SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
OR
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
As of March 31, 1998 there were issued and outstanding 2,616,420 shares and
2,394,612 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
MARCH 31, 1998
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1998 (unaudited) and December 31, 1997 ............. 1
Consolidated Statements of Income (unaudited)
for the three months ended
March 31, 1998 and March 31,1997.............................. 2
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998 and March 31, 1997.. 3
Consolidated Statements of Changes in Stockholders' Equity for the
three months ended March 31, 1998 (unaudited)................. 4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 5-16
Item 3 - Disclosure About Market Risk................................. 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 18
Item 2 - Changes in Securities........................................ 18
Item 3 - Defaults Upon Senior Securities.............................. 18
Item 4 - Submission of Matters to a Vote of Security Holders.......... 18
Item 5 - Other Information.............................................18
Item 6 - Exhibits and Reports on Form 8-K..............................18
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and amounts due from depository institutions $ 8,274,158 $ 11,637,181
Interest-bearing deposits 1,986,064 826,823
Federal funds sold 1,400,000 0
Short term funds 1,347,069 167,618
---------- -----------
Total cash and cash equivalents 13,007,291 12,631,622
Investment securities held to maturity 130,988,114 112,349,476
Investment securities available for sale 101,987,874 80,338,661
Loans, net 299,404,431 302,831,031
Mortgage-backed securities held to maturity 92,888,514 92,020,517
Accrued interest receivable:
Loans 1,729,606 1,750,966
Mortgage-backed securities 707,160 715,981
Investments 2,398,288 1,934,925
Federal Home Loan Bank stock 4,861,400 3,630,800
Real estate held for development, net 644,487 644,487
Real estate owned, net 510,708 446,361
Office properties and equipment, net 15,735,334 15,692,055
Deferred income taxes 1,651,436 1,507,307
Excess cost over fair value of net assets acquired 393,325 469,444
Prepaid expenses and other assets 1,347,178 1,061,125
Subordinated Debentures issue cost, net 364,124 378,460
------------ ------------
TOTAL ASSETS $668,619,270 $628,403,218
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 509,805,680 $ 489,439,980
Securities sold under agreements to repurchase 80,000,000 60,000,000
Advances from the Federal Home Loan Bank 22,146,476 24,496,476
10% Subordinated Debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 16,986 33,481
Advances by borrowers for taxes and insurance 2,329,467 2,192,541
Accrued interest payable 1,138,288 1,114,304
Dividends payable 167,623 167,154
Other liabilities 3,246,434 2,043,465
----------- -----------
Total liabilities 628,850,954 589,487,401
----------- -----------
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 2,616,420 and 2,604,370 and shares outstanding 2,394,612 and
2,387,916 as of March 31, 1998 and December 31, 1997, respectively 261,642 260,437
Paid-in capital in excess of par 8,464,656 8,419,167
Unrealized (loss)/gain on securities available for sale - net of deferred (43,942) 53,955
income taxes
Guarantee of employee stock ownership plan debt (16,986) (33,481)
Retained earnings 34,479,318 33,406,060
Less: Treasury stock (221,808 and 216,454 shares, at cost, as of
March 31, 1998 and December 31, 1997, respectively) (3,376,372) (3,190,321)
----------- -----------
Total stockholders' equity 39,768,316 38,915,817
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $668,619,270 $628,403,218
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1998 1997
----------------------
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest income on:
Loans $ 6,089,704 $ 6,219,114
Mortgage-backed securities 1,655,563 1,847,731
Investments 3,678,814 1,677,424
---------- ---------
Total interest income 11,424,081 9,744,269
---------- ---------
INTEREST EXPENSE:
Interest expense on:
Deposits 4,434,238 4,291,074
Subordinated Debentures 264,337 264,337
Borrowings 1,437,056 423,200
--------- ---------
Total interest expense 6,135,631 4,978,611
--------- ---------
NET INTEREST INCOME 5,288,450 4,765,658
PROVISION FOR LOAN LOSSES 60,000 30,000
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,228,450 4,735,658
--------- ---------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 36,908 50,391
Real estate owned operations, net (27,033) (39,080)
Service charges on accounts 593,865 549,952
Other income 1,509 21,082
--------- --------
Total other income (expense) 605,249 582,345
--------- --------
OPERATING EXPENSES:
Salaries and employee benefits 2,319,797 1,884,635
Occupancy and equipment 720,007 673,942
Purchased services 301,582 233,006
Federal deposit insurance premiums 72,801 15,781
Professional fees 102,972 71,843
Advertising 40,737 23,864
Other 334,606 301,164
--------- ---------
Total operating expenses 3,892,502 3,204,235
--------- ---------
INCOME BEFORE INCOME TAXES 1,941,197 2,113,768
INCOME TAXES:
Current 746,587 703,980
Deferred (46,271) 61,820
--------- --------
Total income taxes 700,316 765,800
NET INCOME $1,240,881 $1,347,968
========== ==========
BASIC EARNINGS PER COMMON SHARE $0.52 $0.56
===== =====
DILUTED EARNINGS PER COMMON SHARE $0.51 $0.55
===== =====
Weighted average common shares outstanding
2,392,242 2,391,462
Potential dilutive effect of the exercise of 45,166 56,947
stock options --------- ---------
Adjusted weighted average common shares 2,437,408 2,448,409
outstanding ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,240,881 $ 1,347,968
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 60,000 30,000
Depreciation and amortization 470,344 419,975
Provision for real estate owned 24,319 33,000
Realized (gains) and losses on:
Sale of loans and loans held for sale (145) (226)
Disposal and sale of fixed assets 0 1,484
Sale of real estate owned (17,565) 0
Increase in accrued interest receivable (433,182) (40,464)
Increase in prepaid expenses and other assets (286,053) (236,154)
Increase (Decrease) in accrued interest payable 23,984 (204,303)
Increase in other liabilities 1,202,969 758,270
Provision for deferred income taxes (89,109) 61,820
--------- ---------
Net cash provided by operating activities 2,196,443 2,171,370
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 151,185 104,945
Real estate owned 245,848 0
Office property and equipment 0 2,277
Proceeds from maturities of investment securities held to maturity 83,642,082 50,642,549
Principal collected and proceeds from sale of investment 19,137,407 3,495,120
securities available for sale
Principal collected and proceeds from sale of mortgage-backed 6,187,753 5,485,477
securities held to maturity
Principal collected on loans, net 14,208,928 9,235,750
Longer-term loans originated or acquired, net (11,287,897) (12,668,301)
Purchase of investment securities and mortgage-backed securities (109,370,061) (59,113,959)
held to maturity
Purchase of investment securities and mortgage-backed securities (41,009,945) (13,643,271)
available for sale
Purchase of Federal Home Loan Bank stock (1,230,600) (10,200)
Purchase of office property and equipment (341,589) (136,547)
------------ ------------
Net cash used by investing activities (39,666,889) (16,606,160)
------------ ------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 14,611,346 8,992,513
Net increase in time deposits 5,754,354 5,465,848
Net decrease in FHLB advances (2,350,000) (4,300,000)
Proceeds from securities sold under agreements to repurchase 20,000,000 0
Increase in advances from borrowers for taxes and insurance 136,926 202,382
Purchase of treasury stock (186,051) (126,036)
Dividends paid on common stock (167,154) (119,635)
Net proceeds from issuance of common stock 46,694 0
---------- ----------
Net cash provided by financing activities 37,846,115 10,115,072
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 375,669 (4,319,718)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,631,622 9,919,549
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $13,007,291 $5,599,831
============ ===========
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 6,111,647 $ 5,182,914
Income taxes 445,787 269,575
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 167,623 119,635
Non-monetary transfers from loans to real estate acquired
through foreclosure 316,949 0
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED GUARANTEE OF
OTHER EMPLOYEE TOTAL
COMMON SHARES COMMON PAID-IN COMPREHENSIVE STOCK RETAINED TREASURY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL INCOME OWNERSHIP EARNINGS STOCK EQUITY
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1997 2,387,916 $260,437 $8,419,167 $53,955 $(33,481) $33,406,060 $(3,190,321) $38,915,817
Net Income 1,240,881 1,240,881
Other comprehensive income,
net of tax of $55,020
Unrealized loss on securities
available for sale (97,897) (97,897)
----------
Total comprehensive income 1,142,984
Dividends declared (167,623) (167,623)
Decrease in guarantee of
employee stock ownership plan debt 16,495 16,495
Exercise of stock options 12,050 1,205 45,489 46,694
Purchase of common stock (5,354) (186,051) (186,051)
- -----------------------------------------------------------------------------------------------------------------------
Balances at
March 31, 1998 2,394,612 $261,642 $8,464,656 $(43,942) $(16,986) $34,479,318 $(3,376,372) $39,768,316
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997.
FMS Financial Corporation (the "Corporation") may from time to time make
written or oral "forward-looking statements", including statements contained
in the Corporation's filings with the Securities and Exchange Commission
(including this quarterly report on form 10-Q and the exhibits thereto), in its
reports to stockholders and in other communications by the Corporation, which
are made in good faith by the Corporation pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Corporation's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Corporation's control). The following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: The strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Corporation and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Corporation's products and services;
the success of the Corporation in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services' laws
and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
involved in the foregoing.
The Corporation cautions that the foregoing list of important factors is not
exclusive. The Corporation does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Corporation.
GENERAL
FMS Financial 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, cash flows and changes in stockholders' equity
for the periods and dates indicated. The results of operations for the three
months ended March 31, 1998 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>
YEAR 2000
The Year 2000 issue concerns the potential impact of historic computer software
code that only utilizes two digits to represent the calendar year (e.g."98" for
"1998").Software so developed could produce inaccurate or unpredictable results
upon the change to January 1, 2000, when current and future dates represent a
lower two digit year number than dates in the prior century.The Bank, similar to
most financial institutions, is significantly subject to the potential impact of
the "Year 2000 issue" due to the nature of financial information. Potential
impact to the Bank may arise from software, hardware, and equipment both within
the Bank's direct control and outside of the Bank's ownership,yet with which the
Bank electronically or operationally interfaces (e.g. vendors providing credit
bureau information). The Bank has a year 2000 compliance program in place to
ensure that all software applications will be year 2000 certified compliant.
Management expects that it will be able to satisfy year 2000 compliance issues
by the end of 1998. Management intends to perform testing on all systems
throughout 1998 and 1999. The Bank does not expect that the costs of its year
2000 compliance program will be material to its financial condition or results
of operations. Non-compliance with the year 2000 issue could have an adverse
affect on the operations of the business.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 Extinguishment of Liabilites" for which certain provisions were applicable
January 1, 1997. This statement was amended by Statement of Financial Accounting
Standards No. 127 (SFAS No. 127) "Deferral of the Effective Date of Certain
Provisions of FASB No. 125" which deferred the effective date of a portion of
SFAS No. 125 until January 1, 1998. The Corporation adopted SFAS No. 127 on
January 1, 1998.This statement provides new conditions that must be met in order
for a transaction to qualify for secured borrowing accounting treatment. The
Corporation's securities puchased under agreements to resell (reverse repurchase
agreements) continue to qualify as secured borrowing transactions under SFAS No.
125. Therefore, the adoption of SFAS No. 125 did not have a material effect on
the financial position or results of operations of the Corporation.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.130
(SFAS No. 130), "Reporting Comprehensive Income" which was effective for the
Corporation beginning January 1, 1998. This Statement establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. This statement was adopted by the Corporation during the first
quarter of 1998 by including comprehensive income in the consolidated Statement
of Changes in Stockholders' Equity.The adoption of this statement did not have a
material effect on the financial position or results of operation of the
Corporation.
<PAGE>
EARNING PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),"Earnings per
share" requires the dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15. The Corporation has presented both basic and
diluted earnings per share as well as the reconciliation of the denominator in
the consolidated statement of operations.
On April 28, 1998, the Board of Directors of the Corporation declared a three-
for-one stock split for shareholders of record on July 1, 1998 payable on July
14, 1998. The number of shares, stock options and per share amounts of the
Corporation's common stock were not retroactively adjusted as the ex-dividend
date is after the release of the financial statements. Basic and diluted
earnings per share would have been $.17 per share for the three months ended
March 31, 1998 and $.19 per share and $.18 per share, respectively for the three
months ended March 31, 1997 had the amounts been retroactively adjusted for the
three-for-one stock split based on the current outstanding shares.
<PAGE>
FINANCIAL CONDITION -
TOTAL ASSETS - at March 31, 1998 were $668.6 million as compared with total
assets at December 31, 1997 of $628.4 million.
INVESTMENT SECURITIES HELD TO MATURITY - increased $18.7 million to $131.0
million at March 31, 1998 from $112.3 million at December 31, 1997 due to the
net purchase of $12.8 million in U.S. Agency notes and $5.8 million in Reverse
Repurchase Agreements during the three months ended March 31, 1998. Investment
securities held to maturity at March 31, 1998 consisted entirely of fixed rate
securities. A comparison of cost and approximate market values of investment
securities held to maturity as of March 31, 1998 and December 31, 1997 follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997
---------------------------------------------------------------------------------
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 $ 92,169,695 $163,565 $(21,835) $ 92,311,425 $ 79,347,265 $ 79,497,591
Reverse Repurchase 36,001,611 0 0 36,001,611 30,185,402 30,185,402
Municipal bonds 2,801,808 13,260 0 2,815,068 2,801,809 2,816,418
U. S. Treasury 15,000 0 (500) 14,500 15,000 14,500
----------------------------------------------------------------------------------
Total $130,988,114 $176,825 $(22,335) $131,142,604 $112,349,476 $112,513,911
----------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES AVAILABLE FOR SALE - increased $21.7 million to $102.0
million at March 31, 1998 from $80.3 million at December 31, 1997 as a result of
the net purchase of $21.6 million of CMOs and $8.2 million in U.S. Agency
notes, partially offset by $8.1 million in principal paydowns on CMOs and
REMICs. Investment securities available for sale at March 31, 1998 consisted of
$96.1 million in fixed rate securities and $5.9 million in adjustable rate
securities. A comparison of cost and approximate market values of investment
securities available for sale as of March 31, 1998 and December 31, 1997
follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997
--------------------------------------------------------------------------------
GROSS GROSS ESTIMATED Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Market
COST GAINS LOSSES VALUE Cost Value
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U. S. Gov't Agencies $ 16,055,473 $21,676 $ (35,256) $ 16,041,893 $ 7,850,135 $ 7,870,581
CMOs 75,946,972 208,277 (64,301) 76,090,948 62,033,734 62,270,124
REMICs 10,056,443 6,072 (207,482) 9,855,033 10,372,889 10,197,956
---------------------------------------------------------------------------------
Total $102,058,888 $236,025 $(307,039) $101,987,874 $80,256,758 $80,338,661
----------------------------------------------------------------------------------
</TABLE>
<PAGE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE - decreased $3.4 million to $299.4
million at March 31, 1998 from $302.8 million at December 31, 1997. This
decrease was the result of approximately $14.2 million of principal collected on
loans, partially offset by $11.3 million of loans originated during the three
months ended March 31, 1998. 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 1
Loans Receivable MARCH 31, 1998 December 31, 1997
-------------- -----------------
Mortgage loans ( 1-4 dwelling) $250,050,262 $253,000,504
Construction loans 2,606,068 3,257,798
Commercial construction 2,683,088 2,385,192
Consumer loans 3,749,637 3,609,033
Commercial real estate 42,637,284 42,974,261
Commercial business 1,869,465 1,712,099
----------- -----------
Subtotal 303,595,804 306,938,887
Less: ----------- -----------
Deferred loan fees 1,000,708 970,075
Allowance for possible
loan losses 3,190,665 3,137,781
------------ ------------
Net Loans Receivable $299,404,431 $302,831,031
============ ============
Table 2
Impaired Loans MARCH 31,1998 December 31,1997
------------- ----------------
Impaired loans - non-accrual:
Mortgage loans:
One-to-four family $1,776,131 $2,394,052
Commercial real estate 1,129,316 1,163,051
Consumer and other 75,891 80,184
---------- ----------
Total impaired loans $2,981,338 $3,637,287
========== ==========
At March 31, 1998, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $3.0 million of
which $1.5 million related to loans that were individually measured for
impairment with a valuation allowance of $363 thousand and $1.5 million of loans
that were collectively measured for impairment with a valuation allowance of $72
thousand. For the three months ended March 31, 1998, the average recorded
investment in impaired loans was approximately $3.2 million. The Bank recognized
$24 thousand of interest income on impaired loans, all of which was recognized
on the cash basis. The Bank had $3.2 million in total reserves for possible loan
losses at March 31, 1998, representing approximately 107% of non-accrual loans
and 1% of total loans.
As of March 31, 1998 the Bank had outstanding loan commitments of $27.8 million,
of which $20.4 million represented variable rate loans and $7.4 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 - increased $868 thousand to $92.9
million at March 31, 1998 from $92.0 million at December 31, 1997. The increase
is the result of the purchase of $6.9 million in GNMA fixed rate securities,
partially offset by $6.2 million in principal repayments. Mortgage-backed
securities at March 31, 1998 consisted of $67.7 million in fixed rate securities
and $25.2 million in adjustable rate securities. A comparison of cost and
appropriate market values of mortgage-backed securities at March 31, 1998 and
December 31, 1997 are summarized below:
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997
---------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED Amortized Estimated
COST GAINS LOSSES MARKET VALUE Cost Market Value
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA $28,035,612 $ 785,712 $(13,730) $28,807,594 $22,586,373 $23,371,522
FNMA 33,728,918 502,862 (44,895) 34,186,885 35,648,943 36,198,921
FHLMC 30,775,283 758,800 (29,995) 31,504,088 33,379,272 34,324,036
Private 348,701 2,624 0 351,325 405,929 412,150
---------------------------------------------------------------------------------
Total $92,888,514 $2,049,998 $(88,620) $94,849,892 $92,020,517 $94,306,629
----------------------------------------------------------------------------------
</TABLE>
REAL ESTATE HELD FOR DEVELOPMENT - remained stable at $644 thousand at March 31,
1998 compared to December 31, 1997. 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 asset so that it may be liquidated as soon as practical.
Management believes that divestiture of its present land investment may take
several years, depending on market conditions. Management will continue to
monitor the net realizable value of its real estate investment. At March 31,
1998, 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 $511
thousand. These properties are carried at the lower of book value or estimated
net realizable value (fair market value less estimated costs to sell) and are
analyzed by management on a periodic basis. Real estate owned at March 31, 1998
is comprised of (i) two residential single family homes, (ii) 18 acres of land
which is zoned for the construction of 109 townhouses and (iii) two residential
condominiums 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 $623 thousand
to $7.2 million during the three months ended March 31, 1998 resulting from a
decrease in one-to-four family of $620 thousand and commercial loans of $63
thousand, partially offset by an increase in real estate owned of $64 thousand.
The following table sets forth information with respect to the Bank's
classified assets at the dates indicated:
MARCH 31, 1998 December 31, 1997
Classified Assets:
Substandard Loans:
One-to-four family $1,999,844 $2,619,491
Commercial real estate 3,939,287 4,002,504
Consumer and other 75,891 80,184
---------- ----------
Total loans 6,015,022 6,702,179
Real estate held for development, net 644,487 644,487
Real Estate Owned, net 510,708 446,361
---------- ----------
Total Substandard 7,170,217 7,793,027
---------- ----------
Doubtful loans 0 0
---------- ----------
Total Doubtful 0 0
---------- ----------
Loss - Commercial Real Estate 15,242 15,242
---------- ----------
Total Loss 15,242 15,242
---------- ----------
TOTAL CLASSIFIED ASSETS $7,185,459 $7,808,269
---------- ----------
DEPOSITS - increased $20.4 million to $509.8 million at March 31, 1998 from
$489.4 million at December 31, 1997 as a result of an increase in saving
accounts of $7.4 million, certificate of deposits of $5.8 million, non-interest
checking accounts of $3.5 million and checking accounts of $2.9 million.
Deposits in the new branch opened during the first quarter of 1998 totaled 804
new accounts for a total of $1.3 million at March 31, 1998. Interest credited to
depositors accounts for the three months ended March 31, 1998 amounted to $3.9
million. The following table set forth certain information concerning deposits
at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997
-------------------------------------------------------------
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 $53,385,659 10.47% 0.00% $49,875,981 10.19% 0.00%
Checking accounts 57,607,118 11.30% 1.84% 54,688,332 11.17% 1.69%
Savings accounts 91,207,910 17.90% 2.87% 83,824,897 17.13% 2.87%
Money market accounts 58,800,913 11.53% 2.73% 58,001,044 11.85% 2.72%
Certificates 248,804,080 48.80% 5.34% 243,049,726 49.66% 5.32%
-------------------------------------------------------------
Total Deposits $509,805,680 100.00% 3.64% $489,439,980 100.00% 3.74%
-------------------------------------------------------------
</TABLE>
<PAGE>
BORROWINGS - at March 31, 1998 amounted to $112.2 million. Borrowings included
$10.0 million of 10% Subordinated Debentures, $80.0 million in securities sold
under the agreement to repurchase with a weighted average interest rate of
5.57%, $22.1 million in Federal Home Loan Bank Advances with a weighted average
interest rate of 5.99%, and $17 thousand in the guarantee of Employee Stock
Ownership Plan debt. At December 31, 1997 borrowings consisted of $10.0 million
of 10% Subordinated Debentures, $60.0 million in securities sold under the
agreement to repurchase with a weighted average interest rate of 5.72%, $24.5
million in Federal Home Loan Bank Advances with a weighted average interest rate
of 6.08% and $33 thousand in the guarantee of Employee Stock Ownership Plan
debt.
There are three (3) standards that a savings association must satisfy in order
to meet its capital requirements under ''FDICIA''. The requirements include a
leverage ratio of tier 1 (core) capital to adjusted total assets of 4.0 percent,
a tangible capital standard requirement of 2.0 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, 1998 the Bank exceeds all three current capital requirements
as the Bank's core, tangible, and risk-based capital ratios were 6.72%, 6.72%,
and 15.56%, 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 (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 provisions 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, 1998 of
$1.2 million, or 51 cents diluted earnings per share as compared to $1.3
million, or 55 cents diluted earnings per share for the comparable period in
1997.
<PAGE>
INTEREST RATE SPREAD
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities. 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:
Three Months Ended
March 31,
-------------------
1998 1997
-------------------
Interest-Earning Assets
Weighted-Average Yields Earned on:
Loans, net 8.00% 7.99%
Mortgage-Backed Securities 7.26 7.18
Investment Securities 6.65 6.70
----- -----
Total Interest-Earning Assets 7.41 7.57
----- -----
Interest-Earning Liabilities
Weighted-Average Interest Rates Paid on:
Deposits 3.68 3.77
Borrowings 5.72 5.97
Subordinated Debentures 10.56 10.56
----- -----
Total Interest-Bearing Liabilities 4.14 4.04
----- -----
Weighted-Average Interest Rate Spread ----- -----
for the Period 3.27% 3.53%
----- -----
<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:
Three Months Ended
March 31,
----------------------------
1998 1997
----------------------------
(In Thousands)
Average Interest-Earning Assets:
Loans, net $304,492 $311,403
Mortgage-Backed Securities 91,173 102,960
Investment Securities 221,298 100,178
-------- --------
Total 616,963 514,541
-------- --------
Average Interest-Bearing
Liabilities:
Deposits 489,099 461,524
Borrowings 101,924 28,751
Subordinated Debentures 10,000 10,000
------- -------
Total 601,023 500,275
------- -------
Excess of Interest-Earning Assets
over Interest-Bearing Liabilities $ 15,940 $ 14,266
======== ========
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).
Three Months Ended
March 31,
1998 compared to 1997
-------------------------------
Increase (Decrease) due to:
Rate Volume Total
-------------------------------
(In Thousands)
Interest income:
Loans receivable $ 9 $ (138) $ (129)
Mortgage-backed securities 19 (212) (193)
Investment securities (26) 2,028 2,002
-------------------------------
Total change - interest income 2 1,678 1,680
-------------------------------
Interest expense:
Deposits (113) 256 143
Borrowings (63) 1,077 1,014
Subordinated Debentures 0 0 0
-------------------------------
Total change - interest expense (176) 1,333 1,157
-------------------------------
Net change in net interest income $ 178 $ 345 $ 523
===============================
<PAGE>
NET INTEREST INCOME - the increase in net interest income for the three months
ended March 31, 1998 of $523 thousand was primarily due to an increase in
interest income of $1.7 million, partially offset by an increase in interest
expense of $1.2 million.
The increase in interest income was primarily the result of an increase in
interest income on investment securities of $2.0 million. The average balance
of the investment portfolio increased $121.1 million to $221.3 million for the
three months ended March 31, 1998 from $100.2 million for the same period in
1997, which resulted in a volume increase in interest income of $2.0 million.
The average balance increase was due to the net purchases of $56.9 million of
CMOs, $52.9 million of U.S. Agency notes and $11.4 million of reverse repurchase
agreements since March 31, 1997. The average yield on the investment portfolio
decreased 5 basis points to 6.65% for the three months ended March 31, 1998 from
6.70% during the three months ended March 31, 1997, which resulted in a decrease
of $26 thousand in interest income due to rate changes.
The increase in interest expense was primarily the result of an increase in
interest expense on borrowings of $1.0 million. The average balance of
borrowings increased $73.2 million to $101.9 million for the three months ended
March 31, 1998 from $28.8 million for the three months ended March 31, 1997.
Securities sold under the agreement to repurchase (repurchase agreements)
increased $80.0 million. The repurchase agreements have maturity dates ranging
from four to ten years with call dates ranging from thirty months to five years
and an average rate of 5.57%.
PROVISION FOR LOAN LOSSES - for the first quarter of 1998 was $60 thousand
compared to $30 thousand for the same period in 1997. At March 31, 1998 the
allowance for possible loan losses amounted to $3.2 million or 1.05% of the
total loans compared to $2.8 million or .90% of the total loans at March 31,
1997. 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. 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.
REAL ESTATE OWNED OPERATIONS, NET - for the first quarter of 1998 totaled $27
thousand of expense as compared to $39 thousand of expense for the same period
in 1997. The decrease is primarily the inclusion of a $15 thousand gain on the
sale of a property during the first quarter of 1998.
OPERATING EXPENSES - for the first quarter of 1998 amounted to $3.9 million, as
compared to $3.2 million for the same period in 1997.
SALARIES AND EMPLOYEE BENEFITS - for the first quarter of 1998 were $2.3
million, as compared to $1.9 million for the same period in 1997. The increase
was due to additional staff in the three new branches opened since the first
quarter of 1997 as well as an increase in branch staff for additional operating
hours, principally for extended weekday hours until 9:00 p.m. Average full time
equivalent employees for the quarter ended March 31, 1998 were 323 as compared
to 239 for the quarter ended March 31, 1997.
<PAGE>
OCCUPANCY AND EQUIPMENT - for the first quarter of 1998 amounted to $720
thousand, compared to $674 thousand for the same period of 1997. The increase is
the result of additional depreciation and occupation expenses on the three new
branches opened since the first quarter of 1997 as well as other facility
improvements and equipment additions between the quarters ended March 31, 1998
and March 31, 1997.
PURCHASED SERVICES - for the first quarter of 1998 amounted to $302 thousand,
compared to $233 thousand for the same period in 1997. MAC charges increased $22
thousand and check processing costs increased $19 thousand as a result of higher
transaction volume and an increase in the number of checking accounts.
FEDERAL INSURANCE PREMIUM - amounted to $73 thousand in the first quarter of
1998, as compared to $16 thousand for the same period in 1997. The increase was
due to an assessment refund of $53 thousand during the first quarter of 1997 as
a result of the SAIF recapitalization.
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 assets", which include obligations of the United States
government and federal agencies and other approved investments. Regulations
currently in effect require the Bank to maintain liquid assets of not less than
4% of its net withdrawable accounts plus short-term borrowings. The Bank has
generally maintained liquidity in excess of required levels. The Bank's
regulatory liquidity was 12.56% at March 31, 1998 and 11.46% at December 31,
1997.
<PAGE>
ITEM 3: DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The Bank's financial performance is impacted by, among other factors, interest
rate risk. Interest rate risk is the risk of loss in value due to changes in
interest rates. This risk is addressed by the Bank's Asset Liability Management
Committee ("ALCO"), which includes senior management. The ALCO monitors and
considers methods of managing interest rate risk by monitoring changes in the
interest rate repricing GAP, the net portfolio values ("NPV") and net interest
income under various interest rate scenarios. The ALCO attempts to manage the
various components of the Bank's balance sheet to minimize the impact of sudden
and sustained changes in interest rates through GAP, NPV and net interest income
scenarios. The Bank's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO. The principal objective of the
ALCO is to maximize income within acceptable levels as established by the risk
policy. The Board of Directors may direct management to adjust its asset and
liability mix to bring interest rate risk within Board approved limits. The Bank
has developed strategies to manage its liquidity, shorten the effective
maturities of certain interest-earning assets and increase the effective
maturities of certain liabilities, to reduce the exposure to interest rate
fluctuations. These strategies include focusing its investment activities on
short and medium-term securities, maintaining and increasing the transaction
deposit accounts, as these accounts are considered to be relatively resistant to
changes in interest rates and utilizing FHLB borrowings and deposit marketing
programs to adjust the term or repricing of its liabilities.
<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities and Use of Proceeds
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, 1998 /s/ Craig W. Yates
------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1998 /s/ Channing L. Smith
---------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,274
<INT-BEARING-DEPOSITS> 3,333
<FED-FUNDS-SOLD> 1,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,988
<INVESTMENTS-CARRYING> 223,877
<INVESTMENTS-MARKET> 225,992
<LOANS> 299,404
<ALLOWANCE> 3,191
<TOTAL-ASSETS> 668,619
<DEPOSITS> 509,806
<SHORT-TERM> 3,652
<LIABILITIES-OTHER> 3,246
<LONG-TERM> 112,147
0
0
<COMMON> 262
<OTHER-SE> 39,506
<TOTAL-LIABILITIES-AND-EQUITY> 668,619
<INTEREST-LOAN> 6,090
<INTEREST-INVEST> 5,334
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,424
<INTEREST-DEPOSIT> 4,434
<INTEREST-EXPENSE> 6,136
<INTEREST-INCOME-NET> 5,288
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,287
<INCOME-PRETAX> 1,941
<INCOME-PRE-EXTRAORDINARY> 1,241
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,241
<EPS-PRIMARY> .52
<EPS-DILUTED> .51
<YIELD-ACTUAL> 3.47
<LOANS-NON> 2,981
<LOANS-PAST> 0
<LOANS-TROUBLED> 618
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,138
<CHARGE-OFFS> 8
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 3,191
<ALLOWANCE-DOMESTIC> 3,191
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,935
</TABLE>
