SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
For the quarterly period ended March 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Sunset and Salem Roads, Burlington, New Jersey 08016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- -------
As of March 31, 1997 there were issued and outstanding 2,602,884 shares and
2,386,483 shares, respectively of the registrant's Common Stock, par value $.10
per share.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
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QUARTERLY REPORT ON FORM 10-Q
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MARCH 31, 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
March 31, 1997 (unaudited) and December 31, 1996.............. 1
Consolidated Statements of Income (unaudited)
for the three months ended
March 31, 1997 and March 31, 1996............................. 2
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1997
and March 31, 1996............................................ 3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 4 - 13
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings........................................... 14
Item 2 - Changes in Securities....................................... 14
Item 3 - Defaults Upon Senior Securities............................. 14
Item 4 - Submission of Matters to a Vote of Security Holders......... 14
Item 5 - Other Information........................................... 14
Item 6 - Exhibits and Reports on Form 8-K............................ 14
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 4,796,288 $ 9,572,347
Interest-bearing deposits 739,328 296,702
Short term funds 64,215 50,500
Total cash and cash equivalents 5,599,831 9,919,549
Investment securities held to maturity 74,729,940 67,601,343
Investment securities and mortgage-backed securities available for sale 35,388,508 25,446,520
Loans receivable - net 310,185,475 306,870,816
Mortgage-backed securities held to maturity 100,118,127 104,312,581
Accrued interest receivable:
Loans 1,843,282 1,754,117
Mortgage-backed securities 936,069 912,599
Investments 892,148 964,319
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 588,556 621,556
Office properties and equipment - net 14,612,057 14,756,238
Deferred income taxes 1,573,683 1,563,480
Excess cost over fair value of net assets acquired 724,876 812,599
Prepaid expenses and other assets 1,126,053 889,899
Subordinated Debentures issue cost - net 421,472 435,809
TOTAL ASSETS $ 553,598,609 $ 541,709,757
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 474,426,653 $ 453,276,534
Advances from the Federal Home Loan Bank 28,250,000 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 89,967 106,463
Advances by borrowers for taxes and insurance 2,341,020 2,138,638
Accrued interest payable 656,242 860,545
Dividends payable 119,635 119,636
Other liabilities 2,898,279 2,140,009
Total liabilities 518,781,796 507,883,583
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.10 par value 5,000,000 shares authorized; none issued
Common stock - $.10 par value 10,000,000 shares authorized; shares
issued 2,602,884 and 2,602,884 and shares outstanding 2,386,483 and
2,392,707 as of March 31, 1997 and December 31, 1996, respectively 260,288 260,288
Paid-in capital in excess of par 8,413,558 8,413,558
Unrealized loss on securities available for sale - net of deferred income taxes (294,307) (166,152)
Guarantee of employee stock ownership plan debt (89,967) (106,463)
Retained earnings 29,716,237 28,487,903
Less: Treasury stock (216,401 and 210,177 shares, at cost, as of
March 31, 1997 and December 31, 1996, respectively) (3,188,996) (3,062,960)
Total stockholders' equity 34,816,813 33,826,174
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 553,598,609 $ 541,709,757
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
1997 1996
INTEREST INCOME: (UNAUDITED)
<S> <C> <C>
Interest income on:
Loans $ 6,219,114 $ 5,823,364
Mortgage-backed securities 1,847,731 1,839,923
Investments 1,677,424 1,183,346
Total interest income 9,744,269 8,846,633
INTEREST EXPENSE:
Interest expense on:
Deposits 4,291,074 3,985,449
Subordinated Debentures 264,337 264,336
Borrowings 423,200 406,722
Total interest expense 4,978,611 4,656,507
NET INTEREST INCOME 4,765,658 4,190,126
PROVISION FOR LOAN LOSSES 30,000 30,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,735,658 4,160,126
OTHER INCOME (EXPENSE):
Loan service charges and other fees 50,391 57,460
Gain on sale of investment securities 0 3,030
Real estate owned operations, net (39,080) (45,278)
Service charges on accounts 549,952 438,252
Other income 21,082 43,665
Total other income (expense) 582,345 497,129
OPERATING EXPENSES:
Salaries and employee benefits 1,884,635 1,665,972
Occupancy and equipment 673,942 622,049
Purchased services 233,006 211,048
Federal deposit insurance premiums 15,781 229,770
Professional fees 71,843 67,346
Advertising 23,864 6,337
Other 301,164 285,702
Total operating expenses 3,204,235 3,088,224
INCOME BEFORE INCOME TAXES 2,113,768 1,569,031
INCOME TAXES:
Current 703,980 658,541
Deferred 61,820 (91,395)
Total income taxes 765,800 567,146
NET INCOME $ 1,347,968 $ 1,001,885
EARNINGS PER COMMON SHARE: $ 0.55 $ 0.39
Weighted average common shares and
common stock equivalents outstanding 2,448,409 2,557,749
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
1997 1996 (A)
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,347,968 $ 1,001,885
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 30,000 30,000
Depreciation and amortization 419,975 439,223
Provision for real estate owned 33,000 33,000
Realized (gains) and losses on:
Sale of loans and loans held for sale (226) (182)
Sale of investment securities available for sale 0 (3,030)
Disposal and sale of fixed assets 1,484 1,814
(Increase) Decrease in accrued interest receivable (40,464) 324,075
Increase in prepaid expenses and other assets (236,154) (324,833)
Decrease in accrued interest payable (204,303) (211,070)
Increase in other liabilities 758,270 389,851
Deferred income taxes 61,820 (91,396)
Net cash provided by operating activities 2,171,370 1,589,337
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 104,945 118,202
Office property and equipment 2,277 0
Proceeds from maturities of investment securities and
mortgage-backed securities held to maturity 50,642,549 47,443,432
Proceeds from maturities of investment securities available for sale 2,000,000 8,226,414
Principal collected on mortgage-backed securities held to maturity 5,485,477 6,424,680
Principal collected on mortgage-backed securities available for sale 1,495,120 1,065,416
Principal collected on longer-term loans, net 9,235,750 12,626,787
Longer-term loans originated or acquired, net (12,668,301) (10,643,466)
Purchase of investment securities and mortgage-backed securities held to maturity (59,113,959) (66,730,867)
Purchase of investment securities and mortgage-backed securities available for sale (13,643,271) (7,353,575)
Purchase of Federal Home Loan Bank stock (10,200) 0
Purchase of office property and equipment (136,547) (371,653)
Net cash provided by investing activities (16,606,160) (9,194,630)
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 8,992,513 (2,561,149)
Net increase (decrease) in time deposits 5,465,848 (4,500,854)
Net (decrease) increase in FHLB advances (4,300,000) 8,750,000
Increase in Repurchase Agreements 0 1,990,000
Increase in advances from borrowers for taxes and insurance 202,382 76,136
Purchase of treasury stock (126,036) (663,869)
Dividends paid on common stock (119,635) (125,288)
Net proceeds from issuance of common stock 0 155
Net cash provided by financing activities 10,115,072 2,965,131
DECREASE IN CASH AND CASH EQUIVALENTS (4,319,718) (4,640,162)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,919,549 9,985,580
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,599,831 $ 5,345,418
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 5,182,914 $ 4,867,577
Income taxes 269,575 302,228
Non cash investing and financing activities:
Dividends declared and not paid at quarter end 119,635 123,379
Non-monetary transfers from loans to real estate acquired
through foreclosure 0 195,300
See notes to consolidated financial statements.
<FN>
<F1>
(A) Reclassified for comparative purposes
</FN>
</TABLE>
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 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 three months ended March 31, 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 March 31, 1997 were $553.6 million as compared with total
assets at December 31, 1996 of $541.7 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased to $74.7 million at March 31,
1997 from $67.6 million at December 31, 1996 due to the net purchase of $4.6
million in Reverse Repurchase Agreements and $2.5 million in U.S. Agency notes
during the three months ended March 31, 1997. Investment securities held to
maturity at March 31, 1997 consisted entirely of fixed rate securities. A
comparison of cost and approximate market values of investment securities held
to maturity as of March 31, 1997 and December 31, 1996 follows:
<TABLE>
<CAPTION>
MARCH 31, 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 $ 49,286,996 $ 2,048 $ (1,441,776) $ 47,847,268 $ 46,791,618 $ 46,155,606
Reverse Repurchase 24,643,099 0 0 24,643,099 20,000,000 20,000,000
Municipal bonds 784,845 945 (329) 785,461 794,725 800,433
U. S. Treasury 15,000 0 0 15,000 15,000 14,000
Total $ 74,729,940 $ 2,993 $ (1,442,105) $ 73,290,828 $ 67,601,343 $ 66,970,039
</TABLE>
INVESTMENT SECURITIES AVAILABLE FOR SALE - increased to $35.4 million at March
31, 1997 from $25.4 million at December 31, 1996 as a result of the purchase of
$7.7 million of CMOs, $2.9 million of REMICs and $2.0 million of MBSs,
partially offset by the maturing of $2.0 million of U.S. Treasury notes
available for sale as well as $1.5 million of principal paydowns on CMOs and
REMICs. Investment securities available for sale at March 31, 1997 consisted of
$8.3 million in adjustable rate securities and $27.1 million in fixed rate
securities. A comparison of cost and approximate market values of investment
securities available for sale as of March 31, 1997 and December 31, 1996
follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 December 31, 1996
GROSS GROSS ESTIMATED Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Market
COST GAINS LOSSES VALUE Cost Value
<S> <C> <C> <C> <C> <C> <C>
U. S. Gov't Agencies $ 6,000,000 $ 0 $ (30,938) $ 5,969,062 $ 5,000,000 $ 4,996,960
U. S. Treasury 0 0 0 0 1,997,757 1,998,560
CMOs 18,949,264 10,319 (188,806) 18,770,777 12,683,603 12,621,499
REMICs 8,869,818 0 (240,291) 8,629,527 6,027,067 5,829,501
MBS 2,031,510 0 (12,368) 2,019,142 0 0
Total $ 35,850,592 $ 10,319 $(472,403) $ 35,388,508 $ 25,708,427 $ 25,446,520
</TABLE>
<PAGE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - increased $3.3 million to $310.2
million at March 31, 1997 from $306.9 million at December 31, 1996. This
increase was the result of approximately $12.7 million of loans originated,
partially offset by $9.2 million of principal collected on loans during the
three months ended March 31, 1997. The following tables set forth certain
information concerning the loan portfolio at the dates indicated. Table 1 shows
loans receivable by major categories. Table 2 shows past due impaired loans by
major categories.
<TABLE>
<CAPTION>
Table 1 MARCH 31, December 31,
Loans Receivable 1997 1996
- ----------------
<S> <C> <C>
Mortgage loans ( 1-4 dwelling) $ 257,181,904 $ 257,607,922
Construction loans 4,228,235 3,711,666
Commercial construction 1,198,214 4,394,901
Consumer loans 4,095,881 4,015,403
Commercial real estate 45,118,666 39,177,194
Commercial business 2,136,869 1,829,956
Subtotal 313,959,769 310,737,042
Less:
Deferred loan fees 961,936 1,084,289
Allowance for possible
loan losses 2,812,358 2,781,937
Net Loans Receivable $ 310,185,475 $ 306,870,816
Table 2 MARCH 31, December 31,
Impaired Loans 1997 1996
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Impaired loans - non-accrual:
Mortgage loans:
One-to-four family $ 2,133,040 $ 2,413,409
Commercial real estate 1,371,150 1,662,727
Consumer and other 34,506 14,546
Total impaired loans $ 3,538,696 $ 4,090,682
</TABLE>
At March 31, 1997, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $3.5 million of
which $1.7 million related to loans that were individually measured for
impairment with a valuation allowance of $315 thousand and $1.8 million of loans
that were collectively measured for impairment with a valuation allowance of $94
thousand. For the three months ended March 31, 1997, the average recorded
investment in impaired loans was approximately $3.8 million. The Bank recognized
$34 thousand of interest income on impaired loans, all of which was recognized
on the cash basis. The Bank had $2.8 million in total reserves for possible loan
losses at March 31, 1997, representing approximately 80% of non-accrual loans
and .9% of total loans.
As of March 31, 1997 the Bank had outstanding loan commitments of $27.2 million,
of which $21.6 million represented variable rate loans and $5.6 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 $4.2 million to $100.1
million at March 31, 1997 from $104.3 million at December 31, 1996. The
decrease is the result of $5.5 million in principal repayments, partially offset
by the purchase of $1.3 million in FHLMC fixed rate securities. Mortgage-backed
securities at March 31, 1997 consisted of $67.5 million in fixed rate securities
and $32.6 million in adjustable rate securities. Mortgage-backed securities at
March 31, 1997 and December 31, 1996 are summarized below:
<TABLE>
<CAPTION>
MARCH 31, 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 $ 22,473,246 $ 478,405 $ (37,346) $ 22,914,305 $ 23,216,175 $ 23,744,319
FNMA 36,221,576 49,786 (562,218) 35,709,144 37,958,391 38,022,335
FHLMC 40,911,271 463,578 (301,002) 41,073,847 42,586,038 43,233,784
Private 512,034 2,593 (2,411) 512,216 551,977 558,018
Total $ 100,118,127 $ 994,362 $(902,977) $ 100,209,512 $104,312,581 $ 105,558,456
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - remained stable at $1.2 million at March 31,
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 March 31,
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 $589
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 March 31, 1997 is comprised of (i) one
residential single family home, (ii) 18 acres of land which is zoned for the
construction of 109 townhouses, (iii) one residential condominium and (iv) 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 decreased $426 thousand
during the three months ended March 31, 1997 resulting from a decrease in one-
to-four family and commercial loans of $280 thousand and $133 thousand,
respectively. The following table sets forth information with respect to the
Bank's classified assets at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1997 1996
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $ 2,133,040 $ 2,413,409
Commercial real estate 3,808,657 3,941,540
Consumer and other 34,506 14,546
Total loans 5,976,203 6,369,495
Real estate held for 1,227,732 1,227,732
development, net
Real Estate Owned, net 588,556 621,556
Total Substandard 7,792,491 8,218,783
Doubtful loans 0 0
Total Doubtful 0 0
TOTAL CLASSIFIED ASSETS $ 7,792,491 $ 8,218,783
</TABLE>
DEPOSITS - increased $21.1 million to $474.4 million at March 31, 1997 from
$453.3 million at December 31, 1996 as a result of an increase in the surrogate
savings accounts of approximately $6.9 million, passbook and statement saving
accounts of $3.4 million, certificate of deposits of $5.5 million, money market
accounts of $4.3 million and non-interest checking accounts of $1.5 million,
partially offset by a decrease in checking accounts of $487 thousand. Interest
credited to depositors accounts for the three months ended March 31, 1997
amounted to $3.8 million. The following table set forth certain information
concerning deposits at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, 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 $39,065,793 8.23% 0.00% $37,552,269 8.28% 0.00%
Checking accounts 46,263,800 9.75% 1.60% 46,750,659 10.31% 1.57%
Savings accounts 81,393,134 17.16% 2.88% 71,057,835 15.68% 2.57%
Money market accounts 61,283,656 12.92% 2.66% 56,961,349 12.57% 2.65%
Certificates 246,420,270 51.94% 5.34% 240,954,422 53.16% 5.30%
Total Deposits $474,426,653 100.00% 3.75% $453,276,534 100.00% 3.77%
</TABLE>
<PAGE>
BORROWINGS - at March 31, 1997 amounted to $38.3 million. Borrowings included
$10.0 million of 10% Subordinated Debentures, $28.2 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 5.96%, and $90 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 $991 thousand to $34.8 million at March 31,
1997, primarily as a result of net income for the three months and a reduction
in the guarantee of Employee Stock Ownership Plan debt partially offset by the
purchase of treasury stock of $126 thousand and an increase in the unrealized
loss on securities available for sale of $128 thousand. Shares outstanding at
March 31, 1997 decreased to 2,386,483 shares from 2,392,707 shares at December
31, 1996, as 6,224 shares were repurchased during the three months ended March
31, 1997. At March 31, 1997 the book value per share was $14.59 as compared to
$14.14 at December 31, 1996. At March 31, 1997, options to purchase 80,151
shares of the Company's common stock were outstanding to directors, certain
officers and employees.
There are three (3) standards that a savings association must satisfy in order
to meet its capital requirements. The requirements include a leverage ratio of
core capital to adjusted total assets of 3.0 percent, a tangible capital
standard requirement of 1.5 percent of total adjusted assets, and a risk-based
capital standard set at 8.0 percent of risk-weighted assets. If a savings
association is not in compliance with applicable capital standards, the Office
of Thrift Supervision (OTS) can restrict the association's asset growth, require
the submission of a capital plan, and require compliance with a capital
directive, which may include restrictions on the payment of dividends and
compensation, and other restrictions determined to be appropriate by the OTS.
At March 31, 1997 the Bank exceeds all three current capital requirements as the
Bank's core, tangible, and risk-based capital ratios were 7.23%, 7.23%, and
15.11%, respectively.
RESULTS OF OPERATIONS -
GENERAL
The earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits and borrowings. Net interest income is a function
of the interest rate spread, which is the difference between the weighted
average yield earned on interest-earning assets and the weighted average rate
paid on interest-bearing liabilities, as well as the average balance of interest
earning-assets as compared to interest-bearing liabilities. Net income is also
affected by the provision for loan losses and real estate owned, non-interest
income, such as gains (losses) on sales of loans and investments, service
charges and other fees. In addition to interest expense, the Bank incurs
operating expenses such as salaries and employee benefits, deposit insurance
premiums, depreciation, occupancy and equipment expense and purchased services
expense.
The Corporation recorded net income for the three months ended March 31, 1997 of
$1.3 million, or 55 cents per share as compared to $1.0 million, or 39 cents 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 three 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. Net
interest income is affected by (i) the spread between the yield earned on
interest earning assets and the interest rates paid on interest-bearing savings
deposits and borrowings (liabilities), and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's
interest rate spread varies over time because money fund accounts and other
flexible rate accounts have become significant sources of savings deposits.
Income from investment securities and mortgage-backed securities depends upon
the amount invested during the period and the yields earned on such securities.
The yield on loans receivable changes principally as a result of existing
mortgage loan repayments, adjustable rate loan adjustments, sales and the
interest rates and volume of new mortgage loans.
The following table sets forth the Bank's weighted-average yields on its
interest-earning assets, weighted-average interest rates paid on its interest-
bearing liabilities and weighted-average interest rate spreads for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
Interest-Earning Assets
<S> <C> <C>
Weighted-Average Yields Earned on:
Loans, net 7.99 % 8.02 %
Mortgage-Backed Securities 7.18 6.78
Investment Securities 6.70 6.22
Total Interest-Earning Assets 7.57 7.45
Interest-Earning Liabilities
Weighted-Average Interest Rates Paid on:
Deposits 3.77 3.82
Borrowings 5.97 5.90
Subordinated Debentures 10.56 10.56
Total Interest-Bearing Liabilities 4.04 4.09
Weighted-Average Interest Rate Spread
for the Period 3.54 % 3.36 %
</TABLE>
<PAGE>
AVERAGE BALANCE OF INTEREST-EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table sets forth the Bank's average balance of interest-earning
assets in comparison to its average balance of interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
(In Thousands)
<S> <C> <C>
Average Interest-Earning Assets:
Loans, net $ 311,403 $ 290,253
Mortgage-Backed Securities 102,960 108,524
Investment Securities 100,178 76,018
Total 514,541 474,795
Average Interest-Bearing Liabilities:
Deposits 461,524 419,908
Borrowings 28,751 27,732
Subordinated Debentures 10,000 10,000
Total 500,275 457,640
Excess of Interest-Earning Assets
over Interest-Bearing Liabilities $ 14,266 $ 17,155
</TABLE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume, (ii) changes in rate and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 compared to 1996
Increase (Decrease) due to:
Rate Volume Total
(In Thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable $ (28) $ 424 $ 396
Mortgage-backed securities 102 (94) 8
Investment securities 118 376 494
Total change - interest income 192 706 898
Interest expense:
Deposits (90) 395 305
Borrowings 1 15 16
Subordinated Debentures 0 0 0
Total change - interest expense (89) 410 321
Net change in net interest income $ 281 $ 296 $ 577
</TABLE>
<PAGE>
NET INTEREST INCOME - the increase in net interest income for the three months
ended March 31, 1997 of $577 thousand was primarily due to an increase in
interest income of investment securities and loans of $494 thousand and $396
thousand respectively, partially offset by an increase in interest expense for
deposits of $305 thousand.
The increase in interest income of investment securities was due to an increase
in the average balance of the portfolio of $24.2 million to $100.2 million for
the three months ended March 31, 1997 from $76.0 million for the same period in
1996, which resulted in a volume increase in interest income of $376 thousand.
The average balance increase was due to the net purchases of $15.7 million of
CMOs and $13.3 million of U.S. Agency notes since March 31, 1996. The average
yield on the investment portfolio increased 48 basis points to 6.70% for the
three months ended March 31, 1997 from 6.22% during the three months ended March
31, 1996, which resulted in an increase in interest income of $118 thousand due
to rate changes.
Interest income on loans increased a total of $396 thousand principally due to
an increase in the average balance of $21.1 million to $311.4 million at March
31, 1997 from $290.3 million at March 31, 1996, which resulted in a volume
increase in interest income of $424 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 $28
thousand yield decrease due to a decline in the loan portfolio's average yield
to 7.99% for the quarter ended March 31, 1997 from 8.02% at March 31, 1996.
The increase in interest expense of $321 thousand was due to an increase in
interest expense on deposits and borrowings. The increase in interest expense
on deposits of $395 thousand was due to an increase in the average balance of
deposits of $41.6 million to $461.5 million at March 31, 1997 from $419.9
million at March 31, 1996. Average balance of certificates of deposits
increased $16.2 million, checking accounts increased $12.3 million and savings
accounts increased $9.9 million and money market accounts increased $3.2 million
from March 31, 1996. The weighted average rate on deposits decreased 3 basis
points to 3.77% which resulted in a $90 thousand decrease in interest expense.
The increase in interest expense on borrowings of $16 thousand was primarily due
to an increase in the average balance of borrowings to $28.7 million at March
31, 1997 from $27.7 million at March 31, 1996. This is primarily the result of
increased borrowings at the Federal Home Loan Bank and an increase in the
average rate by 7 basis points to 5.97%.
PROVISION FOR LOAN LOSSES - for the first quarter of 1997 remained stable at $30
thousand, compared to the first quarter of 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
loses 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 first quarter of 1997 totaled $39
thousand of expense as compared to $45 thousand of expense for the same period
in 1996. The decrease is primarily the result of a decrease in foreclosure
costs as well as an increase in rental income during the first quarter of 1997.
<PAGE>
OPERATING EXPENSES - for the first quarter of 1997 amounted to $3.2 million, as
compared to $3.1 million for the same period in 1996.
SALARIES AND EMPLOYEE BENEFITS - for the first quarter of 1997 were $1.9
million, as compared to $1.7 million for the same period in 1996. The increase
was due to additional staff in the new branches opened since the first quarter
of 1996, as well as an increase in branch staff for additional hours,
principally "Sunday Banking''. Average full time equivalent employees for the
quarter ended March 31, 1997 were 239 as compared to 217 for the quarter ended
March 31, 1996.
OCCUPANCY AND EQUIPMENT - for the first quarter of 1997 amounted to $674
thousand, compared to $622 thousand for the same period of 1996. The increase is
the result of additional depreciation and occupation expenses on the new
branches opened since the first quarter of 1996 as well as other facility
improvements and equipment additions between the quarters ended March 31, 1997
and March 31, 1996.
PURCHASED SERVICES - for the first quarter of 1997 amounted to $233 thousand,
compared to $211 thousand for the same period in 1996. Check processing costs
have increased $14 thousand due to higher transaction volumes from an increase
in the number of checking accounts opened.
FEDERAL INSURANCE PREMIUM - amounted to $16 thousand in the first quarter of
1997, as compared to $230 thousand for the same period in 1996. The decrease is
from a lower FDIC assessment during the first quarter of 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 10.86% and 11.55%, respectively, at March 31, 1997, and
December 31, 1996, respectively, and its short-term liquidity was 7.22% 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: May 14, 1997 /s/ Craig W. Yates
------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 /s/ Channing L. Smith
---------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
3/31/97 3/31/96
------- -------
<S> <C> <C>
Net Income $1,347,968 $1,001,885
Weighted average common shares outstanding 2,391,462 2,493,805
Common stock equivalents due to dilutive effect of stock options 56,947 63,944
Total weighted average common shares and equivalents outstanding 2,448,409 2,557,749
Primary earnings per share $0.55 $0.39
Total weighted average common shares and equivalents outstanding 2,448,409 2,557,749
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
Total outstanding shares for fully diluted earnings per share computation 2,448,409 2,557,749
Fully diluted earnings per share $0.55 $0.39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4796
<INT-BEARING-DEPOSITS> 804
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35388
<INVESTMENTS-CARRYING> 174848
<INVESTMENTS-MARKET> 173500
<LOANS> 310185
<ALLOWANCE> 2812
<TOTAL-ASSETS> 553599
<DEPOSITS> 474427
<SHORT-TERM> 3117
<LIABILITIES-OTHER> 2898
<LONG-TERM> 38340
0
0
<COMMON> 260
<OTHER-SE> 34557
<TOTAL-LIABILITIES-AND-EQUITY> 553599
<INTEREST-LOAN> 6219
<INTEREST-INVEST> 3525
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9744
<INTEREST-DEPOSIT> 4291
<INTEREST-EXPENSE> 4978
<INTEREST-INCOME-NET> 4766
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2622
<INCOME-PRETAX> 2114
<INCOME-PRE-EXTRAORDINARY> 1348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1348
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<YIELD-ACTUAL> 3.76
<LOANS-NON> 3539
<LOANS-PAST> 0
<LOANS-TROUBLED> 557
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2782
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2812
<ALLOWANCE-DOMESTIC> 2812
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2812
</TABLE>
