SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
OR
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
(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, 1997 there were issued and outstanding 2,604,220 shares
and 2,387,766 shares, respectively of the registrant's Common Stock, par value
$.10 per share.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1997 (unaudited) and December 31, 1996....1
Consolidated Statements of Income (unaudited)
for the three and nine month periods ended
September 30, 1997 and September 30, 1996...............2
Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1997
and September 30, 1996.................................3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.....4 - 16
PART II - OTHER INFORMATION
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
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 4,507,906 $ 9,572,347
Interest-bearing deposits 483,651 296,702
Federal funds Sold 3,000,000 0
Short term funds 86,185 50,500
----------- ------------
Total cash and cash equivalents 8,077,742 9,919,549
Investment securities held to maturity 88,001,956 67,601,343
Investment securities and mortgage-backed securities
available for sale 59,259,207 25,446,520
Loans receivable -net 307,077,818 306,870,816
Mortgage-backed securities held to maturity 90,594,330 104,312,581
Accrued interest receivable:
Loans 1,908,970 1,754,117
Mortgage-backed securities 1,003,350 912,599
Investments 1,262,692 964,319
Federal Home Loan Bank stock 3,630,800 3,620,600
Real estate held for development - net 1,177,732 1,227,732
Real estate owned - net 446,926 621,556
Office properties and equipment - net 15,385,503 14,756,238
Deferred income taxes 1,754,074 1,563,480
Excess cost over fair value of net assets acquired 549,431 812,599
Prepaid expenses and other assets 1,136,702 889,899
Subordinated Debentures issue cost - net 392,799 435,809
------------- -------------
TOTAL ASSETS $ 581,660,032 $ 541,709,757
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 477,943,279 $ 453,276,534
Advances from the Federal Home Loan Bank 29,950,000 32,550,000
Securities sold under agreements to repurchase 20,000,000 0
Advances from Bank 0 6,691,758
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 56,977 106,463
Advances by borrowers for taxes and insurance 2,221,823 2,138,638
Accrued interest payable 655,941 860,545
Dividends payable 167,144 119,636
Other liabilities 2,936,271 2,140,009
------------ ------------
Total liabilities 543,931,435 507,883,583
------------ ------------
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 2,604,220 and 2,602,884 and
shares outstanding 2,387,766 and 2,392,707
as of September 30, 1997 and December 31, 1996, respectively 260,422 260,288
Paid-in capital in excess of par 8,418,601 8,413,558
Unrealized gain (loss) on securities available for sale - net
of deferred income taxes 15,769 (166,152)
Guarantee of employee stock ownership plan debt (56,977) (106,463)
Retained earnings 32,281,103 28,487,903
Less: Treasury stock (216,454 and 210,177 shares, at cost,
as of September 30, 1997 and December 31, 1996, respectively) (3,190,321) (3,062,960)
------------- ------------
Total stockholders' equity 37,728,597 33,826,174
------------- ------------
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 581,660,032 $ 541,709,757
=============== ===============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME: (UNAUDITED) (UNAUDITED)
Interest income on:
Loans $ 6,339,240 $ 5,969,092 $ 18,808,847 $ 17,603,438
Mortgage-backed securities 1,746,548 1,954,922 5,402,540 5,580,583
Investments 2,180,988 1,490,492 5,879,755 4,104,703
----------- ----------- ----------- -------------
Total interest income 10,266,776 9,414,506 30,091,142 27,288,724
----------- ----------- ----------- -------------
INTEREST EXPENSE:
Interest expense on:
Deposits 4,512,703 4,114,686 13,215,868 12,060,153
Subordinated Debentures 264,337 264,336 793,011 793,010
Borrowings 406,766 454,636 1,245,510 1,299,953
----------- ---------- ---------- ----------
Total interest expense 5,183,806 4,833,658 15,254,389 14,153,116
----------- ---------- ---------- ----------
NET INTEREST INCOME 5,082,970 4,580,848 14,836,753 13,135,608
PROVISION FOR LOAN LOSSES 60,000 30,000 140,000 90,000
----------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,022,970 4,550,848 14,696,753 13,045,608
----------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 49,513 51,132 149,805 169,054
Gain on sale of loans 6,704 3,610 8,955 4,587
Gain on sale of investment securities 0 0 0 3,030
Loss from real estate held for
development (50,000) 0 (50,000) 0
Real estate owned operations, net (43,815) (45,314) (129,857) (134,567)
Service charges on accounts 554,778 501,723 1,648,235 1,385,104
Other income 25,328 90,541 66,304 155,749
---------- ---------- ---------- ---------
Total other income (expense) 542,508 601,692 1,693,442 1,582,957
---------- ---------- ---------- ---------
OPERATING EXPENSES:
Salaries and employee benefits 1,898,500 1,786,922 5,601,097 5,239,170
Occupancy and equipment 696,500 635,259 2,027,064 1,867,775
Purchased services 287,488 241,423 779,071 681,089
Federal deposit insurance premiums 72,616 235,554 159,941 704,667
SAIF recapitalization assessment 0 2,720,765 0 2,720,765
Professional fees 70,863 70,119 222,408 202,980
Advertising 42,368 10,627 83,717 24,014
Other 316,090 306,684 935,989 877,101
---------- ---------- ---------- ----------
Total operating expenses 3,384,425 6,007,353 9,809,287 12,317,561
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,181,053 (854,813) 6,580,908 2,311,004
INCOME TAXES:
Current 937,693 (23,683) 2,674,701 1,291,851
Deferred (150,623) (361,306) (292,837) (624,723)
---------- --------- --------- ---------
Total income taxes 787,070 (384,989) 2,381,864 667,128
---------- --------- --------- ---------
NET INCOME $ 1,393,983 $ (469,824) $ 4,199,044 $ 1,643,876
========== ========= =========== ==========
EARNINGS PER COMMON SHARE: $ 0.57 $ (0.19) $ 1.72 $ 0.65
========== ========== =========== ============
Weighted average common shares and
common stock equivalents outstanding 2,449,568 2,532,198 2,447,587 2,530,032
========== ========== ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
<S> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 4,199,044 $ 1,643,876
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 140,000 90,000
Depreciation and amortization 1,343,794 1,221,825
Provision for real estate owned 109,630 101,608
Provision for real estate held for development 50,000 0
Realized (gains) and losses on:
Sale of loans and loans held for sale (8,955) (4,587)
Sale of investment securities available for sale 0 (3,030)
Disposal of fixed assets 7,122 6,230
Sale of real estate owned (10,630) (2,608)
Proceeds from sale of loans held for sale 101,625 0
Loans originated for sale (100,000) 0
Increase in accrued interest receivable (543,977) (58,369)
Increase in prepaid expenses and other assets (246,803) (294,618)
Decrease in accrued interest payable (204,604) (238,826)
Increase in other liabilities 796,262 2,411,391
Deferred income taxes (292,838) (565,379)
---------- ---------
Net cash provided by operating activities 5,341,951 4,307,513
---------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 850,425 630,531
Real estate owned 75,630 254,435
Office property and equipment 0 1,500
Proceeds from maturities of investment securities held to
maturity 157,830,112 140,966,318
Proceeds from maturities of investment securities available
for sale 7,500,000 9,226,415
Principal collected on mortgage-backed securities 22,329,690 25,689,031
Principal collected on longer-term loans, net 38,094,034 40,307,584
Longer-term loans originated or acquired, net (39,254,506) (56,075,846)
Purchase of investment securities and mortgage-backed
securities held to maturity (180,562,014) (161,262,646)
Purchase of investment securities and mortgage-backed
securities available for sale (47,531,779) (21,158,580)
(Purchase) Redemption of Federal Home Loan Bank stock (10,200) 437,500
Purchase of office property and equipment (1,480,521) (2,659,667)
------------- -------------
Net cash used by investing activities (42,161,410) (23,643,425)
------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 14,650,282 6,882,497
Net increase in time deposits 3,324,705 3,010,277
Net (decrease) increase in FHLB advances (2,600,000) 4,250,000
Increase in securities sold under agreement to repurchase 20,000,000 0
Increase (Decrease) in advances from borrowers for taxes
and insurance 83,185 (48,357)
Purchase of treasury stock (127,361) (663,869)
Dividends paid on common stock (358,336) (372,046)
Net proceeds from issuance of common stock 5,177 4,765
------------ -------------
Net cash provided by financing activities 34,977,652 13,063,267
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,841,807) (6,272,645)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,919,549 9,985,580
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,077,742 $ 3,712,935
============ =============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 15,458,993 $ 14,391,942
Income taxes 2,578,575 1,647,476
Non cash investing and financing activities:
Dividends declared and not paid at quarter end 167,144 123,388
Non-monetary transfers from loans to real estate acquired
through foreclosure 0 416,833
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
General
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,
1997 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>
FINANCIAL CONDITION -
TOTAL ASSETS - at September 30, 1997 were $581.7 million as compared with total
assets at December 31, 1996 of $541.7 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased $20.4 million to $88.0
million at September 30, 1997 from $67.6 million at December 31, 1996 due to the
increase of $13.1 million in U.S. Agency notes, $2.3 million in municipal bonds
and $5.0 million in reverse repurchase agreements during the nine months ended
September 30, 1997. Investment securities held to maturity at September 30, 1997
consisted entirely of fixed rate securities. A comparison of cost and
approximate market values of investment securities held to maturity as of
September 30, 1997 and December 31, 1996 follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 December 31, 1996
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 $ 59,851,052 $ 73,087 $ (229,319) $ 59,694,820 $ 46,791,618 $ 46,155,606
Reverse Repurchase 25,000,000 0 0 25,000,000 20,000,000 20,000,000
Municipal bonds 3,135,904 10,361 0 3,146,265 794,725 800,433
U. S. Treasury 15,000 0 (1,000) 14,000 15,000 14,000
------------ -------- ----------- ------------ ------------ ------------
Total $ 88,001,956 $ 83,448 $ (230,319) $ 87,855,085 $ 67,601,343 $ 66,970,039
============ ======== =========== ============ ============ ============
</TABLE>
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE -
increased $33.9 million to $59.3 million at September 30, 1997 from $25.4
million at December 31, 1996 as a result of the purchase of $33.1 million of
CMOs, $7.4 million of U.S. Agency notes, $4.9 million of REMICs and $2.0 million
of MBSs, partially offset by $7.5 million of U.S. Treasury and U.S. Agency notes
matured and $6.4 million of principal paydowns on CMOs, REMICs and MBSs during
the nine months ended September 30, 1997. Investments available for sale
consisted of $7.9 million in adjustable rate securities and $51.4 million in
fixed rate securities at September 30, 1997. A comparison of cost and
approximate market values of investment securities available for sale as of
September 30, 1997 and December 31, 1996 follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 December 31, 1996
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 $ 6,850,000 $ 3,195 $ (4,100) $ 6,849,095 $ 5,000,000 $ 4,996,960
U.S. Treasury 0 0 0 0 1,997,757 1,998,560
CMOs 40,063,328 181,696 (25,125) 40,219,899 12,683,603 12,621,499
REMICs 10,608,105 15,504 (165,334) 10,458,275 6,027,067 5,829,501
MBS 1,715,516 16,422 0 1,731,938 0 0
------------ ---------- ---------- ------------ ------------ ------------
Total $ 59,236,949 $ 216,817 $ (194,559) $ 59,259,207 $ 25,708,427 $ 25,446,520
============ ========== =========== ============ ============ ============
</TABLE>
<PAGE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - increased $207 thousand to $307.1
million at September 30, 1997 from $306.9 million at December 31, 1996. This
increase was the result of approximately $39.3 million of loans originated,
partially offset by $38.1 million of principal collected on loans during the
nine months ended September 30, 1997. 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,
1997 1996
<S> <C> <C>
Mortgage loans ( 1-4 dwelling) $ 257,002,629 $ 257,607,922
Construction loans 2,969,247 3,711,666
Commercial construction 1,506,954 4,394,901
Consumer loans 3,581,830 4,015,403
Commercial real estate 44,363,995 39,177,194
Commercial business 1,543,842 1,829,956
------------- ------------
Subtotal 310,968,497 310,737,042
------------- ------------
Less:
Deferred loan fees 979,636 1,084,289
Allowance for possible
loan losses 2,911,043 2,781,937
------------- ------------
Net Loans Receivable $ 307,077,818 $ 306,870,816
============= =============
Table 2 SEPTEMBER 30, December 31,
Impaired Loans 1997 1996
Impaired loans - non-accrual:
Mortgage loans:
One-to-four family $ 2,183,671 $ 2,413,409
Commercial real estate 1,377,455 1,662,727
Consumer and other 21,873 14,546
------------- -------------
Total impaired loans $ 3,582,999 $ 4,090,682
============= =============
</TABLE>
At September 30, 1997, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $3.6 million of
which $1.9 million related to loans that were individually measured for
impairment with a valuation allowance of $361 thousand and $1.7 million of loans
that were collectively measured for impairment with a valuation allowance of $86
thousand. For the nine months ended September 30, 1997, the average recorded
investment in impaired loans was approximately $3.6 million. The Bank
recognized $134 thousand of interest income on impaired loans, all of which was
recognized on the cash basis. The Bank had $2.9 million in total reserves for
possible loan losses at September 30, 1997, representing approximately 80% of
non-accrual loans and 0.9% of total loans.
As of September 30, 1997 the Bank had outstanding loan commitments of $5.2
million, of which $1.3 million represented variable rate loans and $3.9 million
represented fixed rate loans. The Bank intends to fund these commitments
through scheduled amortization of loans and mortgage-backed securities,
additional borrowings and if necessary the sale of investment securities
available for sale.
<PAGE>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY - decreased $13.7 million to $90.6
million at September 30, 1997 from $104.3 million at December 31, 1996. The
decrease is the result of $15.9 million in principal repayments, partially
offset by the purchase of $2.2 million in FHLMC and GNMA fixed rate securities.
Mortgage-backed securities at September 30, 1997 consisted of $61.8 million in
fixed rate securities and $28.8 million in adjustable rate securities. Mortgage-
backed securities held to maturity at September 30, 1997 and December 31, 1996
are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 December 31, 1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED Amortized Estimated
COST GAINS LOSSES MARKET VALUE Cost Market
Value
<S> <C> <C> <C> <C> <C> <C>
GNMA $ 21,754,917 $ 827,685 $ (12,494) $ 22,570,108 $ 23,216,175 $ 23,744,319
FNMA 32,388,080 362,079 (116,078) 32,634,081 37,958,391 38,022,335
FHLMC 36,004,335 831,525 (90,331) 36,745,529 42,586,038 43,233,784
Private 446,998 3,533 (1,209) 449,322 551,977 558,018
------------ ----------- --------- ---------- ------------ ------------
Total $ 90,594,330 $ 2,024,822 $ (220,112 $ 92,399,040 $ 104,312,581 $ 105,558,456
============ ============ ========= =========== ============= =============
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - decreased $50 thousand to $1.2 million at
September 30, 1997, compared to December 31, 1996. During the quarter ended
September 30, 1997, the Bank recorded an additional $50 thousand provision on
the real estate held for development. The losses were reflected as a charge in
the other income section of the consolidated statements of operations. The Bank
has ceased making any new investments in real estate held for development
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, 1997, 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 - consisted of properties with a net book value of $447
thousand. These properties are carried at the lower of book value or fair
market value less estimated costs to sell and are analyzed by management on a
periodic basis. Real estate owned at September 30, 1997 is comprised of (i) 18
acres of land which is zoned for the construction of 109 townhouses, (ii) one
residential condominium and (iii) one commercial condominium located in
Burlington County. The Bank is currently seeking buyers for all of these
properties.
<PAGE>
ASSET CLASSIFICATIONS - are monitored by management on a regular basis.
Classified assets generally consist of assets which have possible credit risk
and/or have a sufficient degree of risk or potential weakness to warrant
management's close attention. Total classified assets increased $426 thousand
during the nine months ended September 30, 1997 resulting from an increase in
commercial real estate of $607 thousand, partially offset by a decrease in real
estate owned of $175 thousand. The increase in classified assets was primarily
from the result of a recent OTS examination and consist mostly of commercial
real estate loans past their stated balloon maturity dates. Management has
initiated a program to review and extend the term of these loans. The following
table sets forth information with respect to the Bank's classified assets at the
dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $2,412,540 $2,413,409
Commercial real estate 4,549,028 3,941,540
Consumer and other 21,873 14,546
----------- ----------
Total loans 6,983,441 6,369,495
Real estate held for development, net 1,177,732 1,227,732
Real Estate Owned, net 446,926 621,556
----------- ----------
Total Substandard 8,608,099 8,218,783
----------- ----------
Doubtful loans 0 0
----------- ----------
Total Doubtful 0 0
----------- ----------
Loss - Commercial Real Estate 36,760 0
----------- ----------
Total Loss 36,760 0
----------- ----------
TOTAL CLASSIFIED ASSETS $8,644,859 $8,218,783
=========== ==========
</TABLE>
DEPOSITS - increased $24.6 million to $477.9 million at September 30, 1997 from
$453.3 million at December 31, 1996 as a result of an increase in saving
accounts of $9.6 million, non-interest checking accounts of $6.7 million,
certificate of deposits of $3.3 million, interest bearing checking accounts of
$2.5 million and money market accounts of $2.5 million. Savings accounts
increased primarily due to the acquisition of $6.7 million in custodian trust
accounts. Non-interest checking accounts increased due to the promotion of
``Free Personal'' and ``Free Business'' checking accounts. Interest credited to
depositors accounts for the nine months ended September 30, 1997 amounted to
$11.8 million. The following table set forth certain information concerning
deposits at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 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 $44,203,564 9.25% 0.00% $37,552,269 8.28% 0.00%
Checking accounts 49,300,012 10.32% 1.72% 46,750,659 10.31% 1.57%
Savings accounts 80,659,519 16.88% 2.84% 71,057,835 15.68% 2.57%
Money market accounts 59,501,057 12.45% 2.66% 56,961,349 12.57% 2.65%
Certificates 244,279,127 51.10% 5.36% 240,954,422 53.16% 5.30%
------------- ------ ------ ----------- ------ -----
Total Deposits $477,943,279 100.00% 3.72% $453,276,534 100.00% 3.77%
============= ====== ====== =========== ====== =====
</TABLE>
<PAGE>
BORROWINGS - at September 30, 1997 amounted to $40.0 million. Borrowings
included $10.0 million of 10% Subordinated Debentures, $30.0 million in Federal
Home Loan Bank Advances with a weighted average interest rate of 6.12% and $57
thousand in the guarantee of Employee Stock Ownership Plan debt. At
December 31, 1996 borrowings consisted of $10.0 million of 10% Subordinated
Debentures, $32.6 million in Federal Home Loan Bank Advances with a weighted
average interest rate of 6.09% and $106 thousand in the guarantee of Employee
Stock Ownership Plan debt.
SECURITIES SOLD UNDER THE AGREEMENTS TO REPURCHASE - increased $20.0 million.
This borrowing has an interest rate of 5.79% and a term of 5 years with a call
feature after the third year.
STOCKHOLDERS' EQUITY - increased $3.9 million to $37.7 million at September 30,
1997, primarily as a result of net income for the nine months and a reduction in
the unrealized loss on securities available for sale and the guarantee of
Employee Stock Ownership Plan debt, partially offset by the purchase of treasury
stock. Shares outstanding at September 30, 1997 decreased to 2,387,766 shares
from 2,392,707 shares at December 31, 1996, as 6,277 shares were repurchased and
stock options for 1,336 shares were exercised during the nine months ended
September 30, 1997. At September 30, 1997 the book value per share was $15.80
as compared to $14.14 at December 31, 1996. Options to purchase 78,815 shares of
the Company's common stock were outstanding to directors, certain officers and
employees at September 30, 1997.
There are three (3) standards that a 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 requirement
of 1.5 percent of total adjusted assets, and a risk-based capital standard set
at 8.0 percent of risk-weighted assets. 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, if the Bank is not in compliance with the
applicable capital standards. At September 30, 1997 the Bank exceeded all three
current capital requirements as the Bank's core, tangible, and risk-based
capital ratios were 7.51%, 7.51%, and 16.23%, respectively.
<PAGE>
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 September 30,
1997 of $1.4 million, or $.57 per share as compared to a net loss of ($470)
thousand, or ($.19) per share for the comparable period in 1996. The net loss
during the quarter ended September 30, 1996 was a result of the one-time SAIF
recapitalization assessment of $2.7 million. Earnings for the nine months ended
September 30, 1997 were $4.2 million, or $1.72 per share as compared to $1.6
million, or $.65 per share for the comparable period in 1996.
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
1997. Primary and fully diluted earnings per share include the dilutive effect
of unexercised stock options.
<PAGE>
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
including non-interest checking accounts. 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 including non-interest
checking accounts 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 Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted-Average Yields Earned on:
Loans, net 8.16% 8.04% 8.05% 8.07%
Mortgage-Backed Securities 7.34 7.10 7.27 6.93
Investment Securities 6.91 6.76 6.83 6.43
----- ----- ----- -----
Total Interest-Earning Assets 7.72 7.60 7.64 7.53
----- ----- ----- -----
Weighted-Average Interest Rates Paid on:
Deposits 3.76 3.75 3.74 3.76
Borrowings 6.05 5.99 5.96 5.92
Subordinated Debentures 10.56 10.56 10.56 10.56
----- ----- ----- -----
Total Interest-Bearing Liabilities 4.02 4.03 3.99 4.05
----- ----- ----- -----
Weighted-Average Interest Rate Spread ----- ----- ----- -----
for the Period 3.70 % 3.57% 3.65 % 3.48 %
===== ===== ===== =====
</TABLE>
<PAGE>
AVERAGE BALANCE OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table sets forth the Bank's average balance of interest-earning
assets in comparison to its average balance of interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Average Interest-Earning
Assets:
Loans, net $ 310,714 $ 297,028 $ 311,371 $ 290,823
Mortgage-Backed
Securities 95,151 110,098 99,013 107,348
Investment Securities 126,203 88,199 114,712 85,088
---------- -------- --------- ---------
Total 532,068 495,325 525,096 483,259
--------- -------- --------- --------
Average Interest-Bearing
Liabilities:
Deposits 479,491 439,089 471,520 427,154
Borrowings 26,919 30,403 27,855 29,313
Subordinated Debentures 10,000 10,000 10,000 10,000
-------- ------- --------- --------
Total 516,410 479,492 509,375 466,467
-------- -------- -------- --------
Excess of Interest-
Earning Assets over
Interest-Bearing
Liabilities $ 15,658 $ 15,833 $ 15,721 $ 16,792
========= ======== ======== =========
</TABLE>
<PAGE>
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 Nine Months Ended
September 30, September 30,
1997 compared to 1996 1997 compared to 1996
Increase (Decrease) due to: Increase (Decrease) due to:
Rate Volume Total Rate Volume Total
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 95 $ 275 $ 370 $ (37) $ 1,244 $ 1,207
Mortgage-backed
securities 57 (265) (208) 255 (433) (178)
Invesment securities 48 642 690 346 1,429 1,775
------ ------ ------ ------ ------ ------
Total change-
interest income 200 652 852 564 2,240 2,804
------ ------ ------ ------ ------ ------
Interest expense:
Deposits 19 379 398 (97) 1,253 1,156
Borrowings 4 (52) (48) 10 (65) (55)
Subordinated Debentures 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
Total change-
interest expense 23 327 350 (87) 1,188 1,101
------ ------ ------ ------ ------ ------
Net change in net
interest income $ 177 $ 325 $ 502 $ 651 $ 1,052 $ 1,703
------ ------ ------ ------ ------- ------
</TABLE>
<PAGE>
NET INTEREST INCOME - for the three and nine months ended September 30, 1997
totaled $5.1 million and $14.8 million, respectively. Net interest income for
the three months ended September 30, 1997 increased $502 thousand to $5.1
million as compared to the same period in 1996 due primarily to an increase in
interest income on investment securities of $690 thousand and loans receivable
of $370 thousand, partially offset by a decrease in mortgage backed securities
of $208 thousand and an increase in interest expense on deposits of $398
thousand.
The increase in interest income on investment securities was due to an increase
in the average balance of the portfolio of $38.0 million to $126.2 million for
the three months ended September 30, 1997 from $88.2 million for the same period
in 1996, which resulted in an increase in interest income of $642 thousand. The
average yield on the investment portfolio increased 15 basis points to 6.91% for
the three months ended September 30, 1997 from 6.76% for the three months ended
September 30, 1996, which resulted in an increase in interest income of $48
thousand.
Interest income on loans increased a total of $370 thousand to $6.3 million for
the three months ended September 30, 1997 as compared to the same period in 1996
principally due to an increase in the average balance of $13.7 million to $310.7
million at September 30, 1997 from $297.0 million at September 30, 1996, which
resulted in a volume increase in interest income of $275 thousand. The increase
is largely the result of the purchase of $14.5 million of adjustable rate
mortgage loans during the third quarter of 1996. The loan portfolio's average
yield increased 12 basis points to 8.16% for the three months ended September
30, 1997 from 8.04% for the three months ended September 30, 1996, which
resulted in an increase in interest income of $95 thousand.
The decrease in interest income on mortgage backed securities of $208 thousand
to $1.7 million for the three months ended September 30, 1997 as compared to the
same period in 1996 was primarily due to a decrease in the average balance of
$14.9 million to $95.2 million at September 30, 1997 which resulted in a
decrease in interest income of $265 thousand. The average yield of the
portfolio increased 24 basis points to 7.34% for the three months ended
September 30, 1997 from 7.10% for the same period in 1996, which resulted in an
increase in interest income of $57 thousand.
The increase in interest expense on deposits of $398 thousand for the three
months ended September 30, 1997 compared to the same period in 1996 was due to
an increase in the average balance of deposits of $40.4 million to $479.5
million at September 30, 1997 from $439.1 million at September 30, 1996. The
average balance for the three months ended September 30, 1997 of certificates of
deposit increased $12.6 million, checking accounts increased $15.5 million,
savings accounts increased $11.1 million and money market accounts increased
$1.2 million as compared to the same period of 1996.
Net interest income for the nine months ended September 30, 1997 increased $1.7
million to $14.8 million from $13.1 million for the same period in 1996 due
primarily to an increase in interest income on investment securities of $1.8
million and loans receivable of $1.2 million, partially offset by an increase in
interest expense on deposits of $1.2 million.
<PAGE>
The increase in interest income for the nine months ended September 30, 1997 as
compared to the same period in 1996 on investment securities was due to an
increase in the average balance of the portfolio of $29.6 million to $114.7
million from $85.1 million for the same period in 1996, which resulted in an
increase in interest income of $1.4 million. The average balance increase was
primarily due to the net purchases of $33.1 million of collateralized mortgage
obligations and $7.4 million of U.S. Agency notes partially offset by $7.5
million of U.S. Treasury and U.S. Agency notes matured and $6.4 million of
principal paydowns on CMOs REMICs and MBSs during the nine months ended
September 30, 1997. The average yield on the investment portfolio increased 40
basis points to 6.83% for the nine months ended September 30, 1997 from 6.43%
for the nine months ended September 30, 1996, which resulted in an increase in
interest income of $346 thousand due to rate changes.
Interest income on loans increased a total of $1.2 million to $18.8 million for
the nine months ended September 30, 1997 from $17.6 million for the same period
in 1996 principally due to an increase in the average balance of loans of $20.6
million to $311.4 million at September 30, 1997 from $290.8 million at September
30, 1996, which resulted in a volume increase in interest income of $1.2
million. The volume increase was partially offset by a $37 thousand yield
decrease due to a 2 basis point decline in the loan portfolio's average yield to
8.05% for the nine months ended September 30, 1997 from 8.07% for the nine
months ended September 30, 1996.
The increase in interest expense on deposits of $1.1 million to $13.2 million
for the nine months ended September 30, 1997 compared to $12.1 million for the
same period in 1996 was due to an increase in the average balance of deposits of
$44.3 million to $471.5 million at September 30, 1997 from $427.2 million at
September 30, 1996. The average balance of certificates of deposit increased
$15.4 million, checking accounts increased $15.4 million, savings accounts
increased $10.7 million and money market accounts increased $2.6 million for the
nine months ended September 30, 1997 as compared to the same period of 1996. The
weighted average rate on deposits decreased 2 basis points to 3.74% for the nine
months ended September 30, 1997 from 3.76% for the nine months ended September
30, 1996, which resulted in a decrease in interest expense of $97 thousand.
PROVISION FOR LOAN LOSSES - for the three months ended September 30, 1997 was
$60 thousand compared to $30 thousand for the same period in 1996. The total
provision for potential loan losses increased to $140 thousand for the nine
months ended September 30, 1997 from $90 thousand for the nine months ended
September 30, 1996. Most of the Bank's lending activity is with customers
located within southern New Jersey. Generally, the loans are secured by real
estate consisting of single family residential properties. While this represents
a concentration of credit risk, the credit losses arising from this type of
lending compare favorably with the Bank's credit loss experience on its
portfolio as a whole. The ultimate repayment of these loans is dependent to a
certain degree on the local economy and real estate market. The 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 nine month periods ended
September 30, 1997 totaled $44 thousand and $130 thousand of expense,
respectively, compared to $45 thousand and $135 thousand of expense for the same
periods in 1996.
OPERATING EXPENSES - for the three and nine month periods ended September 30,
1997 amounted to $3.4 million and $9.8 million, respectively, as compared to
$6.0 million and $12.3 million for the same periods in 1996. The decrease is
the result of the one-time SAIF recapitalization charge of $2.7 million recorded
during the quarter ended September 30, 1996.
<PAGE>
SALARIES AND EMPLOYEE BENEFITS - for the three and nine month periods ended
September 30, 1997 were $1.9 million and $5.6 million, respectively, as compared
to $1.8 million and $5.2 million for the same periods in 1996. The increase was
due to additional staff in the three new branches opened since the third quarter
of 1996, as well as an increase in branch staff for additional hours,
principally "Sunday Banking". Average full time equivalent employees at
September 30, 1997 were 281 as compared to 250 at September 30, 1996.
OCCUPANCY AND EQUIPMENT - for the three and nine month periods ended September
30, 1997 amounted to $697 thousand and $2.0 million, respectively, as compared
to $635 thousand and $1.9 million for the same periods in 1996. The increase is
the result of additional depreciation and occupation expenses on the new
branches opened as well as other facility improvements and equipment additions
since the third quarter of 1996.
PURCHASED SERVICES - for the three and nine month periods ended September 30,
1997 amounted to $287 thousand and $779 thousand, respectively, as compared to
$241 thousand and $681 thousand for the same periods in 1996. Check processing
costs have increased $41 thousand for the nine months ended September 30, 1996
due to the higher number of transactions from an increase in the number of
checking accounts opened.
FEDERAL INSURANCE PREMIUM - for the three and nine month periods ended September
30, 1997 amounted to $73 thousand and $160 thousand, respectively, as compared
to $236 thousand and $705 thousand for the same periods in 1996. The decrease
is from a lower FDIC assessment rate in 1997 due to the SAIF recapitalization
which was signed into legislation during the third quarter of 1996. As a result
of this legislation, deposit premium rates decreased from $0.23 per $100 of
deposits to $.065 per $100 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 10.67% and 11.55%, respectively, at September 30, 1997,
and December 31, 1996, respectively, and its short-term liquidity was 7.88% and
7.31%, respectively, at such dates.
<PAGE>
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
<PAGE>
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, 1997 /s/ Craig W. Yates
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997 /s/ Channing L. Smith
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
<TABLE>
Exhibit No. 11 Statement re: Computation of Per Share Earnings
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Income $1,393,893 ($469,824) $4,199,044 $1,643,876
Weighted average common shares
outstanding 2,387,556 2,467,058 2,388,730 2,476,114
Common stock equivalents due to
dilutive effect of stock options 62,012 65,140 58,857 53,918
Total weighted average common shares
and equivalents outstanding 2,449,568 2,532,198 2,447,587 2,530,032
Primary earnings per share $0.57 ($0.19) $1.72 $0.65
Total weighted average common shares
and equivalents outstanding 2,449,568 2,532,198 2,447,587 2,530,032
Additional dilutive shares using the
higher end of period market value or
average market value for the period
when utilizing the treasury stock method
method regarding stock options 256 - 3,411 -
Total outstanding shares for fully
diluted earnings per share computation 2,449,824 2,532,198 2,450,998 2,530,032
Fully diluted earnings per share $0.57 ($0.19) $1.71 $0.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,508
<INT-BEARING-DEPOSITS> 570
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,259
<INVESTMENTS-CARRYING> 178,596
<INVESTMENTS-MARKET> 180,254
<LOANS> 307,078
<ALLOWANCE> 2,911
<TOTAL-ASSETS> 581,660
<DEPOSITS> 477,943
<SHORT-TERM> 3,102
<LIABILITIES-OTHER> 2,936
<LONG-TERM> 59,950
0
0
<COMMON> 260
<OTHER-SE> 37,468
<TOTAL-LIABILITIES-AND-EQUITY> 581,660
<INTEREST-LOAN> 18,809
<INTEREST-INVEST> 11,282
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,091
<INTEREST-DEPOSIT> 13,216
<INTEREST-EXPENSE> 15,254
<INTEREST-INCOME-NET> 14,837
<LOAN-LOSSES> 140
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,116
<INCOME-PRETAX> 6,581
<INCOME-PRE-EXTRAORDINARY> 4,199
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,199
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 3.78
<LOANS-NON> 3,620
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,444
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,782
<CHARGE-OFFS> 14
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 2,912
<ALLOWANCE-DOMESTIC> 2,912
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,655
</TABLE>
