SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
For the quarterly period ended June 30, 1997
OR
Transition report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
- ---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Sunset and Salem Roads, Burlington, New Jersey 08016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- ------
As of June 30, 1997 there were issued and outstanding 2,603,920 shares and
2,387,519 shares, respectively of the registrant's Common Stock, par value $.10
per share.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------
QUARTERLY REPORT ON FORM 10-Q
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JUNE 30, 1997
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TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
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Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1997 (unaudited) and December 31, 1996...........1
Consolidated Statements of Income (unaudited)
for the three and six month periods ended
June 30, 1997 and June 30, 1996...........................2
Consolidated Statements of Cash Flows (unaudited)
for the six month periods ended June 30, 1997
and June 30, 1996.........................................3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.......4 - 14
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings.......................................15
Item 2 - Changes in Securities...................................15
Item 3 - Defaults Upon Senior Securities.........................15
Item 4 - Submission of Matters to a Vote of Security Holders.....15
Item 5 - Other Information.......................................15
Item 6 - Exhibits and Reports on Form 8-K........................15
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
June 30, 1997 December 31, 1996
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 980,236 $ 9,572,347
Interest-bearing deposits 2,637,592 296,702
Short term funds 238,335 50,500
------------- -------------
Total cash and cash equivalents 3,856,163 9,919,549
Investment securities held to maturity 70,285,972 67,601,343
Investment securities and mortgage-backed securities available for sale 48,660,379 25,446,520
Loans receivable - net 307,934,093 306,870,816
Mortgage-backed securities held to maturity 95,680,143 104,312,581
Accrued interest receivable:
Loans 1,840,867 1,754,117
Mortgage-backed securities 970,900 912,599
Investments 1,157,434 964,319
Federal Home Loan Bank stock 3,630,800 3,620,600
Real estate held for development - net 1,227,732 1,227,732
Real estate owned - net 479,926 621,556
Office properties and equipment - net 15,131,583 14,756,238
Deferred income taxes 1,660,480 1,563,480
Excess cost over fair value of net assets acquired 637,153 812,599
Prepaid expenses and other assets 1,364,708 889,899
Subordinated Debentures issue cost - net 407,135 435,809
------------- -------------
TOTAL ASSETS $ 554,925,468 $ 541,709,757
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 475,092,460 $ 453,276,534
Advances from the Federal Home Loan Bank 27,900,000 32,550,000
Advances from Bank 0 6,691,758
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 73,472 106,463
Advances by borrowers for taxes and insurance 2,469,192 2,138,638
Accrued interest payable 779,159 860,545
Dividends payable 119,376 119,636
Other liabilities 2,107,855 2,140,009
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Total liabilities 518,541,514 507,883,583
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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 2,603,920 and 2,602,884 and shares outstanding 2,387,519 and
2,392,707 as of June 30, 1997 and December 31, 1996, respectively 260,392 260,288
Paid-in capital in excess of par 8,417,469 8,413,558
Unrealized loss on securities available for sale-net of deferred income taxes (85,704) (166,152)
Guarantee of employee stock ownership plan debt (73,472) (106,463)
Retained earnings 31,054,265 28,487,903
Less: Treasury stock (216,401 and 210,177 shares, at cost, as of
June 30, 1997 and December 31, 1996, respectively) (3,188,996) (3,062,960)
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Total stockholders' equity 36,383,954 33,826,174
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 554,925,468 $ 541,709,757
============= =============
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
INTEREST INCOME: (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income on:
Loans $ 6,250,493 $ 5,810,982 $12,469,607 $ 11,634,346
Mortgage-backed securities 1,808,261 1,785,738 3,655,992 3,625,661
Investments 2,021,343 1,430,865 3,698,767 2,614,211
------------ ----------- ----------- ------------
Total interest income 10,080,097 9,027,585 19,824,366 17,874,218
------------ ----------- ----------- ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 4,412,091 3,960,018 8,703,165 7,945,467
Subordinated Debentures 264,337 264,338 528,674 528,674
Borrowings 415,544 438,595 838,744 845,317
------------ ----------- ----------- ------------
Total interest expense 5,091,972 4,662,951 10,070,583 9,319,458
------------ ----------- ----------- ------------
NET INTEREST INCOME 4,988,125 4,364,634 9,753,783 8,554,760
PROVISION FOR LOAN LOSSES 50,000 30,000 80,000 60,000
------------ ----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,938,125 4,334,634 9,673,783 8,494,760
------------ ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 49,901 60,462 100,292 117,922
Gain on sale of loans 2,251 794 2,251 977
Gain on sale of investment securities 0 0 0 3,030
Real estate owned operations, net (46,962) (43,975) (86,042) (89,253)
Service charges on accounts 543,505 445,129 1,093,457 883,381
Other income 19,894 21,726 40,976 65,208
------------ ----------- ----------- ------------
Total other income (expense) 568,589 484,136 1,150,934 981,265
------------ ----------- ----------- ------------
OPERATING EXPENSES:
Salaries and employee benefits 1,817,962 1,786,276 3,702,597 3,452,248
Occupancy and equipment 656,622 610,467 1,330,564 1,232,516
Purchased services 258,577 228,618 491,583 439,666
Federal deposit insurance premiums 71,544 239,343 87,325 469,113
Professional fees 79,702 65,515 151,545 132,861
Advertising 17,485 7,050 41,349 13,387
Other 318,735 284,715 619,899 570,417
------------ ---------- ----------- ------------
Total operating expenses 3,220,627 3,221,984 6,424,862 6,310,208
------------ ---------- ----------- ------------
INCOME BEFORE INCOME TAXES 2,286,087 1,596,786 4,399,855 3,165,817
INCOME TAXES:
Current 1,033,028 656,993 1,737,008 1,315,534
Deferred (204,034) (172,022) (142,214) (263,417)
------------ ---------- ----------- ------------
Total income taxes 828,994 484,971 1,594,794 1,052,117
NET INCOME $ 1,457,093 $ 1,111,815 $ 2,805,061 $ 2,113,700
============ =========== =========== ============
EARNINGS PER COMMON SHARE: $ 0.60 $ 0.44 $ 1.15 $ 0.83
============ =========== ========== ============
Weighted average common shares and
common stock equivalents outstanding 2,444,931 2,523,925 2,446,309 2,537,478
============ =========== ========== ============
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996 (A)
<S> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 2,805,061 $ 2,113,700
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 80,000 60,000
Depreciation and amortization 902,148 843,774
Provision for real estate owned 76,630 66,000
Realized (gains) and losses on:
Sale of loans and loans held for sale (2,251) (977)
Sale of investment securities available for sale 0 (3,030)
Disposal and sale of fixed assets 7,122 2,960
Sale of real estate owned (10,630) 0
Increase in accrued interest receivable (338,166) (83,398)
Increase in prepaid expenses and other assets (474,809) (448,631)
(Decrease) Increase in accrued interest payable (81,386) 26,327
(Decrease) Increase in other liabilities (32,154) 407,551
Deferred income taxes (142,213) (263,419)
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Net cash provided by operating activities 2,789,352 2,720,857
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INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 342,000 264,596
Real estate owned 75,630 0
Office property and equipment 0 0
Proceeds from maturities of investment securities and
mortgage-backed securities held to maturity 115,836,940 107,316,187
Proceeds from maturities of investment securities available for sale 3,000,000 8,226,414
Principal collected on mortgage-backed securities held to maturity 10,874,593 16,831,877
Principal collected on mortgage-backed securities available for sale 3,594,795 0
Principal collected on longer-term loans, net 25,028,377 27,278,230
Longer-term loans originated or acquired, net (26,486,393) (25,140,326)
Purchase of investment securities and mortgage-backed securities held to maturity (120,849,980) (135,420,906)
Purchase of investment securities and mortgage-backed securities available for sale (29,762,744) (17,344,730)
Purchase of Federal Home Loan Bank stock (10,200) 0
Purchase of office property and equipment (939,498) (2,426,111)
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Net cash used in investing activities (19,296,480) (20,414,769)
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FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 13,374,905 3,391,509
Net increase in time deposits 1,749,263 1,380,748
Net (decrease) increase in FHLB advances (4,650,000) 9,800,000
Increase in advances from borrowers for taxes and insurance 330,554 147,599
Purchase of treasury stock (126,036) (663,869)
Dividends paid on common stock (238,959) (248,666)
Net proceeds from issuance of common stock 4,015 4,107
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Net cash provided by financing activities 10,443,742 13,811,428
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DECREASE IN CASH AND CASH EQUIVALENTS (6,063,386) (3,882,484)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,919,549 9,985,580
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,856,163 $ 6,103,096
=============== ==============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 10,151,969 $ 9,293,131
Income taxes 1,569,575 1,503,805
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 119,376 123,380
Non-monetary transfers from loans to real estate acquired
through foreclosure 0 195,300
<FN>
See notes to consolidated financial statements.
(A) Reclassified for comparative purposes
</TABLE>
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996.
General
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FMS Financial Corporation ("the Corporation") is the parent company of Farmers &
Mechanics Bank ("the Bank"), its only subsidiary.
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation contain all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of FMS's financial
condition, results of operations and cash flows for the periods and dates
indicated. The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the operating results for the full fiscal year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for FORM 10-Q, and therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles.
<PAGE>
FINANCIAL CONDITION -
TOTAL ASSETS - at June 30, 1997 were $554.9 million as compared with total
assets at December 31, 1996 of $541.7 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased $2.7 million to $70.3 million
at June 30, 1997 from $67.6 million at December 31, 1996 due to the net increase
of $6.3 million in U.S. Agency notes and $1.4 million in municipal bonds,
partially offset by a net decrease in reverse repurchase agreements of $5.0
million during the six months ended June 30, 1997. Investment securities held to
maturity at June 30, 1997 consisted entirely of fixed rate securities. A
comparison of cost and approximate market values of investment securities held
to maturity as of June 30, 1997 and December 31, 1996 follows:
<TABLE>
JUNE 30, 1997 December 31, 1996
GROSS GROSS ESTIMATED Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Market
COST GAINS LOSSES VALUE Cost Value
<S> <C> <C> <C> <C> <C> <C>
U. S. Gov't Agencies $ 53,041,717 $ 29,958 $ (645,968) $ 52,425,707 $ 46,791,618 $46,155,606
Reverse Repurchase 15,002,818 0 0 15,002,818 20,000,000 20,000,000
Municipal bonds 2,226,437 5,283 (67) 2,231,653 794,725 800,433
U. S. Treasury 15,000 0 (1,000) 14,000 15,000 14,000
-------------------------------------------------- ------------------------
Total $ 70,285,972 $ 35,241 $ (647,035) $ 69,674,178 $ 67,601,343 $66,970,039
================================================== ========================
</TABLE>
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE -
increased $23.3 million to $48.7 million at June 30, 1997 from $25.4 million at
December 31, 1996 as a result of the purchase of $20.2 million of CMOs, $4.5
million of US Agency notes, $2.9 million of REMICs and $1.9 million of MBSs,
partially offset by $3.0 million of U.S. Treasury and Agency notes matured and
$3.6 million of principal paydowns on CMOs, REMICs and MBSs during the six
months ended June 30, 1997. Investment securities available for sale consisted
of $8.2 million in adjustable rate securities and $40.5 million in fixed rate
securities at June 30, 1997. A comparison of cost and approximate market values
of investment securities available for sale as of June 30 1997 and December 31,
1996 follows:
<TABLE>
JUNE 30, 1997 December 31, 1996
GROSS GROSS ESTIMATED Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Market
COST GAINS LOSSES VALUE Cost Value
<S> <C> <C> <C> <C> <C> <C>
U. S. Gov't Agencies $ 8,500,000 $ 9,844 $ (4,788) $ 8,505,056 $ 5,000,000 $ 4,996,960
U. S. Treasury 0 0 0 0 1,997,757 1,998,560
CMOs 29,746,197 93,445 (82,944) 29,756,698 12,683,603 12,621,499
REMICs 8,759,012 3,684 (175,677) 8,587,019 6,027,067 5,829,501
MBS 1,791,416 20,190 0 1,811,606 0 0
-------------------------------------------------- -------------------------
Total $ 48,796,625 $ 127,163 $ (263,409) $ 48,660,379 $25,708,427 $25,446,520
================================================== =========================
</TABLE>
<PAGE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - increased $1.0 million to $307.9
million at June 30, 1997 from $306.9 million at December 31, 1996. This
increase was the result of approximately $26.5 million of loans originated,
partially offset by $25.0 million of principal collected on loans during the six
months ended June 30, 1997. The following tables set forth certain information
concerning the loan portfolio at the dates indicated. Table 1 shows loans
receivable by major categories. Table 2 shows past due impaired loans by major
categories.
<TABLE>
Table 1 JUNE 30, 1997 December 31, 1996
<S> <C> <C>
Mortgage loans ( 1-4 dwelling) $ 257,652,129 $ 257,607,922
Construction loans 3,613,383 3,711,666
Commercial construction 1,261,244 4,394,901
Consumer loans 3,892,311 4,015,403
Commercial real estate 44,253,381 39,177,194
Commercial business 1,084,750 1,829,956
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Subtotal 311,757,198 310,737,042
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Less:
Deferred loan fees 966,145 1,084,289
Allowance for possible
loan losses 2,856,960 2,781,937
----------------- -------------
Net Loans Receivable $ 307,934,093 $ 306,870,816
================= =============
Table 2 JUNE 30, 1997 December 31, 1996
Impaired Loans
- --------------
Impaired loans - non-accrual:
Mortgage loans:
One-to-four family $ 2,084,536 $ 2,413,409
Commercial real estate 1,528,996 1,662,727
Consumer and other 16,681 14,546
----------------- -------------
Total impaired loans $ 3,630,213 $ 4,090,682
================= =============
</TABLE>
At June 30, 1997, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS Nos. 114 and 118 totaled $3.6 million of
which $2.3 million related to loans that were individually measured for
impairment with a valuation allowance of $356 thousand and $1.3 million of loans
that were collectively measured for impairment with a valuation allowance of $67
thousand. For the six months ended June 30, 1997, the average recorded
investment in impaired loans was approximately $3.7 million. The Bank
recognized $79 thousand of interest income on impaired loans, all of which was
recognized on the cash basis. The Bank had $2.9 million in total reserves for
possible loan losses at June 30, 1997, representing approximately 79% of non-
accrual loans and 0.9% of total loans.
As of June 30, 1997 the Bank had outstanding loan commitments of $25.5 million,
of which $20.3 million represented variable rate loans and $5.2 million
represented fixed rate loans. The Bank intends to fund these commitments
through scheduled amortization of loans and mortgage-backed securities,
additional borrowings and if necessary the sale of investment securities
available for sale.
<PAGE>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY - decreased $8.6 million to $95.7
million at June 30, 1997 from $104.3 million at December 31, 1996. The decrease
is the result of $10.9 million in principal repayments, partially offset by the
purchase of $2.3 million in FHLMC and GNMA fixed rate securities. Mortgage-
backed securities at June 30, 1997 consisted of $65.0 million in fixed rate
securities and $30.7 million in adjustable rate securities. Mortgage-backed
securities held to maturity at June 30, 1997 and December 31, 1996 are
summarized below:
<TABLE>
JUNE 30, 1997 December 31, 1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED Amortized Estimated
COST GAINS LOSSES MARKET VALUE Cost Market Value
<S> <C> <C> <C> <C> <C> <C>
GNMA $ 22,737,835 $ 702,487 $ (8,359) $23,431,963 $ 23,216,175 $ 23,744,319
FNMA 34,238,301 372,018 (189,776) 34,420,543 37,958,391 38,022,335
FHLMC 38,223,938 820,836 (80,676) 38,964,098 42,586,038 43,233,784
Private 480,069 3,091 0 483,160 551,977 558,018
----------------------------------------------- --------------------------
Total $ 95,680,143 $1,898,432 $(278,811) $97,299,764 $ 104,312,581 $105,558,456
=============================================== ==========================
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - remained stable at $1.2 million at June 30,
1997, compared to December 31, 1996. The Bank has ceased making any new
investments in real estate held for development projects and has limited any
additional investments to those investments which are necessary to preserve and
protect the existing assets so that they may be liquidated as soon as practical.
Management believes that divestiture of its present land investments may take
several years, depending on market conditions. Management will continue to
monitor the net realizable value of its real estate investments. At June 30,
1997, the Bank's investment in and advances to subsidiaries engaged in land
development was fully deducted from core, tangible, and risk-based capital.
REAL ESTATE OWNED - consisted of properties with a net book value of $480
thousand. These properties are carried at the lower of book value or fair
market value less estimated costs to sell and are analyzed by management on a
periodic basis. Real estate owned at June 30, 1997 is comprised of (i) 18 acres
of land which is zoned for the construction of 109 townhouses, (ii) one
residential condominium and (iii) one commercial condominium located in
Burlington County. The Bank is currently seeking buyers for all of these
properties.
<PAGE>
ASSET CLASSIFICATIONS - are monitored by management on a regular basis.
Classified assets generally consist of assets which have possible credit risk
and/or have a sufficient degree of risk or potential weakness to warrant
management's close attention. Total classified assets increased $465 thousand
during the six months ended June 30, 1997 resulting from an increase in
commercial real estate of $920 thousand, partially offset by a decrease in one-
to-four family of $329 thousand and real estate owned of $142 thousand The
increase in classified assets was primarily from the result of a recent OTS
examination and consist mostly of commercial real estate loans past their
stated balloon dates. Management has initiated a program to review and extend
the term of these loans based on current information. The following table
sets forth information with respect to the Bank's classified assets at the
dates indicated:
<TABLE>
JUNE 30, 1997 December 31, 1996
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $2,084,536 $2,413,409
Commercial real estate 4,861,421 3,941,540
Consumer and other 16,681 14,546
---------- ----------
Total loans 6,962,638 6,369,495
Real estate held for development, net 1,227,732 1,227,732
Real Estate Owned, net 479,926 621,556
---------- ----------
Total Substandard 8,670,296 8,218,783
---------- ----------
Doubtful loans 0 0
---------- ----------
Total Doubtful 0 0
---------- ----------
Loss - Commercial Real Estate 13,316 0
---------- ----------
Total Loss 13,316 0
---------- ----------
TOTAL CLASSIFIED ASSETS $8,683,612 $8,218,783
========== ==========
</TABLE>
DEPOSITS - increased $21.8 million to $475.1 million at June 30, 1997 from
$453.3 million at December 31, 1996 as a result of an increase in passbook and
statement saving accounts of $12.8 million, non-interest checking accounts of
$6.6 million, certificate of deposits of $1.7 million and interest-bearing
checking accounts of $1.6 million partially offset by a decrease in money
market accounts of $975 thousand. Saving accounts increased primarily due to
the acquisition of $6.7 million in custodian trust accounts. Non-interest
checking accounts increased due to the promotion of "Free Personal" and "Free
Business" checking accounts. Interest credited to depositors accounts for the
six months ended June 30, 1997 amounted to $7.8 million. The following table
set forth certain information concerning deposits at the dates indicated:
<TABLE>
JUNE 30, 1997 December 31, 1996
PERCENT WEIGHTED Percent Weighted
OF TOTAL AVERAGE of Total Average
AMOUNT DEPOSITS RATE Amount Deposits Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest checking $44,128,201 9.29% 0.00% $37,552,269 8.28% 0.00%
Checking accounts 48,400,051 10.19% 1.58% 46,750,659 10.31% 1.57%
Savings accounts 83,873,975 17.65% 2.83% 71,057,835 15.68% 2.57%
Money market accounts 55,986,548 11.78% 2.66% 56,961,349 12.57% 2.65%
Certificates 242,703,685 51.09% 5.36% 240,954,422 53.16% 5.30%
------------------------------ -----------------------------
Total Deposits $475,092,460 100.00% 3.71% $453,276,534 100.00% 3.77%
============================== =============================
</TABLE>
<PAGE>
BORROWINGS - at June 30, 1997 amounted to $38.0 million. Borrowings included
$10.0 million of 10% Subordinated Debentures, $27.9 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 6.07%, and $73 thousand
in the guarantee of Employee Stock Ownership Plan debt. At December 31, 1996
borrowings consisted of $10.0 million of 10% Subordinated Debentures, $32.6
million in Federal Home Loan Bank Advances with a weighted average interest rate
of 6.09% and $106 thousand in the guarantee of Employee Stock Ownership Plan
debt.
STOCKHOLDERS' EQUITY - increased $2.6 million to $36.4 million at June 30, 1997,
primarily as a result of net income for the six months and a reduction in the
unrealized loss on securities available for sale and the guarantee of Employee
Stock Ownership Plan debt, partially offset by the purchase of treasury stock.
Shares outstanding at June 30, 1997 decreased to 2,387,519 shares from 2,392,707
shares at December 31, 1996, as 6,224 shares were repurchased and stock options
for 1,036 shares were exercised during the six months ended June 30, 1997. At
June 30, 1997 the book value per share was $15.24 as compared to $14.14 at
December 31, 1996. Options to purchase 79,115 shares of the Company's common
stock were outstanding to directors, certain officers and employees at
June 30, 1997.
There are three (3) standards that a Bank must satisfy in order to meet its
capital requirements. The requirements include a leverage ratio of core capital
to adjusted total assets of 3.0 percent, a tangible capital standard requirement
of 1.5 percent of total adjusted assets, and a risk-based capital standard set
at 8.0 percent of risk-weighted assets. The Office of Thrift Supervision (OTS)
can restrict the Bank's asset growth, require the submission of a capital plan,
and require compliance with a capital directive, which may include restrictions
on the payment of dividends and compensation, and other restrictions determined
to be appropriate by the OTS, if the Bank is not in compliance with the
applicable capital standards. At June 30, 1997 the Bank exceeded all three
current capital requirements as the Bank's core, tangible, and risk-based
capital ratios were 7.51%, 7.51%, and 16.23%, respectively.
RESULTS OF OPERATIONS -
GENERAL
The earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits and borrowings. Net interest income is a function
of the interest rate spread, which is the difference between the weighted
average yield earned on interest-earning assets and the weighted average rate
paid on interest-bearing liabilities, as well as the average balance of interest
earning-assets as compared to interest-bearing liabilities. Net income is also
affected by the provision for loan losses and real estate owned, non-interest
income, such as gains (losses) on sales of loans and investments, service
charges and other fees. In addition to interest expense, the Bank incurs
operating expenses such as salaries and employee benefits, deposit insurance
premiums, depreciation, occupancy and equipment expense and purchased services
expense.
The Corporation recorded net income for the three months ended June 30, 1997 of
$1.5 million, or $.60 per share as compared to $1.1 million, or $.44 per share
for the comparable period in 1996. Earnings for the six months ended June 30,
1997 were $2.8 million, or $1.15 per share as compared to $2.1 million, or $.83
per share for the comparable period in 1996.
<PAGE>
EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average number of
shares and common equivalent shares outstanding during the first six months of
1997. Primary and fully diluted earnings per share include the dilutive effect
of unexercised stock options.
INTEREST RATE SPREAD
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities
including non-interest checking accounts. Net interest income is affected by
(i) the spread between the yield earned on interest earning assets and the
interest rates paid on interest-bearing savings deposits including non-interest
checking accounts and borrowings (liabilities), and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's
interest rate spread varies over time because money fund accounts and other
flexible rate accounts have become significant sources of savings deposits.
Income from investment securities and mortgage-backed securities depends upon
the amount invested during the period and the yields earned on such securities.
The yield on loans receivable changes principally as a result of existing
mortgage loan repayments, adjustable rate loan adjustments, sales and the
interest rates and volume of new mortgage loans.
The following table sets forth the Bank's weighted-average yields on its
interest-earning assets, weighted-average interest rates paid on its interest-
bearing liabilities and weighted-average interest rate spreads for the periods
indicated:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted-Average Yields Earned on:
Loans, net 8.01% 8.04% 8.00% 8.03%
Mortgage-Backed Securities 7.22 6.91 7.24 6.84
Investment Securities 6.88 6.40 6.80 6.28
--------------- ----------------
Total Interest-Earning Assets 7.61 7.49 7.60 7.46
--------------- ----------------
Weighted-Average Interest Rates Paid on:
Deposits 3.72 3.72 3.72 3.76
Borrowings 5.95 5.89 5.92 5.88
Subordinated Debentures 10.56 10.56 10.56 10.56
--------------- ----------------
Total Interest-Bearing Liabilities 3.98 4.01 3.98 4.04
--------------- ----------------
Weighted-Average Interest Rate Spread --------------- ----------------
for the Period 3.64% 3.49% 3.62% 3.42%
=============== ================
</TABLE>
<PAGE>
AVERAGE BALANCE OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table sets forth the Bank's average balance of interest-earning
assets in comparison to its average balance of interest-bearing liabilities
during the periods indicated:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
(In Thousands) (In Thousands)
Average Interest-Earning Assets:
Loans, net $ 311,997 $ 289,068 $ 311,700 $ 289,660
Mortgage-Backed Securities 100,113 103,396 101,041 105,960
Investment Securities 117,438 89,506 108,866 83,258
----------------------- -------------------
Total 529,548 481,970 521,607 478,878
----------------------- -------------------
Average Interest-Bearing Liabilities:
Deposits 474,221 425,631 467,470 422,089
Borrowings 27,962 29,790 28,362 28,762
Subordinated Debentures 10,000 10,000 10,000 10,000
----------------------- -------------------
Total 512,183 465,421 505,832 460,851
----------------------- -------------------
Excess of Interest-Earning Assets
over Interest-Bearing Liabilities $ 17,365 $ 16,549 $ 15,775 $ 18,027
======================= ===================
</TABLE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume, (ii) changes in rate and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate).
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1997 compared to 1996 1997 compared to 1996
Increase (Decrease) due to: Increase (Decrease) due to:
Rate Volume Total Rate Volume Total
<S> <C> <C> <C> <C> <C> <C>
(In Thousands) (In Thousands)
Interest income:
Loans receivable $ (21) $ 461 $ 440 $ (50) $ 885 $ 835
Mortgage-backed securities 79 (57) 22 198 (168) 30
Investment securities 143 447 590 281 804 1,085
--------------------------- ----------------------------
Total change - interest income 201 851 1,052 429 1,521 1,950
--------------------------- ----------------------------
Interest expense:
Deposits 0 452 452 (96) 854 758
Borrowings 4 (27) (23) 6 (12) (6)
Subordinated Debentures 0 0 0 (1) 0 (1)
--------------------------- ----------------------------
Total change - interest expense 4 425 429 (91) 842 751
--------------------------- ----------------------------
Net change in net interest income $ 197 $ 426 $ 623 $ 520 $ 679 $ 1,199
=========================== ============================
</TABLE>
<PAGE>
NET INTEREST INCOME - for the three and six months ended June 30, 1997 totaled
$5.0 million and $9.8 million, respectively. Net interest income for the three
months ended June 30, 1997 increased $623 thousand as compared to the same
period in 1996 due primarily to an increase in interest income on investment
securities of $590 thousand, loans receivable of $440 thousand, partially offset
by an increase in interest expense on deposits of $452 thousand.
The increase in interest income on investment securities was due to an increase
in the average balance of the portfolio of $27.9 million to $117.4 million for
the three months ended June 30, 1997 from $89.5 million for the same period in
1996, which resulted in an increase in interest income of $447 thousand. The
average balance increase was due to the net purchases of $19.6 million of
collateralized mortgage obligations and $8.2 million of U.S. Agency notes since
June 30, 1996. The average yield on the investment portfolio increased 48 basis
points to 6.88% for the three months ended June 30, 1997 from 6.40% for the
three months ended June 30, 1996, which resulted in an increase in interest
income of $143 thousand due to rate changes.
Interest income on loans increased a total of $440 thousand for the three months
ended June 30, 1997 principally due to an increase in the average balance of
$22.9 million to $312.0 million at June 30, 1997 from $289.1 million at June 30,
1996, which resulted in volume increase in interest income of $461 thousand. The
increase is largely the result of the purchase of $14.5 million of adjustable
rate mortgage loans during the third quarter of 1996. The volume increase was
partially offset by a $21 thousand yield decrease due to a decline in the loan
portfolio's average yield to 8.01% for the three months ended June 30, 1997 from
8.04% for the three months ended June 30, 1996.
The increase in interest expense on deposits of $452 thousand for the three
months ended June 30, 1997 compared to the same period in 1996 was due to an
increase in the average balance of deposits of $48.6 million to $474.2 million
at June 30, 1997 from $425.6 million at June 30, 1996. The average balance for
the three months ended June 30, 1997 of certificates of deposit increased $17.7
million, checking accounts increased $15.0 million, savings accounts increased
$12.6 million and money market accounts increased $3.3 million as compared to
the same period of 1996. The increase in the average balance is due to $9.2
million of deposits purchased and three branch openings since June 30, 1996 .
Net interest income for the six months ended June 30, 1997 increased $1.2
million primarily due to an increase in interest income on investment securities
of $1.1 million and loans receivable of $835 thousand, partially offset by an
increase in interest expense on deposits of $758 thousand as compared to the
same period in 1996.
The increase in interest income on investment securities was due to an increase
in the average balance of the portfolio of $25.6 million to $108.9 million for
the six months ended June 30, 1997 from $83.3 million for the same period in
1996, which resulted in an increase in interest income of $804 thousand. The
average yield on the investment portfolio increased 52 basis points to 6.80% for
the six months ended June 30, 1997 from 6.28% for the six months ended June 30,
1996, which resulted in an increase in interest income of $281 thousand due to
rate changes.
<PAGE>
Interest income on loans increased a total of $835 thousand for the six months
ended June 30, 1997 due to an increase in the average balance of $22.0 million
to $311.7 million at June 30 1997 from $289.7 million at June 30, 1996, which
resulted in a volume increase in interest income of $885 thousand. The volume
increase was partially offset by a $50 thousand yield decrease due to a decline
in the loan portfolio's average yield to 8.00% for the six months ended June 30,
1997 from 8.03% for the six months ended June 30, 1996.
The increase in interest expense on deposits of $758 thousand for the six months
ended June 30, 1997 compared to the same period in 1996 was due to an increase
in the average balance of deposits of $45.4 million to $467.5 million for the
six months ended June 30, 1997 from $422.1 million for the six months ended June
30, 1996, which resulted in an increase in interest expense of $854 thousand.
The average balance for the six months ended June 30, 1997 of certificates of
deposit increased $16.9 million, checking accounts increased $13.9 million,
savings accounts increased $11.3 million and money market accounts increased
$3.3 million as compared to the same period of 1996. The weighted average rate
on deposits decreased 4 basis points to 3.72% for the six months ended June 30,
1997 from 3.76% for the six months ended June 30, 1996, which resulted in a
decrease in interest expense of $96 thousand.
PROVISION FOR LOAN LOSSES - for the three months ended June 30, 1997 was $50
thousand compared to $30 thousand for the same period in 1996. The total
provision for potential loan losses increased to $80 thousand for the six months
ended June 30, 1997 from $60 thousand for the six months ended June 30, 1996.
Most of the Bank's lending activity is with customers located within southern
New Jersey. Generally, the loans are secured by real estate consisting of single
family residential properties. While this represents a concentration of credit
risk, the credit losses arising from this type of lending compare favorably with
the Bank's credit loss experience on its portfolio as a whole. The ultimate
repayment of these loans is dependent to a certain degree on the local economy
and real estate market. The determination of the allowance level for loan losses
is based on management's analysis of the risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying collateral and current economic conditions. Accordingly, there
can be no assurance that future provisions for loans losses will not increase or
be necessary.
REAL ESTATE OWNED OPERATIONS, NET - for the three and six month periods ended
June 30, 1997 totaled $47 thousand and $86 thousand of expense, respectively,
compared to $44 thousand and $89 thousand of expense for the same periods in
1996.
OPERATING EXPENSES - for the three and six month periods ended June 30, 1997
amounted to $3.2 million and $6.4 million, respectively, as compared to $3.2
million and $6.3 million for the same periods in 1996.
SALARIES AND EMPLOYEE BENEFITS - for the three and six month periods ended June
30, 1997 were $1.8 million and $3.7 million, respectively, as compared to $1.7
million and $3.5 million for the same periods in 1996. The increase was due to
additional staff in the three new branches opened since the second quarter of
1996, as well as an increase in branch staff for additional hours, principally
"Sunday Banking". Average full time equivalent employees at June 30, 1997 were
262 as compared to 238 at June 30, 1996.
<PAGE>
OCCUPANCY AND EQUIPMENT - for the three and six month periods ended June 30,
1997 amounted to $657 thousand and $1.3 million, respectively, as compared to
$610 thousand and $1.2 million for the same periods in 1996. The increase is the
result of additional depreciation and occupation expenses on the new branches
opened as well as other facility improvements and equipment additions since the
second quarter of 1996.
PURCHASED SERVICES - for the three and six month periods ended June 30, 1997
amounted to $259 thousand and $492 thousand, respectively, as compared to $229
thousand and $440 thousand for the same periods in 1996. Check processing costs
have increased $29 thousand for the six months ended June 30, 1996 due to higher
transaction volumes from an increase in the number of checking accounts opened.
FEDERAL INSURANCE PREMIUM - for the three and six month periods ended June 30,
1997 amounted to $72 thousand and $87 thousand, respectively, as compared to
$239 thousand and $469 thousand for the same periods in 1996. The decrease is
from a lower FDIC assessment in 1997 due to the SAIF recapitalization which was
signed into legislation during the third quarter of 1996. As a result of this
legislation, deposit premiums decreased from $0.23 per $100 of deposits to $.065
per $100 of deposits.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits, and other cash outflows in a cost effective manner. The Bank's
primary sources of funds are deposits and scheduled amortization and prepayments
of loan principal. To a lesser extent, the Bank obtains funds from sales and
maturities of mortgage-backed securities, investment securities, and short-term
investments and borrowings. During the past several years, the Bank has used
such funds primarily to meet ongoing commitments to fund maturing time deposits
and saving withdrawals, fund existing and continuing loan commitments and to
maintain liquidity. While loan payments, maturing investments and mortgage-
backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank's liquidity is also influenced by the level
of demand for funding loan originations.
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid investments", which include certain United States government
and federal agency obligations and other approved investments. Regulations
currently in effect require the Bank to maintain liquid assets of not less than
5% of its net withdrawable accounts plus short-term borrowings. Short-term
liquid assets must consist of not less than 1% of such accounts and borrowings,
which is also included in the 5% requirement. These levels are changed from
time to time by the OTS to reflect current economic conditions. The Bank has
generally maintained liquidity in excess of required levels. The Bank's
regulatory liquidity was 8.39% and 11.55%, respectively, at June 30, 1997, and
December 31, 1996, respectively, and its short-term liquidity was 4.77% and
7.31%, respectively, at such dates.
<PAGE>
PART II. ...............................OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Changes in Securities
------- ---------------------
None
Item 3: Defaults Upon Senior Securities
------- -------------------------------
None
Item 4: Submission of Matters to Vote of Security of Holders
------- ----------------------------------------------------
None
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
None
<PAGE>
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: August 13, 1997 /s/ Craig W. Yates
------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1997 /s/ Channing L. Smith
---------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT NO. 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Income $1,457,093 $1,111,815 $2,805,061 $2,113,700
Weighted average common shares outstanding 2,387,132 2,467,578 2,389,316 2,480,692
Common stock equivalents due to dilutive effect of stock options 57,799 56,347 56,993 56,786
Total weighted average common shares and equivalents outstanding 2,444,931 2,523,925 2,446,309 2,537,478
Primary earnings per share $0.60 $0.44 $1.15 $0.83
Total weighted average common shares and equivalents outstanding 2,444,931 2,523,925 2,446,309 2,537,478
Additional dilutive shares using the higher of the end of period market
value or average market value for the period when utilizing the treasury 2,079 - 2,884 -
stock method regarding stock options
Total outstanding shares for fully diluted earnings per share computation 2,447,010 2,523,925 2,449,193 2,537,478
Fully diluted earnings per share $0.60 $0.44 $1.15 $0.83
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 980
<INT-BEARING-DEPOSITS> 2876
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48660
<INVESTMENTS-CARRYING> 165966
<INVESTMENTS-MARKET> 166974
<LOANS> 307934
<ALLOWANCE> 2857
<TOTAL-ASSETS> 554925
<DEPOSITS> 475092
<SHORT-TERM> 3368
<LIABILITIES-OTHER> 2108
<LONG-TERM> 37973
0
0
<COMMON> 260
<OTHER-SE> 36124
<TOTAL-LIABILITIES-AND-EQUITY> 554925
<INTEREST-LOAN> 12469
<INTEREST-INVEST> 7355
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19824
<INTEREST-DEPOSIT> 8703
<INTEREST-EXPENSE> 10070
<INTEREST-INCOME-NET> 9754
<LOAN-LOSSES> 80
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5274
<INCOME-PRETAX> 4400
<INCOME-PRE-EXTRAORDINARY> 2805
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2805
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 3.77
<LOANS-NON> 3630
<LOANS-PAST> 0
<LOANS-TROUBLED> 1463
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2782
<CHARGE-OFFS> 6
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2857
<ALLOWANCE-DOMESTIC> 2857
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2603
</TABLE>
