SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ______________________
Commission File Number: 0-17353
FMS FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Sunset and Salem Roads, Burlington, New Jersey 08016
------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
---------------
Securities registered pursuant to Section 12(b) of the Act: None
---------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
Based on the closing sales price of $19.75 per share of the registrant's
common stock on March 3, 1997, as reported on the Nasdaq National Market System
the aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $47.3 million. On such date, 2,392,707 shares of
the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1996. (Parts II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Business
- -----------------
General
The Corporation. FMS Financial Corporation (the "Corporation") was
incorporated under the laws of the State of New Jersey on September 1, 1988 for
the purpose of becoming a savings and loan holding company. On December 21,
1988, the Corporation acquired all of the common stock of Farmers' and
Mechanics' Savings Bank, SLA, now known as Farmers and Mechanics Bank (the
"Bank" or "Farmers and Mechanics") following the Bank's conversion from a New
Jersey chartered mutual to a New Jersey chartered stock savings institution. The
Bank converted its charter to that of a federal savings bank on October 15,
1993.
Prior to the acquisition of all of the outstanding stock of the Bank, the
Corporation had no assets or liabilities and engaged in no business activities.
Subsequent to the acquisition of Farmers and Mechanics, the Corporation engaged
in no significant activity other than holding the stock of the Bank and
operating a savings and loan business through the Bank, and the issuance in
July, 1994 of 10% subordinated debentures due 2004 in the aggregate principal
amount of $10 million. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the Bank
and its subsidiaries.
The Corporation's executive offices are located at Sunset and Salem Roads,
Burlington, New Jersey. Its telephone number is (609) 386-2400.
The Bank. Farmers and Mechanics commenced operations in 1871 under the
name Farmers and Mechanics Building and Loan Association. The Bank became a
member of the Federal Home Loan Bank ("FHLB") System and has had its savings
deposits federally insured by the Savings Association Insurance Fund ("SAIF"),
and its predecessor the Federal Savings and Loan Insurance Corporation
("FSLIC"), since 1952. The Bank is subject to regulation by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). See
"Regulation." Effective October 26, 1994, the Bank changed its name to Farmers
and Mechanics Bank. The name change was approved by the Bank's Board of
Directors, the Corporation and the OTS. The Bank conducts its business through
its main administrative office and eighteen branch offices located throughout
Burlington County, New Jersey. At December 31, 1996, the Bank's total assets,
deposits and stockholders' equity amounted to $541.7 million, $453.3 million and
$33.8 million, respectively.
Farmers and Mechanics is primarily engaged in the business of attracting
deposits from the general public and originating loans which are secured by
residential real estate. To a lesser extent, the Bank also originates consumer,
commercial real estate and construction loans and invests in U.S.
government securities and mortgage-related securities.
Farmers and Mechanics considers its primary market area for savings
deposits to be Burlington County, New Jersey, while its primary market for
lending activities consists of Burlington County, and, to a lesser extent, other
regions of southern New Jersey.
<PAGE>
Lending Activities
General. The principal lending activity of the Bank has been the
origination of conventional fixed-rate and adjustable-rate mortgage loans for
the purpose of financing or refinancing one-to four-family residential
properties. To a lesser extent, the Bank also originates commercial real estate,
consumer, construction and commercial business loans. As of December 31, 1996,
98.14% of the Bank's loans were real estate loans, of which 82.22% consisted of
loans secured by mortgages on one-to four-family residential properties of which
.62% were insured or guaranteed real estate loans, 1.28% were consumer loans,
and .58% were commercial business loans. Such percentages have been calculated
before the deduction of loans in process, deferred loan fees and loan loss
reserves. See "--Analysis of Loan Portfolio". The Bank also sells fixed-rate
loans in the secondary mortgage market and has purchased adjustable-rate loans.
2
<PAGE>
Analysis of Loan Portfolio
The following table sets forth the composition of the Bank's loan
portfolio and mortgage-backed and related securities portfolio in dollar amounts
and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------- ----------------- ------------------ ------------------
Carrying Percent Carrying Percent Carrying Percent Carrying Percent Carrying Percent
Value of Total Value of Total Value of Tota Value of Total Value of Total
------- -------- -------- -------- -------- ------- -------- -------- -------- --------
(Dollars In Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ......... $257,608 82.22% $ 249,278 84.74% $245,874 84.83% $237,381 86.03% $ 222,178 85.08%
Commercial real estate....... 39,177 12.50 34,721 11.81 32,228 11.12 28,892 10.47 29,136 11.38
Commercial Construction...... 4,715 1.51 -- -- -- -- -- -- -- --
Construction ................ 5,989 1.91 4,063 1.38 5,699 1.97 4,157 1.51 2,760 1.06
-------- -------- ------ ------ ------
Total mortgage loans..... 307,489 288,062 283,801 270,430 254,074
Consumer and other loans:
Consumer .................... 4,016 1.28 4,337 1.47 4,317 1.49 4,119 1.49 4,234 1.62
Commercial business ......... 1,830 .58 1,779 0.60 1,712 0.59 1,377 0.50 2,248 0.86
-------- -------- ------ ------ ------
Total consumer and other
loans ................. 5,846 6,116 6,029 5,496 6,482
-------- -------- ------ ------ ------
Total loans ............. 313,335 100.00% 294,178 100.00% 289,830 100.00% 275,926 100.00% 260,556 100.00%
====== ====== ====== ====== ======
Less:
Unearned discount, premium,
loans in process, deferred
loan fees, net ............ (3,682) (3,011) (3,948) (4,113) (3,187)
Allowance for loan losses.... (2,782) (2,767) (2,622) (2,589) (2,380)
-------- -------- ------ ------ ------
Total loans, net......... $306,871 $ 288,400 $283,260 $269,224 $254,989
======== ========= ======== ======== ========
Mortgage-backed securities
held to maturity and available
for sale:
FHLMC ....................... $ 42,586 34.69% $ 54,039 43.47% $ 64,474 44.99% $ 56,258 43.77% $ 52,602 41.68%
FNMA ........................ 37,958 30.92 41,507 33.38 48,746 34.01 36,533 28.42 32,617 25.84
GNMA ........................ 23,216 18.91 15,225 12.25 17,522 12.23 16,879 13.13 15,425 12.22
Real estate investment
mortgage conduit .......... 5,830 4.75 7,291 5.86 7,577 5.29 10,187 7.93 12,564 9.96
Collateralized mortgage
obligations ............... 12,621 10.28 5,485 4.41 3,863 2.69 6,485 5.05 10,474 8.30
Mortgage pass throughs ...... 552 .45 784 0.63 1,131 0.79 2,190 1.70 2,525 2.00
-------- ------ --------- ------ -------- ------ -------- ----- -------- ------
Total mortgage-backed and
related securities..... $122,763 100.00% $ 124,331 100.00% $143,313 100.00% $128,532 100.00% $126,207 100.00%
======== ====== ========= ====== ======== ====== ======== ====== ======== ======
</TABLE>
3
<PAGE>
The following table sets forth the Bank's loan originations and loan and
mortgage-backed and related securities purchases, sales and principal payments
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
Total loans receivable (gross):
<S> <C> <C> <C> <C> <C>
At beginning of period ............................. $ 294,178 $ 289,830 $ 275,926 $ 260,556 $ 240,018
Mortgage loans originated:
One-to four-family ............................... 30,192 34,775 52,902 87,061 88,468
Commercial real estate ........................... 17,751 7,144 6,806 6,509 10,902
Commercial construction .......................... 4,715 -- -- -- --
Construction ..................................... 4,792 2,925 3,516 -- 125
--------- --------- --------- --------- ---------
Total mortgage loans originated ................ 57,450 44,844 63,224 93,570 99,495
Mortgage and consumer loans purchased:
One to four family ............................... 14,486 -- -- -- 8,072
Consumer ......................................... -- -- 127 -- --
--------- --------- --------- --------- ---------
Total mortgage and consumer loans purchased..... 14,486 -- 127 -- 8,072
Total mortgage loans originated and purchased ........ 71,936 44,844 63,351 93,570 107,567
Consumer loans originated ............................ 1,131 1,048 475 834 710
Transfer of mortgage loans to real estate owned ...... (482) (57) (1,091) (362) (619)
Sale of loans ........................................ (950) (1,118) (1,739) (12,362) (23,125)
Principal repayments ................................. (52,478) (40,369) (47,092) (66,310) (63,995)
--------- --------- --------- --------- ---------
Total loans receivable at end of period .............. $ 313,335 $ 294,178 $ 289,830 $ 275,926 $ 260,556
========= ========= ========= ========= =========
Mortgage backed securities held to maturity
and available for sale:
At beginning of period ............................... $ 124,331 $ 143,313 $ 128,532 $ 126,207 $ 107,632
Mortgage backed securities purchased (1) ............. 31,927 2,755 52,051 54,697 49,827
Mortgage backed securities sold (1) .................. (923) -- -- -- (1,000)
Amortization and repayments .......................... (32,646) (22,018) (37,270) (52,372) (30,252)
Charge in mark to market on available
for sale securities ................................ 74 281 -- -- --
--------- --------- --------- --------- ---------
At end of period (1) ................................. $ 122,763 $ 124,331 $ 143,313 $ 128,532 $ 126,207
========= ========= ========= ========= =========
</TABLE>
- -------------------
(1) Includes the purchase and sale of CMO's and Remics
4
<PAGE>
Residential Loans. One of the primary lending activities of the Bank has
been the origination of conventional mortgage loans to enable borrowers to
purchase existing homes, refinance existing mortgage loans or construct new
homes. The Bank generally originates mortgage loans with terms of 15 to 30
years, amortized on a monthly basis, with principal and interest due each month.
Typically, residential real estate loans remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or
prepay loans at their option.
Regulations permit thrift institutions to make home loans on which the
interest rate, loan balance or term to maturity may be adjusted, provided that
the adjustments are tied to specified indices. The Bank presently offers
mortgage loans that adjust every year after an initial fixed term of one, two,
five or seven years, at an interest rate indexed higher than the corresponding
U.S. Treasury Security Index. The interest rates on these mortgages adjust
annually after the one, two, five or seven year anniversary date of the loan
with an interest rate adjustment cap of 1.5% per year and presently not to
exceed a rate of 11.5% over the life of the loan. At December 31, 1996,
adjustable-rate residential first mortgage loans amounted to $79.9 million, or
25.5% of the Bank's total loan portfolio.
Fixed-rate mortgage loans are generally underwritten according to Federal
Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA") guidelines. The Bank sells fixed-rate loans in the
secondary market from time to time when such sales are consistent with the
Bank's asset/liability management goals and can be achieved on terms favorable
to the Bank. The Bank generally charges a higher interest rate on loans if the
property is not owner-occupied. At December 31, 1996, $150.3 million or 48.0% of
the Bank's total loan portfolio, consisted of long-term fixed-rate first
mortgage loans.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on owner-occupied residential mortgage loans to 95% of the lesser of the
appraised value or purchase price, with the condition that private mortgage
insurance is required on loans with loan-to-value ratios in excess of 80%.
Mortgage loans on investment properties are made by the Bank at loan-to-value
ratios up to 70%. The loan-to-value ratio, maturity and other provisions of the
loans made by the Bank have generally reflected the policy of making less than
the maximum loan permissible under applicable regulations, in accordance with
established lending practices, market conditions and underwriting standards
maintained by the Bank. The Bank requires title, fire and casualty insurance on
all properties securing real estate loans made by the Bank.
The Bank actively solicits and originates home equity loans and home
equity reserve lines of credit secured by the equity in the borrower's primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust based upon the prime rate.
At December 31, 1996, the Bank had home equity loans in the amount of $13.3
million or 4.26% of its total loan portfolio. Also at December 31, 1996, the
Bank had approved $31.8 million in home equity lines of credit, of which $14.0
million was outstanding.
Construction Loans. The Bank originates loans to finance the construction
of one-to four-family dwellings or commercial real estate. Generally, the Bank
only makes interim construction loans to individuals if it also makes the
permanent mortgage loan on the property. Construction loans to builders are
generally made only if the Bank makes the permanent mortgage loan or if the
builder has a contract for sale and the purchaser has received a permanent
mortgage commitment. At December 31, 1996, the Bank's construction loans
amounted to $8.1 million, net of loans in process.
5
<PAGE>
Interim construction loans to builders generally have terms of up to 9
months and interest rates which adjust at a positive spread over the prime
interest rate. Construction loans to build single family residences are
available. These loans are available to borrowers who qualify for a permanent
loan.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
Commercial Real Estate Loans. Loans secured by commercial real estate
(e.g., shopping centers, medical buildings, retail offices) and multi-family
dwelling units (e.g., apartment projects with more than four units), constituted
$39.2 million, or 12.5%, of the Bank's total loan portfolio at December 31,
1996. Commercial real estate loans and multi-family residential loans have been
made in amounts up to $3.8 million, with most of such loans ranging in size from
$100,000 to $1.0 million. Permanent loans on commercial properties are generally
originated in amounts up to 75% of the appraised value of the property. The
Bank's permanent commercial real estate loans are secured by improved property
such as office buildings, retail stores, warehouse, church buildings and other
non-residential buildings, most of which are located in the Bank's primary
market area. Commercial real estate loans and multi-family residential loans are
generally made at rates which adjust at a positive spread over the prime
interest rate or are balloon loans with fixed interest rates which mature in
three to five years with principal amortization for a period of up to 25 years.
Loans secured by commercial real estate are generally larger and involve a
greater degree of risk than one-to four-family residential mortgage loans. Of
primary concern in commercial and multi-family real estate lending is the
borrower's creditworthiness and the feasibility and cash flow potential of the
project. Loans secured by income properties are generally larger and involve
greater risks than residential mortgage loans because payments on loans secured
by income properties are often dependent on successful operation or management
of the properties. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. In order to monitor cash flows on income
properties, the Bank requires borrowers and loan guarantors, if any, to provide
annual financial statements and rent rolls on commercial real estate loans. At
December 31, 1996, the five largest commercial real estate loans totalled $10.0
million with no single loan larger than $3.6 million. All such loans were
current and were performing in accordance with their terms and the property
securing such loans are in the Bank's market area.
Consumer. Regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of the institution's assets.
The Bank makes various types of secured and unsecured consumer loans including
education loans, lines of credit, automobile loans (new and used) and loans
secured by deposit accounts. As of December 31, 1996, consumer loans totalled
$4.0 million, or 1.3% of the Bank's total loan portfolio. Consumer loans
generally have terms of six months to 5 years, some of which are at fixed rates
and some of which have rates that adjust periodically.
6
<PAGE>
The Bank intends to continue to emphasize the origination of consumer
loans. The Bank believes that the shorter term and the normally higher interest
rates available on various types of consumer loans have been helpful in
maintaining a profitable spread between the Bank's average loan yield and its
cost of funds.
Consumer loans are advantageous to the Bank because of their interest rate
sensitivity, but they also involve more credit risk than residential mortgage
loans because of the higher potential of defaults and the difficulties involved
in disposing of the collateral, if any.
Commercial Business Loans. The Bank's portfolio of commercial business
loans amounted to $1.8 million, or .6% of the Bank's total loan portfolio, at
December 31, 1996. These commercial business loans are underwritten on the basis
of the borrower's ability to service such debt from income. The Bank's
commercial business loans are generally made to small and mid-sized companies
located within the Bank's primary lending area. In most cases, the Bank requires
additional collateral of equipment, chattel or other assets before making a
commercial business loan.
Loan Originations, Purchases and Sales. In the past, the Bank has retained
in its portfolio most of the loans it originates. However, the Bank's general
policy is to originate fixed-rate mortgage loans under terms, conditions and
documentation which permit sale to the FHLMC, FNMA, or other investors in the
secondary market. Adjustable-rate mortgage loans are generally not originated
under terms and conditions that would permit their sale in the secondary
mortgage market to FHLMC or FNMA. The Bank's policy has been to sell certain of
its fixed-rate mortgage loan originations. These sales may result in gains or
losses. This policy was established to reduce the Bank's vulnerability to rapid
interest rate movements and to provide a source of funding for ongoing
commitments. Fixed-rate mortgages designated for sale are accounted for
separately in accordance with applicable accounting rules. At December 31, 1996,
the Bank had no loans available-for-sale. The Bank continually monitors the loan
inventory and its commitments.
Loan Commitments. The Bank issues loan origination commitments to real
estate developers and qualified borrowers primarily for the construction,
purchase and refinancing of residential real estate and commercial real estate.
Such commitments are made on specified terms and conditions, including in most
cases the payment of a non-refundable commitment fee based on a percentage of
the amount of committed funds. At December 31, 1996, the Bank had unused lines
of credit and outstanding loan origination commitments of approximately $26.2
million.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank receives loan origination fees or "points" for originating loans. Loan
points are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for origination of the loan. The Bank's loan origination
fees generally range from 2% to 3% on conventional residential mortgages and 1%
to 2% on commercial real estate loans. All loan origination fees net of
incremental direct loan origination costs, are deferred and amortized over the
contractual life of the related loans.
The Bank recognizes other fees and service charges on loans. Other fees
and service charges consist of late fees, loan service fees, fees collected with
a change in borrower or other loan modifications. The Bank recognized other fees
and service charges on loans of $122 thousand, $157 thousand and $179 thousand
for the years ended December 31, 1996, 1995 and 1994, respectively.
7
<PAGE>
Residential Mortgage Loan Servicing. The Bank services loans retained in
its portfolio and loans which were originated by the Bank and sold through the
secondary mortgage market with the servicing rights to those loans retained by
the Bank. The loan servicing activities of the Bank include collecting and
remitting loan payments, holding escrow funds for the payment of real estate
taxes and insurance premiums and generally administering the loans. Under the
loan servicing contracts, the Bank receives servicing fees that are withheld
from the monthly payments made to investors. The servicing spreads on loans
serviced are usually based on the unpaid principal balance of the loan being
serviced and typically range from .25 percent to .375 percent per annum of
declining principal balance on the loans. At December 31, 1996, the Bank
serviced for others 642 loans with an outstanding aggregate balance of $29.3
million. Loan servicing income for the years ended December 31, 1996, 1995 and
1994, was $98 thousand, $113 thousand and $132 thousand, respectively.
Collection Procedures. The Bank's collection procedures provide that a
late charge will be assessed after a loan is 15 days delinquent. When a loan is
more than 30 days delinquent, the borrower will be contacted by mail or phone
and payment requested. If the delinquency continues, subsequent efforts will be
made to contact the delinquent borrower. In certain instances, the Bank may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs. If the loan continues in a
delinquent status for 90 days or more, the Bank generally will initiate
foreclosure proceedings.
Non-Performing Loans. Loans are generally placed on non-accrual status
when either principal or interest is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Impaired Loans. The Bank considers all non-accrual loans as well as any
loans in which it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement as
impaired. Small balances of homogeneous loans such as delinquent residential
mortgages and delinquent consumer installment loans are collectively measured
for impairment and a reserve is established based on historical loss data.
Certain larger balance impaired loans and other impaired loans are reviewed
individually and reserves are established based on a discounted cash flow
analysis or as a practical expedient, the underlying collateral value. Interest
income on impaired loans is recognized on a cash basis.
8
<PAGE>
The following table sets forth information regarding impaired loans,
troubled debt restructured and real estate owned assets by the Bank at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Impaired loans - non-accrual: (Dollars in Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C>
One-to four-family ....................... $2,413 $2,502 $1,446 $3,395 $2,780
Commercial real estate ................... 1,663 1,604 1,040 1,266 1,261
Consumer and other ....................... 15 6 469 13 571
------ ------ ------ ------ ------
Total impaired non-accrual loans ....... $4,091 $4,112 $2,955 $4,674 $4,612
====== ====== ====== ====== ======
Other impaired loans ....................... $ -- 354 -- -- --
Troubled debt restructuring ................ 560(1) $ 634(1) $1,143 $ 663 $ 642
Real estate owned, net ..................... 622 669 1,812 1,624 1,714
Other non-performing assets ................ 1,228 1,228 1,428 1,453 2,203
------ ------ ------ ------ ------
Total non-performing assets ................ $6,501 $6,997 $7,338 $8,414 $9,171
====== ====== ====== ====== ======
Total non-accrual loans to net loans ....... 1.33% 1.43% 1.04% 1.74% 1.81%
====== ====== ====== ====== ======
Total non-accrual loans to total assets..... 76% 0.82% 0.61% 1.05% 1.07%
====== ====== ====== ====== ======
Total non-performing assets to total assets. 1.20% 1.39% 1.52% 1.89% 2.12%
====== ====== ====== ====== ======
</TABLE>
- -----------------------------
(1) Loans restructured prior to SFAS Nos. 114 and 118 effective date and
performing in accordance with the terms of the restructuring agreement.
Classified Assets. Classified assets generally consist of assets which
have possible credit risk and/or have sufficient degree of risk or potential
weakness to warrant management's close attention. Each asset is assigned a
quality rating based on management's best judgment concerning the degree of risk
and the likelihood of repayment or orderly liquidation. Quality ratings are
divided into the following groups: Pass and Special Mention (unclassified),
Substandard, Doubtful and Loss.
An asset classified Substandard is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Assets so classified have well-defined weakness or weaknesses. An asset
classified Substandard has shown an inability or unwillingness on the part of
the borrower and/or guarantors to meet their obligations or the collateral
securing the obligation has deteriorated in some condition. Such assets have a
well-defined weakness that points to the distinct possibility that the Bank will
not be paid back in a timely fashion and it may require legal action to effect
payment.
An asset classified Doubtful has all the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. The possibility of a
loss on a Doubtful asset is high. However, due to important and reasonably
specific pending factors, which may work to strengthen (or weaken) the asset,
its classification as an estimated loss is deferred until its more exact status
can be determined.
An asset classified Loss is considered uncollectible and of such little
value that its continuance as an asset, without establishment of a specific
valuation allowance or charge-off, is not warranted. This classification does
not necessarily mean that an asset has absolutely no recovery or salvage value;
but
9
<PAGE>
rather, it is not practical or desirable to defer writing off a basically
worthless asset even though partial recovery may be effected in the future.
Federal regulations require that each insured institution classify its own
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS and FDIC examiners have authority to identify problem
assets and, if appropriate, classify them. Assets classified as Substandard or
Doubtful require the institution to establish general allowances for loan
losses. If an asset or portion thereof is classified Loss, the insured
institution must either establish specified allowances for loan losses in the
amount of 100 percent of the portion of the asset classified Loss, or charge off
such amount. General loss allowances established to cover possible losses
related to assets classified Substandard or Doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. OTS and FDIC
examiners may disagree with the insured institution's classification and amounts
reserved.
10
<PAGE>
The following table sets forth information with respect to the Bank's
classified assets for the periods indicated. The Bank had no assets classified
as Loss for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
----- ------ ------ ------ -----
Classified Assets: (In Thousands)
Substandard Loans:
<S> <C> <C> <C> <C> <C>
One- to four-family......... $2,413 $2,502 $1,446 $3,395 $2,234
Commercial real estate...... 3,942 4,247 3,763 5,503 5,782
Consumer and other.......... 15 6 469 13 415
----- ------- ------ ------ ------
Total loans............... 6,370 6,755 5,678 8,911 8,431
----- ----- ------ ------ ------
Real Estate held for
development, net ......... 1,228 1,228 1,428 1,453 2,203
Real estate owned, net....... 622 669 1,812 1,624 1,714
----- ------ ------ ------ ------
Total Substandard........... $8,220 $8,652 $ 8,918 $11,988 $12,348
===== ===== ====== ====== ======
Doubtful loans.............. $ -- $ -- $ -- $ -- $ 625
----- ----- ------ ------ ------
Total Doubtful.............. $ -- $ -- $ -- $ -- $ 625
===== ===== ====== ====== ======
Total Classified Assets....... $8,220 $8,652 $ 8,918 $11,988 $12,973
===== ===== ====== ====== ======
</TABLE>
At December 31, 1996, the Bank's non-performing loans consisted primarily
of loans secured by residential and commercial real estate. The largest
non-performing loan consisted of a loan in the amount of $709 thousand secured
by a first mortgage on a commercial real estate property operating as a retail
liquor store.
For a full explanation of the Bank's real estate held for development at
December 31, 1996, see "--Subsidiary and Land Development Activities".
Real Estate Owned. The Bank's real estate owned classified as Substandard
at December 31, 1996, consisted of properties valued at $1.1 million, gross.
These properties are carried at the lower of book value or fair market value
less estimated costs to sell and are analyzed by management on a periodic basis.
The real estate owned is comprised of (i) one residential single family home
with a net book value of $65 thousand, (ii) 18 acres of land, with a net book
value of $818 thousand, which is zoned for the construction of 109 townhouses,
(iii) a condominium with a net book value of $38 thousand and (iv) one
commercial condominium located in Burlington County with a net book value of
$138 thousand. See "-- Provision for Loan and Real Estate Losses."
Provision for Loan and Real Estate Losses. A provision for loan losses is
charged to operations based on management's evaluation of the risk inherent in
its loan portfolio in relation to the level of the allowance for loan losses and
changes in the nature and volume of its loan activity. For the year ended
December 31, 1996, the Bank charged $120 thousand and $153 thousand, to
operations as a provision for losses on loans and real estate owned,
respectively.
The Bank provides valuation reserves for anticipated losses on loans and
real estate when management determines that a significant decline in the value
of the collateral has occurred, as a result of which, the value of the
collateral is less than the amount of the unpaid principal of the related loan
plus estimated costs of acquisition and sale. In addition, the Bank also
provides reserves based on the dollar amount and type of collateral securing its
loans, in order to protect against unanticipated losses. Although
11
<PAGE>
management believes that it uses the best information available to make such
determinations, future adjustments to reserves may be necessary, and net income
could be significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. At December 31, 1996, the
Bank had an allowance for loan losses of $2.8 million and an allowance for
losses on real estate owned of $437 thousand. While the Bank believes it had
established its existing allowance for loan losses in accordance with Generally
Accepted Accounting Principles ("GAAP") at December 31, 1996, there can be no
assurance that regulators, when reviewing the Bank's loan portfolio in the
future, will not request the Bank to significantly increase its allowance for
loan losses, thereby adversely impacting the Bank's financial condition and
earnings.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .......... $ 2,767 $ 2,622 $ 2,589 $ 2,380 $ 1,839
Loans charged-off:
One-to four-family .................... (114) (13) (44) -- (18)
Commercial real estate ................ -- -- -- -- --
Construction .......................... -- -- -- -- --
Consumer .............................. (1) (6) (37) (8) (6)
Commercial business ................... -- -- (38) -- (95)
------- ------- ------- ------- -------
Total charge-offs ................... (115) (19) (119) (8) (119)
Recoveries .............................. 10 44 86 15 8
------- ------- ------- ------- -------
Net loans charged-off ................... (105) 25 (33) 7 (111)
------- ------- ------- ------- -------
Provision for possible loan losses ...... 120 120 66 202 652
------- ------- ------- ------- -------
Balance at end of period ................ $ 2,782 $ 2,767 $ 2,622 $ 2,589 $ 2,380
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding during the period ......... 0.36% (0.009%) 0.012% (0.003%) 0.046%
</TABLE>
12
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable for the periods indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowances to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- ------------------- ------------------- ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
----- ----------- ------ ----------- ------ ----------- ------ ---------- ------ ----------
Loans: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family ......... $1,716(1)(2) 82.22% $1,718(3) 84.74% $1,656 84.83 $1,613 86.00%$ 927 85.08%
Commercial real estate ..... 877(2) 12.50 819(4) 11.81 757 11.12 757 10.47 897 11.38
Commercial construction .... 44 1.51 -- -- -- -- -- -- -- --
Construction ............... 37 1.91 21 1.38 29 1.97 13 1.51 10 1.06
Consumer and other ......... 76(1) 1.28 68(3) 1.47 70 1.49 66 1.52 286 1.62
Commercial business ........ 32 .58 141(4) 0.60 110 0.59 140 0.50 260 0.86
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses........... $2,782 100.00% $2,767 100.00% $2,622 100.00% $2,589 100.00% $2,380 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------------------------------
(1) Includes reserves for impaired loans collectively measured for impairment
of residential real estate and consumer loans of $115 thousand and $15
thousand, respectively.
(2) Includes reserves for impaired loans individually measured for impairment
of residential real estate and commercial real estate of $12 thousand and
$262 thousand, respectively.
(3) Includes reserves for impaired loans collectively measured for impairment
of residential real estate and consumer loans of $144 thousand and $6
thousand, respectively.
(4) Includes reserves for impaired loans individually measured for impairment
of commercial real estate and commercial business of $241 thousand and $109
thousand, respectively.
13
<PAGE>
Changes in the allowance for losses on real estate owned are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.. $313 $ 79 $ -- $ -- $ 16
Provisions charged to operations 153 354 158 29 729
Charge-offs................... (30) (120) (79) (29) (745)
Recoveries.................... 1 -- -- -- --
---- ----- ----- ----- -----
Balance at end of year...... $437 $ 313 $ 79 $ -- $ --
==== ===== ===== ===== =====
</TABLE>
Mortgage-Backed Securities
The Bank purchases mortgage-backed securities guaranteed by the Government
National Mortgage Association ("GNMA") and the FNMA and participation
certificates issued by the FHLMC. GNMA mortgage-backed securities are
certificates issued and backed by the GNMA and are secured by interests in pools
of mortgages which are fully insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veterans' Administration ("VA"). FHLMC
mortgage-backed securities are participation certificates issued and guaranteed
by the FHLMC and secured by interests in pools of conventional mortgages
originated by financial institutions. At December 31, 1996, these
mortgage-backed securities held to maturity, consisting of GNMA, FHLMC, FNMA,
and private pass-through certificates amounted to $104.3 million or 19.26% of
total assets.
Investment Securities Held to Maturity and Securities Available for Sale
Farmers and Mechanics investment policy is to ensure safety and soundness,
provide and maintain the liquidity ratios required under regulations of the OTS,
optimize the Bank's return on investments, provide low-risk, high-quality
assets, manage the overall interest rate sensitivity of the portfolio and serve
as a vehicle to absorb excess funds when loan demand is low and to infuse funds
when loan demand is high. The amount of the Bank's investment portfolio at any
time will depend in part upon the Bank's loan origination volume and the
availability of attractive long-term investments. Investment decisions are based
on a thorough analysis of each investment to determine quality, prospects for
yield and appreciation and any inherent risks. See "Regulation."
At December 31, 1996, Farmers and Mechanics had an investment portfolio of
$93.0 million, of which $25.4 million was available for sale, consisting
primarily of U.S. Government securities and obligations of U.S. Government
agencies. For more information on the Bank's investment activities see Notes 2
and 3 of the Notes to the Consolidated Financial Statements. Other investment
activities of the Bank, which are not reported as part of the Bank's investment
portfolio, include an investment of $3.6 million in FHLB stock, which is
required as part of its membership in the Federal Home Loan Bank system (see
"--Regulation -- Federal Home Loan Bank System"), and $347 thousand in interest
bearing deposits and overnight investments.
14
<PAGE>
The following table sets forth the carrying value and market value of the
Bank's investment securities held to maturity and securities available for sale,
FHLB stock, and interest bearing deposits and overnight investments at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
Estimated Estimated Estimated
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- --------- -------- --------- -------- ---------
Investment securities held to maturity: (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency securities $46,792 $46,156 $34,086 $34,110 $20,964 $19,726
Reverse Repurchase Agreements.......... 20,000 20,000 9,000 9,000 -- --
Municipal bonds........................ 795 800 464 464 240 235
U.S. Treasuries........................ 15 14 15 14 -- --
Investment securities available for sale:
U.S. Agencies.......................... 4,997 4,997 7,928 7,928 -- --
U.S. Treasuries........................ 1,999 1,999 1,980 1,980 -- --
REMIC's................................ 5,830 5,830 7,291 7,291 7,577 7,577
CMO's.................................. 12,621 12,621 5,485 5,485 3,863 3,863
Common Stock........................... -- -- 84 84 26 26
------- ------- ------- ------- ------- -------
Total investment securities........ 93,049 92,417 66,333 66,356 32,670 31,427
------- ------- ------- ------- ------- -------
Federal Home Loan Bank of New York
stock................................ 3,621 3,621 4,058 4,058 3,728 3,728
Interest bearing deposits and overnight
investments.......................... 347 347 181 181 1,955 1,955
------- ------- ------- ------- ------- -------
Total investments...................$97,017 $96,385 $70,572 $70,595 $38,353 $37,110
======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment securities at
December 31, 1996.
<TABLE>
<CAPTION>
More than
One Year or Less One to Five Years Five to Ten Years Ten Years Total Investment Securities
----------------- ------------------- ------------------- ------------------ ----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
------- -------- ------- -------- -------- ------- -------- ------- -------- ------- -------
Investment securities
held to maturity (Dollars in Thousands)
U.S. government and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
agency obligations $2,000 5.60% $2,994 5.74% $16,250 7.49% $25,548 7.59% $46,792 $46,156 7.36%
Municipal Bond..... 465 4.08 103 5.60 -- -- 227 5.60 795 800 4.71
Reverse Repurchase
Agreements........ 20,000 6.05 -- -- -- -- -- -- 20,000 20,000 6.05
U.S. Treasury...... -- -- 15 3.50 -- -- -- -- 15 14 3.50
MBS................ 630 7.46 9,621 7.30 7,440 7.72 86,622 7.54 104,313 105,558 7.53
Investment securities
available for sale:
U.S. Treasury...... 1,999 5.70 -- -- -- -- -- -- 1,999 1,999 5.70
U.S. Government.... 996 4.95 4,001 5.98 -- -- -- -- 4,997 4,997 5.98
CMOs............... 259 7.00 3,186 6.52 822 8.31 8,354 7.08 12,621 12,621 7.02
REMICs............. -- -- -- -- 1,973 5.15 3,857 5.28 5,830 5,830 5.25
------- ----- ------- ----- ------- ----- -------- ----- -------- -------- -----
Total............ $26,349 5.88% $19,920 6.66% $26,485 7.40% $124,608 7.43% $197,362 $197,975 7.17%
======= ======= ======= ======== ======== ========
</TABLE>
16
<PAGE>
Subsidiary and Land Development Activities
Farmers and Mechanics is generally permitted to invest an amount equal to
3% of its total assets in subsidiary service corporations with at least 1% of
that investment in community reinvestment activities. Under such 3% limitation,
at December 31, 1996, Farmers and Mechanics was authorized to invest up to
approximately $16.2 million in the stock of or loans to its subsidiary service
corporations. As of December 31, 1996, the net book value of the Bank's
investment in stock, unsecured loans, and conforming loans in its subsidiaries
was $1.3 million, all of which had been invested in the Bank's wholly owned
subsidiary corporations, which were organized to engage in real estate
development activities.
Under FIRREA, savings associations are required to deduct from capital
their investments in, and extensions of credit to, service corporations engaged
in activities which are not permissible for national banks. The real estate
development activities of the Bank's service corporation are not permissible for
national banks, as promulgated by FIRREA. At December 31, 1996, the Bank's
investment in and advances to subsidiaries engaged in non-permissible activities
amounted to $1.3 million was deducted from tangible, core and risk-based
capital.
Real estate held for development represents a high degree of credit risk
because of the relatively long period of time needed to obtain necessary
developmental approvals and the uncertainty of future market conditions. During
recent periods, conditions in the real estate market deteriorated as a result of
unfavorable interest rates, the general unavailability of credit, a slow down in
home sales and construction, and a surplus of available real estate. These
conditions have contributed to many project failures throughout the industry and
have reduced the demand for land. As a result, property values have declined and
substantial losses have been incurred by many institutions. During the year
ended December 31, 1996, and 1995, the Bank recorded provisions for losses on
real estate held for development totalling $0 and $200 thousand, respectively.
There can be no assurance that conditions in the economy or real estate market
will not deteriorate further.
The Board of Directors of Land Financial Services, Inc., a wholly owned
subsidiary of the Bank, passed a resolution in February 1991 to cease all new
direct real estate investment activities. In addition, the Board further
resolved that there shall be no new real estate investment in connection with
existing assets except those investments which are necessary to preserve and
protect the existing assets so that such assets can be liquidated as soon as
practical. Management believes that divesture of its present land investment may
take several years, depending on market conditions.
Deposit Activities and Other Sources of Funds
General. Deposits are the major source of Farmers and Mechanics funds for
lending and other investment purposes. In addition to deposits, Farmers and
Mechanics derives funds from loan principal and interest repayments and
prepayments, principal and interest payments on mortgage-backed securities and
other investment securities, advances from the FHLB of New York and other
borrowings (see "Borrowings" below). Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer term
basis for general business purposes.
17
<PAGE>
Deposits. Deposits are attracted from within the Bank's primary market area
of Burlington County, New Jersey, through the offering of a broad selection of
deposit instruments including regular checking accounts, non-interest checking
accounts, money market accounts, regular passbook accounts, certificates of
deposit and IRA accounts. Deposit account terms vary, according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. The Bank is a member of an automated teller
machine network.
The Bank regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. The
Bank does not have any brokered deposits and has no present intention to accept
or solicit such deposits.
Certificates of Deposit Maturity Schedule. The following table sets forth
the amount and maturities of the Bank's certificates of deposit at December 31,
1996.
Less than 1 to 2 to After
1 year 2 years 3 years 3 years Total
-------- ------- ------- ------- ------
(In Thousands)
2.01 - 4.00%........ $ 14,778 $ 3 $ -- $ -- $ 14,781
4.01 - 6.00%........ 116,916 38,634 13,444 19,931 188,925
6.01 - 8.00%........ 9,498 2,634 8,946 12,815 33,893
8.01 - 10.00%........ 187 1,099 1,923 77 3,286
10.01 - 12.00%........ 3 -- 12 54 69
--------- --------- ------- ------- --------
Total............ $141,382 $42,370 $24,325 $32,877 $240,954
Certificates of Deposit in Excess of $100,000. The following table
indicates the amount of the Bank's certificates of deposit of $100,000 or more
by time remaining until maturity as of December 31, 1996.
Maturity Period of Deposits Certificates of
- --------------------------- ---------------
Deposit
-------
(In Thousands)
Three months or less............................. $3,722
Three through six months......................... 3,777
Six through twelve months........................ 2,867
Over twelve months............................... 7,726
-------
Total....................................... $18,092
18
<PAGE>
Deposit Rate. The following table sets forth the distribution of the
Bank's deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ -------------------------------
Weighted Weighted Weighted
Percent of Average Percent Average Percent Average
Average Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ------- ------- -------- ------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and regular
savings................. $ 69,666 16.22% 2.52% $66,798 15.93% 2.54% $66,608 15.52% 2.50%
Checking accounts......... 72,427 16.87 .96 63,607 15.17 1.11 60,226 14.03 1.09
Money market deposit
accounts................ 57,399 13.37 2.65 58,990 14.06 2.66 71,423 16.64 2.67
Certificates of deposit... 228,974 53.32 5.30 229,103 54.63 5.21 221,990 51.70 4.44
Surrogate statement....... 947 .22 6.12 896 0.21 6.10 9,094 2.11 4.81
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total Deposits.......... $429,413 100.00% 3.77% $419,394 100.00% 3.81% $429,341 100.00% 3.39%
======= ====== ==== ======= ====== ====== ======= ====== ======
</TABLE>
19
<PAGE>
Borrowings. Savings deposits are the primary source of funds for Farmers
and Mechanics lending and investment activities and for its general business
purposes. From time to time, however, the Bank has relied upon other borrowings
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.
The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, Farmers and Mechanics is required to own capital stock in the FHLB of
New York and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally, securities
which are obligations of, or guaranteed by, the United States), provided certain
standards related to credit worthiness have been met. Under its current credit
policies, the FHLB of New York limits advances to 30% of a member's assets. At
December 31, 1996, the Bank had $32.6 million in FHLB advances outstanding at a
weighted-average interest rate of 6.09%. The advances are collateralized by FHLB
stock and certain first mortgage loans.
On July 28, 1994 the Corporation issued $10 million of 10% Subordinated
Debentures (the "Debentures") due 2004. Interest is payable on the Debentures
semi-annually on February 1 and August 1 of each year. The Corporation made its
first interest payment on the Debentures on February 1, 1995. The Corporation
used the proceeds for expansion of the Corporation's operations through branch
acquisitions and general corporate purposes. The Debentures were issued under an
Indenture which provides that the Corporation cannot declare or pay dividends
on, or purchase, redeem or acquire for value its capital stock, return any
capital to holders of capital stock as such, or make any distribution of assets
to capital stockholders as such, unless, from and after the date of any such
dividend declaration or the date of any such purchase, redemption, payment or
distribution specified above, the Corporation retains at all times cash, cash
equivalents (as determined in accordance with generally accepted accounting
principles) or marketable securities (with a market value as measured on the
applicable Declaration Date or Redemption Date) in an amount sufficient to cover
the two consecutive semi-annual interest payments that will be due and payable.
Personnel
As of December 31, 1996 the Corporation, including its subsidiaries, had
170 full-time employees and 115 part-time employees. The employees are not
represented by a collective bargaining unit. Management believes its
relationship with its employees is good.
Competition
The Bank faces strong competition in its attraction of savings deposits
and in the origination of real estate loans. Its most direct competition for
savings deposits has historically come from other thrift institutions and
commercial banks located in Burlington County and the contiguous counties. The
Bank's competition for real estate loans is principally from other thrift
institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers, and home builders. The Bank competes for
deposits by offering depositors a wide variety of savings accounts, checking
accounts, convenient office locations and hours, tax-deferred retirement
programs and other miscellaneous services.
20
<PAGE>
Regulation
Set forth below is a brief description of certain laws which are related
to the regulation of the Bank and the Corporation. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Corporation
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for
stockholders of the Corporation.
Restrictions on Acquisitions. If the Corporation acquires control of
another savings institution as a separate subsidiary (other than a financially
troubled institution acquired pursuant to special provisions of the Federal
Deposit Insurance Act), the Corporation would become a multiple savings and loan
holding company whose activities and those of its subsidiaries (other than the
Bank or any other savings association) would become subject to restrictions
under the Home Owners' Loan Act ("HOLA"). No such multiple savings and loan
holding company or subsidiary thereof that is not a savings association may
commence, or continue for more than 180 days after becoming a multiple savings
and loan holding company or subsidiary thereof, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or an escrow business; (iii)
holding or managing properties used or occupied by a subsidiary savings
association; or (iv) acting as a trustee under deeds of trust. In addition,
unless prohibited or limited by the OTS, such a multiple savings and loan
holding company may engage in non-banking activities permissible for bank
holding companies, including, but not limited to, investment advice, leasing,
underwriting credit insurance, management consulting services, and securities
brokerage activities, as the Federal Reserve Board determines under section
4(c)(8) of the Bank Holding Company Act of 1956 ("BHCA"), and may engage in
those activities authorized by the OTS. Such a multiple savings and loan holding
company must obtain prior OTS approval before it may engage in any particular
activity permissible for bank holding companies under section 4(c)(8) of the
BHCA.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control" as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
21
<PAGE>
Payment of Dividends. The Corporation's principal source of income is
dividends to the extent declared and paid by the Bank. Therefore, restrictions
on the Bank's ability to pay dividends may impact on the Corporation's ability
to pay dividends to stockholders.
Regulation of the Bank
General. As a federally-chartered, SAIF-insured savings bank, the Bank is
subject to extensive regulation by the OTS and the FDIC. Lending activities and
other investments must comply with various federal statutory and regulatory
requirements. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Corporation, the Bank and
their operations.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") imposes a number of mandatory supervisory measures on savings
associations, such as the Bank. The FDICIA requires financial institutions to
take certain actions relating to their internal operations, including: providing
annual reports on financial condition and management to the appropriate federal
banking regulators; having an annual independent audit of financial statements
performed by an independent public accountant; and establishing an independent
audit committee comprised solely of outside directors. The FDICIA also imposes
certain operational and managerial standards on financial institutions relating
to internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits. The FDICIA also
requires the FDIC to assess deposit insurance premiums based on risk. As of
December 31, 1996 management of the Bank believes it is in compliance with the
regulations adopted pursuant to FDICIA.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). FIRREA gives the FDIC the authority to suspend the deposit
insurance of any savings association without tangible capital. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially, the institution fails to enter into and remain in compliance with an
approved capital plan or the institution is operating in an unsafe or unsound
manner.
22
<PAGE>
Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. This
risk classification is based on an institution's capital group and supervisory
subgroup assignment. In addition, the FDIC is authorized to increase such
deposit insurance rates, on a semi-annual basis, if it determines that the
reserve ratio of the SAIF will be less than the designated reserve ratio of
1.25% of SAIF-insured deposits. In setting these increased assessments, the FDIC
must seek to restore and preserve the ratio to that designated reserve level, or
such higher reserve ratio as established by the FDIC. In addition, under the
FDICIA, the FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the U.S. Treasury or for any other reason deemed necessary by the
FDIC. The Bank's federal deposit insurance premium expense for the year ended
December 31, 1996, amounted to $947 thousand.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $2.7 million
pre-tax expense for this assessment at September 30, 1996, and such assessment
was paid on November 27, 1996. Effective January 1, 1997, deposit insurance
assessments for SAIF members were reduced on an annual basis through the end of
1999. Thereafter, assessments for BIF and SAIF members are expected to be the
same and the SAIF and BIF may be merged. It is expected that these continuing
assessments for both the SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Bank is expected to
decline.
Examination Fees. In addition to federal deposit insurance premiums,
savings institutions like the Bank are required by OTS regulations to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a semi-annual basis and is computed based on total assets of the
institution, including subsidiaries.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to 3% of
total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of
total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained income), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, plus purchased mortgage servicing rights valued at the lower of
90% of fair market value, 90% of original cost or 100% of the current amortized
book value as determined under GAAP, and qualifying supervisory goodwill, less
nonqualifying intangible assets.
The OTS leverage ratio regulation establishes a core capital ratio of at
least 3% for those savings associations in the strongest financial and
managerial condition based on the "CAMEL" rating system in
23
<PAGE>
use by the OTS at December 31, 1996. Those savings associations receiving a
CAMEL rating of "1", the best possible rating on a scale of 1 to 5, are required
to maintain a ratio of core capital to adjusted total assets of 3%. All other
savings associations are required to maintain minimum core capital of at least
4% of total adjusted assets, with a maximum core capital ratio requirement 5%.
In determining the required minimum core capital ratio, the OTS will assess the
quality of risk management and the level of risk in each savings association on
a case-by-case basis. The OTS did not indicate in the proposed regulation the
standards it will use in establishing the appropriate core capital requirement
for savings associations not rated "1" under the CAMEL rating system. At
December 31, 1996, the Savings Bank's ratio of core capital to total adjusted
assets was 7.23%.
The OTS regulations also require savings associations to deduct from
capital, for purposes of meeting the leverage tangible and risk-based capital
requirements, their investments in and loans to a subsidiary engaged in
activities not permissible for a national bank ("nonconforming subsidiaries") in
increasing amounts until fully deducted after June 30, 1994 (or June 30, 1996 if
the OTS specifically permits such extended period). At December 31, 1996, the
Bank had $1.3 million invested in nonconforming subsidiaries all of which was
deducted from the Bank's regulatory capital.
On January 20, 1993, the OTS issued a statement imposing certain
limitations on the inclusion of net deferred tax assets calculated under FAS 109
in regulatory capital. Deferred tax assets that are dependent on future taxable
income or the institution's tax planning strategies may only be counted as a
component of Tier 1 capital to the extent they do not exceed the lesser of: (i)
10% of Tier 1 capital, or (ii) the amount of such benefits which may be realized
based on one year's projected earnings.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the allowance for loan losses. Allowance
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
OTS Regulations set forth the methodology for calculating an interest rate
risk ("IRR") component which is added to the risk-based capital requirements for
OTS regulated thrift institutions. Under the Regulations, savings associations
with a greater than "normal" level of interest rate exposure will be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirement. Specifically, interest rate exposure will be measured as
the decline in net portfolio value due to a 200 basis point decrease in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure which is defined as two percent of the estimated
economic value of its assets.
Prompt Corrective Action. The FDICIA also establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of capitalization. Under the OTS final
rule implementing the prompt corrective action provisions, an institution shall
be deemed to be (i) "well capitalized" if it has
24
<PAGE>
total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio
(core or leverage capital to risk-weighted assets) of 6.0% or more, has a
leverage capital of 5.0% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risked-based ratio of 4.0% or more and a
leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of "well capitalized," (iii) "undercapitalized" if
it has a total risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a leverage capital ratio that
is less than 4.0% (3.0% in certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a leverage
capital ratio that is less than 3.0% and (v) "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than
2.0% In addition, under certain circumstances, a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category
(except that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized).
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Corporation, and the OTS has the authority under
its supervisory powers to prohibit the payment of dividends to the Corporation.
In addition, the Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Bank below the amount required for the liquidation account established pursuant
to the Bank's Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all requirements before and after a
proposed capital distribution ("Tier 1 institution") and has not been advised by
the OTS that it is in need of more than the normal supervision can, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess over its capital requirements) at the beginning of
the calendar year, or (ii) 75% of its net income over the most recent four
quarter period. Any additional capital distributions require prior regulatory
approval. As of December 31, 1996, the Bank was a Tier 1 institution. In the
event the Bank's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Finally, under the FDICIA, a savings association is prohibited from making
a capital distribution if, after making the distribution, the savings
association would be "undercapitalized".
Qualified Thrift Lender Test. HOLA requires savings institutions to meet a
QTL test. If the Bank maintains an appropriate level of Qualified Thrift
Investments (primarily residential mortgages and related investments, including
certain mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full borrowing privileges from the FHLB of New York.
The required percentage of QTIs is 65% of portfolio assets (defined as all
assets minus intangible assets, property used
25
<PAGE>
by the institution in conducting its business and liquid assets equal to 10% of
total assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings associations may include shares of stock
of the FHLBs, FNMA and FHLMC as qualifying QTIs. The method for measuring
compliance with the QTL test is on a monthly basis in nine out of every 12
months. As of December 31, 1996, the Bank was in compliance with its QTL
requirement with 79.72% of its assets invested in QTIs.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The Bank received an "Outstanding" rating as a result of
its last community reinvestment evaluation in October 1995.
Loans-to-One Borrower. Under the HOLA, as amended, savings institutions
are subject to the national bank limits on loans-to-one borrower. Generally, a
savings association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the association's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. The Bank does not have any loans to one borrower which
exceed these limits.
Transactions With Related Parties. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
transactions with non-affiliates. In addition, certain of these transactions are
restricted to a percentage of the Bank's capital. Affiliates of the Bank include
the Corporation and any company which would be under common control with the
Bank. In addition, a savings association may not lend to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate which is not a subsidiary. The OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a
case-by-case basis.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. The Bank's liquidity ratio equalled 11.6% at December 31,
1996.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term U.S. Government obligations), and long-term assets (e.g., U.S.
Government obligations of more than one and less than five years and state
agency obligations with a minimum term of 18 months). The regulations governing
liquidity requirements include as liquid assets debt securities hedged with
forward commitments obtained from, or debt securities subject to repurchase
agreements with, members of the Association of Primary Dealers in the United
States Government Securities or banks whose accounts are insured by the FDIC,
debt securities directly hedged with a short financial future position, and debt
securities that provide the holder with a right to redeem
26
<PAGE>
the security at par value, regardless of the stated maturities of the
securities. FIRREA also authorized the OTS to designate as liquid assets certain
mortgage-related securities with less than one year to maturity. Short-term
liquid assets currently must constitute at least 1% of an association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Monetary penalties may be imposed upon associations for violations of liquidity
requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1996, the Bank had $3.6 million in
FHLB stock, which was in compliance with this requirement.
The FHLB is required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the year ended December 31, 1996, dividends paid by the FHLB
of New York to the Bank totalled $253 thousand.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily non-interest checking and
interest-bearing checking accounts) and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy the liquidity requirements that are imposed by the OTS.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at December 31, 1996.
27
<PAGE>
Item 2. Properties
The following table sets forth the location of the Bank's offices, the net
book value of each facility, including furniture, fixtures and equipment, as
well as certain additional information relating to these offices as of December
31, 1996. The net book value of the Bank's investment in office property and
equipment, including electronic data processing equipment, totalled $14.8
million at December 31, 1996.
<TABLE>
<CAPTION>
Year Facility
Opened or Square
Acquired Total Net Book Footage of Owned/
in Merger Investment Value(1) Building Leased
--------- ---------- -------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Burlington Township.............. 1962 $3,536 $1,525 6,624 Owned
Administrative Building
811 Sunset Road & Salem Road
Burlington, NJ 08016
Burlington Township.............. 1992 2,819 2,131 24,315 Owned
Administrative Building
3 Sunset Road & Route 541
Burlington, NJ 08016
Burlington Township Branch....... 1984 1,209 852 3,512 Owned
809 Sunset Road & Salem Road
Burlington, NJ 08016
City of Burlington Branch........ 1958 358 149 3,575 Owned
352 High Street
Burlington, NJ 08016
Medford Lakes Branch............. 1967 519 178 1,848 Owned
Lakes Shopping Center
712 Stokes Road
Medford, NJ 08055
Moorestown Branch................ 1979 1,061 601 5,473 Owned
53 East Main Street
Moorestown, NJ 08057
Edgewater Park Branch............ 1975 774 545 2,600 Owned
1149 Cooper Street & Elm Street
Edgewater, NJ 08010
Mt. Laurel Branch................ 1973 1,590 1,109 4,700 Owned
4522 Church Road & Church Street
Mt. Laurel, NJ 08054
Lumberton Branch................. 1991 764 550 2,856 Leased (2)
Lumberton Plaza
1636-61 Route 38
Lumberton, NJ 08048
Willingboro Branch............... 1991 418 338 1,617 Owned
399 Charleston Road & JFK Way
Willingboro, NJ 08046
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Year Facility
Opened or Square
Acquired Total Net Book Footage of Owned/
in Merger Investment Value(1) Building Leased
--------- ---------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Medford Branch................ 1991 117 32 2,500 Leased
Taunton Forge Shopping Center
200 Tuckerton Road & Taunton Road
Medford, NJ 08055
Southampton Branch............ 1992 656 528 2,250 Owned
1841 Route 70 & Red Lion Circle
Southampton, NJ 08088
Eastampton Branch............. 1994 565 452 2,266 Owned
1191 Woodlane Road
Eastampton, NJ 08060
Willingboro East Branch....... 1994 625 521 3,200 Owned
611 Beverly-Rancocas Road
Willingboro, NJ 08046
Willingboro West Branch....... 1994 405 363 2,130 Owned
1 Rose Street & Beverly-Rancocas Road
Willingboro, NJ 08046
Delran Branch................. 1995 630 606 2,891 Owned
3002 North Route 130
Delran, NJ 08075
Bordentown Branch............. 1995(5) 486 460 3,600 Owned
335 Farnsworth Avenue
Bordentown, NJ 08505
Main Branch................... 1996(6) 89 75 3,600 Owned
3 Sunset Road & Route 541
Burlington, NJ 08016
Riverton Branch............... 1996(7) 530 524 7,600 Owned
604 Main and Harrison Streets
Riverton, NJ 08077
Larchmont Branch.............. 1996(8) 488 486 3,450 Owned
3320 Route 38
Mt. Laurel, NJ 08054
Voorhees Land................. 1990 373 373 N/A Owned
Evesham Road & Main Street
Voorhees, NJ 08043
Cinnaminson Building.......... 1994(3) 545 541 32,200 Owned
2601 & 2603 Route 130
Cinnaminson, NJ 08077
Medford 541 Land.............. 1994(4) 262 262 N/A Owned
7 Wilkins Station Road
Medford, NJ 08055
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Year Facility
Opened or Square
Acquired Total Net Book Footage of Owned/
in Merger Investment Value(1) Building Leased
--------- ---------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Cinnaminson Land.............. 1995 182 182 N/A Owned
1703 Highland Avenue
Cinnaminson, NJ 08077
Medford 541-2 Land............ 1995 267 267 N/A Owned
Church Road & Route 541
Medford, NJ 08055
Medford Lakes Property........ 1996(9) 794 794 6,570 Owned
700 Stokes Road
Medford, NJ 08055
Burlington Land............... 1996(10) 312 312 N/A Owned
Neck Road
Burlington, NJ 08016
------- -------
Total..................... $20,374 $14,756
======= =======
</TABLE>
- --------------------
(1) As of December 31, 1996. Represents the net book value of land, building,
furniture, fixtures and equipment owned by the Bank.
(2) Lease expires August 20, 2021.
(3) Purchased in April 1994, a future location for retail banking.
(4) Medford 541 land purchased in September 1994, will be put up for sale in
lieu of another parcel of land.
(5) Branch opened in February 1996.
(6) Branch opened in April 1996.
(7) Branch opened in September 1996.
(8) Branch opened in November 1996.
(9) Purchased in May 1996 and is a future location for retail banking.
(10) Purchased in December 1996 and is a future location for retail banking.
Item 3. Legal Proceedings
- --------------------------
The Bank is periodically involved as a plaintiff or defendant in various
legal actions, such as actions to enforce liens, condemnation proceedings on
properties in which the Bank holds mortgage interests, matters involving the
making and servicing of mortgage loans and other matters incident to the Bank's
business. In the opinion of management, none of these actions individually or in
the aggregate is believed to be material to the financial condition or results
of operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Stock Market
Information" in the Corporation's Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1996 (the "Annual Report") is incorporated herein by
reference.
30
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The information contained in the table captioned "Financial Highlights" in
the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Corporation's financial statements are listed in Item 14 herein are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
----------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1997 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
The executive officers of the Corporation are as follows:
Name Age(1) Position
- ---- ------ --------
Charles B. Yates.......... 57 Chairman of the Board
Craig W. Yates............ 54 President and Chief Executive Officer
Channing L. Smith......... 53 Vice President and Chief Financial
Officer
James E. Igo.............. 40 Senior Vice President and Chief
Lending Officer
Thomas M. Topley.......... 36 Senior Vice President and Corporate
Secretary
31
<PAGE>
- --------------
(1) At December 31, 1996.
The principal office of each executive officer is set forth below.
Charles B. Yates is Chairman of the Board of the Corporation and the Bank.
Mr. Yates has been a private investor for seven years. He previously was
president of Yates Industries, Inc., a New York Stock Exchange listed
manufacturing company from 1967 to 1982. He was also Vice Chairman of Square D
Corporation from 1982 to 1983 and served as Assemblyman and State Senator in the
New Jersey Legislature from 1972 to 1982.
Craig W. Yates serves as President and Chief Executive Officer. He became
a director of the Bank in January 1990 and President of the Corporation and the
Bank on December 31, 1990. For the previous five years, Mr. Yates was a private
investor. In his capacity as President, Mr. Yates is responsible for the
operations of the Corporation pursuant to the policies and procedures adopted by
the Board of Directors.
Channing L. Smith serves as Vice President and Chief Financial Officer
since October 1994. In this capacity he is responsible for the management of the
accounting, treasury, investment, and human resources of the Bank. From April
1994 to October 1994, he served as controller. From January 1990 to April 1993
he served as corporate Controller for Circuit Foil USA.
James E. Igo has served as Vice President and Senior Mortgage Lending
Officer since November 1991. In that capacity he is responsible for overall loan
production, credit quality, product development, loan servicing and the creation
of lending policies and procedures. From September 1990 to November 1991, he
served as the Vice President, Commercial Lending. Prior to 1990, Mr. Igo was
Senior Vice President and Senior Lending Officer for a commercial bank.
Thomas M. Topley has served as Vice President of Operations since April
1993 and as Corporate Secretary since April 1992. In that capacity, he is
responsible for corporate records, retail branch administration, data processing
and accounting operations. From June 1990 to April 1993, Mr.
Topley served as Vice President and Controller for the Bank.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and Principal
Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
32
<PAGE>
Information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K*
- -----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. The following financial statements and the report of
independent auditors of the Registrant included in the
Registrant's 1996 Annual Report to Stockholders are
incorporated herein by reference and also in Item 8 hereof.
(a) Report of Coopers & Lybrand L.L.P.
(b) Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995
(c) Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994
(d) Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
(e) Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1996, 1995 and
1994
(f) Notes to Consolidated Financial Statements
2. No financial statement schedules are provided herein because
the required information is either not applicable or not
required or is shown in the consolidated financial statements
or in the notes thereto.
3. Exhibits
3.1 Certificate of Incorporation (Incorporated by reference
to the Registrant's Form S-1 Registration Statement No.
33-24340).
3.2 Bylaws (Incorporated by reference to the Registrant's
Form S-1 Registration Statement No. 33-24340).
33
<PAGE>
4 Agreement to furnish copy to Securities and Exchange
Commission upon request of Indenture dated July 28,
1994, relating to 10% Subordinated Debentures due 2004
in aggregate principal amount of $10 million.
(Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1994).
10.1 Stock Option and Incentive Plan (Incorporated by
reference to the Registrant's Form S-8 Registration
Statement No. 33-24340).
11 Statement regarding computation of per share earnings.
13 Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1996.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
(b) No Reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this Report.
- -------------------
* Incorporated by reference from the Registrant's 1996 Annual Report to
Stockholders attached hereto as Exhibit 13.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: March 28, 1997 By: /s/ Craig W. Yates
----------------- --------------------------------
Craig W. Yates, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Dated
/s/ Charles B. Yates March 28, 1997
- ------------------------------------------------ ----------------------
Charles B. Yates
Chairman of the Board
/s/ Craig W. Yates March 28, 1997
- ------------------------------------------------ ----------------------
Craig W. Yates
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ George J. Barber March 28, 1997
- ------------------------------------------------ ---------------------
George J. Barber, Director
/s/ Channing L. Smith March 28, 1997
- ------------------------------------------------ ---------------------
Channing L. Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Edward J. Staats, Jr. March 28, 1997
- ------------------------------------------------ ---------------------
Edward J. Staats, Jr., Director
/s/ Wayne H. Page March 28, 1997
- ------------------------------------------------ ---------------------
Wayne H. Page, Director
/s/ James C. Lignana March 28, 1997
- ------------------------------------------------ ---------------------
James C. Lignana, Director
/s/ Dominic W. Flamini March 28, 1997
- ------------------------------------------------ ---------------------
Dominic W. Flamini, Director
/s/ Vincent R. Farias March 28, 1997
- ------------------------------------------------ ----------------------
Vincent R. Farias, Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
3.1 Certificate of Incorporation (Incorporated by reference to the
Registrant's Form S-1 Registration Statement No. 33-24340).
3.2 Bylaws (Incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-24340).
4 Agreement to furnish copy to Securities and Exchange Commission upon
request of Indenture dated July 28, 1994, relating to 10% Subordinated
Debentures due 2004 in aggregate principal amount of $10 million.
(Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.1 Stock Option and Incentive Plan (Incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 33-24340).
11 Statement regarding computation of per share earnings.
13 Annual Report to Stockholders for the Fiscal Year Ended December 31,
1996.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedule
EXHIBIT 11
<PAGE>
Exhibit No. 11 Statement re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
At December 31,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income .................................................................... $3,025,821 $4,343,404 $4,455,455
Weighted average common shares outstanding .................................... 2,470,361 2,504,322 2,575,938
Common stock equivalents due to dilutive effect of stock options............... 54,129 60,844 74,696
Total weighted average common shares and equivalents outstanding............... 2,524,490 2,565,166 2,650,634
Primary earnings per share .................................................... $ 1.20 $ 1.69 $ 1.68
Total weighted average common shares and equivalents outstanding.............. 2,524,490 2,565,166 2,650,634
Additional dilutive shares using the higher of the end of period
market value or average market value for the period when utilizing
the treasury stock method regarding stock options ........................... 2,779 4,578 250
Total outstanding shares for fully diluted earnings per share computation...... 2,527,269 2,569,774 2,650,884
Fully diluted earnings per share .............................................. $ 1.20 $ 1.69 $ 1.68
</TABLE>
EXHIBIT 13
<PAGE>
<PAGE>
CORPORATE PROFILE
FMS Financial Corporation is the holding company for Farmers & Mechanics Bank.
Farmers & Mechanics Bank, with total assets of $542 million, is the largest
community bank headquartered in its primary market area of Burlington County,
New Jersey.
Founded in Burlington City in 1871 under the name of Farmers' and Mechanics'
Building and Loan Association, the Bank operates eighteen banking offices, all
of which are in Burlington County, New Jersey.
The daily stock quotation for FMS Financial Corporation is listed in the Nasdaq
National Market System published in The Wall Street Journal, the Philadelphia
Inquirer and other leading newspapers under the trading symbol of FMCO.
<PAGE>
FINANCIAL HIGHLIGHTS FINANCIAL CONDITION (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Assets $541,710 $501,550 $483,776 $445,029 $432,072
Loans receivable and loans held
for sale, net 306,871 288,400 283,260 269,264 254,989
Deposits 453,277 428,809 429,431 406,017 402,172
Stockholders' equity 33,826 33,053 29,159 25,906 21,582
</TABLE>
OPERATIONS: (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Interest income $36,841 $35,201 $32,270 $31,510 $31,836
Interest expense 18,978 18,041 15,336 16,100 18,854
Net interest income 17,863 17,160 16,934 15,410 12,982
Net income 3,026 4,343 4,455 4,215 1,752
Earnings per common share 1.20 1.69 1.68 1.63 0.68
Dividends declared per common
share 0.20 0.20 0 0 0
Weighted average common shares and
common stock equivalents outstanding 2,524 2,565 2,651 2,580 2,574
</TABLE>
OTHER SELECTED DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net interest rate spread 3.50% 3.49% 3.64% 3.49% 3.24%
Net interest margin 3.66 3.66 3.72 3.62 3.36
Return on average assets 0.60 0.89 0.94 0.96 0.43
Return on average equity 8.99 14.00 16.01 17.80 8.20
Dividend payout ratio 16.67 11.83 0.00 0.00 0.00
Equity-to-asset ratio 6.24 6.59 6.03 5.82 4.99
</TABLE>
<PAGE>
1.
TO OUR SHAREHOLDERS:
We are pleased to report continued progress in building our community
banking franchise in Burlington County, New Jersey. During 1996, Farmers &
Mechanics Bank increased assets, deposits, loans, branches, personnel, and
service to our customers.
The bank had good operating results for 1996, but they were significantly
offset by the assessment to recapitalize the SAIF insurance fund. This is
expected to be a one-time charge that will result in lower deposit insurance
costs in the future.
We have completed the move to our headquarters building purchased several
years ago and took over the branch bank in the building in 1996. We also opened
branches in Bordentown, Riverton and Mount Laurel-Larchmont in buildings
purchased from Corestates and PNC. The decision of larger banks to consolidate
and close some branches has created excellent opportunities for us to make
significant additions to our branch system. We also already own a number of good
locations to build future branches.
The most important activity in a community bank is customer service. During
1996 we introduced Sunday Banking with all of our drive-thrus open from 12 to 4
and three of our larger regional branches also open indoors for full banking
service and new accounts. We also began to use a signature in the computer
system that reduces the time necessary to handle check cashing transactions. For
1997, we are introducing Free Business Checking with no account balance or per
check charges. We have been very successful with Free Personal Checking over the
last several years. More services, additional offices and longer hours of
banking increase our operating costs, but are really an investment in building
core deposits.
The banking industry has continued to consolidate and we believe that this
is good for the community banks that remain. During 1996 our competitors,
Midlantic and Chemical, merged into PNC. A local commercial bank, Burlington
County Bank, was acquired by Trenton Savings. During 1997, Summit Bank will
acquire BMJ Financial and Collective Bancorp, both of which are significant
competitors in Burlington County. We believe there is a significant difference
between community banks and the larger institutions, in service and decision
making, and that a local organization can compete very effectively against the
larger banks.
Once again we want to express our appreciation for the loyalty of our
customers, the dedicated efforts of our staff, and the support of shareholders
in building the continued success of this institution.
Sincerely,
Craig W. Yates Charles B. Yates
President Chairman
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
FMS Financial Corporation ("the Corporation") is the parent company of
Farmers & Mechanics Bank ("the Bank"), its only subsidiary. Earnings of the
Corporation are primarily dependent on the earnings of the Bank as the
Corporation has engaged in no significant operations of its own. Accordingly,
the earnings of the Corporation are largely dependent on the receipt of earnings
from the Bank in the form of dividends.
The earnings of the Bank depend primarily on its net interest income. Net
interest income is affected by: (i) the volume of interest-earning assets and
interest-bearing liabilities (see "Rate Volume Analysis"), (ii) rates of
interest earned on interest-earning assets and rates paid on interest-bearing
liabilities and (iii) the difference ("interest rate spread") between average
rates of interest earned on interest-earning assets and average rates paid on
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.
The Bank also derives income from service charges on customer deposit
accounts and fees on loans. In addition to interest expense, the Bank incurs
operating expenses such as salaries and employee benefits, deposit insurance
premiums, depreciation, property maintenance and advertising.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread which can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "GAP", provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates over a period of time. A GAP is
considered positive when the amount of interest-rate sensitive assets maturing
or repricing over a specified period of time exceeds the amount of interest-rate
sensitive liabilities maturing or repricing within that period and is considered
negative when the amount of interest-rate sensitive liabilities maturing or
repricing over a specified period of time exceeds the amount of interest-rate
sensitive assets maturing or repricing within that period. Generally, during a
period of rising interest rates, a negative GAP within a given period of time
would adversely affect net interest income, while a positive GAP within such
period of time may result in an increase in net interest income; during a period
of falling interest rates, a negative GAP within a given period of time may
result in an increase in net interest income while a positive GAP within such
period of time may have the opposite effect.
<PAGE>
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
expected to reprice or mature in each of the future time periods shown. The
amount of assets or liabilities shown which reprice or mature during a
particular period were determined by the contractual terms or assumed decay
rates of the asset or liability. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-backed securities, and
assumes that adjustable-rate mortgage loans will reprice at contractual
repricing intervals. There has been no adjustment for the impact of future loan
commitments and loans in process.
<TABLE>
<CAPTION>
FARMERS & MECHANICS BANK 3 MONTHS 3 MONTHS 1 TO 3 3 TO 5 OVER 5
GAP TABLE OR LESS TO 1 YEAR YEARS YEARS YEARS TOTAL
-------- --------- ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Investment securities $ 29,510 $ 7,837 $ 7,889 $ 4,287 $ 47,493 $ 97,016
Loans 57,569 40,886 57,439 44,724 109,035 309,653
Mortage-backed securities 6,466 41,279 20,818 11,817 23,933 104,313
--------- --------- ---------- ----------- -------- --------
Total 93,545 90,002 86,146 60,828 180,461 510,982
--------- --------- ---------- ----------- -------- --------
Interest-bearing
liabilities:
Now, Super Now, Passbook
and Club accounts 8,531 18,185 36,217 23,202 31,674 117,809
Money market accounts 11,664 22,610 19,232 2,972 483 56,961
Certificates of Deposit 35,520 106,145 66,418 32,359 512 240,954
Borrowings 4,406 5,500 6,250 15,000 4,092 35,248
--------- --------- ---------- ----------- -------- --------
Total 60,121 152,440 128,117 73,533 36,761 450,972
--------- --------- ---------- ----------- -------- --------
Interest Rate Sensitivity
GAP $ 33,424 $ (62,438) $ (41,971) $ (12,705) $143,700 $ 60,010
========= ========= ========= ========== ======== ========
Cumulative Interest Rate
Sensitivity GAP $ 33,424 $ (29,014) $ (70,985) $ (83,690) $ 60,010
========= ========= ========= ========== ========
Ratio of Interest Rate
Sensitive Assets to
Interest Rate
Sensitive Liabilities 155.59 % 59.04 % 67.24 % 82.72 % 490.90 % 113.31 %
========= ========= ========= ========== ======== ========
RATIO OF CUMULATIVE GAP
TO TOTAL BANK ASSETS 6.18 % (5.36)% (13.11)% (15.46)% 11.09 %
========= ========= ========= ========== ========
</TABLE>
The Bank's analysis of its interest-rate sensitivity incorporates certain
assumptions concerning the amortization of loans and other interest-earning
assets and the repricing characteristics of deposits. The Bank has made the
following assumptions in calculating the values on the GAP table:
adjustable-rate mortgage loans have a constant prepayment rate of 10%;
fixed-rate mortgage loans have a prepayment rate that is constant through time
at 6.0%; fixed and adjustable rate commercial loans have a constant prepayment
rate of 10%; consumer loans have a prepayment rate that is constant over time at
12%; mortgage-backed securities and CMO/REMIC's have a prepayment rate that is
constant over time at 10%. Core savings and NOW checking deposits have a decay
rate of 17% which is based on OTS assumption rates from industry experience;
money market deposits have a decay rate of 80%. The interest-rate sensitivity of
the Bank's assets and liabilities illustrated in the table could vary
substantially if different assumptions were used or if actual experience differs
from the assumptions used.
The table indicates the time period in which interest-earning assets and
interest-bearing liabilities will mature or reprice in accordance with their
contractual terms or assumed decay rates, as applicable. However, this table
does not necessarily indicate the impact of general interest rate movements on
the Bank's net interest income because the repricing of various categories of
assets and liabilities is discretionary and is subject to competition and other
pressures. As a result, various assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
The Bank measures its interest rate risk (IRR) using the OTS's net
portfolio value (NPV) method. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts. An institution's IRR is measured as the change to its NPV as a result
of a hypothetical 200 basis point change in market interest rates. Based on this
analysis at December 31, 1996, the Bank would experience a 261 basis point
decrease in its NPV as a percent of assets if rates rise by 200 basis points in
comparison to a flat rate scenario and a 123 basis point increase in NPV if
rates decline 200 basis points.
RESULTS OF OPERATIONS
Net Interest Income
The earnings of the Bank depend primarily upon the level of net interest
income, which is the difference between interest earned on its interest-earning
assets, such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits and borrowings. Net interest income is a function
of the interest rate spread, which is the difference between the weighted
average yield earned on interest-earning assets and the weighted average rate
paid on interest-bearing liabilities, as well as the average balance of
interest-earning assets as compared to interest-bearing liabilities. Net income
is also affected by non-interest income, such as gains (losses) on sales of
loans and investments, provision for loan losses and real estate owned, service
charges and other fees, and operating expenses.
<PAGE>
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average rates paid on liabilities for the periods indicated. Such yields and
rates are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods presented.
AVERAGE BALANCES, INTEREST AND YIELDS/RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ------------------------------ ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning
assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $296,276 $ 23,797 8.03% 289,665 $ 23,572 8.14% $ 280,041 $ 22,241 7.94%
Mortgage-backed securities 107,268 7,499 6.99% 122,838 8,034 6.54% 128,775 7,492 5.82%
Investment securities 84,762 5,545 6.54% 55,798 3,595 6.44% 46,591 2,536 5.44%
-------- -------- ------ ------- --------- ------- --------- -------- -------
Total interest-earning
assets 488,306 36,841 7.54% 468,301 35,201 7.52% 455,407 32,269 7.09%
-------- -------- ------ ------- --------- ------- --------- -------- -------
Interest-bearing
liabilities:
Deposits 429,413 16,176 3.77% 419,394 15,961 3.81% 429,341 14,539 3.39%
Borrowings 29,450 1,745 5.93% 17,889 1,031 5.76% 7,407 340 4.59%
Subordinated Debentures 10,000 1,057 10.57% 10,000 1,049 10.49% 7,684 456 5.93%
-------- -------- ------ ------- --------- ------- --------- -------- -------
Total interest-bearing
liabilities $468,863 18,978 4.05% $447,283 18,041 4.03% $ 444,432 15,335 3.45%
======== -------- ------- ======= --------- ------- ========= -------- -------
Net interest income $ 17,863 $ 17,160 $ 16,934
======== ========= =========
Interest rate spread 3.50% 3.49% 3.64%
====== ====== ======
Net yield on average
interest-earning assets 3.66% 3.66% 3.72%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing
liabiliies 104.15% 104.70% 102.47%
====== ====== ======
</TABLE>
RATE VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume; (ii) changes in rates; (iii) total change in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). Because average balances on loans include
non-performing loans which reduce the computed yield, a higher level of
non-performing loans affects both the changes due to volume and rate.
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 VS. 1995 1995 VS. 1994
------------------------ -----------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------------ -----------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
----- ------ ----- ---- ------ -----
(IN THOUSANDS)
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ (313) $ 538 $ 225 $ 567 $ 764 $ 1,331
Mortgage-backed securities 483 (1,018) (535) 887 (346) 541
Investment securities 84 1,866 1,950 558 501 1,059
------- -------- ------- ------- -------- --------
Total change - interest
income 254 1,386 1,640 2,012 919 2,931
------- -------- ------- ------- -------- --------
Interest expense:
Deposits (166) 381 215 1,759 (337) 1,422
Borrowings 48 666 714 210 481 691
Subordinated Debentures 8 0 8 456 137 593
------- -------- ------- ------- -------- --------
Total change - interest
expense (110) 1,047 937 2,425 281 2,706
------- -------- ------- ------- -------- --------
Net change in net interest
income $ 364 $ 339 $ 703 $ (413) $ 638 $ 225
======== ========= ======== ======= ======== ========
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
generally require the measurement of financial position and operating results in
terms of historical dollars (except investments available for sale), without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued the Statement of Financial Accounting
Standards No. 125 (SFAS No. 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" which is effective for the
Corporation beginning January 1, 1997. SFAS No. 125, which is to be applied
prospectively, provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on the
concept of control. It is anticipated that the adoption of SFAS No. 125 will not
have a material effect on the financial position or results of operation of the
Corporation.
<PAGE>
COMPARISONS OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income
The Corporation and its subsidiary recorded net income of $3.0 million for
the year ended December 31, 1996, or $1.20 per share as compared to net income
of $4.3 million, or $1.69 per share for the year ended December 31, 1995. Net
interest income was $17.9 million in 1996 compared to $17.2 million in 1995.
Provisions for loan losses remained consistent at $120 thousand during 1996 and
1995. Other income totaled $2.3 million in 1996 compared to $1.7 million for the
same period in 1995. Total operating expenses for the year ended December 31,
1996 were $15.7 million (includes $2.7 million for a one-time special assessment
to recapitalize the Savings Association Insurance Fund) compared to $11.9
million in the previous year. During 1996, the Corporation declared dividends
which totaled $.20 per share which resulted in a dividend payout ratio of
16.67%. The ability of the Corporation to pay dividends to shareholders is
directly dependent upon the ability of the Bank to pay dividends to the
Corporation. See Stockholders' Equity footnote.
Interest Income
Total interest income increased $1.6 million to $36.8 million in 1996 from
$35.2 million in 1995. The increase is attributable to increases in interest
income on investment securities of $1.9 million and loans of $225 thousand,
partially offset by a decrease in interest income on mortgage-backed securities
of $535 thousand.
The increase in interest income on investment securities was due to a $29.0
million increase in the average balance of investment securities to $84.8
million in 1996 from $55.8 million in 1995. The investment portfolio increased
due to the net purchase of $9.7 million in U.S. Agency notes and net increase of
and $11.0 million in reverse repurchase agreements and $7.5 million in
collaterialized mortgage obligations (CMOs). The increase in the average balance
of investment securities resulted in an increase in interest income of $1.9
million. The average yield increased to 6.54% in 1996 from 6.44% in 1995, which
resulted in an increase in interest income of $84 thousand.
The average balance of the loan portfolio increased $6.6 million to $296.3
million in 1996 from $289.7 million in 1995. During the year the Bank purchased
$14.5 million of adjustable rate mortgages from First Tennessee Bank. These
loans are residential mortgages on properties primarily located within the
Bank's lending area of Burlington County, NJ. The loan volume increase resulted
in a $538 thousand increase in interest income, partially offset by a $313
thousand decrease in interest income attributed to an 11 basis point decrease in
the average yield on the loan portfolio. The average yield on the loan portfolio
decreased to 8.03% in 1996 from 8.14% in 1995.
Interest income on mortgage-backed securities decreased $535 thousand in
1996 due to a volume decrease of the portfolio, partially offset by an increase
in the yield on the portfolio. The average balance of the portfolio decreased
$15.5 million to $107.3 million in 1996 from $122.8 million in 1995, resulting
in a decrease in interest income of $1.0 million. The decline in the average
balance is due to $24.4 million of principal paydowns, partially offset by
mortgage-backed securities purchases of $17.5 million during the year. The
average yield on the portfolio increased to 6.99% in 1996 from 6.54% in 1995,
which resulted in an increase in interest income of $483 thousand.
Interest Expense
Total interest expense increased $937 thousand to $19.0 million in 1996
from $18.0 million in 1995. The increase was due to an increase in interest
expense on deposits and borrowings.
Interest expense on deposits increased $215 thousand to $16.2 million in
1996 from $16.0 million in 1995. The average balance of deposits increased $10.0
million to $429.4 million in 1996 from $419.4 million in 1995, resulting in an
increase in interest expense of $381 thousand. The increase in deposits is
primarily due to an increase in the average balance of checking accounts in 1996
of $9.2 million to $72.8 million. This increase was partially offset by a
decline in the average rate paid on deposits of 4 basis points to 3.77% in 1996
from 3.81% in 1995, resulting in a decrease in interest expense of $166
thousand.
Interest expense on borrowings increased $714 thousand to $1.7 million in
1996 from $1.0 million in 1995. This increase was due to an increase in the
average balance of borrowings as well as an increase in the average rate. The
average balance of borrowing increased to $29.5 million in 1996 from $17.9
million in 1995, resulting in a $666 thousand increase in interest expense due
to volume. This was primarily the result of an $11.7 million increase in the
average balance of advances from the Federal Home Loan Bank during the year. The
average rate on borrowing increased to 5.93% during 1996 from 5.76% during 1995,
resulting in a $48 thousand increase in interest expense due to rate.
Provision For Loan Losses
The provision for loan losses remained constant at $120 thousand during
1996 and 1995. The determination of the allowance level for loan losses is based
on management's analysis of risk characteristics of various classifications of
loans, previous loan loss experience, estimated fair value of the underlying
collateral and current economic conditions.
Other Income (Expense)
Other income from operations was $2.3 million in 1996 compared with $1.7
million in 1995.
<PAGE>
Real estate owned operations, net in 1996 resulted in a loss of $175
thousand, which was comprised of $43 thousand in real estate owned operating
expenses, $124 thousand of provisions for loss on real estate, net, and realized
losses of $8 thousand on the sale of real estate owned properties.
Service charges collected on depositors' accounts increased $427 thousand
to $1.9 million in 1996 from $1.5 million in 1995. The increase is the result of
additional retail banking fees due to higher transaction volume during the year.
Operating Expenses
Total operating expenses increased $3.8 million to $15.7 million in 1996
from $11.9 million in 1995. The increase in operating expenses was primarily due
to a one-time special assessment of $2.7 million charged in connection with the
federal legislation requiring the recapitalization of the Savings Association
Insurance Fund (SAIF). Operating expenses also increased as a result of opening
four additional branches during 1996.
On September 30, 1996, the President signed legislation which required
savings institutions with SAIF insured deposits to pay a one-time special
assessment to facilitate the recapitalization of the SAIF. The assessment was
based on 65.7 cents per $100 of deposits at March 31, 1995. This assessment
resulted in a charge of approximately $2.7 million to operating expense during
the year ended December 31, 1996. The legislation also includes provisions
whereby at such time as the SAIF is adequately recapitalized, the Bank's future
deposit premiums will decrease from $.23 per $100 of deposits paid during 1996
to approximately $.065 in 1997 through the year 2000 and approximately $.025
through the year 2017.
Salaries and benefits increased $758 thousand to $7.0 million in 1996 from
$6.3 million in 1995. The increase was due to additional staff in the new
branches opened during the year as well as an increase in branch staff for
additional operating hours, principally for "Sunday Banking". Average full time
equivalent employees during 1996 were 236 as compared to 209 during 1995.
Occupancy and equipment expense increased $488 thousand to $2.5
million in 1996 from $2.1 million in 1995. This increase is due to additional
depreciation and occupancy expenses on four new branches opened in 1996, as well
as other facility and equipment additions and improvements during the year.
Purchased services expense decreased $105 thousand to $917 thousand in
1996 from $1.0 million in 1995. This decrease includes a reduction in check
processing costs attributed to the implementation of an in-house check
processing system in October 1995. The decrease in check processing costs were
partially offset by an increase in MAC charges of $83 thousand.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Income
The Corporation and its subsidiary recorded net income of $4.3 million for
the year ended December 31, 1995, or $1.69 per share as compared to net income
of $4.5 million, or $1.68 per share for the year ended December 31, 1994. Net
interest income was $17.2 million in 1995 compared to $16.9 million in 1994.
Provisions for loan losses in 1995 was $120 thousand compared to $66 thousand in
1994. Other income totaled $1.7 million in 1995 compared to $1.3 million for the
same period in 1994. Total operating expenses for the year ended December 31,
1995 were $11.9 million compared to $11.4 million in the previous year. During
1995, the Corporation declared dividends which totaled $.20 per share which
resulted in a dividend payout ratio of 11.83% during 1995.
Interest Income
Total interest income increased $2.9 million to $35.2 million in 1995 from
$32.3 million in 1994. The increase is attributable to increases in interest
income on loans, investment securities and mortgage-backed securities of $1.3
million, $1.1 million and $541 thousand, respectively.
The increase in interest income on loans was due to an increase in the
average volume of loans of $9.6 million, primarily due to an increase in the
average balance of fixed rate mortgages, adjustable rate mortgage loans and
commercial loans of $5.7 million, $3.7 million and $1.9 million, respectively,
which resulted in an increase in interest income of $764 thousand. The increase
in interest income was also the result of an increase of 20 basis points in the
average yield on the loan portfolio. The average yield on the portfolio
increased to 8.14% in 1995 from 7.94% in 1994 which resulted in an increase of
$567 thousand of interest income.
Interest income on investment securities increased $1.1 million to $3.6
million in 1995. The increase was the result of a $9.2 million increase in the
average balance of investments to $55.8 million in 1995 from $46.6 million in
1994 as well as an increase in the average yield on the investments. The
increase in the average balance of the portfolio was due to the purchase of
$18.5 million of U.S. Government Agency notes and $2.8 million of collateralized
mortgage obligations in 1995. The increase in the average balance of investment
securities resulted in an increase in interest income of $501 thousand. The
average yield increased to 6.44% in 1995 from 5.44% in 1994 which resulted in an
increase in interest income of $558 thousand.
<PAGE>
Interest income on mortgage-backed securities increased $541 thousand to
$8.0 million in 1995. The increase was due to an increase in the average yield
of these securities to 6.54% in 1995 from 5.82% in 1994, which resulted in a
$887 thousand increase in interest income. This increase was partially offset by
a decrease in the average balance of the portfolio. The average balance of
mortgage-backed securities declined $5.9 million to $122.8 million due to
principal paydowns of $19.8 million during the year, which resulted in a
decrease in interest income of $346 thousand.
Interest Expense
Total interest expense increased $2.7 million to $18.0 million in 1995 from
$15.3 million in 1994. The increase in interest expense was due to both an
increase in interest expense on deposits as well as borrowings.
Interest expense on deposits increased $1.4 million to $15.9 million in
1995 from $14.5 million in 1994. The average rate on deposits increased 42 basis
points to 3.81% during 1995 from 3.39% during 1994, resulting in an increase in
interest expense of $1.8 million. This increase was partially offset by a
decline in the average balance of deposits of $9.9 million to $419.4 million in
1995, resulting in a decrease in interest expense of $337 thousand. This was
primarily due to a decline in the average balance of money market accounts of
$12.4 million, partially offset by an increase in the average balance of
certificates of deposit of $7.1 million in 1995.
Interest expense on borrowings increased $691 thousand to $1.0 million in
1995 from $340 thousand in 1994. This increase was due to an increase in the
average balance of borrowings as well as an increase in the average rate. The
average balance of borrowing increased to $17.9 million in 1995 from $7.4
million in 1994, resulting in a $481 thousand increase in interest expense due
to volume. This was the result of a $10.2 million increase in the average
balance of advances from the Federal Home Loan Bank in 1995. The average rate on
borrowing increased to 5.76% in 1995 from 4.59% in 1994, resulting in a $210
thousand increase in interest expense due to rate.
Provision For Loan Losses
The provision for loan losses increased $54 thousand to $120 thousand during
1995 from $66 thousand in 1994. The determination of the allowance level for
loan losses is based on management's analysis of risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying collateral and current economic conditions.
Other Income (Expense)
Other income from operations was $1.7 million in 1995 compared with $1.3
million in 1994.
Loss from real estate held for development of $200 thousand was the result
of an additional provision to the valuation allowance. The allowance level was
adjusted in 1995 based on management's analysis of the current market conditions
relating to the two remaining land development properties.
Real estate owned operations, net in 1995 resulted in a loss of $92
thousand, which was comprised of $35 thousand in real estate owned operating
expenses, $234 thousand of provisions, for loss on real estate, net, and $177
thousand of realized gains on the sale of real estate owned properties.
Service charges collected on depositors' accounts increased $431 thousand
to $1.5 million in 1995 from $1.1 million in 1994. The increase is the result of
additional retail banking fees due to a higher transaction volume during the
year.
Operating Expenses
Total operating expenses increased $563 thousand to $11.9 million in
1995 from $11.4 million in 1994. The increase in operating expenses was
primarily due to the addition of one branch to the Bank's branch network during
the year.
Salaries and benefits increased $339 thousand to $6.3 million in 1995
from $5.9 million in 1994. The increase was due to additional staff in the new
branch opened during the year as well as an increase in administrative staffing.
Average full time equivalent employees during 1995 were 209 as compared to 196
during 1994.
Occupancy and equipment increased $131 thousand to $2.1 million in
1995 from $1.9 million in 1994. This increase is due to additional depreciation
and occupancy expenses on a new branch opened in 1995, as well as other facility
and equipment additions and improvements during the year.
Purchased services increased $176 thousand to $1.0 million in 1995
from $846 thousand in 1994 which includes an increase in MAC charges of $85
thousand as well as an increase in DDA processing of $11 thousand due to higher
transaction volume during the year.
Federal deposit insurance premiums decreased to $974 thousand in 1995 from
$1.0 million in 1994. The decrease is due to a decline in the average deposits
of the Bank as well as a full year of the lowered FDIC rate of $.23 per $100
which was changed during the last six months of 1994.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to fund loans, withdrawals
of deposits and other cash outflows in a cost effective manner. The Bank's
primary sources of funds are deposits and scheduled amortization and prepayments
of loan principal. The Bank also obtains funds from the sale and maturity of
investment securities and short-term investments as well as the maturity of
mortgage-backed securities and funds provided by operations. During the past
several years, the Bank has used such funds primarily to meet its ongoing
commitments to fund maturing time deposits and savings withdrawals, to fund
existing and continuing loan commitments and to maintain liquidity. While the
Bank has been able to fund its operations internally during recent periods, it
has periodically supplemented its liquidity needs with advances from the FHLB of
New York. At December 31, 1996 the Bank had $32.6 million in advances from the
Federal Home Loan Bank of New York. While loan payments, maturing investments
and mortgage-backed securities are relatively predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Bank's liquidity is also
influenced by the level of demand for funding loan originations.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid investments", which include certain United States
government and federal agency securities and other approved investments.
Regulations currently in effect require the Bank to maintain liquid assets of
not less than 5% of its withdrawable accounts plus short-term borrowings.
Short-term liquid assets must consist of not less than 1% of such accounts and
borrowings, which amount is also included in the 5% requirement. These levels
are changed from time to time by the regulators to reflect the current economic
conditions. The Bank has generally maintained liquidity in excess of required
levels. The Bank's regulatory liquidity and short-term liquidity was 11.55% and
7.31%, respectively, at December 31, 1996.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 31, 1997 is approximately $141.4 million. To the
extent these deposits do not remain at the Bank upon maturity, the Bank believes
it can replace these funds with deposits, FHLB advances or outside borrowings.
It has been the Bank's experience that a substantial portion of such maturing
deposits remain with the Bank.
At December 31, 1996, the Bank had loan commitments outstanding of $26.2
million, of which $3.5 million were for fixed-rate loans and $22.7 million were
for adjustable-rate loans. Funds required to fulfill the commitments are derived
primarily from loan repayments, net deposit inflows or, when appropriate,
borrowings.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") the Bank must have core capital equal to 3% of assets, of which
1.5% must be tangible capital, excluding goodwill. FIRREA also established
risk-based capital standards. In measuring the Bank's compliance with FIRREA
capital standards, the Bank must deduct from its regulatory capital calculation
investments in, and advances to, subsidiaries engaged in activities not
permissible for national banks. At December 31, 1996, the Bank exceeded all
three regulatory capital levels required under FIRREA. At December 31, 1996, the
Bank's regulatory tangible and core capital was $39.0 million or 7.23% of total
bank assets and risk-based capital was $41.6 million or 15.35% of risk- weighted
assets.
The Bank holds a substantial component of its investment portfolio in
mortgage-backed securities and collateralized mortgage obligations
(collectively, "MBS"). At the end of 1996, the total investment in MBS amounted
to $122.8 million, or 61% of total investments. These are instruments
collateralized by pools of residential and commercial mortgages, which return
interest and principal payments to the investor. Approximately 85% of the Bank's
MBS holdings are U.S. Government Agency securities (GNMA, FNMA, and FHLMC),
which carry either a direct government or a quasi-government guarantees and are
rated AAA in terms of quality. The Bank also owns non-agency MBS, issued by
major financial institutions, which are rated AAA and AA. MBS are generally very
liquid issues with major brokerage houses providing ready markets. However, MBS
are subject to prepayment and extension risk which can adversely affect their
yields and expected maturities.
<PAGE>
CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)
The following table presents summarized quarterly data for 1996 and 1995:
- --------------------------------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
1996 QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income $ 8,847 $9,028 $ 9,415 $9,551 $36,841
Total interest expense 4,657 4,663 4,834 4,824 18,978
------- ------ ------ ------ -------
Net interest income 4,190 4,365 4,581 4,727 17,863
Provision for loan losses 30 30 30 30 120
------- ------ ------ ------ -------
Net interest income after
provision for loan losses 4,160 4,335 4,551 4,697 17,743
Total other income 497 484 601 671 2,253
Total operating expenses 3,088 3,222 6,007(a) 3,374 15,691(a)
------- ------ ------ ------ -------
Income before income taxes 1,569 1,597 (855) 1,994 4,305
Federal and state income
taxes 567 485 (385) 612 1,279
------- ------ ------ ------ -------
Net income $ 1,002 $1,112 $ (470) $1,382 $ 3,026
======= ====== ===== ====== =======
Earnings per common share $ 0.39 $ 0.44 $(0.19) $ 0.56 $ 1.20
======= ====== ===== ====== =======
(a) Includes $2.7 million for the one-time assessment to recapitalize the SAIF
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
1995 Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
(In Thousands, except per share amounts)
Total interest income $8,444 $8,721 $9,013 $9,023 $35,201
Total interest expense 4,052 4,408 4,791 4,790 18,041
------ ------ ------ ------ -------
Net interest income 4,392 4,313 4,222 4,233 17,160
Provision for loan losses 30 30 30 30 120
------ ------ ------ ------ -------
Net interest income
after provision for loan losses 4,362 4,283 4,192 4,203 17,040
Total other income 438 446 458 348 1,690
Total operating expenses 2,967 2,961 2,993 2,995 11,916
------ ------ ------ ------ -------
Income before income taxes 1,833 1,768 1,657 1,556 6,814
Federal and state income taxes 669 639 600 563 2,471
------ ------ ------ ------ -------
Net income $1,164 $1,129 $1,057 $ 993 $ 4,343
====== ====== ====== ====== =======
Earnings per common share $ 0.45 $ 0.44 $ 0.42 $ 0.38 $ 1.69
====== ====== ====== ====== =======
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 9,572,347 $ 9,804,770
Interest-bearing deposits 296,702 124,334
Short term funds 50,500 56,476
------------- -------------
Total cash and cash equivalents 9,919,549 9,985,580
Investment securities held to maturity 67,601,343 43,564,913
Investment securities available for sale 25,446,520 22,767,981
Loans receivable - net 306,870,816 288,400,236
Mortgage-backed securities held to maturity 104,312,581 111,554,864
Accrued interest receivable:
Loans 1,754,117 1,749,652
Mortgage-backed securities 912,599 964,148
Investments 964,319 892,533
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 621,556 668,792
Office properties and equipment - net 14,756,238 12,773,479
Deferred income taxes 1,563,480 897,443
Excess cost over fair value of net assets acquired 812,599 997,505
Prepaid expenses and other assets 889,899 553,944
Subordinated Debentures issue cost - net 435,809 493,157
------------- -------------
TOTAL ASSETS $ 541,709,757 $ 501,550,059
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 453,276,534 $ 428,809,380
Advances from the Federal Home Loan Bank 32,550,000 24,500,000
Advances from Bank 6,691,758 0
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 106,463 182,444
Advances by borrowers for taxes and insurance 2,138,638 2,093,130
Accrued interest payable 860,545 888,456
Dividends payable 119,636 125,288
Other liabilities 2,140,009 1,898,861
------------- -------------
Total liabilities 507,883,583 468,497,559
------------- -------------
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 2,602,884 and 2,601,634 and shares outstanding 2,392,707
and 2,505,756 as of December 31, 1996 and 1995, respectively 260,288 260,163
Paid-in capital in excess of par 8,413,558 8,408,840
Unrealized loss on securities available for sale - net of deferred
income taxes (166,152) (236,154)
Guarantee of employee stock ownership plan debt (106,463) (182,444)
Retained earnings 28,487,903 25,951,864
Less: Treasury stock (210,177 and 95,878 shares, at cost, as of
December 31, 1996 and 1995, respectively) (3,062,960) (1,149,769)
------------- -------------
Total stockholders' equity 33,826,174 33,052,500
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 541,709,757 $ 501,550,059
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
INTEREST INCOME:
Interest income on:
<S> <C> <C> <C>
Loans $23,797,512 $23,572,092 $22,241,502
Mortgage-backed securities 7,499,231 8,033,982 7,492,533
Investments 5,544,668 3,594,867 2,535,568
----------- ----------- -----------
Total interest income 36,841,411 35,200,941 32,269,603
----------- ----------- -----------
INTEREST EXPENSE:
Interest expense on:
Deposits 16,176,223 15,961,110 14,539,097
Subordinated Debentures 1,057,348 1,049,015 456,306
Borrowings 1,745,032 1,031,043 339,840
----------- ----------- -----------
Total interest expense 18,978,603 18,041,168 15,335,243
----------- ----------- -----------
NET INTEREST INCOME 17,862,808 17,159,773 16,934,360
PROVISION FOR LOAN LOSSES 120,000 120,000 66,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 17,742,808 17,039,773 16,868,360
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 219,639 269,977 319,192
Gain on sale of loans 8,432 8,836 14,728
Gain (Loss) on sale of investment securities 54,406 0 (121,609)
Loss from real estate held for development 0 (200,000) 0
Real estate owned operations, net (174,503) (91,986) (258,685)
Service charges on accounts 1,946,307 1,519,078 1,087,928
Other income 199,097 184,687 233,172
----------- ----------- -----------
Total other income (expense) 2,253,378 1,690,592 1,274,726
----------- ----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 7,043,584 6,285,898 5,947,270
Occupancy and equipment 2,541,296 2,053,513 1,922,159
Purchased services 916,803 1,021,442 845,537
Federal deposit insurance premiums 946,594 973,503 1,022,196
SAIF recapitalization assessment 2,720,765 0 0
Professional fees 285,972 367,160 363,347
Advertising 42,956 25,250 24,104
Other 1,192,896 1,189,114 1,227,855
----------- ----------- -----------
Total operating expenses 15,690,866 11,915,880 11,352,468
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,305,320 6,814,485 6,790,618
INCOME TAXES:
Current 2,044,225 2,526,805 2,076,887
Deferred (764,726) (55,724) 258,276
----------- ----------- -----------
Total income taxes 1,279,499 2,471,081 2,335,163
NET INCOME $ 3,025,821 $ 4,343,404 $ 4,455,455
=========== =========== ===========
EARNINGS PER COMMON SHARE $ 1.20 $ 1.69 $ 1.68
=========== =========== ===========
Weighted average common shares and
common stock equivalents outstanding 2,524,490 2,565,166 2,650,634
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 (a) 1994 (a)
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 3,025,821 $ 4,343,404 $ 4,455,455
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 120,000 120,000 66,000
Depreciation and amortization 1,639,469 1,622,710 1,735,995
Provision for real estate owned 124,315 354,453 157,526
Provision for real estate held for development 0 200,000 0
Realized (gains) and losses on:
Sale of loans and loans held for sale (8,432) (8,836) (14,728)
Sale of investments available for sale (54,406) 0 121,609
Disposal and sale of fixed assets 7,240 3,836 265
Sale of real estate owned 8,235 (177,197) 90,204
Proceeds from sale of loans held for sale 112,226 257,989 571,966
Loans originated for sale (110,000) (254,000) (519,164)
Increase in accrued interest receivable (24,702) (533,227) (171,288)
(Increase) Decrease in prepaid expenses and other assets (120,213) 348,840 (210,871)
(Decrease) Increase in accrued interest payable (27,911) 50,762 480,227
Increase (Decrease) in other liabilities 241,148 (15,899) (600,518)
Deferred income taxes (705,382) (55,724) 258,276
Other 75,981 75,981 80,108
------------- ------------ ------------
Net cash provided by operating activities 4,303,389 6,333,092 6,501,062
------------- ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 846,443 868,725 1,182,050
Real estate owned 396,519 1,022,006 641,754
Office property and equipment 1,700 0 0
Proceeds from maturities of investment securities held to maturity 157,566,650 35,549,229 51,749,025
Proceeds from maturities of investment securities available for sale 16,327,791 13,767,144 3,527,118
Principal collected on mortgage-backed securities 32,335,567 21,454,381 35,831,645
Principal collected on longer-term loans, net 52,372,663 40,393,832 47,098,661
Longer-term loans originated or acquired, net (72,113,495) (46,373,552) (63,052,814)
Purchase of investment securities and mortgage-backed securities
held to maturity (199,107,774) (62,865,500) (106,872,825)
Purchase of investment securities available for sale (26,797,361) (21,317,509) (1,136,497)
Decrease in real estate held for development 0 0 25,575
Redemption (Purchase) of Federal Home Loan Bank stock 437,500 (329,700) (240,800)
Purchase of office property and equipment (3,271,960) (3,037,422) (2,314,663)
Net cash received from deposit and branch purchase 9,044,846 0 37,423,277
------------- ------------ ------------
Net cash (used) provided by investing activities (31,960,911) (20,868,366) 3,861,506
------------- ------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 3,813,048 (5,609,287) (6,649,839)
Net increase (decrease) in time deposits 11,470,940 4,987,853 (9,254,006)
Net increase in FHLB advances and advances from Bank 14,741,758 14,430,000 2,070,000
Principal repayment of employee stock onership plan debt (75,981) (75,981) (65,981)
Net proceeds from issuance of 10% Subordinated Debentures 0 0 9,426,522
Increase (Decrease) in advances from borrowers for taxes and insurance 45,508 (12,151) 196,380
Purchase of treasury stock (1,913,191) (249,219) (900,550)
Dividends paid on common stock (495,434) (375,213) 0
Net proceeds from issuance of common stock 4,843 44,307 24,025
------------- ------------ ------------
Net cash provided (used) by financing activities 27,591,491 13,140,309 (5,153,449)
------------- ------------ ------------
DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (66,031) (1,394,965) 5,209,119
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,985,580 11,380,545 6,171,426
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,919,549 $ 9,985,580 $ 11,380,545
============= ============ ============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 19,006,514 $ 17,990,406 $ 14,855,016
Income taxes 1,647,476 2,503,591 2,212,593
Non-cash investing and financing activities:
Transfer of securities to available for sale during FASB 115
suspension period 0 4,979,408 0
Dividends declared and not paid at year end 119,636 125,288 0
Non-monetary transfers from loans to real estate acquired
through foreclosure 481,833 56,527 1,090,740
See notes to consolidated financial statements.
(a) Reclassified for comparative purposes.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED GUARANTEE OF
PAID-IN LOSS ON EMPLOYEE
CAPITAL SECURITIES STOCK TOTAL
COMMON IN EXCESS AVAILABLE OWNERSHIP RETAINED TREASURY STOCKHOLDERS'
STOCK OF PAR FOR SALE, NET PLAN DEBT EARNINGS STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 129,200 $ 8,471,471 $ (23,600) $(324,406) $17,653,506 $ 0 $ 25,906,171
Net Income 4,455,455 4,455,455
Increase in unrealized loss on
securities available for sale, net (392,272) (392,272)
Decrease in guarantee of
employee stock ownership plan debt 65,981 65,981
Exercise of stock options 310 23,715 24,025
Purchase of common stock (900,550) (900,550)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 129,510 8,495,186 (415,872) (258,425) 22,108,961 (900,550) 29,158,810
Net Income 4,343,404 4,343,404
Dividends declared (500,501) (500,501)
Decrease in unrealized loss on
securities available for sale, net 179,718 179,718
Decrease in guarantee of
employee stock ownership plan debt 75,981 75,981
Exercise of stock options 572 43,735 44,307
Purchase of common stock (249,219) (249,219)
Two-for-one stock split 130,081 (130,081) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 260,163 8,408,840 (236,154) (182,444) 25,951,864 (1,149,769) 33,052,500
Net Income 3,025,821 3,025,821
Dividends declared (489,782) (489,782)
Decrease in unrealized loss on
securities available for sale, net 70,002 70,002
Decrease in guarantee of
employee stock ownership plan debt 75,981 75,981
Exercise of stock options 125 4,718 4,843
Purchase of common stock (1,913,191) (1,913,191)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 260,288 $ 8,413,558 $(166,152) $(106,463) $28,487,903 $(3,062,960) $ 33,826,174
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles. The consolidated financial statements
include the accounts of FMS Financial Corporation ("the Corporation"), Farmers &
Mechanics Bank, and its wholly-owned subsidiaries ("the Bank"). Material
intercompany accounts and transactions have been eliminated in consolidation.
REGULATORY AUTHORITIES
The regulatory agency overseeing savings associations is the Office of
Thrift Supervision ("OTS") and the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC").
At periodic intervals, both the OTS and the FDIC routinely examine the
Corporation as part of their legally prescribed oversight of the savings and
loan industry. Based on these examinations, the regulators can direct that the
Corporation's financial statements be adjusted in accordance with their
findings. In addition, the Corporation is subject to regulations of the
Securities and Exchange Commission ("SEC").
SAIF RECAPITALIZATION ASSESSMENT
Legislation was signed by the President on September 30, 1996 requiring
savings institutions with SAIF insured deposits to pay a one-time special
assessment to facilitate the recapitalization of the SAIF. The assessment was
based on 65.7 cents per $100 of deposits at March 31, 1995. This assessment
resulted in a charge of approximately $2.7 million to operating expenses during
the year ended December 31, 1996.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits with an original maturity of 90 days or
less, money market funds and federal funds sold. Cash and cash equivalents
exclude reverse repurchase agreements which are generally classified as
investments held to maturity. Generally, federal funds are purchased and sold
for one-day periods. The Bank is required to maintain certain average reserve
balances as established by the Federal Reserve Bank. The amount of those
balances for the reserve computation periods which include December 31, 1996 and
1995 were $4.7 million and $3.2 million, respectively. These requirements were
satisfied through the balance of vault cash and a balance at the Federal Home
Loan Bank.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
During 1994, the Corporation adopted Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt
and Equity Securities " which required the classification of investments into
three categories, as applicable; trading, available for sale or held to
maturity. Upon the adoption of SFAS No. 115 on January 1, 1994, the Corporation
categorized selected investments and mortgage-backed securities that are part of
the Corporation's asset/liability management strategy and that may be sold in
response to changes in interest rates, prepayments and similar factors, as
available for sale. Investments classified as available for sale are reported at
the current market value with net unrealized gains and losses, net of applicable
deferred tax effects, added to or deducted from the Corporation's total
stockholders' equity. Gains and losses on the sale of investment securities are
recognized utilizing the specific identification method.
Investment and mortgage-backed securities classified as held to maturity
are recorded at cost, adjusted for amortization of premiums or accretion of
discounts over the term of the security. Premiums and discounts are amortized
using a method which in total approximates the interest method over the
remaining contractual life of the security. The Corporation has the intent and
ability to hold these securities to maturity.
REVERSE REPURCHASE AGREEMENTS
The Bank invests excess funds in reverse repurchase agreements.
Generally, the maturity date of the reverse repurchase agreement is less than 90
days. Due to the short-term nature of the agreement, the Bank does not take
possession of the securities; instead, the securities are held in safekeeping by
the Bank's agent. The carrying value of the agreements approximates fair market
value because of the short maturity of the investment and the Bank believes that
it is not exposed to any significant risk on its investments in reverse
repurchase agreements.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
An allowance for possible loan losses is maintained at a level that
management considers adequate to provide for potential losses based upon the
portfolio's past loss experience, current economic conditions and other relevant
factors. When collection of a loan's principal balance or portion thereof is
considered doubtful, management charges the allowance for possible loan losses
based on their assessment of the loan's underlying collateral, if collateral
dependent, or present value of estimated future cash flows. While management
uses the best information available to
<PAGE>
make evaluations about the adequacy of the allowance for loan losses, future
adjustments to the allowance may be necessary if conditions differ substantially
from the assumptions used in making evaluations.
LOANS HELD FOR SALE
The Bank sells selected fixed-rate residential mortgage loans, without
recourse, to provide additional funds for lending and to restructure the loan
portfolio to improve interest rate risk. These loans are carried at the lower of
cost or market value, determined on a net aggregate basis.
INTEREST ON LOANS
The Bank recognizes interest on loans when earned. Generally, the Bank does
not recognize interest on loans three months or more delinquent. Such interest
ultimately collected is credited to income in the period of recovery.
REAL ESTATE OWNED
Real estate owned consists of properties acquired by or in-lieu of
foreclosure. These assets are carried at the lower of cost or estimated fair
value at the time the loan is foreclosed less estimated cost to sell. The
amounts recoverable from real estate owned could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the control of the Bank. Costs to improve the
property are capitalized, whereas costs of holding the property are charged to
expense.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets. The costs of maintenance and repairs are expensed as they are incurred.
Renewal and improvement costs are capitalized.
DEFERRED LOAN FEES
The Bank defers all loan fees and related direct loan origination costs.
Deferred loan fees and costs are generally amortized as a yield adjustment over
the life of the loan using the interest method.
LOANS SERVICED FOR OTHERS
Servicing loans for others generally consists of collecting mortgage
payments, disbursing payments to investors and processing foreclosures. Loan
servicing income is recorded upon receipt and includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. The total amount of loans being serviced for the benefit of others was
$29.3 million and $34.4 million at December 31, 1996 and 1995, respectively.
Loan servicing fee income was approximately $98 thousand, $113 thousand and $132
thousand for the years ended December 31, 1996, 1995 and 1994, respectively.
REAL ESTATE HELD FOR DEVELOPMENT
Real estate held for development is carried at cost not to exceed net
realizable value. Net realizable value is determined based on a discounted
estimate of the fair market value.
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess costs over the fair value of assets acquired are being amortized
over a five year period using the straight-line method.
INCOME TAXES
The Corporation computes its taxable income for both financial reporting
and federal tax purposes on the accrual basis. The Corporation reports certain
items of income and expense in its consolidated financial statements in periods
different from those in which such items enter into the determination of taxable
income. In conformity with generally accepted accounting principles, the
Corporation provides for the tax effects of such timing differences in its
consolidated financial statements, subject to the deferred tax asset
realizability provisions of Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes". These differences between pretax
accounting income and taxable income for return purposes consist primarily of
the calculations for bad debt deductions, real estate losses, depreciation,
recognition of income and expenses associated with loan origination, profit
recognition on discounted mortgages and securities income.
ACCOUNTING STANDARDS CHANGE
Effective January 1, 1994, the Corporation adopted the Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities'. The effect of adopting SFAS No. 115
resulted in an unrealized holding loss of $615 thousand for investments
available for sale. The impact on stockholders' equity, net of tax, was $392
thousand. The adoption of SFAS No. 115 had no effect on net income.
<PAGE>
During the first quarter of 1995, the Corporation adopted the provisions of
Statement of Financial Accounting Standards Nos. 114 and 118 (SFAS Nos. 114 and
118) "Accounting by Creditors for Impairment of a Loan" which generally applies
to all loans including all loans that are restructured as a troubled debt
restructuring involving a modification of terms. According to SFAS Nos. 114 and
118, impairment of a loan occurs when it is probable the Bank will not be able
to collect all amounts due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected cash flows discounted at the historical effective interest
rate, except that collateral dependent loans may be measured for impairment
based on the fair value of collateral. The adoption of SFAS Nos. 114 and 118 did
not have a material impact on the financial position or results of operations of
the Corporation during the years ended December 31, 1996 and 1995.
In May 1995, the FASB issued the Statement of Financial Accounting
Standards No. 122 (SFAS No. 122) "Accounting for Mortgage Servicing Rights".
This pronouncement requires entities which sell or securitize loans and retain
the mortgage servicing rights to allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their fair values if it is practicable to estimate those fair
values. Any cost allocated to mortgage servicing rights should be recognized as
a separate asset and amortized over the period of estimated net servicing
income. The adoption of SFAS No. 122 during 1996, did not have a material impact
on the financial position or results of operations of the Corporation due to the
Bank's limited volume of loan sales.
In October 1995, the FASB issued the Statement of Financial Accounting
Standards No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation". This
statement defines a fair value based method of accounting for an employee stock
option or similar equity instrument. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method. Corporations electing to remain with their current accounting
method must make pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting had been applied. This statement is
effective for the fiscal year ending December 31, 1996. The bank opted to
continue with its current method of accounting for stock based compensation as
prescribed by APB opinion No. 25, "Accounting for Stock Issued to Employees".
See Stock Options footnote.
In June 1996, the FASB issued the Statement of Financial Accounting
Standards No. 125 (SFAS No. 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" which is effective for the
Corporation beginning January 1, 1997. SFAS No. 125, which is to be applied
prospectively, provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on the
concept of control. It is anticipated that the adoption of SFAS No. 125 will not
have a material effect on the financial position or results of operation of the
Corporation.
RECLASSIFICATIONS
Certain items in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the presentation in the 1996 consolidated
financial statements.
EARNINGS PER COMMON SHARE
Earnings per common share and weighted average common shares outstanding
and common stock equivalents have been retroactively restated to reflect the
increased number of common shares resulting from a two-for-one stock split that
was announced in November 1995 and paid to shareholders on January 12, 1996. A
total of 1,300,817 additional shares were issued in conjunction with the stock
split. The par value of the Corporation's stock remained unchanged. As a result,
$130,081 was transferred from paid-in capital in excess of par to common stock.
Earnings per share are calculated based on dividing net income by the weighted
average number of common shares outstanding plus the shares that would be
outstanding assuming the exercise of dilutive stock options, all of which are
considered to be common stock equivalents. The weighted average shares and
common stock equivalents outstanding for the year ended December 31, 1996, 1995
and 1994 totaled 2,524,490, 2,565,166 and 2,650,634, respectively.
<PAGE>
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and estimated market value of investment
securities held to maturity at December 31, 1996 and 1995 are as follows:
DECEMBER 31, 1996
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
U.S. Gov't Agencies $ 46,791,618 $ 39,819 $ (675,831) $ 46,155,606
Reverse Repurchase 20,000,000 0 0 20,000,000
Municipal bonds 794,725 5,734 (26) 800,433
U.S. Treasury 15,000 0 (1,000) 14,000
- ------------------------------------------------------------------------------
Total $ 67,601,343 $ 45,553 $ (676,857) $ 66,970,039
==============================================================================
December 31, 1995
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -----------------------------------------------------------------------------
U.S. Gov't Agencies $ 34,086,243 $ 64,656 $ (40,910) $ 34,109,989
Reverse Repurchase 9,000,000 0 0 9,000,000
Municipal bonds 463,670 447 0 464,117
U.S. Treasury 15,000 0 (1,000) 14,000
- -----------------------------------------------------------------------------
Total $ 43,564,913 $ 65,103 $ (41,910) $ 43,588,106
=============================================================================
The amortized cost and estimated market value of investments held to
maturity at December 31, 1996, by contractual maturity are shown in the
following table. Expected maturities may differ as borrowers have the right to
call certain obligations.
DECEMBER 31, 1996
--------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
- -------------------------------------------------------
Due one year or less $ 22,464,482 $ 22,464,117
Due one to five years 3,111,553 3,100,250
Due five to ten years 16,249,625 16,174,888
Due after ten years 25,775,683 25,230,784
- -------------------------------------------------------
$ 67,601,343 $ 66,970,039
=======================================================
The Bank has the intent and ability to hold these securities to maturity.
During December 1996 the Bank purchased $20.0 million of reverse repurchase
agreements with Paine Webber, with an average maturity of 11 days and an average
rate of 6.05%. At December 31, 1996, neither a disposal, nor conditions that
could lead to a decision not to hold these remaining securities to maturity,
were reasonably foreseen.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of investment securities
available for sale at December 31, 1996 and 1995 are as follows:
DECEMBER 31, 1996
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------
U.S. Gov't Agencies $ 5,000,000 $ 10,060 $ (13,100) $ 4,996,960
U.S. Treasury 1,997,757 803 0 1,998,560
CMOs 12,683,603 24,400 (86,504) 12,621,499
REMICs 6,027,067 0 (197,566) 5,829,501
- -------------------------------------------------------------------------
Total $ 25,708,427 $ 35,263 $(297,170) $ 25,446,520
=========================================================================
December 31, 1995
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------
U.S. Gov't Agencies $ 8,000,000 $ 0 $ (72,500) $ 7,927,500
U.S. Treasury 1,979,408 592 0 1,980,000
CMOs 5,520,407 13,179 (48,787) 5,484,799
REMICs 7,589,420 0 (298,218) 7,291,202
Common Stock 50,000 34,480 0 84,480
- -------------------------------------------------------------------------
Total $ 23,139,235 $ 48,251 $(419,505) $22,767,981
=========================================================================
The amortized cost and estimated market value of investments available for
sale at December 31, 1996, by contractual maturity are shown in the following
table. Expected maturities may differ as borrowers have the right to call or
prepay certain obligations. CMOs and REMICs are shown separately due to the
amortization and prepayment of principal occurring throughout the life of these
instruments.
DECEMBER 31, 1996
---------------------------
AMORTIZED ESTIMATED
COST MARKET
VALUE
- --------------------------------------------------
Due one year or less $ 2,997,757 $ 2,994,810
Due one to five years 4,000,000 4,000,710
CMOs 12,683,603 12,621,499
REMICs 6,027,067 5,829,501
- --------------------------------------------------
Total $ 25,708,427 25,446,520
==================================================
During 1996, Common Stock and FHLMC-Remics were sold which resulted in
realized gains of $51 thousand and $3 thousand, respectively. During 1995, there
were no sales of investment securities available for sale. In 1994, the ARM
mutual funds were sold which resulted in a $122 thousand loss.
<PAGE>
4. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995 consist of the following:
1996 1995
- -------------------------------------------------------------
Mortgage Loans $ 257,607,922 $ 249,278,288
Construction Loans 5,989,300 4,063,081
Commercial Construction 4,715,000 0
Consumer Loans 4,015,403 4,336,346
Commercial Real Estate 39,177,194 34,721,212
Commercial Business 1,829,956 1,779,051
- -------------------------------------------------------------
Subtotal 313,334,775 294,177,978
Less:
Loans in process 2,597,733 1,947,301
Deferred loan fees 1,084,289 1,063,662
Allowance for
possible loan losses 2,781,937 2,766,779
- -------------------------------------------------------------
Total loans receivable, net $ 306,870,816 $ 288,400,236
=============================================================
The Corporation adopted SFAS Nos. 114 and 118, "Accounting by Creditors for
Impairment of a Loan" during the first quarter of 1995. At December 31, 1996 and
1995 the recorded investment in loans for which impairment had been recognized
in accordance with SFAS Nos. 114 and 118 totaled $4.1 million and $4.5 million,
respectively. At December 31, 1996, impaired loans of $1.8 million related to
loans that were individually measured for impairment with a valuation allowance
of $274 thousand and $2.3 million of loans that were collectively measured for
impairment with a valuation allowance of $130 thousand. At December 31, 1995
impaired loans of $2.0 million related to loans that were individually measured
for impairment with a valuation allowance of $350 thousand and $2.5 million of
loans that were collectively measured for impairment with a valuation allowance
of $150 thousand. For the years ended December 31, 1996 and 1995, the average
recorded investment in impaired loans was approximately $4.0 million and $3.6
million, respectively. During the years ended December 31, 1996 and 1995 the
Corporation recognized $296 thousand and $259 thousand, respectively, of
interest on impaired loans, all of which is recognized on the cash basis.
Loans which are 90 days delinquent as to principal and interest are placed
on a non-accrual status and all previously accrued interest is reversed. The
principal amount of non-accrual loans at December 31, 1996 and 1995 was $4.1
million. Interest income on non-accrual loans that would have been recorded in
1996 under the original terms of such loans was $364 thousand, and the interest
income actually recognized in 1996 for such loans was $201 thousand. Interest
income on non-accrual loans that would have been recorded in 1995 under the
original terms of such loans was $232 thousand, and the actual interest income
recognized in 1995 for such loans was $186 thousand.
The Bank originates and purchases both adjustable and fixed interest rate
loans. At December 31, 1996, the composition of these loans is as follows:
<TABLE>
<CAPTION>
Maturing Maturing
during from 1998 Maturing
(In Thousands) 1997 through 2000 after 2001 Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Loans (1-4 dwelling) $ 2,299 $ 12,029 $ 243,280 $257,608
Construction Loans 3,480 2,510 0 5,990
Commercial Construction 0 0 4,715 4,715
Consumer Loans 1,668 793 1,554 4,015
Commercial Real Estate 11,627 14,125 13,425 39,177
Commercial Business 1,021 665 144 1,830
- ------------------------------------------------------------------------------------------
Total $ 20,095 $ 30,122 $ 263,118 $313,335
- ------------------------------------------------------------------------------------------
Interest sensitivity on the above loans:
Loans with predetermined rates $ 18,445 $ 28,496 $ 164,141 $211,082
Loans with adjustable or
floating rates 1,650 1,626 98,977 102,253
- ------------------------------------------------------------------------------------------
Total $ 20,095 $ 30,122 $ 263,118 $313,335
- ------------------------------------------------------------------------------------------
</TABLE>
Construction, commercial and land loans are generally indexed to the prime
rate plus a percentage (generally 1% to 2%). The adjustable rate mortgage loans
have interest rate adjustment limitations and are generally indexed to the one
year U.S. Treasury constant maturity yield. Future market factors may affect the
correlation of the loan interest rate adjustments with the rates the Bank pays
on the short-term deposits that have been primarily utilized to fund these
loans.
Changes in the allowance for possible loan losses are as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
Balance at beginning
of year $ 2,766,779 $2,621,512 $ 2,588,660
Provision charged to
operations 120,000 120,000 66,000
Charge-offs (115,253) (18,475) (119,625)
Recoveries 10,411 43,742 86,477
- -----------------------------------------------------------------------
Balance at end of year $ 2,781,937 $2,766,779 $ 2,621,512
=======================================================================
<PAGE>
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at December 31, 1996 and 1995
are summarized as follows:
DECEMBER 31, 1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES VALUE MARKET
- -----------------------------------------------------------------
GNMA $ 23,216,175 $ 548,034 $ (19,890) $ 23,744,319
FNMA 37,958,391 308,922 (244,978) 38,022,335
FHLMC 42,586,038 752,658 (104,912) 43,233,784
PRIVATE 551,977 6,041 0 558,018
- -----------------------------------------------------------------
TOTAL $ 104,312,581 $ 1,615,655 $(369,780) $ 105,558,456
=================================================================
December 31, 1995
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- -------------------------------------------------------------------
GNMA $ 15,225,124 $ 426,254 $ (348) $ 15,651,030
FNMA 41,506,743 549,696 (106,535) 41,949,904
FHLMC 54,039,337 1,233,442 (49,292) 55,223,487
Private 783,660 1,196 (4,477) 780,379
- -------------------------------------------------------------------
Total $ 111,554,864 $ 2,210,588 $ (160,652) $ 113,604,800
===================================================================
The Bank has the intent and ability to hold these securities to maturity.
At December 31, 1996, neither a disposal, nor a condition that could lead to a
decision not to hold these securities to maturity were reasonably foreseen.
Mortgage-backed securities of $859 thousand and $1.1 million were used to secure
public funds on deposit at December 31, 1996 and 1995, respectively.
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1996 and 1995 are
summarized by major classification, as follows:
DECEMBER 31,
--------------------------------
1996 1995
- -----------------------------------------------------------------------
Land, buildings and
improvements $ 14,675,111 $ 12,351,961
Furniture and equipment 3,413,347 3,032,286
Computers 2,285,858 2,979,324
- -----------------------------------------------------------------------
Total 20,374,316 18,363,571
Less accumulated depreciation (5,618,078) (5,590,092)
- -----------------------------------------------------------------------
Office properties and equipment, net $ 14,756,238 $ 12,773,479
=======================================================================
7. REAL ESTATE HELD FOR DEVELOPMENT
The Bank, through its wholly-owned subsidiary, Land Financial Services,
Inc., has entered into several real estate investments. Real estate held for
development is carried at the lower of cost or estimated net realizable value.
Intercompany loans from the Bank are the primary sources of funding and have
been eliminated in consolidation. Such investments in real estate at December
31, 1996 and 1995, are summarized as follows:
DECEMBER 31,
----------------------------
1996 1995
- ----------------------------------------------------
Real Estate held for
development $ 4,898,782 $ 4,898,782
Valuation allowance (3,671,050) (3,671,050)
- ----------------------------------------------------
Net $ 1,227,732 $ 1,227,732
====================================================
During 1995, the Bank recorded an additional $200 thousand provision on the
real estate held for development. The losses were reflected as a charge to
income in the other income section of the consolidated statements of operations.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the Bank is required to deduct from capital its investments in
and advances to subsidiaries engaged in activities not permissible for national
banks (i.e. real estate development).
<PAGE>
8. REAL ESTATE OWNED
Real estate owned, which was acquired through foreclosure and deeds in-lieu
of foreclosure, totaled $622 thousand and $669 thousand, net at December 31,
1996 and 1995, respectively. Changes in allowance for real estate owned is as
follows:
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
- --------------------------------------------------------------------
Balance at beginning of year $ 313,192 $ 79,000 $ 0
Provisions charged
to operations 153,482 354,453 157,526
Charge-offs (29,717) (120,261) (78,526)
Recoveries 550 0 0
- --------------------------------------------------------------------
Balance at end of year $ 437,507 $ 313,192 $ 79,000
====================================================================
9. DEPOSITS
Deposits at December 31, 1996 and 1995 consisted of the following major
classifications and weighted average rates:
DECEMBER 31, 1996
----------------------------------
Weighted
Average Percent
Rate Amount Of Total
- -------------------------------------------------------------
Non-interest checking 0.00% $ 37,552,269 8.28 %
Checking accounts 1.57 46,750,659 10.31
Savings accounts 2.57 71,057,835 15.68
Money market accounts 2.65 56,961,349 12.57
Certificates 5.30 240,954,422 53.16
- -------------------------------------------------------------
Total 3.77% $453,276,534 100.00 %
=============================================================
December 31, 1995
----------------------------------
Weighted Percent
Average Rate Amount of Total
- --------------------------------------------------------------
Non-interest checking 0.00% $ 28,678,611 6.69 %
Checking accounts 1.52 44,442,958 10.36
Savings accounts 2.59 68,710,447 16.02
Money market accounts 2.66 57,493,882 13.41
Certificates 5.21 229,483,482 53.52
- --------------------------------------------------------------
Total 3.81% $ 428,809,380 100.00 %
==============================================================
A summary of certificates by maturity at December 31, 1996 is as follows:
YEAR ENDED DECEMBER 31, AMOUNT
- -----------------------------------------------
1997 $ 141,382,229
1998 42,370,029
1999 24,325,661
Thereafter 32,876,503
- -----------------------------------------------
Total $ 240,954,422
===============================================
A summary of interest expense on deposits is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------
Checking accounts $ 693,879 $ 704,815 $ 657,628
Savings accounts 1,816,081 1,750,873 2,102,620
Money market accounts 1,519,789 1,571,079 1,913,044
Certificates 12,146,474 11,934,343 9,865,805
- --------------------------------------------------------------------
Total interest expense $16,176,223 $15,961,110 $14,539,097
====================================================================
10. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1996, the Bank had advances from the Federal Home Loan Bank
of New York ("FHLB") in the amount of $32.6 million with a weighted average
interest rate of 6.09%. The advances are scheduled to mature as follows: $4.1
million maturing in January 1997, $5.0 million maturing in June 1997, $5.0
million maturing in June 1998, $2.0 million maturing in October 1998, $10.0
million maturing in June 2000, $5.0 million maturing in February 2001 and $1.5
million maturing in October 2007. At December 31, 1996, the Bank had an unused
credit line with the FHLB of $21.0 million. Advances from FHLB at December 31,
1995 totaled $24.5 million with a weighted average interest rate of 5.96%.
Advances are collateralized by FHLB stock and certain first mortgage loans.
11. ADVANCES FROM BANK
At December 31, 1996, the Bank had advances from financial institutions of
$6.7 million. These advances mature during January 1997 and will be used to fund
the acquisition of deposits.
12. SUBORDINATED DEBENTURES
The Corporation completed the issuance of $10.0 million of Subordinated
Debentures in a public offering on July 28, 1994. The Debentures are unsecured,
bear interest at a rate of 10% per annum and mature on July 28, 2004. Interest
payments are due semiannually on February 1 and August 1 commencing February 1,
1995. The Debentures are redeemable, in whole or in part, at any time at the
option of the Corporation at specified redemption prices, except that the
debentures may not be redeemed prior to August 1, 1997. The net proceeds from
the sale of the Debentures totaled $9.4 million and were used for the expansion
of the Bank's operations through branch acquisitions and general corporate
purposes. The Corporation is required to retain at all times cash, cash
equivalents or marketable securities in an amount not less than the aggregate
amount of two consecutive semi-annual interest payments that will be due and
payable on the Debentures following such declaration date or redemption date.
<PAGE>
13. INCOME TAXES
In accordance with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), deferred tax
assets and liabilities are established for the temporary differences between
accounting bases and tax bases of the Corporation's assets and liabilities at
the tax rates expected to be in effect when the temporary differences are
realized or settled. Management believes the existing net deductible temporary
differences which give rise to the net deferred income tax assets are realizable
on a more likely than not basis.
The temporary differences that gives rise to significant portions of
deferred tax assets and deferred tax liability are as follows:
DECEMBER 31,
--------------------------
1996 1995
- -----------------------------------------------------------------
Deferred income tax assets:
Allowance for possible loan losses $ 508,394 $ 448,273
Real estate losses 339,600 286,597
Deferred loan fees, net 27,927 54,262
Compensation and pension liability 78,652 60,869
Amortization of deposit premium 201,791 116,338
Post retirement benefits 185,000 185,000
Capitalized interest 540,411 466,821
Unrealized (gain) loss on investments 0 (12,758)
Other 44,829 85,654
- -----------------------------------------------------------------
Gross deferred tax assets 1,926,604 1,691,056
Valuation allowance 0 (289,588)
- -----------------------------------------------------------------
1,926,604 1,401,468
Deferred income tax liabilities:
Prepaid deposit insurance premium 5,839 170,029
Depreciation 357,285 333,996
- -----------------------------------------------------------------
Gross deferred tax liabilities: 363,124 504,025
- -----------------------------------------------------------------
Deferred income tax assets, net $1,563,480 $ 897,443
=================================================================
The net change in the valuation allowance for the year ended December 31,
1996 was a decrease of $290 thousand. This change in the valuation allowance
resulted from a reassessment of the realizability of the existing net deductible
temporary differences which give rise to the net deferred income tax asset.
There was no change in the valuation allowance for the year ended December 31,
1995.
The following represents the components of income tax expense for the years
ended December 31, 1996, 1995 and 1994, respectively.
1996 1995 1994
- --------------------------------------------------------------------
Current Federal tax provision $ 1,862,681 $2,305,857 $1,880,325
Current State tax provision 181,544 220,948 196,562
- --------------------------------------------------------------------
Total Current provision 2,044,225 2,526,805 2,076,887
- --------------------------------------------------------------------
Deferred Federal tax provision
(benefit) (725,109) (51,078) 234,892
Deferred State tax provision
(benefit) (39,617) (4,646) 23,384
- --------------------------------------------------------------------
Total Deferred provision
(benefit) (764,726) (55,724) 258,276
- --------------------------------------------------------------------
Total $ 1,279,499 $2,471,081 $2,335,163
====================================================================
On August 20, 1996, the Small Business Job Protection Act was signed into
law which repealed the favorable reserve method available to savings banks. The
Bank was required to change its tax bad debt method to the specific charge-off
method effective for the fiscal year ended December 31, 1996. The change in
method resulted in taxable income of approximately $1.7 million representing the
excess of the Bank's tax bad debt reserve at December 31, 1996 over the base
year reserve amount of $6.3 million that arose in tax years beginning before
December 31, 1987. The income will be recognized for tax purposes ratably over a
six year period.
The Company has not provided deferred income taxes for the Bank's tax
return reserve for bad debts that arose in tax years beginning before December
31, 1987 because it is not expected that this difference will reverse in the
foreseeable future. The cumulative amount of temporary differences related to
the reserve for bad debts for which deferred taxes have not been provided was
approximately $6.3 million at December 31, 1996. This potential liability for
which no deferred income taxes have been provided was approximately $2.4 million
as of December 31, 1996. A deferred tax liability has been recognized for the
portion of the tax bad debt reserves which arose in 1988 through 1995.
<PAGE>
The Corporation's provision for income taxes differs from that computed by
applying the statutory federal income tax rate to income before income taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $1,463,808 34.00% $2,316,925 34.00% $2,308,810 34.00%
Increase (Decrease) from:
State income taxes, net
of federal income tax
benefit 93,672 2.18 142,759 2.09 145,164 2.14
Change in valuation
allowance (289,588) (6.73) 0 0.00 (234,701) (3.46)
Other 11,607 0.27 11,397 0.17 115,890 1.71
---------- ----- ---------- ----- ---------- -----
Total $1,279,499 29.72% $2,471,081 36.26% $2,335,163 34.39%
========== ===== ========== ===== ========== =====
</TABLE>
14. LEASES
The Bank leases a building and land to operate two branches and certain
equipment under noncancelable leases which expire over the next 25 years. These
leases generally provide for the payment of taxes and maintenance by the lessee.
Most of these operating leases provide the Bank with the option to renew the
lease after the initial lease term. Future minimum rental payments under
existing leases as of December 31, 1996 are as follows:
FISCAL YEAR AMOUNT
- ------------------------------------
1997 $ 72,035
1998 55,245
1999 55,245
2000 55,245
2001 and beyond 1,068,065
- ------------------------------------
Total $ 1,305,835
====================================
The leases contain cost of living adjustments based on changes in the
consumer price index. The minimum lease payments shown above include base
rentals exclusive of any future adjustments. Total rent expense for all
operating leases amounted to $107 thousand, $104 thousand and $97 thousand for
fiscal years 1996, 1995 and 1994, respectively.
15. STOCKHOLDERS' EQUITY
On December 14, 1988, the Bank converted to a state chartered stock Savings
Bank and simultaneously formed FMS Financial Corporation. At the time of
conversion, eligible deposit account holders were granted priority in the
unlikely event of a future liquidation of the Bank. The special reserve has been
decreased to the extent that the balances of eligible account holders were
reduced at annual determination dates. The Bank converted its charter to that of
a Federal Savings Bank on October 15, 1993.
The ability of the Corporation to pay dividends to stockholders is directly
dependent upon the ability of the Bank to pay dividends to the Corporation. OTS
regulations restrict the ability of the Bank to pay dividends to the Corporation
if such dividends reduce the net worth of the Bank below the amount required in
the special reserve account and based on the Bank's net income and capital
position. Furthermore, income appropriated to bad debt reserves and deducted for
federal income tax purposes cannot be used to pay dividends without payment of
federal income taxes on the amount of such income removed from reserves for such
purposes at the then current income tax rate.
Under FIRREA the Bank must have core capital equal to 3%, tangible capital
equal to 1.5% and risk-based capital equal to 8%. At December 31, 1996, the Bank
exceeded all three regulatory capital levels required under FIRREA. The Bank's
regulatory tangible and core capital was $39.0 million or 7.23% of total bank
assets and risk-based capital was $41.6 million or 15.35% of risk-weighted
assets.
<PAGE>
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles ("GAAP") to regulatory capital at December 31,
1996:
Tangible Core Risk-Based
Capital Capital Capital
- -------------------------------------------------------------------------
Bank's GAAP Capital $ 40,901,723 40,901,723 40,901,723
Add:
Unrealized loss on
investments AFS 166,152 166,152 166,152
Less:
Subsidiary
investments not
eligible (1,271,162) (1,271,162) (1,271,162)
Goodwill (812,599) (812,599) (812,599)
Supplementary
qualifying capital
item:
General valuation
allowance 0 0 2,573,216
- -------------------------------------------------------------------------
Regulatory capital
computed 38,984,114 38,984,114 41,557,330
Minimum regulatory
capital requirement 8,087,812 16,175,625 21,664,416
- -------------------------------------------------------------------------
Regulatory capital
excess $ 30,896,302 $ 22,808,489 $ 19,892,914
=========================================================================
16. PENSION PLAN
The Bank has a defined benefit pension plan for active employees. Net
pension expense was $412 thousand, $279 thousand and $239 thousand for years
ended December 31, 1996, 1995 and 1994, respectively. The components of net
pension cost are as follows:
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
- ----------------------------------------------------------
Service Cost $ 397,001 $ 253,640 $ 218,797
Interest Cost 204,457 163,002 146,491
Return on Assets (596,276) (616,173) (39,613)
Net Amortization
and Deferral 406,357 478,773 (86,277)
- ----------------------------------------------------------
Net periodic
pension cost $ 411,539 $ 279,242 $ 239,398
==========================================================
The following table presents a reconciliation of the funded status of the
defined benefit pension plan at December 31, 1996 and 1995:
DECEMBER 31,
--------------------------
1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $ 2,689,892 $ 2,084,446
Nonvested 265,891 176,264
- -------------------------------------------------------------------------------
Accumulated benefit obligation 2,955,783 2,260,710
Projected benefit obligation 3,959,973 2,941,106
Fair value of plan assets 4,105,395 3,194,912
- -------------------------------------------------------------------------------
Excess (Deficit) of plan assets over
projected benefit obligation 145,422 253,806
Unrecognized net (gain) loss (91,026) (225,225)
Unrecognized prior service cost 88,094 94,542
Unrecognized net transition
obligation 224,381 255,287
- -------------------------------------------------------------------------------
Prepaid pension liability
included in the consolidated
balance sheets $ 366,871 $ 378,410
===============================================================================
<PAGE>
Actuarial assumptions used in determining pension cost are as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
- ---------------------------------------------------
Discount rate for
benefit obligation 6.00% 6.00 % 6.00 %
Rate of increase in
compensation levels
and social security
wage base 4.00% 4.00 % 4.00 %
Expected long-term
rate of return on
plan assets 7.00% 7.00 % 7.00 %
===================================================
In addition to providing pension plan benefits, the Bank provides certain
health care and life insurance benefits to certain retired employees. In
accordance with the provisions of Statement of Financial Accounting Standards
No. 106, "Employer Accounting for Post Retirement Benefits other than
Pensions"(SFAS No. 106) the expected cost of such benefits must be actuarially
determined and accrued ratably from the date of hire to the date the employee is
fully eligible to receive benefits. The accumulated post-retirement benefit
obligation is not funded but is reflected in the statement of financial
condition as a liability.
The net periodic post-retirement benefit cost includes the following
components:
December 31,
-----------------------
1996 1995
- --------------------------------------------------------------
Service Cost $ 0 $ 0
Interest Cost 33,489 42,258
Amortization of prior service cost (9,123) (1,521)
Amortization of (Gain)/Loss (3,677) (9,045)
- --------------------------------------------------------------
Net periodic post-retirement
benefit cost $ 20,689 $ 31,692
==============================================================
The assumed discount rate used in the calculation for net periodic
post-retirement benefit cost was 7.0% and 8.25% for 1996 and 1995, respectively.
The assumed health care cost trend rate for 1996 was 7% and was graded down in
1% increments per year to an ultimate rate of 5% per year. The impact of a 1%
increase in the assumed health care cost trend for each future year would be as
follows:
December 31, 1996
- ----------------------------------------------------------------
Accumulated post-retirement obligation
at year end $512,229
Service Cost $ 0
Interest Cost $ 36,215
================================================================
The following table summarizes the amounts recognized in the Bank's balance
sheet:
DECEMBER 31,
-------------------------
1996 1995
- ------------------------------------------------------------
Accumulated post-retirement
benefit obligation $(472,895) $ (485,073)
Unrecognized prior service cost (89,709) (98,832)
Unrecognized net gain (103,217) (106,555)
- ------------------------------------------------------------
Accrued post-retirement benefit
cost $(665,821) $ (690,460)
============================================================
The assumed discount rate used in the calculation for the accumulated
post-retirement benefit obligation as of December 31, 1996 and 1995 was 7.5% and
7.0%, respectively.
<PAGE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available, fair
values are based on assumptions including future cash flows and discount rates.
Accordingly, the fair value estimates cannot be substantiated, may not be
realized, and do not represent the underlying value of the Corporation.
The Corporation uses the following methods and assumptions to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS: The carrying value is a reasonable estimate of fair
value.
INVESTMENT SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE: For
investment securities with a quoted market price, fair value is equal to quoted
market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other categories of
loans such as residential mortgages, commercial and consumer loans, fair value
is estimated based on discounting the estimated future cash flows using the
current rates at which similar loans would be made to borrowers with similar
collateral and credit ratings and for similar remaining maturities.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair value
is the amount payable on demand at the reporting date. For certificates of
deposits, fair value is estimated using the rates currently offered for deposits
of similar remaining maturities.
SUBORDINATED DEBENTURES: Fair value is estimated using the quoted average of
the broker bid and asked price at year end.
OTHER BORROWINGS: Fair value is estimated using a discounted cash flow
analysis.
ADVANCES FROM BANK: The carrying value is a reasonable estimate of fair value
due to the short term nature of these obligations.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: For commitments and
standby letters of credit expiring within 90 days or with a variable rate, the
settlement amount is a reasonable estimate of fair value. For commitments and
standby letters of credit expiring beyond 90 days or with a fixed rate, the fair
value is the present value of the obligations based on current loan rates.
<PAGE>
At December 31, 1996 and December 31, 1995, the carrying amount and the
estimated market value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT MARKET VALUE AMOUNT MARKET VALUE
-------------- ------------- ------------- -------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,919,549 $ 9,919,549 $ 9,985,580 $ 9,985,580
Investment securities held to maturity and investment
securities available for sale $ 93,047,863 $ 92,416,559 $ 66,332,894 $ 66,356,087
Mortgage-backed securities $ 104,312,581 $ 105,558,456 $ 111,554,864 $ 113,604,800
FHLB Stock $ 3,620,600 $ 3,620,600 $ 4,058,100 $ 4,058,100
Loans, net of unearned income $ 309,652,753 $ 311,325,000 $ 291,167,015 $ 297,704,000
Less: Allowance for possible loan losses (2,781,937) 0 (2,766,779) 0
Net loan receivable and loans held for sale $ 306,870,816 $ 311,325,000 $ 288,400,236 $ 297,704,000
Financial liabilities:
Deposits
Checking, passbook, and money market accounts $ 212,322,112 $ 212,322,112 $ 199,325,898 $ 199,325,898
Certificates $ 240,954,422 $ 238,005,000 $ 229,483,482 $ 229,200,000
Subordinated debentures $ 10,000,000 $ 10,300,000 $ 10,000,000 $ 10,150,000
Other borrowings $ 32,656,463 $ 32,343,000 $ 24,682,444 $ 24,866,000
Advances from Bank $ 6,691,758 $ 6,691,758 $ 0 $ 0
Off-balance sheet financial instruments:
Commitments to extend credit $ 26,199,447 $ 26,199,447 $ 25,686,791 $ 25,686,791
Standby letters of credit $ 1,094,381 $ 1,094,381 $ 935,673 $ 935,673
</TABLE>
18. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT ("FDICIA")
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted into law on December 19, 1991. The statute includes a
number of additional supervisory measures. The additional supervisory powers and
regulations mandated by FDICIA include a "Prompt Corrective Action" program that
permits regulators to take increasingly harsh action against associations that
fail to meet certain new capital-based requirements. Various other sections of
FDICIA impose substantial new audit and reporting requirements.
FDICIA also requires each regulatory agency to institute non-capital safety
and soundness standards for each institution it regulates by August 1, 1993.
These standards must cover (1) internal controls, (2) loan documentation, (3)
credit underwriting, (4) interest rate exposure, (5) asset growth, (6)
compensation, fees and benefits paid to employees, officers and directors, (7)
operational and managerial standards, and (8) asset quality, earnings and stock
valuation standards for preserving a minimum ratio of market value to book value
for publicly traded shares (if feasible). Many of the regulations required by
FDICIA have been promulgated by federal regulators. As of December 31, 1996
management of the Bank believes that it is in compliance with the regulations
adopted pursuant to FDICIA.
19. COMMITMENTS AND CONTINGENCIES
The Bank has outstanding loan commitments of $26.2 million as of December
31, 1996. Of these commitments outstanding, the breakdown between fixed and
variable rate loans is as follows:
December 31, 1996
-------------------------------------------
Fixed Variable
Rate Rate Total
- -----------------------------------------------------------------
Commitments to:
fund loans $ 3,484,776 $ 1,745,950 $ 5,230,726
Unused lines:
Construction 0 2,597,733 2,597,733
Equity line of
credit loans 0 18,370,988 18,370,988
- -----------------------------------------------------------------
$ 3,484,776 $ 22,714,671 $ 26,199,447
=================================================================
In addition to outstanding loan commitments, the Bank as of December 31, 1996,
issued $1.1 million in standby letters of credit to guarantee performance of a
customer to a third party.
Commitments and standby letters of credit are issued in accordance with the
same loan policies and underwriting standards as settled loans. Since some
commitments and standby letters of credit are expected to expire without being
drawn down, these amounts do not necessarily represent future cash requirements.
<PAGE>
20. LITIGATION
There are no significant pending legal proceedings at December 31, 1996
which will have a material impact on the Corporation's financial position or
results of operations.
21. LOANS TO OFFICERS AND DIRECTORS
Regulation O provides that all loans to executive officers and directors be
made on substantially the same terms and conditions as are available to the
general public. On November 11, 1996, Regulation O was amended to allow
executive officers to participate in any employee loan rate discount benefit
program available to all full-time employees. Since the Bank offers such an
employee benefit program, the policy governing loans to executive officers was
amended to allow the executive officers to participate in this loan program and
thereby receive rate discounts. These changes went into effect on January 1,
1997. The rate discounts are available to employees as long as they are employed
at the Bank. If employment is terminated, the rate discount ceases from the date
of termination. At December 31, 1996 and 1995, loans made to directors and
officers whose indebtedness exceeded $60 thousand amounted to $532 thousand and
$661 thousand, respectively. During 1996 and 1995 there were no new loans to
these individuals and repayments totaled $18 thousand and $187 thousand,
respectively.
22. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion to stock form, the Corporation
established an Employee Stock Ownership Plan ("ESOP"), which purchased
approximately $660 thousand worth of common stock. In order to make the
purchase, the ESOP borrowed approximately $660 thousand on December 8, 1988 from
a commercial bank. The debt, which accrues interest at 80% of the commercial
bank's base rate, has been guaranteed by the Corporation, and is payable and
expensed in ten annual installments of approximately $66 thousand. Additional
principal payments may be made from cash dividends paid on the unallocated ESOP
shares.
Annual contributions to the ESOP are made in amounts determined by the
Board of Directors. Because the Corporation's loan guarantee represents a
commitment either to make future contributions to the ESOP or to make the
principal payments when due, the guarantee has been reflected as a liability,
and an offsetting charge equivalent to the future contributions to be made has
been reflected as a reduction of stockholders' equity in the accompanying
consolidated statements of financial condition.
23. STOCK OPTIONS
The Corporation has established a stock compensation plan (the "Plan") for
executive officers and other selected employees of the Corporation. The Plan
consists of incentive stock options intended to qualify under Section 422A of
the Internal Revenue Code of 1986. These stock options may be surrendered and
stock appreciation rights may be granted in their place, with the approval of
the Corporation.
A total of 111,642 shares of authorized but unissued common stock of the
Corporation has been reserved for future issuance under the Plan. The option
price per share for options granted may not be less than the fair market value
of the common stock on the date of grant. At December 31, 1996, the option
exercise prices are $3.88 and $16.00. Options are fully vested at the date of
grant and must be exercised within ten years.
A Summary of the status of the Bank's Stock Option Plan as of December 31,
1996, 1995 and 1994 and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
Beginning of the year 95,823 $ 5.40 100,958 $ 3.88 123,758 $ 3.88
Options granted - - 12,000 16.00 - -
Options exercised (1,250) 3.88 (11,435) 3.88 (6,200) 3.88
Options surrendered (12,422) 3.88 (5,700) 3.88 (16,600) 3.88
- -----------------------------------------------------------------------------------------------
Outstanding at the
End of the year 82,151 $ 5.65 95,823 $ 5.40 100,958 $ 3.88
===============================================================================================
</TABLE>
On January 1, 1996, the Bank adopted Statement of Financial Accounting
Standard No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). As
permitted by SFAS No. 123, the Bank has chosen to continue to apply APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its Plan. Accordingly, no compensation cost
has been recognized for options granted under the Plan. If the Bank had adopted
the fair value method of accounting for stock based compensation the Bank's net
income and net income per share would have been as follows:
December 31, 1995
- ----------------------------------------------------------
As Reported Pro Forma
- ----------------------------------------------------------
Net Income $ 4,343,404 $ 4,300,435
Net Income Per Share $ 1.69 $ 1.68
==========================================================
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: dividend
yield of 2.35%, expected volatility of 20.64%, discount rate of 6.0% and an
expected life of 10 years at December 31, 1995. There were no options granted in
1996.
24. RISKS AND UNCERTAINTIES
The earnings of the Corporation depend on the earnings of the Bank. The
earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations of the
Bank are subject to risks and uncertainties surrounding its exposure to changes
in the interest rate environment.
Most of the Bank's lending activity is with customers located within
southern New Jersey. Generally, the loans are secured by real estate consisting
of single family residential properties. While this represents a concentration
of credit risk, the credit losses arising from this type of lending 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 financial statements of the Corporation are prepared in conformity with
generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the
allowance for possible loan losses and carrying values of real estate owned and
real estate held for development. Consideration is given to a variety of factors
in establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. Since the allowance for
possible loan losses and carrying value of real estate assets and real estate
held for development is dependent, to a great extent, on the general economy and
other conditions that may be beyond the Bank's control, it is at least
reasonably possible that the estimates of the allowance for possible loan losses
and the carrying values of the real estate assets could differ materially in the
near term.
25. SUBSEQUENT EVENTS
On November 26, 1996, the Board of Directors of the Corporation declared a
$.05 per share cash dividend which is payable on January 10, 1997 to
shareholders of record on January 2, 1997.
On February 25, 1997, The Board of Directors of the Corporation declared a
$.05 per share cash dividend which is payable on April 14, 1997 to shareholders
of record on April 2, 1997.
<PAGE>
26. PARENT COMPANY FINANCIAL INFORMATION
The financial statements for FMS Financial Corporation are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF FINANCIAL CONDITION 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Cash $ 254,546 $ 81,827
Investment in subsidiary 43,768,186 40,339,762
Investment securities 1,000,000 1,000,000
Intercompany receivable-net 1,591,556 3,043,996
Subordinated Debentures issue cost-net 435,809 493,157
Other 168,843 168,157
------------------------------------
TOTAL ASSETS $ 47,218,940 $ 45,126,899
------------------------------------
LIABILITIES:
10% Subordinated Debentures due 2004 $ 10,000,000 $ 10,000,000
Guarantee of employee stock ownership plan debt 106,463 182,444
Dividends payable 119,636 125,288
Accrued interest payable 416,667 416,667
------------------------------------
TOTAL LIABILITIES 10,642,766 10,724,399
------------------------------------
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 2,602,884 and 2,601,634 and shares outstanding 2,392,707 and 2,505,756 as
of December 31, 1996 and 1995, respectively 260,288 260,163
Paid-in capital in excess of par 8,413,558 8,408,840
Unrealized loss on securities available for sale,
net of deferred income taxes (166,152) (236,154)
Guarantee of employee stock ownership plan debt (106,463) (182,444)
Retained earnings 31,237,903 27,301,864
Less:Treasury Stock (210,177 and 95,878 shares, at cost at December 31, 1996 and
1995, respectively) (3,062,960) (1,149,769)
------------------------------------
TOTAL STOCKHOLDERS' EQUITY 36,576,174 34,402,500
------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,218,940 $ 45,126,899
====================================
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intercompany interest income $ 560,750 $ 537,030 $ 288,546
Interest expense (1,057,348) (1,049,013) (456,306)
Equity in undistributed income of subsidiary 3,353,576 4,687,233 4,566,175
- --------------------------------------------------------------------------------------------------------
Income before taxes 2,856,978 4,175,250 4,398,415
Income tax benefit 168,843 168,154 57,040
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 3,025,821 $ 4,343,404 $ 4,455,455
========================================================================================================
</TABLE>
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
-----------------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,025,821 $ 4,343,404 $ 4,455,455
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the subsidiary (3,353,576) (4,687,233) (4,566,175)
Amortization of bond issue costs 57,348 57,348 22,973
(Decrease) Increase in interest payable 0 (16,666) 433,333
Decrease (Increase) in intercompany receivable, net 1,452,440 (229,477) 792,981
Other operating activities 75,292 (35,136) 32,542
------------- ------------- -------------
Net cash provided (used) by operating activities 1,257,325 (567,760) 1,171,109
INVESTING ACTIVITIES
Purchase of marketable security 0 (1,000,000) 0
------------- ------------- -------------
Net cash used by investing activities 0 (1,000,000) 0
FINANCING ACTIVITIES
Net proceeds from issuance of 10% subordinated debentures 0 0 9,426,522
Purchase of treasury stock (1,913,191) (249,219) (900,550)
Cash dividends received from subsidiary 1,400,000 1,350,000 0
Investment in subsidiary (4,843) (44,307) (5,047,625)
Intercompany note receivable 0 0 (3,607,500)
Cash dividends paid on common stock (495,434) (375,213) 0
Principal repayment of employee stock ownership plan debt (75,981) (75,981) (65,981)
Proceeds from issuance of stock 4,843 44,307 24,025
------------- ------------- -------------
Net cash (used) provided by financing activities (1,084,606) 649,587 (171,109)
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 172,719 (918,173) 1,000,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 81,827 1,000,000 0
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 254,546 $ 81,827 $ 1,000,000
============= ============= =============
</TABLE>
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
<PAGE>
MANAGEMENT REPORT
FINANCIAL STATEMENTS
FMS Financial Corporation ("the Corporation") is responsible for the
preparation, integrity and fair presentation of its published financial
statements as of December 31, 1996, and the year then ended. The financial
statements have been prepared in accordance with generally accepted accounting
principles, and as such, include amounts, some of which are based on judgments
and estimates of management.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING AND COMPLIANCE WITH LAWS AND
REGULATIONS
The management of FMS Financial Corporation is responsible for establishing and
maintaining an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Office of Thrift Supervision reporting instructions for the Thrift Financial
Report (TFR). The structure contains a system of monitoring mechanisms and
actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over financial
reporting presented in conformity with generally accepted accounting principles
and the Office of Thrift Supervision reporting instructions as of December 31,
1996. This assessment was based on criteria for effective internal control over
financial reporting described in "Internal Control-Integrated Framework" issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management believes that, as of December 31, 1996, FMS
Financial Corporation maintained an effective internal control structure over
financial reporting presented in conformity with both generally accepted
accounting and the Office of Thrift Supervision reporting instructions.
Management is responsible for compliance with federal and state laws and
regulations concerning dividend restrictions and the federal law and regulations
concerning loans to insiders designated by the FDIC as safety and soundness laws
and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment management believes
that the Bank has complied, in all significant respects, with the designated
laws and regulations relating to safety and soundness for the year ended
December 31, 1996.
/s/Craig W. Yates /s/Channing L. Smith
Craig W. Yates Channing L. Smith
President and Chief Executive Officer Vice President and Chief Financial
Officer
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FMS FINANCIAL CORPORATION:
We have audited the accompanying consolidated statements of financial condition
of FMS Financial Corporation and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the consolidated financial position of FMS
Financial Corporation and subsidiary as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 10, 1997
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING
The 1997 Annual Shareholders' Meeting of FMS Financial Corporation will be
held at 10:00 a.m., Tuesday, April 29, 1997 at the Riverton Country Club,
Highland Avenue off of Route 130, Cinnaminson, New Jersey.
STOCK MARKET INFORMATION
The common stock of FMS Financial Corporation is traded over-the-counter
and is listed on the Nasdaq National Market System under the symbol "FMCO".
Daily quotations are included in the Nasdaq National Market stock tables
published in the Wall Street Journal and other leading newspapers.
The number of record holders of common stock of the Corporation as of March
3, 1997 was approximately 809, not including those shares registered in names of
various investment brokers held in account for their customers.
The following table sets forth the range of closing common bid prices, as
reported by Nasdaq, for the periods ended December 31, 1996 and 1995:
1996
-----------------
QUARTER ENDED HIGH LOW
- ---------------------------------------
March 31, $ 17.50 $ 16.25
June 30, $ 17.50 $ 14.75
September 30, $ 16.50 $ 15.50
December 31, $ 18.25 $ 15.50
=======================================
1995
-----------------
QUARTER ENDED HIGH LOW
- ---------------------------------------
March 31, $ 12.25 $ 11.25
June 30, $ 13.28 $ 11.50
September 30, $ 16.50 $ 13.50
December 31, $ 17.00 $ 16.25
=======================================
The Corporation's sole operating assets are derived from its subsidiary,
Farmers & Mechanics Bank. Consequently, the ability of the Corporation to
accumulate cash for payment of cash dividends to stockholders is directly
dependent upon the ability of the Bank to pay dividends to the Corporation.
There are regulatory limitations on the ability of the Bank to pay cash
dividends to the Corporation which could, in turn, be used by the Corporation to
pay cash dividends to its stockholders. Interest on savings accounts must be
paid by the Bank prior to payment of dividends on the common stock.
Additionally, the Corporation must pay interest to holders of its debentures
before payment of cash dividends to its stockholders. Under the regulations of
the OTS, the Bank is not permitted to pay dividends on its stock if its
regulatory capital would be reduced below the amount required for the
liquidation account established in connection with its mutual-to-stock
conversion. The Bank will not be permitted to pay dividends on its capital stock
if its regulatory capital would be reduced below the regulatory capital
requirements prescribed for institutions regulated by the OTS. Further, income
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used to pay cash dividends without the payments of federal income
taxes on the amount of such income removed from reserves for such purpose at the
then current income tax rate.
The Bank's ability to pay dividends or make other capital distributions to
the Corporation is also governed by OTS regulations. Under these regulations,
"capital distributions" are defined as cash dividends, payments by savings
associations to repurchase or otherwise acquire its shares, payments to
shareholders of another entity in a cash-out merger, and other distributions
charged against capital. An institution that has regulatory capital that is at
least equal to its fully phased-in capital requirement and that has not been
notified that it "is in need of more than normal supervision," is a Tier 1
institution. A Tier 1 institution is permitted under OTS regulations, after
prior notice to (and no objection by) the OTS, to make capital distributions
during a calendar year up to 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio",
which is the percentage by which the ratio of its regulatory capital to assets
exceeds the ratio of its fully phased-in capital requirement to assets at the
beginning of the calendar year. As of December 31, 1996 the Bank was a Tier 1
institution and had available $14.3 million for dividends to the Corporation,
subject to no objection by the OTS. It is not likely that the Corporation would
request a dividend of that magnitude.
The Corporation is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, although the source of such dividends
is dependent upon dividends received by it from the Bank. The Corporation is
subject, however, to the requirements of New Jersey law, which permits the
Corporation to pay dividends in cash or shares out of the Corporation's surplus,
defined as the excess of net assets of the Corporation over stated capital.
<PAGE>
BOARD OF DIRECTORS
CHARLES B. YATES
Chairman of the Board
WAYNE H. PAGE
Vice Chairman
GEORGE J. BARBER
DOMINIC W. FLAMINI
VINCENT R. FARIAS
JAMES C. LIGNANA
EDWARD J. STAATS, JR.
CRAIG W. YATES
DIRECTORS EMERITUS
ADOLPH N. BRIGHT
KAREN S. OLEKSA
HILYARD S. SIMPKINS
BANK OFFICERS
CHARLES B. YATES*
Chairman of the Board
CRAIG W. YATES*
President
JAMES E. IGO*
Sr. Vice President and Chief Lending Officer
CHANNING L. SMITH*
Vice President and Chief Financial Officer
THOMAS M. TOPLEY*
Sr. Vice President of Operations and
Corporate Secretary
DOUGLAS B. HALEY
Vice President, Consumer Lending
KAREN R. KOENIG
Vice President, Business Development
NANCY L. PARKER
Vice President, Human Resources
PETER S. SCHOENFELD
Vice President, Investments
KAREN D. SHINN
Vice President, Operations
MICHAEL J. HAGELGANS
Assistant Vice President, Commercial Lending
AMY J. HANNIGAN
Controller
MARCELLA F. HATCHER*
Assistant Secretary
* Officers of Bank and Holding Company
<PAGE>
MARKET MAKERS
The following companies were making a market in the Corporation's common stock
at December 31, 1996:
HERZOG, HEINE, GEDULD, INC. ROBERT W. BAIRD & CO., INC.
26 Broadway 4300 W. Cypress Street
First Floor Tampa, FL 33607
New York, NY 10004 (813) 877-4000
(212) 908-4000
MERRILL LYNCH, PIERCE, FENNER RYAN BECK & CO.
& SMITH, INC. 80 Main St.
World Financial Center W. Orange, NJ 07052
250 Vesey Street (201) 325-3000
New York, NY 10281
(212) 449-1000
FORM 10-K AND OTHER FINANCIAL INQUIRIES
The Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, as filed with the Securities and Exchange Commission will be furnished
to shareholders of the Corporation upon written request without charge.
Shareholders, analysts and others seeking this and other requests for
information relating to stock, annual shareholders' meeting and related matters
on FMS Financial Corporation, should contact the Corporate Secretary at the
Administrative Offices.
TRANSFER AGENT AND REGISTRAR AUDITORS
American Stock Transfer and Trust Company Coopers & Lybrand L.L.P.
40 Wall Street 2400 Eleven Penn Center
New York, NY 10005 Philadelphia, PA 19103
SPECIAL COUNSEL
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
<PAGE>
OFFICE LOCATIONS
EXECUTIVE AND ADMINISTRATIVE OFFICES
3 Sunset Road and 811 Sunset Road
Burlington, NJ 08016
(609) 386-2400
MAIN BRANCH LUMBERTON
3 Sunset Road & Route 541 1636-61 Route 38 & Eayrestown Road
Burlington, NJ 08016 Lumberton, NJ 08048
(609) 386-2400 (609) 267-6811
BURLINGTON TOWNSHIP
809 Sunset Road
Burlington, NJ 08016
(609) 387-1150
BURLINGTON CITY MEDFORD
352 High Street 200 Tuckerton Road
Burlington, NJ 08016 Medford, NJ 08055
(609) 386-4643 (609) 596-4300
BORDENTOWN MEDFORD LAKES
335 Farnsworth Ave. 712 Stokes Road
Bordentown, NJ 08505 Medford, NJ 08055
(609) 291-8200 (609) 654-6373
DELRAN MOORESTOWN
3002 Route 130 North 53 East Main Street
Delran, NJ 08075 Moorestown, NJ 08057
(609) 764-3740 (609) 235-0544
EASTAMPTON MOUNT LAUREL
1191 Woodlane Road 4522 Church Road
Eastampton, NJ 08060 Mount Laurel, NJ 08054
(609) 261-6400 (609) 235-4445
EDGEWATER PARK RIVERTON
1149 Cooper Street 604 Main Street
Edgewater Park, NJ 08010 Riverton, NJ 08077
(609) 387-0046 (609) 786-5333
LARCHMONT SOUTHAMPTON
3320 Route 38 1841 Route 70
Mount Laurel, NJ 08054 Southampton, NJ 08088
(609) 235-6666 (609) 859-2700
WILLINGBORO
399 Charleston Road
Willingboro, NJ 08046
(609) 877-2888
WILLINGBORO EAST
611 Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 871-4900
WILLINGBORO WEST
1 Rose Street & Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 835-4700
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant(1)
State of Percentage
Incorporation Ownership
------------- ---------
Farmers and Mechanics Bank United States 100%
FMS Financial Services, Inc.(2) New Jersey 100%
Land Financial Services, Inc.(2) New Jersey 100%
First Plunge, Inc. (3) New Jersey 100%
Fishpond, Inc. (3) New Jersey 100%
Angell Ayes, Inc. (3) New Jersey 100%
Peter's Passion, Inc. (3) New Jersey 100%
Atlantic Adventures, Inc.(3) New Jersey 100%
- ------------------------
(1) The operations of the subsidiaries are included in the consolidated
financial statements contained in the Annual Report to Stockholders
attached as Exhibit 13 to the Form 10-K.
(2) Subsidiary of Farmers and Mechanics Bank.
(3) Subsidiary of Land Financial Services, Inc.
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
FMS Financial Corporation on Form S-8 (File No. 33-24340) of our report dated
February 10, 1997 on our audits of the consolidated financial statements of FMS
Financial Corporation and Subsidiary as of December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996, which report is
incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
- -------------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,572
<INT-BEARING-DEPOSITS> 347
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,447
<INVESTMENTS-CARRYING> 171,914
<INVESTMENTS-MARKET> 172,528
<LOANS> 306,871
<ALLOWANCE> 2,782
<TOTAL-ASSETS> 541,710
<DEPOSITS> 453,277
<SHORT-TERM> 9,811
<LIABILITIES-OTHER> 2,140
<LONG-TERM> 42,656
0
0
<COMMON> 260
<OTHER-SE> 33,566
<TOTAL-LIABILITIES-AND-EQUITY> 541,710
<INTEREST-LOAN> 23,797
<INTEREST-INVEST> 13,044
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 36,841
<INTEREST-DEPOSIT> 16,176
<INTEREST-EXPENSE> 18,978
<INTEREST-INCOME-NET> 17,863
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 54
<EXPENSE-OTHER> 13,492
<INCOME-PRETAX> 4,305
<INCOME-PRE-EXTRAORDINARY> 3,026
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,026
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 3.66
<LOANS-NON> 4,091
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,455
<LOANS-PROBLEM> 0
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<CHARGE-OFFS> 115
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2,782
<ALLOWANCE-DOMESTIC> 2,782
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,782
</TABLE>
