-SE> 33566
<TOTAL-LIABILITIES-AND-EQUITY> 518540
<INTEREST-LOAN> 17604
<INTEREST-INVEST> 9685
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 27289
<INTEREST-DEPOSIT> 12060
<INTEREST-EXPENSE> 14153
<INTEREST-INCOME-NET> 13136
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 12452
<INCOME-PRETAX> 2311
<INCOME-PRE-EXTRAORDINARY> 1644
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1644
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 3.48
<LOANS-NON> 3577
<LOANS-PAST> 0
<LOANS-TROUBLED> 562
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2767
<CHARGE-OFFS> 97
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2770
<ALLOWANCE-DOMESTIC> 2770
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2397
</TABLE>
