SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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 incorporation (I.R.S. Employer
or organization) Identification No.)
3 Sunset Road, 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
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
Based on the closing sales price of $35.00 per share of the
registrant's common stock on March 2, 1998, as reported on the Nasdaq National
Market System the aggregate market value of voting stock held by non-affiliates
of the registrant was approximately $83.9 million. On such date, 2,397,966
shares of the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of 1997 Annual Report to Stockholders (Parts II and IV)
2. Portions of Proxy Statement for the 1998 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
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 ANNUAL REPORT ON FORM 10-K 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.
Item 1. Business
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General
The Corporation. FMS Financial Corporation (the "Corporation") was
incorporated under the laws of the State of New Jersey on September 1, 1988 for
the purpose of becoming a savings and loan holding company. On December 21,
1988, the Corporation acquired all of the common stock of Farmers' and
Mechanics' Savings Bank, SLA, now known as Farmers and Mechanics Bank (the
"Bank"
<PAGE>
or "Farmers and Mechanics") following the Bank's conversion from a New Jersey
chartered mutual to a New Jersey chartered stock savings institution. The Bank
converted its charter to that of a federal savings bank on October 15, 1993.
Prior to the acquisition of all of the outstanding stock of the Bank,
the Corporation had no assets or liabilities and engaged in no business
activities. Subsequent to the acquisition of Farmers and Mechanics, the
Corporation engaged in no significant activity other than holding the stock of
the Bank, operating a savings and loan business through the Bank, and the
issuance in July, 1994 of 10% subordinated debentures due 2004 in the aggregate
principal amount of $10 million. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Bank and its subsidiaries.
The Corporation's executive offices are located at 3 Sunset Road,
Burlington, New Jersey. The telephone number is (609) 386-2400.
The Bank. Farmers and Mechanics commenced operations in 1871 under the
name Farmers and Mechanics Building and Loan Association. The Bank became a
member of the Federal Home Loan Bank ("FHLB") System and has had its savings
deposits federally insured by the Savings Association Insurance Fund ("SAIF")
and its predecessor the Federal Savings and Loan Insurance Corporation
("FSLIC"), since 1952. The Bank is subject to regulation by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). See
"Regulation." Effective October 26, 1994, the Bank changed its name to Farmers
and Mechanics Bank. The name change was approved by the Bank's Board of
Directors, the Corporation and the OTS. The Bank conducts its business through
its main administrative office and twenty-one branch offices located throughout
Burlington County, New Jersey. At December 31, 1997, the Bank's total assets,
deposits and stockholders' equity amounted to $628.4 million, $489.4 million and
$38.9 million, respectively.
Farmers and Mechanics is primarily engaged in the business of
attracting deposits from the general public and originating loans which are
secured by residential real estate. To a lesser extent, the Bank also originates
consumer, commercial real estate and construction loans and invests in U.S.
government securities and mortgage-related securities.
Farmers and Mechanics considers its primary market area for savings
deposits to be Burlington County, New Jersey, while its primary market for
lending activities consists of Burlington County, and, to a lesser extent, other
regions of southern New Jersey.
Lending Activities
General. The principal lending activity of the Bank has been the
origination of conventional fixed-rate and adjustable-rate mortgage loans for
the purpose of financing or refinancing one-to-four family residential
properties. To a lesser extent, the Bank also originates commercial real estate,
consumer, construction and commercial business loans. As of December 31, 1997,
98.27% of the Bank's loans were real estate loans, of which 82.43% consisted of
loans secured by mortgages on one-to-four family residential properties of which
13.05% were insured or guaranteed real estate loans, 1.17% were consumer loans
and .56% were commercial business loans. Such percentages have been calculated
before the deduction of unearned discount, premium, deferred loan fees and loan
loss reserves. See "-- Analysis of Loan Portfolio". The Bank also sells
fixed-rate loans in the secondary mortgage market and has purchased
adjustable-rate loans.
2
<PAGE>
Analysis of Loan Portfolio
The following table sets forth the composition of the Bank's loan
portfolio and mortgage-backed and related securities portfolio in dollar amounts
and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------- ------------------- ----------------- ------------------ ------------------
Carrying Percent Carrying Percent Carrying Percent Carrying Percent Carrying Percent
Value of Total Value of Total Value of Total Value of Total Value of Total
------- -------- ------- -------- ------- -------- ------- -------- ------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family......... $253,001 82.43% $257,451 82.89% $249,278 85.30% $245,874 85.65% $237,381 86.92%
Commercial real estate..... 42,974 14.00 39,177 12.61 34,721 11.88 32,228 11.23 28,892 10.58
Commercial construction.... 2,385 .78 4,395 1.42 -- -- -- -- -- --
Construction............... 3,258 1.06 3,712 1.20 2,116 .73 2,924 1.02 1,337 .49
------- ------- ------- ------- -------
Total mortgage loans... 301,618 304,735 286,115 281,026 267,610
Consumer and other loans:
Consumer................... 3,609 1.17 4,015 1.29 4,337 1.48 4,317 1.50 4,119 1.51
Commercial business........ 1,712 .56 1,830 .59 1,779 .61 1,712 .60 1,377 0.50
------- ------- ------ ------- -------
Total consumer and other
loans................ 5,321 5,845 6,116 6,029 5,496
------- ----- ------ ------- -------
Total loans............ 306,939 100.00% 310,580 100.00% 292,231 100.00% 287,055 100.00% 273,106 100.00%
====== ====== ====== ====== ======
Less:
Unearned discount, premium,
deferred loan fees, net.. (970) (927) (1,064) (1,173) (1,293)
Allowance for loan losses.. (3,138) (2,782) (2,767) (2,622) (2,589)
-------- ------ ------ -------- -------
Total loans, net....... $302,831 $306,871 $288,400 $283,260 $269,224
======= ======= ======= ======= =======
Mortgage-backed securities
held to maturity and available
for sale:
FHLMC...................... $ 33,379 20.29% $42,586 34.69% $54,039 43.47% $64,474 44.99% $56,258 43.77%
FNMA....................... 35,649 21.67 37,958 30.92 41,507 33.38 48,746 34.01 36,533 28.42
GNMA....................... 22,586 13.73 23,216 18.91 15,225 12.25 17,522 12.23 16,879 13.13
Real estate investment
mortgage conduit......... 10,198 6.20 5,830 4.75 7,291 5.86 7,577 5.29 10,187 7.93
Collateralized mortgage
obligations.............. 62,270 37.86 12,621 10.28 5,485 4.41 3,863 2.69 6,485 5.05
Mortgage pass throughs..... 406 .25 552 .45 784 0.63 1,131 0.79 2,190 1.70
------- ------ ------ ----- ------- ------ -------- ---- ------- ------
Total mortgage-backed and
related securities... $164,488 100.00% $122,763 100.00% $124,331 100.00% $143,313 100.00% $128,532 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
3
<PAGE>
The following table sets forth the Bank's loan originations and loan
and mortgage-backed and related securities purchases, sales and principal
payments for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total loans receivable (gross):
At beginning of period ........................ $ 310,580 $ 292,231 $ 287,055 $ 273,106 $ 258,724
Mortgage loans originated:
One-to-four family .......................... 31,320 30,034 34,775 52,902 86,073
Commercial real estate ...................... 8,355 17,751 7,144 6,806 6,509
Commercial construction ..................... 5,307 4,715 -- -- --
Construction ................................ 4,265 4,142 3,753 3,561 --
--------- --------- --------- --------- ---------
Total mortgage loans originated ........... 49,247 56,642 45,672 63,269 92,582
Mortgage and consumer loans purchased:
One-to-four family .......................... -- 14,486 -- -- --
Consumer .................................... -- -- -- 127 --
--------- --------- --------- --------- ---------
Total mortgage and consumer loans purchased -- 14,486 -- 127 --
Total mortgage loans originated and purchased ... 49,247 71,128 45,672 63,396 92,582
Consumer loans originated ....................... 1,254 1,131 1,048 475 834
Transfer of mortgage loans to real estate owned . (32) (482) (57) (1,091) (362)
Sale of loans ................................... (1,045) (950) (1,118) (1,739) (12,362)
Principal repayments ............................ (53,065) (52,478) (40,369) (47,092) (66,310)
--------- --------- --------- --------- ---------
Total loans receivable at end of period ......... $ 306,939 $ 310,580 $ 292,231 $ 287,055 $ 273,106
========= ========= ========= ========= =========
Mortgage backed securities held to maturity
and available for sale:
At beginning of period .......................... $ 122,763 $ 124,331 $ 143,313 $ 128,532 $ 126,207
Mortgage backed securities purchased (1) ........ 75,227 31,927 2,755 52,051 54,697
Mortgage backed securities sold (1) ............. (1,580) (923) -- -- --
Amortization and repayments ..................... (32,243) (32,646) (22,018) (37,270) (52,372)
Change in mark to market on available
for sale securities ........................... 321 74 281 -- --
--------- --------- --------- --------- ---------
At end of period (1) ............................ $ 164,488 $ 122,763 $ 124,331 $ 143,313 $ 128,532
========= ========= ========= ========= =========
</TABLE>
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(1) Includes the purchase and sale of CMO's and Remics
4
<PAGE>
Residential Loans. One of the primary lending activities of the Bank
has been the origination of conventional mortgage loans to enable borrowers to
purchase existing homes, refinance existing mortgage loans or construct new
homes. The Bank generally originates mortgage loans with terms of 15 to 30
years, amortized on a monthly basis, with principal and interest due each month.
Typically, residential real estate loans remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or
prepay loans at their option.
Regulations permit thrift institutions to make home loans in which the
interest rates may be adjusted, provided that the adjustments are tied to
specified indices. The Bank presently offers mortgage loans that adjust every
year after an initial fixed term of one, two, five or seven years, at an
interest rate indexed higher than the corresponding U.S. Treasury Security
Index. The interest rates on these mortgages adjust annually after the one, two,
five or seven year anniversary date of the loan with an interest rate adjustment
cap of 1.5% per year and presently not to exceed a rate of 11.5% over the life
of the loan. At December 31, 1997, adjustable-rate residential first mortgage
loans amounted to $72.7 million or 23.69% of the Bank's total loan portfolio.
Fixed-rate mortgage loans are generally underwritten according to
Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA") guidelines. The Bank sells fixed-rate loans in the
secondary market from time to time when such sales are consistent with the
Bank's asset/liability management goals and can be achieved on terms favorable
to the Bank. The Bank generally charges a higher interest rate on loans if the
property is not owner-occupied. At December 31, 1997, $153.5 million or 50.0% of
the Bank's total loan portfolio, consisted of long-term fixed-rate first
mortgage loans.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on owner-occupied residential first mortgage loans to 95% of the lesser of
the appraised value or purchase price, with the condition that private mortgage
insurance is required on loans with loan-to-value ratios in excess of 80%.
Mortgage loans on investment properties are made by the Bank at loan-to-value
ratios up to 70%. The loan-to-value ratio, maturity and other provisions of the
loans made by the Bank have generally reflected the policy of making less than
the maximum loan permissible under applicable regulations, in accordance with
established lending practices, market conditions and underwriting standards
maintained by the Bank. The Bank requires fire and casualty insurance on all
properties securing real estate loans made by the Bank. The Bank also performs
title searches to ensure its lien position.
The Bank actively solicits and originates home equity loans and equity
reserve lines of credit secured by the equity in the borrower's primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust based upon the prime rate.
At December 31, 1997, the Bank had home equity loans in the amount of $14.8
million or 4.81% of its total loan portfolio. Also at December 31, 1997, the
Bank had approved $28.8 million in home equity lines of credit, of which $12.0
million was outstanding.
Construction Loans. The Bank originates loans to finance the
construction of one-to-four family dwellings or commercial real estate.
Generally, the Bank only makes interim construction loans to individuals if it
also makes the permanent mortgage loan on the property. Construction loans to
builders are generally made only if the Bank makes the permanent mortgage loan
or if the builder has a contract for sale and the purchaser has received a
permanent mortgage commitment. At December 31, 1997, the Bank's construction
loans amounted to $5.6 million, net of loans in process or 1.84% of the Bank's
total loan portfolio.
5
<PAGE>
Interim construction loans to builders generally have terms of up to
nine months and interest rates which adjust at a positive spread over the prime
interest rate. Construction loans to build single family residences are
available. These loans are available to borrowers who qualify for a permanent
loan.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Commercial Real Estate Loans. Loans secured by commercial real estate
(e.g., shopping centers, medical buildings, retail offices) and multi-family
dwelling units (e.g., apartment projects with more than four units), constituted
$43.0 million or 14.0% of the Bank's total loan portfolio at December 31, 1997.
Commercial real estate loans and multi-family residential loans have been made
in amounts up to $3.8 million, with most of such loans ranging in size from
$100,000 to $1.0 million. Permanent loans on commercial properties are generally
originated in amounts up to 75% of the appraised value of the property. The
Bank's permanent commercial real estate loans are secured by improved property
such as office buildings, retail stores, warehouse, church buildings and other
non-residential buildings, most of which are located in the Bank's primary
market area. Commercial real estate loans and multi-family residential loans are
generally made at rates which adjust at a positive spread over the prime
interest rate or a specified treasury index or are balloon loans with fixed
interest rates which mature in three to five years with principal amortization
for a period of up to 25 years.
Loans secured by commercial real estate are generally larger and
involve a greater degree of risk than one-to-four family residential mortgage
loans. Of primary concern, in commercial and multi-family real estate lending,
is the borrower's creditworthiness and the feasibility and cash flow potential
of the project. Loans secured by income properties are generally larger and
involve greater risks than residential mortgage loans because payments on loans
secured by income properties are often dependent on successful operation or
management of the properties. As a result, repayment of such loans may be
subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy. In order to monitor cash
flows on income properties, the Bank requires borrowers and loan guarantors, if
any, to provide annual financial statements and rent rolls on commercial real
estate loans. At December 31, 1997, the five largest commercial real estate
loans totaled $9.9 million with no single loan larger than $3.7 million. All
such loans were current and were performing in accordance with their terms.
Consumer. Regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of the institution's assets.
The Bank makes various types of secured and unsecured consumer loans including
education loans, lines of credit, automobile loans (new and used) and loans
secured by deposit accounts. As of December 31, 1997, consumer loans totaled
$3.6 million, or 1.18% of the Bank's total loan portfolio. Consumer loans
generally have terms of six months to five years, some of which are at fixed
rates and some of which have rates that adjust periodically.
6
<PAGE>
The Bank intends to continue to emphasize the origination of consumer
loans. The Bank believes that the shorter term and the normally higher interest
rates available on various types of consumer loans have been helpful in
maintaining a profitable spread between the Bank's average loan yield and its
cost of funds.
Consumer loans are advantageous to the Bank because of their interest
rate sensitivity, but they also involve more credit risk than residential
mortgage loans because of the higher potential of defaults and the difficulties
involved in disposing of the collateral, if any.
Commercial Business Loans. The Bank's portfolio of commercial business
loans amounted to $1.7 million or .56% of the Bank's total loan portfolio, at
December 31, 1997. These commercial business loans are underwritten on the basis
of the borrower's ability to service such debt from income. The Bank's
commercial business loans are generally made to small and mid-sized companies
located within the Bank's primary lending area. In most cases, the Bank requires
additional collateral of equipment, chattel or other assets before making a
commercial business loan.
Loan Originations, Purchases and Sales. In the past, the Bank has
retained in its portfolio most of the loans it originates. However, the Bank's
general policy is to originate fixed-rate mortgage loans under terms, conditions
and documentation which permit sale to the FHLMC, FNMA, or other investors in
the secondary market. Adjustable-rate mortgage loans are generally not
originated under terms and conditions that would permit their sale in the
secondary mortgage market to FHLMC or FNMA. The Bank's policy has been to sell
certain of its fixed-rate mortgage loan originations. These sales may result in
gains or losses. This policy was established to reduce the Bank's vulnerability
to rapid interest rate movements and to provide a source of funding for ongoing
commitments. Fixed-rate mortgages designated for sale are accounted for
separately in accordance with applicable accounting rules. At December 31, 1997,
the Bank had no loans held-for-sale. The Bank continually monitors its loan
inventory and commitments.
Loan Commitments. The Bank issues loan origination commitments to real
estate developers and qualified borrowers primarily for the construction,
purchase and refinancing of residential real estate and commercial real estate.
Such commitments are made on specified terms and conditions, including in most
cases, the payment of a non-refundable commitment fee based on a percentage of
the amount of committed funds. At December 31, 1997, the Bank had unused lines
of credit and outstanding loan origination commitments of approximately $25.5
million.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage loan
which are charged to the borrower for origination of the loan. The Bank's loan
origination fees generally range from 2% to 3% on conventional residential
mortgages and 1% to 2% on commercial real estate loans. All loan origination
fees, net of incremental direct loan origination costs, are deferred and
amortized over the contractual life of the related loans.
The Bank receives other fees and service charges on loans. Other fees
and service charges consist of late fees, loan service fees and fees collected
with a change in borrower or other loan modifications. The Bank recognized other
fees and service charges on loans of $88 thousand, $122 thousand and $157
thousand for the years ended December 31, 1997, 1996 and 1995, respectively.
7
<PAGE>
Residential Mortgage Loan Servicing. The Bank services loans retained
in its portfolio and loans which were originated by the Bank and sold through
the secondary mortgage market with the servicing rights to those loans retained
by the Bank. The loan servicing activities of the Bank include collecting and
remitting loan payments, holding escrow funds for the payment of real estate
taxes and insurance premiums and generally administering the loans. Under the
loan servicing contracts, the Bank receives servicing fees that are deducted
from the monthly payments made to investors. The servicing spreads on loans
serviced are usually based on the unpaid principal balance of the loan being
serviced and typically range from .25 percent to .375 percent per annum of
declining principal balance on the loans. At December 31, 1997, the Bank
serviced for others 580 loans with an outstanding aggregate balance of $25.6
million. Loan servicing income for the years ended December 31, 1997, 1996 and
1995, was $83 thousand, $98 thousand and $113 thousand, respectively.
Collection Procedures. When a loan is more than 30 days delinquent, the
borrower will be contacted by mail or phone and payment requested. If the
delinquency continues, subsequent efforts will be made to contact the delinquent
borrower. In certain instances, the Bank may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs. If the loan continues in a delinquent status for 90 days or more, the
Bank generally will initiate foreclosure proceedings.
Non-Performing Loans. Loans are generally placed on non-accrual status
when either principal or interest is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Impaired Loans. The Bank considers all non-accrual loans as well as any
loans in which it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement as
impaired. Small balances of homogeneous loans such as delinquent residential
mortgages and delinquent consumer installment loans are collectively measured
for impairment and a reserve is established based on historical loss data.
Certain larger balance impaired loans and other impaired loans are reviewed
individually and reserves are established based on a discounted cash flow
analysis or as a practical expedient, the underlying collateral value. Interest
income on impaired loans is recognized on a cash basis.
8
<PAGE>
The following table sets forth information regarding impaired loans,
troubled debt restructured and real estate owned assets by the Bank at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Impaired loans - non-accrual:
Mortgage loans:
One-to-four family............................. $2,394 $2,413 $2,502 $1,446 $3,395
Commercial real estate......................... 1,163 1,663 1,604 1,040 1,266
Consumer and other............................. 80 15 6 469 13
------ ----- ------- ------ ------
Total impaired non-accrual loans............. $3,637 $4,091 $4,112 $2,955 $4,674
===== ===== ===== ===== =====
Other impaired loans............................. -- -- $ 354 -- --
Troubled debt restructuring...................... $ 684(1) $ 560(1) 634(1) $ 1,143 $ 663
Real estate owned, net........................... 446 622 669 1,812 1,624
Other non-performing assets...................... 644 1,228 1,228 1,428 1,453
----- ----- ----- ----- -----
Total non-performing assets...................... $5,411 $6,501 $6,997 $7,338 $8,414
===== ===== ===== ===== =====
Total non-accrual loans to net loans............. 1.20% 1.33% 1.43% 1.04% 1.74%
==== ==== ==== ==== ====
Total non-accrual loans to total assets.......... .58% .76% 0.82% 0.61% 1.05%
==== === ==== ==== ====
Total non-performing assets to total assets...... .86% 1.20% 1.39% 1.52% 1.89%
==== ==== ==== ==== ====
</TABLE>
- ----------------------
(1) Loans restructured prior to SFAS Nos. 114 and 118 effective date and
performing in accordance with the terms of the restructuring agreement.
Classified Assets. Classified assets generally consist of assets which
have possible credit risk and/or have sufficient degree of risk or potential
weakness to warrant management's close attention. Each asset is assigned a
quality rating based on management's best judgment concerning the degree of risk
and the likelihood of repayment or orderly liquidation. Quality ratings are
divided into the following groups: Pass and Special Mention (unclassified),
Substandard, Doubtful and Loss.
An asset classified as Substandard is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Assets so classified have well-defined weakness or weaknesses.
An asset classified Substandard has shown an inability or unwillingness on the
part of the borrower and/or guarantors to meet their obligations or the
collateral securing the obligation has deteriorated in some condition. Such
assets have a well-defined weakness that points to the distinct possibility that
the Bank will not be paid back in a timely fashion and it may require legal
action to effect payment.
An asset classified as Doubtful has all the weaknesses inherent in
those classified Substandard with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable. The
possibility of a loss on a Doubtful asset is high. However, due to important and
reasonably specific pending factors, which may work to strengthen (or weaken)
the asset, its classification as an estimated loss is deferred until its more
exact status can be determined.
An asset classified as Loss is considered uncollectible and of such
little value that its continuance as an asset, without establishment of a
specific valuation allowance or charge-off, is not warranted. This
classification does not necessarily mean that an asset has absolutely no
recovery or salvage value; but
9
<PAGE>
rather, it is not practical or desirable to defer writing off a basically
worthless asset even though partial recovery may be effected in the future.
Federal regulations require that each insured institution classify its
own assets on a regular basis. The Bank has an outside firm to perform
commercial loan review and quality control for residential mortgages including a
review of classifications. In addition, in connection with examinations of
insured institutions, OTS and FDIC examiners have authority to identify problem
assets and, if appropriate, classify them. Assets classified as Substandard or
Doubtful require the institution to establish specific allowances for loan
losses. If an asset or portion thereof is classified as Loss, the insured
institution must either establish specified allowances for loan losses in the
amount of 100 percent of the portion of the asset classified as Loss or charge
off such amount. General loss allowances established to cover possible losses
related to assets classified as Substandard or as Doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. OTS and FDIC
examiners may disagree with the insured institution's classification and amounts
reserved.
The following table sets forth information with respect to the Bank's
classified assets for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- -------------- -------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family....................... $2,619 $2,413 $2,502 $1,446 $3,395
Commercial real estate................... 4,003 3,942 4,247 3,763 5,503
Consumer and other....................... 80 15 6 469 13
------ ----- ------- ------ ------
Total loans............................ 6,702 6,370 6,755 5,678 8,911
----- ----- ----- ------ ------
Real Estate held for development,
net ................................... 644 1,228 1,228 1,428 1,453
Real estate owned, net.................... 446 622 669 1,812 1,624
----- ----- ------ ------ ------
Total Substandard...................... 7,792 8,220 8,652 8,918 11,988
===== ===== ===== ====== ======
Doubtful loans........................... -- -- -- -- --
------- ------- ------- -------- --------
Total Doubtful......................... -- -- -- -- --
======= ======= ======= ======== ========
Loss..................................... 15 -- -- -- --
------ ------- ------- -------- --------
Total loss............................. 15 -- -- -- --
====== ======= ======= ======== ========
Total Classified Assets.................... $7,807 $8,220 $8,652 $ 8,918 $11,988
===== ===== ===== ====== ======
</TABLE>
At December 31, 1997, the Bank's non-performing loans consisted
primarily of loans secured by residential and commercial real estate. The
largest non-performing loan consisted of a loan in the amount of $631 thousand
secured by a first mortgage on a commercial real estate property operating as a
retail liquor store.
For a full explanation of the Bank's real estate held for development
at December 31, 1997, see "--Subsidiary and Land Development Activities".
Real Estate Owned. The Bank's real estate owned at December 31, 1997,
consisted of properties valued at $1.0 million, gross. These properties are
carried at the lower of book value or fair market value less estimated costs to
sell and are analyzed by management on a periodic basis. The real estate owned
is comprised of (i) 18 acres of land, with a net book value of $818 thousand
which is zoned for the construction of 109 townhouses, (ii) two condominiums
with a net book value of $50 thousand
10
<PAGE>
and (iii) one commercial condominium located in Burlington County with a net
book value of $138 thousand. See "--Provision for Loan and Real Estate Losses."
Provision for Loan and Real Estate Losses. A provision for loan losses
is charged to operations based on management's evaluation of the risk inherent
in its loan portfolio in relation to the level of the allowance for loan losses
and changes in the nature and volume of its loan activity. For the year ended
December 31, 1997, the Bank charged $400 thousand and $143 thousand to
operations as a provision for losses on loans and real estate owned,
respectively.
The Bank provides general reserves based on management's analysis of
risk characteristics of various classifications of loans, previous loan loss
experience, estimated fair value of the underlying collateral and current
economic conditons. In addition, the Bank also provides specific valuation
reserves for anticipated losses on loans and real estate when management
determines that a significant decline in the value of the collateral has
occurred, as a result of which, the value of the collateral is less than the
amount of the unpaid principal of the related loan plus estimated costs of
acquisition and sale. Although management believes that it uses the best
information available to make such determinations, future adjustments to
reserves may be necessary, and net income could be significantly affected if
circumstances differ substantially from the assumptions used in making the
initial determinations. At December 31, 1997, the Bank had an allowance for loan
losses of $3.1 million and an allowance for losses on real estate owned of $560
thousand. While the Bank believes it had established its existing allowance for
loan losses in accordance with Generally Accepted Accounting Principles ("GAAP")
at December 31, 1997, there can be no assurance that regulators, when reviewing
the Bank's loan portfolio in the future, will not request the Bank to
significantly increase its allowance for loan losses, thereby adversely
impacting the Bank's financial condition and earnings.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- --------------- --------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $2,782 $2,767 $2,622 $2,589 $2,380
Loans charged-off:
One-to-four family........................ (8) (114) (13) (44) --
Commercial real estate.................... -- -- -- -- --
Construction.............................. -- -- -- -- --
Consumer.................................. (40) (1) (6) (37) (8)
Commercial business....................... (1) -- -- (38) --
------ ----- ------ ----- -----
Total charge-offs....................... (49) (115) (19) (119) (8)
Recoveries.................................. 5 10 44 86 15
------ ----- ------- ---- -----
Net loans charged-off....................... (44) (105) 25 (33) 7
------ ----- ------ ----- -----
Provision for possible loan losses.......... 400 120 120 66 202
------ ----- ------ ----- -----
Balance at end of period.................... $3,138 $2,782 $2,767 $2,622 $2,589
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period............. 0.014% 0.035% (0.009%) 0.012% (0.003%)
</TABLE>
11
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable for the periods indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowances to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------- ------------------ ------------------ ------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family....... $2,016(1)(2) 82.43% $1,716 82.89% $1,718 85.30% $1,656 85.65% $1,613 86.92%
Commercial real estate... 954(2) 14.00 877 12.61 819 11.88 757 11.23 757 10.58
Commercial construction.. 24 .78 44 1.42 -- -- -- -- -- --
Construction............. 32 1.06 37 1.20 21 .73 29 1.02 13 .49
Consumer and other....... 62(1) 1.17 76 1.29 68 1.48 70 1.50 66 1.51
Commercial business...... 50 .56 32 .59 141 .61 110 .60 140 .50
------ ----- ----- ----- ------ -------- ----- ------- ----- -------
Total allowance
for loan losses.... $3,138 100.00% $2,782 100.00% $2,767 100.00% $2,622 100.00% $2,589 100.00%
===== ====== ===== ====== ===== ======= ===== ====== ===== ======
</TABLE>
- --------------------
(1) Includes reserves for impaired loans collectively measured for impairment
of residential real estate and consumer loans of $96 thousand and $1
thousand, respectively.
(2) Includes reserves for impaired loans individually measured for impairment
of residential real estate and commercial real estate of $70 thousand and
$249 thousand, respectively.
12
<PAGE>
Changes in the allowance for losses on real estate owned are as
follows:
Year Ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
Balance at beginning of year ... $ 437 $ 313 $ 79 $ -- $ --
Provisions charged to operations 143 153 354 158 29
Charge-offs .................... (20) (30) (120) (79) (29)
Recoveries ..................... -- 1 -- -- --
----- ----- ----- ----- -----
Balance at end of year ....... $ 560 $ 437 $ 313 $ 79 $ --
===== ===== ===== ===== =====
Mortgage-Backed Securities
The Bank purchases mortgage-backed securities guaranteed by the
Government National Mortgage Association ("GNMA") and the FNMA and participation
certificates issued by the FHLMC. GNMA mortgage-backed securities are
certificates issued and backed by the GNMA and are secured by interests in pools
of mortgages which are fully insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veterans' Administration ("VA"). FHLMC
mortgage-backed securities are participation certificates issued and guaranteed
by the FHLMC and secured by interests in pools of conventional mortgages
originated by financial institutions. At December 31, 1997, these
mortgage-backed securities held to maturity, consisting of GNMA, FHLMC, FNMA,
and private pass-through certificates amounted to $92.0 million or 14.64% of
total assets.
Investment Securities Held to Maturity and Securities Available for Sale
Farmers and Mechanics investment policy is to ensure safety and
soundness, provide and maintain the liquidity ratios required under regulations
of the OTS, optimize the Bank's return on investments, provide low-risk,
high-quality assets, manage the overall interest rate sensitivity of the
portfolio and serve as a vehicle to absorb excess funds when loan demand is low
and to infuse funds when loan demand is high. The amount of the Bank's
investment portfolio at any time will depend in part upon the Bank's loan
origination volume and the availability of attractive long-term investments.
Investment decisions are based on a thorough analysis of each investment to
determine quality, prospects for yield and appreciation and any inherent risks.
See "Regulation."
At December 31, 1997, Farmers and Mechanics had an investment portfolio
of $192.7 million of which $80.3 million was available for sale, consisting
primarily of U.S. Government securities and obligations of U.S. Government
agencies. For more information on the Bank's investment activities see Notes 2
and 3 of the Notes to the Consolidated Financial Statements. Other investment
activities of the Bank, which are not reported as part of the Bank's investment
portfolio, include an investment of $3.6 million in FHLB stock, which is
required as part of its membership in the Federal Home Loan Bank system (see
"--Regulation -- Federal Home Loan Bank System"), and $827 thousand in interest
bearing deposits and overnight investments.
13
<PAGE>
The following table sets forth the carrying value and market value of
the Bank's investment securities held to maturity and securities available for
sale, FHLB stock, and interest bearing deposits and overnight investments at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ----------------------------- ----------------------------
Estimated Estimated Estimated
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and Agency securities..... $79,347 $79,498 $46,792 $46,156 $34,086 $34,110
Reverse repurchase agreements............. 30,185 30,185 20,000 20,000 9,000 9,000
Municipal bonds........................... 2,802 2,816 795 800 464 464
U.S. Treasuries........................... 15 14 15 14 15 14
Investment securities available for sale:
U.S. Agencies............................. 7,871 7,871 4,997 4,997 7,928 7,928
U.S. Treasuries........................... -- -- 1,999 1,999 1,980 1,980
REMIC's................................... 10,198 10,198 5,830 5,830 7,291 7,291
CMO's..................................... 62,270 62,270 12,621 12,621 5,485 5,485
Common Stock.............................. -- -- -- -- 84 84
--------- ---------- --------- --------- ------- -------
Total investment securities........... 192,688 192,852 93,049 92,417 66,333 66,356
------- ------- ------ ------ ------ ------
Federal Home Loan Bank of New York
stock................................... 3,631 3,631 3,621 3,621 4,058 4,058
Interest bearing deposits and overnight
investments............................. 827 827 347 347 181 181
-------- -------- ----- ----- ------ ------
Total investments...................... $197,146 $197,310 $97,017 $96,385 $70,572 $70,595
======= ======= ====== ====== ====== ======
</TABLE>
14
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment securities at
December 31, 1997.
<TABLE>
<CAPTION>
More than
One Year or Less One to Five Years Five to Ten Years Ten Years Total Investment Securities
------------------ ----------------- ------------------ ---------------- ------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
------- ------- ------- ------- ------- ------- ----- ----- ------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
held to maturity:
U.S. government and
agency obligations $ 1,000 5.47% $ -- --% $38,163 7.13% $ 40,184 7.45% $ 79,347 $ 79,498 7.27%
Municipal bond ..... 2,472 4.10 101 5.60 229 5.60 -- -- 2,802 2,816 4.28
Reverse repurchase
agreements ........ 30,185 5.83 -- -- -- -- -- -- 30,185 30,185 5.83
U.S. Treasury ...... 15 3.50 -- -- -- -- -- -- 15 14 3.50
MBS ................ 1,588 7.30 7,695 7.31 6,395 7.48 76,343 7.61 92,021 94,307 7.57
Investment securities
available for sale:
U.S. Government .... 999 4.31 2,009 6.60 4,863 7.02 -- -- 7,871 7,871 6.57
CMO's .............. -- -- 4,599 6.55 2,602 7.31 55,069 7.26 62,270 62,270 7.21
REMICs ............. -- -- -- -- 1,973 5.38 8,225 6.56 10,198 10,198 6.33
-------- ---- ------- ---- ------- ---- -------- ---- -------- -------- ----
Total ............ $ 36,259 5.73% $14,404 6.97% $54,225 7.10% $179,821 7.42% $284,709 $287,159 7.12%
======== ======= ======= ======== ======== ========
</TABLE>
15
<PAGE>
Subsidiary and Land Development Activities
Farmers and Mechanics is generally permitted to invest an amount equal
to 3% of its total assets in subsidiary service corporations with at least 1% of
that investment in community reinvestment activities. Under such 3% limitation,
at December 31, 1997, Farmers and Mechanics was authorized to invest up to
approximately $18.8 million in the stock of or loans to its subsidiary service
corporations. As of December 31, 1997, the net book value of the Bank's
investment in stock, unsecured loans, and conforming loans in its subsidiaries
was $1.1 million, all of which had been invested in the Bank's wholly owned
subsidiary corporations, which were organized to engage in real estate
development activities.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), savings associations are required to deduct from capital
their investments in, and extensions of credit to, service corporations engaged
in activities which are not permissible for national banks. The real estate
development activities of the Bank's service corporation are not permissible for
national banks. At December 31, 1997, the Bank's investment in and advances to
subsidiaries engaged in non-permissible activities amounted to $976 thousand and
was deducted from tangible, core and risk-based capital.
Real estate held for development represents a high degree of credit
risk because of the relatively long period of time needed to obtain necessary
developmental approvals and the uncertainty of future market conditions. During
the year ended December 31, 1997, the Bank recorded a $200 thousand provision
for losses as a result of the loss on the sale of one of the land development
properties. No provision for loss on real estate was recorded in 1996.
The Board of Directors of Land Financial Services, Inc., a wholly owned
subsidiary of the Bank, passed a resolution in February 1991 to cease all new
direct real estate investment activities. In addition, the Board further
resolved that there shall be no new real estate investment in connection with
existing assets except those investments which are necessary to preserve and
protect the existing assets so that such assets can be liquidated as soon as
practical. Management believes that divesture of its present land investment may
take several years, depending on market conditions.
Deposit Activities and Other Sources of Funds
General. Deposits are the major source of Farmers and Mechanics funds
for lending and other investment purposes. In addition to deposits, Farmers and
Mechanics derives funds from loan principal and interest repayments and
prepayments, principal and interest payments on mortgage-backed securities and
other investment securities, advances from the FHLB of New York and other
borrowings (see "Borrowings"). Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short term basis to compensate for reductions in the availability
of funds from other sources. They may also be used on a longer term basis for
general business purposes.
Deposits. Deposits are attracted from within the Bank's primary market
area of Burlington County, New Jersey, through the offering of a broad selection
of deposit instruments including regular checking accounts, non-interest
checking accounts, money market accounts, regular passbook accounts,
certificates of deposit and IRA accounts. Deposit account terms vary according
to the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. The Bank is a member of an
automated teller machine network.
16
<PAGE>
The Bank regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. The
Bank does not have any brokered deposits and has no present intention to accept
or solicit such deposits.
Certificates of Deposit Maturity Schedule. The following table sets
forth the amount and maturities of the Bank's certificates of deposit at
December 31, 1997.
Less than 1 to 2 to After
1 year 2 years 3 years 3 years Total
-------- ------- ------- ------- ------
(In Thousands)
less than 4.00% $ 15,032 $ 3 $ -- $ 10 $ 15,045
4.01 - 6.00% ... 87,011 47,339 17,135 49,470 200,955
6.01 - 8.00% ... 209 83 1,674 21,788 23,754
8.01 - 10.00% .. -- -- -- 3,223 3,223
10.01 - 12.00% .. -- -- -- 73 73
-------- -------- -------- -------- --------
Total ...... $102,252 $ 47,425 $ 18,809 $ 74,564 $243,050
======== ======== ======== ======== ========
Certificates of Deposit in Excess of $100,000. The following table
indicates the amount of the Bank's certificates of deposit of $100,000 or more
by time remaining until maturity as of December 31, 1997.
Maturity Period of Deposits Certificates of
- --------------------------- ---------------
Deposit
-------
(In Thousands)
Three months or less................ $13,681
Three through six months............ 2,901
Six through twelve months........... 4,196
Over twelve months.................. 8,654
------
Total.......................... $29,432
======
17
<PAGE>
Deposit Rate. The following table sets forth the distribution of the
Bank's average balance of deposit accounts at the dates indicated and the
weighted average nominal interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Percent of Average Percent Average Percent Average
Average Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ------ ------- -------- ------ ------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and regular savings... $ 73,802 15.6% 2.56% $ 69,666 16.22% 2.52% $ 66,798 15.93% 2.54%
Checking accounts.............. 89,418 18.8 .92 72,427 16.87 .96 63,607 15.17 1.11
Money market deposit accounts.. 59,797 12.6 2.72 57,399 13.37 2.65 58,990 14.06 2.66
Certificates of deposit........ 243,381 51.3 5.32 228,974 53.32 5.30 229,103 54.63 5.21
Surrogate statement............ 7,860 1.7 5.80 947 .22 6.12 896 0.21 6.10
------- ----- ---- ------- ------ ------- ------- ------- -------
Total Deposits............... $474,258 100.00% 3.74% $429,413 100.00% 3.77% $419,394 100.00% 3.81%
======= ====== ==== ======= ====== ==== ======= ====== ======
</TABLE>
18
<PAGE>
Borrowings. Savings deposits are the primary source of funds for
Farmers and Mechanics lending and investment activities and for its general
business purposes. From time to time, however, the Bank has relied upon other
borrowings to supplement its supply of lendable funds and to meet deposit
withdrawal requirements.
The FHLB functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, Farmers and Mechanics is required to own capital stock in the FHLB
of New York and is authorized to apply for advances on the security of such
stock and certain of its home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States),
provided certain standards related to credit worthiness have been met. Under its
current credit policies, the FHLB of New York limits advances to 30% of a
member's assets. At December 31, 1997, the Bank had $24.5 million in FHLB
advances outstanding at a weighted-average interest rate of 6.08%. The advances
are collateralized by certain first mortgage loans.
At December 31, 1997, the Bank had securities sold under the agreements
to repurchase (repurchase agreements) in the aggregate amount of $60.0 million.
The repurchase agreements are collateralized by U.S. Agency Notes and CMOs with
a market value of $63.0 million.
On July 28, 1994 the Corporation issued $10 million of 10% Subordinated
Debentures (the "Debentures") due 2004. Interest is payable on the Debentures
semi-annually on February 1 and August 1 of each year. The Corporation made its
first interest payment on the Debentures on February 1, 1995. The Corporation
used the proceeds for expansion of the Corporation's operations through branch
acquisitions and general corporate purposes. The Debentures were issued under an
Indenture which provides that the Corporation cannot declare or pay dividends
on, or purchase, redeem or acquire for value its capital stock, return any
capital to holders of capital stock as such, or make any distribution of assets
to capital stockholders as such, unless, from and after the date of any such
dividend declaration or the date of any such purchase, redemption, payment or
distribution specified above, the Corporation retains at all times cash, cash
equivalents (as determined in accordance with generally accepted accounting
principles) or marketable securities (with a market value as measured on the
applicable Declaration Date or Redemption Date) in an amount sufficient to cover
the two consecutive semi-annual interest payments that will be due and payable.
Personnel
As of December 31, 1997 the Corporation, including its subsidiaries,
had 191 full-time employees and 161 part-time employees. The employees are not
represented by a collective bargaining unit. Management believes its
relationship with its employees is good.
Competition
The Bank faces strong competition in its attraction of savings deposits
and in the origination of real estate loans. Its most direct competition for
savings deposits has historically come from other thrift institutions and
commercial banks located in Burlington County and the contiguous counties. The
Bank's competition for real estate loans is principally from other thrift
institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers, and home builders.
19
<PAGE>
The Bank competes for deposits by offering depositors a wide variety of savings
accounts, checking accounts, convenient office locations and hours, tax-deferred
retirement programs and other miscellaneous services.
Regulation
Set forth below is a brief description of certain laws which are
related to the regulation of the Bank and the Corporation. The description does
not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Corporation
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for
stockholders of the Corporation.
Restrictions on Acquisitions. If the Corporation acquires control of
another savings institution as a separate subsidiary (other than a financially
troubled institution acquired pursuant to special provisions of the Federal
Deposit Insurance Act), the Corporation would become a multiple savings and loan
holding company whose activities and those of its subsidiaries (other than the
Bank or any other savings association) would become subject to restrictions
under the Home Owners' Loan Act ("HOLA"). No such multiple savings and loan
holding company or subsidiary thereof that is not a savings association may
commence, or continue for more than 180 days after becoming a multiple savings
and loan holding company or subsidiary thereof, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or an escrow business; (iii)
holding or managing properties used or occupied by a subsidiary savings
association; or (iv) acting as a trustee under deeds of trust. In addition,
unless prohibited or limited by the OTS, such a multiple savings and loan
holding company may engage in non-banking activities permissible for bank
holding companies, including, but not limited to, investment advice, leasing,
underwriting credit insurance, management consulting services, and securities
brokerage activities, as the Federal Reserve Board determines under section
4(c)(8) of the Bank Holding Company Act of 1956 ("BHCA"), and may engage in
those activities authorized by the OTS. Such a multiple savings and loan holding
company must obtain prior OTS approval before it may engage in any particular
activity permissible for bank holding companies under section 4(c)(8) of the
BHCA.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control" as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS with an opportunity to disapprove the proposed
acquisition. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings institution or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel
20
<PAGE>
indicates that it would not be in the interest of the depositors or the public
to permit the acquisitions of control by such person.
Payment of Dividends. The Corporation's principal source of income is
dividends to the extent declared and paid by the Bank. Therefore, restrictions
on the Bank's ability to pay dividends may impact the Corporation's ability to
pay dividends to stockholders.
Regulation of the Bank
General. As a federally-chartered, SAIF-insured savings bank, the Bank
is subject to extensive regulation by the OTS and the FDIC. Lending activities
and other investments must comply with various federal statutory and regulatory
requirements. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulations, whether by the OTS, the FDIC or the Congress could
have a material adverse impact on the Corporation, the Bank and their
operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority to suspend the deposit insurance of
any savings association without tangible capital. However, if a savings
association has positive capital when it includes qualifying intangible assets,
the FDIC cannot suspend deposit insurance unless capital declines materially,
the institution fails to enter into and remain in compliance with an approved
capital plan or the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
This risk classification is based on an institution's capital group and
supervisory subgroup assignment. In addition, the FDIC is authorized to increase
such deposit insurance rates, on a semi-annual basis, if it determines that the
reserve ratio of the
21
<PAGE>
SAIF will be less than the designated reserve ratio of 1.25% of SAIF-insured
deposits. In setting these increased assessments, the FDIC must seek to restore
and preserve the ratio to that designated reserve level, or such higher reserve
ratio as established by the FDIC. In addition, under the FDICIA, the FDIC may
impose special assessments on SAIF members to repay amounts borrowed from the
U.S. Treasury or for any other reason deemed necessary by the FDIC.
On January 1, 1997, deposit insurance assessments for SAIF members were
reduced to approximately .064% of deposits on an annual basis; this rate may
continue through the end of 1999. During this same period, members of the Bank
Insurance Fund ("BIF"), predominantly commercial banks, are expected to be
annually assessed approximately .013% of deposits. Thereafter, assessments for
BIF and SAIF members should be the same and the SAIF and BIF may be merged. It
is expected that these continuing assessments for both SAIF and BIF members will
be used to repay outstanding Financing Corporation bond obligations. As a result
of these changes, beginning January 1, 1997, the rate of deposit insurance
assessed to the Bank substantially declined. The Bank's federal deposit
insurance premium for the fiscal year ended December 31, 1997 was $233 thousand.
In addition to federal deposit insurance premiums, savings institutions
like the Bank are required by OTS regulations to pay assessments to the OTS to
fund the operations of the OTS. The general assessment is paid on a semi-annual
basis and is computed based on total assets of the institution, including
subsidiaries.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
3% of total adjusted assets and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets. The Bank exceeded its minimum capital
requirements with regulatory tangible, core and risk-based capital ratios of
7.05%, 7.05% and 15.85%, respectively, at December 1997.
Savings associations with a greater than "normal" level of interest
rate exposure will be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirement. Specifically, interest rate
exposure will be measured as the decline in net portfolio value due to a 200
basis point decrease in market interest rates. The interest rate risk ("IRR")
component to be deducted from total capital is equal to one-half the difference
between an institution's measured exposure and the "normal" level of exposure
which is defined as two percent of the estimated economic value of its assets.
Dividend and Other Capital Distribution Limitations. Current OTS
regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Corporation and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Corporation. In addition, the Bank may not declare or pay a cash dividend on
its capital stock if the effect thereof would be to reduce the regulatory
capital of the Bank below the amount required for the liquidation account
established pursuant to the Bank's Conversion.
Current OTS regulations impose limitations upon all capital
distributions by savings institutions, such as cash dividends, payments to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, based primarily on an
institution's capital level. An institution that exceeds all requirements before
and after a proposed capital distribution ("Tier 1 institution") and has not
been advised by the OTS that it is in need of more than the normal supervision
can, after prior notice,
22
<PAGE>
but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess over its capital requirements) at the beginning of
the calendar year, or (ii) 75% of its net income over the most recent four
quarter period. Any additional capital distributions require prior regulatory
approval. As of December 31, 1997, the Bank was a Tier 1 institution. In the
event the Bank's capital fell below its requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Finally, a savings association is
prohibited from making a capital distribution if, after making the distribution,
the savings association would be "undercapitalized".
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Under certain
other circumstances, savings associations will be required to file a notice with
OTS prior to making the capital distribution. The OTS proposed limitations on
capital distributions are similar to the limitations imposed upon national
banks. The Bank is unable to predict whether or when the proposed regulation
will become effective.
Qualified Thrift Lender Test. HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. If the Bank maintains an
appropriate level of Qualified Thrift Investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of New York. The required percentage of QTIs
is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. As of
December 31, 1997, the Bank was in compliance with its QTL requirement with
80.21% of its assets invested in QTIs.
Loans-to-One Borrower. Under the HOLA, as amended, savings institutions
are subject to the national bank limits on loans-to-one borrower. Generally, a
savings association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the association's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and
23
<PAGE>
bullion, but generally does not include real estate. The Bank does not have any
loans-to-one borrower which exceed these limits.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1997, the Bank had $3.6 million in
FHLB stock, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily non-interest checking and
interest-bearing checking accounts) and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy the liquidity requirements that are imposed by the OTS.
Proposed Legislation. Bills have been introduced to congressional
committees that would consolidate the OTS with the Office of the Comptroller of
the Currency ("OCC"). The resulting agency would regulate all federally
chartered commercial banks and thrift institutions. In the event that the OTS is
consolidated with the OCC, it is possible that the thrift charter could be
eliminated and thrifts could be forced to convert to commercial banks. Under
current law and regulations, a unitary savings and loan holding company, such as
the Company, which has only one thrift subsidiary such as the Bank, has
essentially unlimited investment authority. Legislation has also been proposed
which, if enacted, would limit the non-banking related activities of savings and
loan holding companies to those activities permitted for bank holding companies.
Item 2. Properties
- -------------------
The Bank conducts its business through its two administrative offices
located in Burlington, New Jersey and its 21 branch locations in Burlington
County, New Jersey. All of the Bank's office and branch facilities are owned by
the Bank, except for two branch office locations in Lumberton and Medford, New
Jersey. Management of the Bank considers the physical condition of each of the
Bank's administrative and branch offices to be good and adequate for the conduct
of the Bank's business. The net book value of the Bank's investment in office
property and equipment, including data processing equipment, totaled $15.7
million at December 31, 1997.
Item 3. Legal Proceedings
- --------------------------
The Bank is periodically involved as a plaintiff or defendant in
various legal actions, such as actions to enforce liens, condemnation
proceedings on properties in which the Bank holds mortgage interests, matters
involving the making and servicing of mortgage loans and other matters incident
to the Bank's business. In the opinion of management, none of these actions
individually or in the aggregate is believed to be material to the financial
condition or results of operations of the Bank.
24
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
Part II
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" in the Corporation's 1997 Annual Report to Stockholders (the
"Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the table captioned "Financial Highlights" in
the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained in the section captioned "Asset and Liability
Management" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Corporation's financial statements listed in Item 14 herein are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
25
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
The executive officers of the Corporation are as follows:
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Charles B. Yates....................... 58 Chairman of the Board
Craig W. Yates......................... 55 President and Chief Executive Officer
Channing L. Smith...................... 54 Vice President and Chief Financial
Officer
James E. Igo........................... 41 Senior Vice President and Chief
Lending Officer
Thomas M. Topley....................... 37 Senior Vice President and Corporate
Secretary
</TABLE>
- ----------------
(1) At December 31, 1997.
The principal office of each executive officer is set forth below.
Charles B. Yates has served as Chairman of the Board of the Corporation
and the Bank since April 1994. Mr. Yates has been a private investor for seven
years. He previously was president of Yates Industries, Inc., a New York Stock
Exchange listed manufacturing company from 1967 to 1982. He was also Vice
Chairman of Square D Corporation from 1982 to 1983 and served as Assemblyman and
State Senator in the New Jersey Legislature from 1972 to 1982.
Craig W. Yates serves as President and Chief Executive Officer of the
Corporation and the Bank. He became a director of the Bank in January 1990 and
President of the Corporation and the Bank on December 31, 1990. For the previous
five years, Mr. Yates was a private investor. In his capacity as President, Mr.
Yates is responsible for the operations of the Corporation pursuant to the
policies and procedures adopted by the Board of Directors.
Channing L. Smith has served as Vice President and Chief Financial
Officer of the Corporation and the Bank since October 1994. In this capacity, he
is responsible for the management of the accounting, treasury, investment, and
human resources of the Bank. From April 1994 to October 1994, he served as
controller of the Corporation and the Bank. From January 1990 to April 1993 he
served as corporate Controller for Circuit Foil USA.
James E. Igo has served as Senior Vice President and Senior Mortgage
Lending Officer of the Corporation and the Bank since November 1991. In that
capacity, he is responsible for overall loan production, credit quality, product
development, loan servicing and the creation of lending policies and procedures.
From September 1990 to November 1991, he served as the Vice President,
Commercial Lending of the Corporation and the Bank. Prior to 1990, Mr. Igo was
Senior Vice President and Senior Lending Officer for a commercial bank.
26
<PAGE>
Thomas M. Topley has served as Senior Vice President of Operations
since April 1993 and as Corporate Secretary of the Corporation and the Bank
since April 1992. In that capacity, he is responsible for corporate records,
retail branch administration, data processing and accounting operations. From
June 1990 to April 1993, Mr. Topley served as Vice President and Controller for
the Bank.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K*
- ------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. The following financial statements and the report of
independent auditors of the Registrant included in
the Registrant's 1997 Annual Report to Stockholders
are incorporated herein by reference and also in Item
8 hereof.
(a) Report of Coopers & Lybrand L.L.P.
(b) Consolidated Statements of Financial
Condition as of December 31, 1997 and 1996
(c) Consolidated Statements of Operations for
the years ended December 31, 1997, 1996 and
1995
27
<PAGE>
(d) Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996 and
1995
(e) Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
(f) Notes to Consolidated Financial Statements
2. No financial statement schedules are provided herein
because the required information is either not
applicable, not required or is shown in the
consolidated financial statements or in the notes
thereto.
3. Exhibits
3.1 Certificate of Incorporation (Incorporated
by reference to the Registrant's Form S-1
Registration Statement No. 33-24340).
3.2 Bylaws (Incorporated by reference to the
Registrant's Form S-1 Registration Statement
No. 33-24340).
4 Agreement to furnish copy to Securities and
Exchange Commission upon request of
Indenture dated July 28, 1994, relating to
10% Subordinated Debentures due 2004 in
aggregate principal amount of $10 million.
(Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1994).
10.1 Stock Option and Incentive Plan(Incorporated
by reference to the Registrant's Form S-8
Registration Statement No. 33-24340).
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) No Reports on Form 8-K were filed during the last quarter of
the fiscal year covered by this Report.
- -------------------
* Incorporated by reference from the Registrant's 1997 Annual Report to
Stockholders attached hereto as Exhibit 13.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: March 30, 1998 By: /s/ Craig W. Yates
--------------------------- ------------------------------------
Craig W. Yates, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Dated
/s/ Charles B. Yates March 30, 1998
- ------------------------------------------ -----------------------------
Charles B. Yates
Chairman of the Board
/s/ Craig W. Yates March 30, 1998
- ------------------------------------------ -----------------------------
Craig W. Yates
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ George J. Barber March 30, 1998
- ------------------------------------------ -----------------------------
George J. Barber, Director
/s/ Channing L. Smith March 30, 1998
- ------------------------------------------ -----------------------------
Channing L. Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Edward J. Statts, Jr. March 30, 1998
- ------------------------------------------ -----------------------------
Edward J. Staats, Jr., Director
/s/ Wayne H. Page March 30, 1998
- ------------------------------------------ -----------------------------
Wayne H. Page, Director
/s/ James C. Lignana March 30, 1998
- ------------------------------------------ -----------------------------
James C. Lignana, Director
/s/ Dominic W. Flamini March 30, 1998
- ------------------------------------------ -----------------------------
Dominic W. Flamini, Director
/s/ Vincent R. Farias March 30, 1998
- ------------------------------------------ -----------------------------
Vincent R. Farias, Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
- -------
3.1 Certificate of Incorporation (Incorporated
by reference to the Registrant's Form S-1
Registration Statement No. 33-24340).
3.2 Bylaws (Incorporated by reference to the
Registrant's Form S-1 Registration Statement
No. 33-24340).
4 Agreement to furnish copy to Securities and Exchange
Commission upon request of Indenture dated July 28,
1994, relating to 10% Subordinated Debentures due
2004 in aggregate principal amount of $10 million.
(Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994).
10.1 Stock Option and Incentive Plan (Incorporated
by reference to the Registrant's Form S-8
Registration Statement No. 33-24340).
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedule
EXHIBIT 13
CORPORATE PROFILE
FMS Financial Corporation is the holding company for Farmers & Mechanics Bank.
Farmers & Mechanics Bank, with total assets of $628 million, is the largest
community bank headquartered in its primary market area of Burlington County,
New Jersey.
Founded in Burlington City in 1871 under the name of Farmers' and Mechanics'
Building and Loan Association, the Bank operates twenty-one banking offices,
all of which are in Burlington County, New Jersey.
The daily stock quotation for FMS Financial Corporation is listed in the
Nasdaq National Market System published in The Wall Street Journal, the
Philadelphia Inquirer and other leading newspapers under the trading symbol of
FMCO.
About our cover -
During 1997 Farmers & Mechanics initiated an advertising campaign to increase
awareness among our present customers and to encourage new accounts. Shown on
our cover are three of our more popular advertisements used during the year.
-1-
<PAGE>
FMS FINANCIAL CORPORATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FINANCIAL CONDITION: (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1996 (A) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $628,403 $541,710 $501,550 $483,776 $445,029
Loans, net 302,831 306,871 288,400 283,260 269,264
Deposits 489,440 453,277 428,809 429,431 406,017
Stockholders' equity 38,916 33,826 33,053 29,159 25,906
</TABLE>
<TABLE>
<CAPTION>
OPERATIONS: (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 (A) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $40,813 $36,841 $35,201 $32,270 $31,510
Interest expense 20,879 18,978 18,041 15,336 16,100
Net interest income 19,934 17,863 17,160 16,934 15,410
Net income 5,491 3,026 4,343 4,455 4,215
Basic earnings per common share 2.30 1.22 1.73 1.73 1.63
Diluted earnings per common share 2.24 1.20 1.69 1.69 1.59
Dividends declared per common share 0.24 0.20 0.20 0 0
Weighted average common shares outstanding 2,388 2,470 2,504 2,576 2,580
Weighted average common shares and common
stock equivalents outstanding 2,449 2,524 2,565 2,642 2,647
</TABLE>
<TABLE>
<CAPTION>
OTHER SELECTED DATA:
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 (A) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest rate spread 3.60% 3.50% 3.49% 3.64% 3.49%
Net interest margin 3.72 3.66 3.66 3.72 3.62
Return on average assets 0.98 0.60 0.89 0.94 0.96
Return on average equity 15.14 8.99 14.00 16.01 17.80
Dividend payout ratio 10.71 16.67 11.83 0.00 0.00
Equity-to-asset ratio 6.19 6.24 6.59 6.03 5.82
</TABLE>
(a) Includes $2.7 million for the one-time special assessment to recapitalize
the SAIF.
-2-
<PAGE>
FMS FINANCIAL CONDITION
- --------------------------------------------------------------------------------
To Our Shareholders:
Farmers & Mechanics Bank had very satisfactory financial results for 1997 and
made significant progress in expanding our branch system and improving customer
service.
Earnings for 1997 look particularly strong because the prior year earnings
were reduced by the assessment required to recapitalize the deposit insurance
fund. Earnings before the assessment were quite good in both years. Deposits
and assets have increased significantly and our interest margin has continued to
be satisfactory due to the growth of low cost core deposits. However, interest
rate spreads are narrowing in the current low interest environment.
Our goal is to improve our coverage of the Burlington County market with
more branch convenience. During 1997, we purchased and reopened existing bank
buildings in Beverly and Tabernacle. We also purchased properties in Browns
Mills and Pemberton for future new branches. In early 1998, we opened a
temporary branch at the Browns Mills location and began construction of a new
branch in Cinnaminson, New Jersey.
During 1997, we introduced free business checking with no balance
requirement and no per check charges. Business accounts have increased
significantly. We also extended banking hours to 9 p.m. weekdays at our main
branch and all drive-thru locations. More branches, longer hours, and
additional services increase our cost of operations and reduce current
profitability, but we view it as a good investment in our franchise.
The trend of mergers and consolidations of banks continues in our market
area, creating new opportunities to attract customers and obtain additional
branch locations. We are convinced that a community bank with real convenience,
good service, and local decision making can compete very effectively against the
larger institutions.
Once again, we wish to thank our customers, our staff, and our shareholders
for their continued support.
Sincerely,
/s/Craig W. Yates /s/Charles B. Yates
Craig W. Yates Charles B. Yates
President Chairman
-3-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Certain forward-looking statements contained herein are subject to risks
and uncertainties. The Corporation's actual results may differ materially from
those set forth in such forward-looking statements. Reference is made to the
Corporation's reports filed with the Securities and Exchange Commission for a
discussion of factors that may cause such differences to occur.
FMS Financial Corporation ("the Corporation") is the parent company of
Farmers & Mechanics Bank ("the Bank"), its only subsidiary. Earnings of the
Corporation are primarily dependent on the earnings of the Bank as the
Corporation has engaged in no significant operations of its own. Accordingly,
the earnings of the Corporation are largely dependent on the receipt of earnings
from the Bank in the form of dividends.
The earnings of the Bank depend primarily on its net interest income. Net
interest income is affected by: (i) the volume of interest-earning assets and
interest-bearing liabilities (see "Rate Volume Analysis"), (ii) rates of
interest earned on interest-earning assets and rates paid on interest-bearing
liabilities and (iii) the difference ("interest rate spread") between average
rates of interest earned on interest-earning assets and average rates paid on
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
The Bank also derives income from service charges on customer deposit
accounts and fees on loans. In addition to interest expense, the Bank incurs
operating expenses such as salaries, employee benefits, deposit insurance
premiums, depreciation, property maintenance and advertising.
ASSET AND LIABILITY MANAGEMENT
The Bank's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Bank utilizes no derivatives to mitigate
its credit risk, relying instead on loan review and an adequate loan loss
reserve. The Bank's policy allows investment only in securities which have a
rating of AA or better. The Bank holds a substantial component of its investment
portfolio in mortgage-backed securities and collateralized mortgage obligations
(collectively, "MBS"). At the end of 1997, the total investment in MBS
amounted to $164.5 million, or 57% of total investments. These are instruments
collateralized by pools of residential and commercial mortgages which return
interest and principal payments to the investor. Approximately 56% of the
Bank's MBS holdings are U.S. Government Agency securities (GNMA, FNMA and
FHLMC), which carry either direct government or quasi-government guarantees and
are rated AAA in terms of quality. The Bank also owns non-agency MBS, issued by
major financial institutions, which are rated AAA and AA. MBSs are generally
very liquid issues with major brokerage houses providing ready markets.
However, MBS are subject to prepayment and extension risk which can adversely
affect their yields and expected maturities.
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 ("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. Interest rate sensitivity is a measure
of the difference between amounts of interest-earning assets and interest-
bearing liabilities which either reprice or mature within a given period of
time.
The difference, or the interest rate repricing "GAP", provides an
indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates over a period of time. A GAP is
considered positive when the amount of interest-rate sensitive assets maturing
or repricing over a specified period of time exceeds the amount of interest-rate
sensitive liabilities maturing or repricing within that period and is considered
negative when the amount of interest-rate sensitive liabilities maturing or
repricing over a specified period of time exceeds the amount of interest-rate
sensitive assets maturing or repricing within that period. Generally, during a
period of rising interest rates, a negative GAP within a given period of time
would adversely affect net interest income, while a positive GAP within such
period of time may result in an increase in net interest income; during a period
of falling interest rates, a negative GAP within a given period of time may
result in an increase in net interest income while a positive GAP within such
period of time may have the opposite effect.
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FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities and borrowings outstanding at December 31, 1997,
which are expected to reprice or mature in each of the future time periods
shown. The amount of assets or liabilities shown which reprice or mature during
a particular period were determined by the contractual terms or assumed decay
rates of the asset or liability. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-backed securities, and
assumes that adjustable-rate mortgage loans will reprice at contractual
repricing intervals. There has been no adjustment for the impact of future loan
commitments and loans in process.
<TABLE>
<CAPTION>
FARMERS & MECHANICS BANK 3 MONTHS 3 MONTHS 1 TO 3 3 TO 5 OVER 5
GAP TABLE OR LESS TO 1 YEAR YEARS YEARS YEARS TOTAL
- --------- ------- --------- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $ 62,768 $ 33,657 $ 17,268 $ 12,065 $ 71,555 $ 197,313
Loans 56,686 43,466 68,799 42,337 94,681 305,969
Mortgage-backed securities 11,320 28,109 18,087 10,599 23,906 92,021
------- ------- ------- ------ ------- -------
Total 130,774 105,232 104,154 65,001 190,142 595,303
------- ------- ------- ------ ------- -------
Interest-bearing liabilities:
Now, Super Now, Passbook and
Club accounts 9,704 28,939 38,509 24,462 36,899 138,513
Money market accounts 11,873 23,019 19,585 3,031 493 58,001
Certificates of Deposit 50,894 104,704 66,534 20,661 257 243,050
Borrowings 2,384 5,750 50,000 25,000 4,321 87,455
------- ------- ------- ------ ------- -------
Total 74,855 162,412 174,628 73,154 41,970 527,019
------- ------- ------- ------ ------- -------
Interest Rate Sensitivity GAP $ 55,919 $ (57,180) $ (70,474) $ (8,153) $ 148,172 $ 68,284
========== =========== ========= ======== ========== ==========
Cumulative Interest Rate $ 55,919 $ (1,261) $ (71,735) $(79,888) $ 68,284
Sensitivity GAP ========== =========== ========= ======== ==========
Ratio of Interest Rate
Sensitive Assets to Interest
Rate Sensitive Liabilities 174.70% 64.79% 59.64% 88.86% 453.04% 112.96%
====== ===== ===== ===== ====== ======
RATIO OF CUMULATIVE GAP TO TOTAL 8.90% -0.20% -11.42% -12.71% 10.87%
BANK ASSETS ==== ==== ===== ===== =====
</TABLE>
The Bank's analysis of its interest-rate sensitivity incorporates certain
assumptions concerning the amortization of loans and other interest-earning
assets and the repricing characteristics of deposits. The Bank has made the
following assumptions in calculating the values in the GAP table: adjustable-
rate mortgage loans have a constant prepayment rate of 15%; fixed-rate mortgage
loans have a prepayment rate that is constant through time at 8.0%; fixed and
adjustable rate commercial loans have a constant prepayment rate of 10%;
consumer loans have a prepayment rate that is constant over time at 12%;
mortgage-backed securities and CMOs and REMICs have a prepayment rate that is
constant over time at 12%. Core savings and NOW checking deposits have a decay
rate of 17% and money market accounts have a decay rate of 80%. These decay
rates are based on FHLB assumption rates using industry experience adjusted by
the Bank as needed to reflect our individual experience. The interest-rate
sensitivity of the Bank's assets and liabilities illustrated in the table could
vary substantially if different assumptions were used or if actual experience
differs from the assumptions used.
The table indicates the time period in which interest-earning assets and
interest-bearing liabilities will mature or reprice in accordance with their
contractual terms or assumed decay rates, as applicable. However, this table
does not necessarily indicate the impact of general interest rate movements on
the Bank's net interest income because the repricing of various
categories of assets and liabilities is discretionary and is subject
to competition and other pressures. As a result, various assets and liabilities
indicated as repricing within the same period may in fact reprice at different
times and at different rate levels.
Interest rate risk exposure is also measured using interest rate
sensitivity analysis to determine the Bank's change in NPV in the event of
hypothetical changes in interest rates. If potential changes to NPV and net
interest income resulting from hypothetical interest rate changes are not within
the limits established 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.
-5-
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FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The Bank also measures its interest rate risk using the OTS's NPV method.
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources. An institution's
interest rate risk is measured as the change to its NPV as a result of a
hypothetical immediate 200 basis point change in market interest rates. Based on
this analysis at December 31, 1997, the Bank would experience a 227 basis point
decrease in its NPV as a percent of assets if rates rise by 200 basis points in
comparison to a flat rate scenario and a 93 basis point increase in NPV if rates
decline 200 basis points.
Although the NPV calculation provides an indication of the Bank's interest
rate risk at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
RESULTS OF OPERATIONS
Net Interest Income
The earnings of the Corporation 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 including non-interest checking
accounts and borrowings. Net interest income is a function of the interest
rate spread, which is the difference between the weighted average yield earned
on interest-earning assets and the weighted average rate paid on interest-
bearing liabilities, as well as the average balance of interest-earning assets
as compared to interest-bearing liabilities. Net income is also affected by
non-interest income, such as gains (losses) on the sale of loans and
investments, provision for loan losses and real estate owned, service charges
and other fees, and operating expenses.
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average rates paid on liabilities for the periods indicated. Such yields and
rates are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods presented.
AVERAGE BALANCES, INTEREST AND YIELDS/RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------- -------- ---------- ------- -------- ---------- ------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 310,540 $ 25,038 8.06% $ 296,276 $ 23,797 8.03% $ 289,665 $ 23,572 8.14%
Mortgage-backed securities 97,013 7,062 7.28% 107,268 7,499 6.99% 122,838 8,034 6.54%
Investment securities 127,937 8,713 6.81% 84,762 5,545 6.54% 55,798 3,595 6.44%
--------- -------- ---- --------- --------- ---- ---------- --------- ----
Total interest-earning
assets 535,490 40,813 7.62% 488,306 36,841 7.54% 468,301 35,201 7.52%
--------- -------- ---- --------- --------- ---- ---------- --------- ----
Interest-bearing liabilities:
Deposits 474,258 17,755 3.74% 429,413 16,176 3.77% 419,394 15,961 3.81%
Borrowings 34,776 2,067 5.94% 29,450 1,745 5.93% 17,889 1,031 5.76%
Subordinated Debentures 10,000 1,057 10.57% 10,000 1,057 10.57% 10,000 1,049 10.49%
--------- -------- ---- --------- --------- ---- ---------- --------- ----
Total interest-bearing
liabilities $ 519,034 20,879 4.02% 468,863 18,978 4.05% $ 447,283 18,041 4.03%
========= ====== ==== ======= ====== ==== ========== ====== ====
Net interest income $ 19,934 $ 17,863 $ 17,160
======== ========= =========
Interest rate spread 3.60% 3.50% 3.49%
==== ==== ====
Net yield on average interest-
earning assets 3.72% 3.66% 3.66%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabiltites 103.17% 104.15% 104.70%
====== ====== ======
</TABLE>
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FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
RATE VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rates; (ii) changes in volume; (iii) total change in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). Because average balances on loans include non-
performing loans which reduce the computed yield, a higher level of non-
performing loans affects both the changes due to volume and rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
-------------------------------------- ------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
-------------------------------------- ------------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
---- ------ ----- ---- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 95 $ 1,146 $ 1,241 $ (313) $ 538 $ 225
Mortgage-backed securities 280 (717) (437) 483 (1,018) (535)
Investment securities 344 2,824 3,168 84 1,866 1,950
----------- ---------- ----------- ---------- ----------- --------
Total change - interest
income 719 3,253 3,972 254 1,386 1,640
Interest expense:
Deposits (110) 1,689 1,579 (166) 381 215
Borrowings 6 316 322 48 666 714
Subordinated Debentures 0 0 0 8 0 8
----------- ---------- ----------- ---------- ----------- --------
Total change - interest
expense (104) 2,005 1,901 (110) 1,047 937
----------- ---------- ----------- ---------- ----------- --------
Net change in net interest
income $ 823 $ 1,248 $ 2,071 $ 364 $ 339 $ 703
=========== ======== =========== ========== =========== ========
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
generally require the measurement of financial position and operating results in
terms of historical dollars (except investments available for sale), without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
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 March 1997, the FASB issued Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings per Share", which supersedes Accounting
Principles Board Opinion No. 15, "Earnings per Share", and was adopted by the
Corporation for the fiscal year ended December 31, 1997. This statement
requires restatement of all prior-period earnings per share data presented.
SFAS No. 128 establishes standards by simplifying the computation and
presentation of earnings per share (EPS), and applies to entities with publicly
held common stock or potential common stock. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires 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
-7-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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.
In June 1996, the FASB issued the Statement of Financial Accounting
Standards No. 125 (SFAS No. 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" for which certain
provisions are 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. SFAS No. 125,
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the concept of
control. The adoption of SFAS No. 125 did not have a material effect on the
financial position or results of operation of the Corporation.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), "Reporting Comprehensive Income", which is effective
for the Corporation beginning January 1, 1998, and requires restatement of all
prior-period financial statements presented for comparative purposes. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It is anticipated that the
adoption of SFAS No. 130 in 1998 will not have a material effect on the
financial position or results of operation of the Corporation.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1997 AND 1996.
Net Income
The Corporation and its subsidiary recorded net income of $5.5 million for
the year ended December 31, 1997, or $2.24 diluted earnings per share as
compared to net income of $3.0 million, or $1.20 diluted earnings per share for
the year ended December 31, 1996. Net interest income was $19.9 million in 1997
compared to $17.9 million in 1996. Provisions for loan losses were $400
thousand in 1997 compared to $120 thousand in 1996. Other income totaled $2.1
million in 1997 compared to $2.3 million for the same period in 1996. Total
operating expenses for the year ended December 31, 1997 were $13.0 million
compared to $15.7 million in the previous year which included $2.7 million for
the one-time special assessment to recapitalize the Savings Association
Insurance Fund. During 1997, the Corporation declared dividends which totaled
$.24 per share which resulted in a dividend payout ratio of 10.71%. The ability
of the Corporation to pay dividends to shareholders is directly dependent upon
the ability of the Bank to pay dividends to the Corporation. See Stockholders'
Equity footnote.
Interest Income
Total interest income increased $4.0 million to $40.8 million in 1997 from
$36.8 million in 1996. The increase is attributable to increases in interest
income on investment securities of $3.2 million and loans of $1.2 million,
partially offset by a decrease in interest income on mortgage-backed securities
of $437 thousand.
The increase in interest income on investment securities was due to a $43.1
million increase in the average balance of investment securities to $127.9
million in 1997 from $84.8 million in 1996. The investment portfolio increased
primarily due to the net purchase in 1997 of $59.0 million in collateralized
mortgage obligations (CMOs), partially offset by $10.3 million in principal
paydowns, $35.4 million in U.S. Agency notes and $10.2 million in reverse
repurchase agreements. The increases in the average balance of investment
securities resulted in an increase in interest income of $2.8 million in 1997
from the previous year. Average yields increased to 6.81% in 1997 from 6.54% in
1996, which resulted in an increase in interest income of $344 thousand.
The average balance of the loan portfolio increased $14.2 million to $310.5
million in 1997 from $296.3 million in 1996. In August 1996 the Bank purchased
$14.5 million of adjustable rate mortgages from First Tennessee Bank. These
loans are residential mortgages on properties primarily located within the
Bank's lending area of Burlington County, NJ. The 1997 increase in loan volume
resulted in a $1.1 million increase in interest income. The average yield on
the loan portfolio increased to 8.06% in 1997 from 8.03% in 1996 which resulted
in an increase in interest income of $95 thousand.
Interest income on mortgage-backed securities decreased $437 thousand in
1997 due to volume decreases in the portfolio, partially offset by increases in
the yield on the portfolio. The average balance of the portfolio decreased $10.3
million to $97.0 million in 1997 from $107.3 million in 1996, resulting in a
decrease in interest income of $717 thousand. The decline in the average balance
is primarily due to principal paydowns of $21.6 million, partially offset by
purchases of $9.4 million during the year. The average yield on the portfolio
increased to 7.28% in 1997 from 6.99% in 1996, which resulted in an increase in
interest income of $280 thousand.
-8-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Interest Expense
Total interest expense increased $1.9 million to $20.9 million in 1997 from
$19.0 million in 1996. The increase was due to an increase in interest expense
on deposits and borrowings.
Interest expense on deposits increased $1.6 million to $17.8 million in
1997 from $16.2 million in 1996. The average balance of deposits increased $44.8
million to $474.2 million in 1997 from $429.4 million in 1996, resulting in an
increase in interest expense of $1.7 million. Increases in deposits in 1997 are
primarily due to increases in the average balances of checking accounts of
$17.2 million, certificates of deposit accounts of $14.4 million and savings
accounts of $11.0 million. These increases were partially offset by a decline in
the average rate paid on deposits of 3 basis points to 3.74% in 1997 from 3.77%
in 1996, resulting in a decrease in interest expense of $110 thousand. The
lowering of the average rate on deposits in 1997 was due to an increase in the
average balance of non-interest "Free Checking" accounts of $12.7 million.
Interest expense on borrowings increased $322 thousand to $2.1 million in
1997 from $1.7 million in 1996. This increase was due to an increase in the
average balance of borrowings as well as an increase in the average rate. The
average balance of borrowings increased $5.3 million to $34.8 million in 1997
from $29.5 million in 1996, resulting in a $316 thousand increase in interest
expense due to volume. This was primarily the result of a $8.9 million increase
in the average balance of repurchase agreements during the year. The average
rate on borrowings increased to 5.94% in 1997 from 5.93% in 1996, resulting in a
$6 thousand increase in interest expense due to rate.
Provision For Loan Losses
The provision for loan losses increased $280 thousand to $400 thousand in
1997 from $120 thousand in 1996. At December 31, 1997 the allowance for possible
loan losses amounted to $3.1 million or 1.0% of the total loan compared to $2.8
million or .9% at December 31, 1996. The determination of the allowance level
for loan losses is based on management's analysis of risk characteristics of
various classifications of loans, previous loan loss experience, estimated fair
value of the underlying collateral and current economic conditions.
Other Income (Expense)
Other income from operations decreased $152 thousand to $2.1 million in
1997 compared with $2.3 million in 1996.
Loss from real estate held for development of $200 thousand was the result
of an increase in the valuation allowance for the loss on the sale of one of the
land development properties in 1997.
Real estate owned operations, net in 1997 resulted in a loss of $180
thousand, which was comprised of $48 thousand in real estate owned operating
expenses, $123 thousand of provisions for loss on real estate, net of charge-
offs, and realized gains of $11 thousand on the sale of real estate owned
properties.
Service charges on accounts increased $258 thousand to $2.2 million in
1997 from $1.9 million in 1996. The increase is the result of additional retail
banking fees due to higher transaction volume during the year.
Operating Expenses
Total operating expenses decreased $2.7 million to $13.0 million in 1997
from $15.7 million in 1996. The decrease in operating expenses was primarily
due to the absence in 1997 of the one-time special assessment of $2.7 million in
1996 charged in connection with the federal legislation requiring the
recapitalization of the Savings Association Insurance Fund (SAIF).
Salaries and benefits increased $276 thousand to $7.3 million in 1997 from
$7.0 million in 1996. The increase was due to additional staff in the new
branches opened during the year as well as an increase in branch staff for
additional operating hours, principally for "Sunday Banking" and extended
weekday hours until 9:00 p.m. Average full time equivalent employees during
1997 were 299 as compared to 236 during 1996.
Occupancy and equipment expense increased $174 thousand to $2.7
million in 1997 from $2.5 million in 1996. This increase is due to additional
depreciation and occupancy expenses on two new branches opened in 1997, as well
as other facility and equipment additions and improvements during the year.
Federal deposit insurance premiums decreased $714 thousand to $233 thousand
in 1997 from $947 thousand in 1996. The decrease reflects the reduction in rates
charged by the FDIC to $.065 per $100 of deposits during 1997 from $.23 per $100
in 1996, partially offset by an increase in average deposits of the Bank.
Purchased services expense increased $155 thousand to $1.1 million in
1997 from $917 thousand in 1996. This increase is primarily the result of an
increase in check processing costs of $59 thousand and MAC charges of $53
thousand.
Advertising expense increased by $86 thousand to $129 thousand in 1997 from
$43 thousand in 1996. The Bank has initiated a newspaper and television
advertising campaign emphasizing our twenty-one branch locations and increased
hours of operations.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1996 AND 1995.
Net Income
The Corporation and its subsidiary recorded net income of $3.0 million for
the year ended December 31, 1996, or $1.20 diluted earnings per share as
compared to net income of $4.3 million, or $1.69 diluted earnings per share for
the year ended December 31, 1995. Net interest income was $17.9 million in 1996
compared to $17.2 million in 1995. Provisions for loan losses remained
consistent at $120 thousand during 1996 and 1995. Other income totaled $2.3
million in 1996 compared to $1.7 million for the same period in 1995. Total
operating expenses for the year ended December 31, 1996 were
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<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
$15.7 million (includes $2.7 million for the one-time special assessment to
recapitalize the Savings Association Insurance Fund) compared to $11.9 million
in the previous year. During 1996, the Corporation declared dividends which
totaled $.20 per share which resulted in a dividend payout ratio of 16.67%.
Interest Income
Total interest income increased $1.6 million to $36.8 million in 1996 from
$35.2 million in 1995. The increase is attributable to increases in interest
income on investment securities of $1.9 million and loans of $225 thousand,
partially offset by a decrease in interest income on mortgage-backed securities
of $535 thousand.
The increase in interest income on investment securities was due to a $29.0
million increase in the average balance of investment securities to $84.8
million in 1996 from $55.8 million in 1995. The investment portfolio increased
due to the net purchase of $9.7 million in U.S. Agency notes and net increase of
$11.0 million in reverse repurchase agreements and $7.5 million in
collateralized mortgage obligations. The increase in the average balance of
investment securities resulted in an increase in interest income of $1.9
million. The average yield increased to 6.54% in 1996 from 6.44% in 1995, which
resulted in an increase in interest income of $84 thousand.
The average balance of the loan portfolio increased $6.6 million to $296.3
million in 1996 from $289.7 million in 1995. During the year, the Bank purchased
$14.5 million of adjustable rate mortgages from First Tennessee Bank. These
loans are residential mortgages on properties primarily located within the
Bank's lending area of Burlington County, NJ. The loan volume increase resulted
in a $538 thousand increase in interest income, partially offset by a $313
thousand decrease in interest income attributed to an 11 basis point decrease in
the average yield on the loan portfolio. The average yield on the loan portfolio
decreased to 8.03% in 1996 from 8.14% in 1995.
Interest income on mortgage-backed securities decreased $535 thousand in
1996 due to a volume decrease of the portfolio, partially offset by an increase
in the yield on the portfolio. The average balance of the portfolio decreased
$15.5 million to $107.3 million in 1996 from $122.8 million in 1995, resulting
in a decrease in interest income of $1.0 million. The decline in the average
balance is due to $24.4 million of principal paydowns, partially offset by
mortgage-backed securities purchases of $17.5 million during the year. The
average yield on the portfolio increased to 6.99% in 1996 from 6.54% in 1995,
which resulted in an increase in interest income of $483 thousand.
Interest Expense
Total interest expense increased $937 thousand to $19.0 million in 1996
from $18.0 million in 1995. The increase was due to an increase in interest
expense on deposits and borrowings.
Interest expense on deposits increased $215 thousand to $16.2 million in
1996 from $16.0 million in 1995. The average balance of deposits increased $10.0
million to $429.4 million in 1996 from $419.4 million in 1995, resulting in an
increase in interest expense of $381 thousand. The increase in deposits is
primarily due to an increase in the average balance of checking accounts in 1996
of $9.2 million to $72.8 million. This increase was partially offset by a
decline in the average rate paid on deposits of 4 basis points to 3.77% in 1996
from 3.81% in 1995, resulting in a decrease in interest expense of $166
thousand.
Interest expense on borrowings increased $714 thousand to $1.7 million in
1996 from $1.0 million in 1995. This increase was due to an increase in the
average balance of borrowings as well as an increase in the average rate. The
average balance of borrowings increased to $29.5 million in 1996 from $17.9
million in 1995, resulting in a $666 thousand increase in interest expense due
to volume. This was primarily the result of a $11.7 million increase in the
average balance of advances from the Federal Home Loan Bank during the year. The
average rate on borrowings increased to 5.93% during 1996 from 5.76% during
1995, resulting in a $48 thousand increase in interest expense due to rate.
Provision For Loan Losses
The provision for loan losses remained constant at $120 thousand during
1996 and 1995. The determination of the allowance level for loan losses is based
on management's analysis of risk characteristics of various classifications of
loans, previous loan loss experience, estimated fair value of the underlying
collateral and current economic conditions.
Other Income (Expense)
Other income from operations was $2.3 million in 1996 compared with $1.7
million in 1995.
Real estate owned operations, net in 1996 resulted in a loss of $175
thousand, which was comprised of $43 thousand in real estate owned operating
expenses, $124 thousand of provisions for loss on real estate, net of charge-
offs, and a $8 thousand loss on the sale of real estate owned properties.
Service charges on accounts increased $427 thousand to $1.9 million in 1996
from $1.5 million in 1995. The increase is the result of additional retail
banking fees due to higher transaction volume during the year.
Operating Expenses
Total operating expenses increased $3.8 million to $15.7 million in 1996
from $11.9 million in 1995. The increase in operating expenses was primarily
due to the one-time special assessment of $2.7 million charged in connection
with the federal legislation requiring the recapitalization of the Savings
Association Insurance Fund. Operating expenses also increased as a result of
opening four additional branches during 1996.
On September 30, 1996, the President signed legislation which required
savings institutions with SAIF insured deposits to pay a one-time special
assessment to facilitate the recapitalization of the SAIF. The assessment
-10-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
was based on 65.7 cents per $100 of deposits at March 31, 1995. This assessment
resulted in a charge of approximately $2.7 million to operating expense during
the year ended December 31, 1996. The legislation also includes provisions
whereby at such time as the SAIF is adequately recapitalized, the Bank's future
deposit premiums will decrease from $.23 per $100 of deposits paid during 1996
to approximately $.065 in 1997 through the year 2000 and approximately $.025
through the year 2017.
Salaries and benefits increased $758 thousand to $7.0 million in 1996 from
$6.3 million in 1995. The increase was due to additional staff in the new
branches opened during the year as well as an increase in branch staff for
additional operating hours, principally for "Sunday Banking". Average full
time equivalent employees during 1996 were 236 as compared to 209 during 1995.
Occupancy and equipment expense increased $488 thousand to $2.5 million in
1996 from $2.1 million in 1995. This increase is due to additional depreciation
and occupancy expenses on four new branches opened in 1996, as well as other
facility and equipment additions and improvements during the year.
Purchased services expense decreased $105 thousand to $917 thousand in 1996
from $1.0 million in 1995. This decrease includes a reduction in check
processing costs attributed to the implementation of an in-house check
processing system in October 1995. The decrease in check processing costs were
partially offset by an increase in MAC charges of $83 thousand.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to fund loans, withdrawals
of deposits and other cash outflows in a cost effective manner. The Bank's
primary sources of funds are deposits and scheduled amortization and prepayments
of loan principal. The Bank also obtains funds from the sale and maturity of
investment securities and short-term investments as well as the maturity of
mortgage-backed securities and funds provided by operations. During the past
several years, the Bank has used such funds primarily to meet its ongoing
commitments to fund maturing time deposits and savings withdrawals, to fund
existing and continuing loan commitments and to maintain liquidity. While the
Bank has been able to fund its operations internally during recent periods, it
has periodically supplemented its liquidity needs with securities sold under
agreements to repurchase (repurchase agreements) and advances from the Federal
Home Loan Bank of New York (FHLB). At December 31, 1997 the Bank had $60.0
million in repurchase agreements and $24.5 million in advances from the FHLB of
New York. While loan payments, maturing investments and mortgage-backed
securities are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank's liquidity is also influenced by the
level of demand for funding loan originations.
The Bank is required under applicable federal regulations to maintain a
specified level of "liquid investments", which include certain United States
government and federal agency securities and other approved investments.
Regulations currently in effect require the Bank to maintain liquid assets of
not less than 4% of its withdrawable accounts plus short-term borrowings. These
levels are changed from time to time by the regulators to reflect the current
economic conditions. The Bank has generally maintained liquidity in excess of
the required level. The Bank's regulatory liquidity was 11.46% at December 31,
1997.
The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 1998 is approximately $102.3 million. To
the extent these deposits do not remain at the Bank upon maturity, the Bank
believes it can replace these funds with deposits, FHLB advances or outside
borrowings. It has been the Bank's experience that a substantial portion of such
maturing deposits remain with the Bank.
At December 31, 1997, the Bank had loan commitments outstanding of $25.5
million, of which $3.6 million were for fixed-rate loans and $21.9 million were
for adjustable-rate loans. Funds required to fulfill the commitments are
derived primarily from loan repayments, net deposit inflows or, when
appropriate, borrowings.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") the Bank must have core capital equal to 3% of assets, of
which 1.5% must be tangible capital, excluding goodwill. FIRREA also
established risk-based capital standards. In measuring the Bank's compliance
with FIRREA capital standards, the Bank must deduct from its regulatory capital
calculation investments in, and advances to, subsidiaries engaged in activities
not permissible for national banks. At December 31, 1997, the Bank exceeded all
three required regulatory capital levels. At December 31, 1997, the Bank's
regulatory tangible and core capital was $44.1 million or 7.05% of total bank
assets and risk-based capital was $47.0 million or 15.85% of risk-weighted
assets.
-11-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)
The following table presents summarized quarterly data for 1997 and 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
1997 QUARTER QUARTER QUARTER QUARTER YEAR
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total interest income $ 9,744 $ 10,080 $ 10,267 $ 10,722 $ 40,813
Total interest expense 4,978 5,092 5,184 5,625 20,879
---------- -------- --------- -------- ------------
Net interest income 4,766 4,988 5,083 5,097 19,934
Provision for loan losses 30 50 60 260 400
---------- -------- --------- -------- ------------
Net interest income after provision
for loan losses 4,736 4,938 5,023 4,837 19,534
Total other income 582 569 542 408 2,101
Total operating expenses 3,204 3,221 3,384 3,208 13,017
---------- -------- --------- -------- ------------
Income before income taxes 2,114 2,286 2,181 2,037 8,618
Federal and state income taxes 766 829 787 745 3,127
---------- -------- --------- -------- ------------
Net income $ 1,348 $ 1,457 $ 1,394 $ 1,292 $ 5,491
========== ======== ========= ======== ============
Basic earnings per common share $ 0.56 $ 0.61 $ 0.58 $ 0.55 $ 2.30
========== ======== ========= ======== ============
Diluted earnings per common share $ 0.55 $ 0.60 $ 0.57 $ 0.52 $ 2.24
========== ======== ========= ======== ============
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
1996 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income $ 8,847 $ 9,028 $ 9,415 $ 9,551 $ 36,841
Total interest expense 4,657 4,663 4,834 4,824 18,978
---------- -------- --------- -------- ------------
Net interest income 4,190 4,365 4,581 4,727 17,863
Provision for loan losses 30 30 30 30 120
---------- -------- --------- -------- ------------
Net interest income after provision
for loan losses 4,160 4,335 4,551 4,697 17,743
Total other income 497 484 601 671 2,253
Total operating expenses 3,088 3,222 6,007(a) 3,374 15,691(a)
---------- -------- --------- -------- ------------
Income before income taxes 1,569 1,597 (855) 1,994 4,305
Federal and state income taxes 567 485 (385) 612 1,279
---------- -------- --------- -------- ------------
Net income $ 1,002 $ 1,112 $ (470) $ 1,382 $ 3,026
========== ======== ========= ======== ============
Basic earnings per common share $ 0.40 $ 0.45 $ (0.19) $ 0.56 $ 1.22
========== ======== ========= ======== ============
Diluted earnings per common share $ 0.39 $ 0.44 $ (0.19) $ 0.56 $ 1.20
========== ======== ========= ======== ============
</TABLE>
(a) Includes $2.7 million for the one-time special assessment to recapitalize
the SAIF.
-12-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 11,637,181 $ 9,572,347
Interest-bearing deposits 826,823 296,702
Short term funds 167,618 50,500
-------------- ----------------
Total cash and cash equivalents 12,631,622 9,919,549
-------------- ----------------
Investment securities held to maturity 112,349,476 67,601,343
Investment securities available for sale 80,338,661 25,446,520
Loans, net 302,831,031 306,870,816
Mortgage-backed securities held to maturity 92,020,517 104,312,581
Accrued interest receivable:
Loans 1,750,966 1,754,117
Mortgage-backed securities 715,981 831,821
Investments 1,934,925 1,045,097
Federal Home Loan Bank stock 3,630,800 3,620,600
Real estate held for development, net 644,487 1,227,732
Real estate owned, net 446,361 621,556
Office properties and equipment, net 15,692,055 14,756,238
Deferred income taxes 1,507,307 1,563,480
Excess cost over fair value of net assets acquired 469,444 812,599
Prepaid expenses and other assets 1,061,125 889,899
Subordinated Debentures issue costs, net 378,460 435,809
-------------- ----------------
TOTAL ASSETS $ 628,403,218 $ 541,709,757
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 489,439,980 $ 453,276,534
Securities sold under agreements to repurchase 60,000,000 0
Advances from the Federal Home Loan Bank 24,496,476 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 33,481 106,463
Advances by borrowers for taxes and insurance 2,192,541 2,138,638
Accrued interest payable 1,114,304 860,545
Dividends payable 167,154 119,636
Other liabilities 2,043,465 2,140,009
-------------- ----------------
Total liabilities 589,487,401 507,883,583
-------------- ----------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.10 par value 5,000,000 shares authorized; none issued
Common stock - $.10 par value 10,000,000 shares authorized; shares
issued 2,604,370 and 2,602,884, and shares outstanding 2,387,916
and 2,392,707 as of December 31, 1997 and 1996, respectively 260,437 260,288
Paid-in capital 8,419,167 8,413,558
Unrealized gain(loss) on securities available for sale, net of deferred income taxes 53,955 (166,152)
Guarantee of employee stock ownership plan debt (33,481) (106,463)
Retained earnings 33,406,060 28,487,903
Less: Treasury stock (216,454 and 210,177 shares, at cost, as of
December 31, 1997 and 1996, respectively) (3,190,321) (3,062,960)
-------------- ----------------
Total stockholders' equity 38,915,817 33,826,174
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 628,403,218 $ 541,709,757
============== ================
</TABLE>
See notes to consolidated financial statements.
-13-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest income on:
<S> <C> <C> <C>
Loans $ 25,037,855 $ 23,797,512 $ 23,572,092
Mortgage-backed securities 7,062,459 7,499,231 8,033,982
Investments 8,712,928 5,544,668 3,594,867
------------- ------------------- --------------
Total interest income 40,813,242 36,841,411 35,200,941
------------- ------------------- --------------
INTEREST EXPENSE:
Interest expense on:
Deposits 17,754,531 16,176,223 15,961,110
Subordinated Debentures 1,057,348 1,057,348 1,049,015
Borrowings 2,066,929 1,745,032 1,031,043
------------- ------------------- --------------
Total interest expense 20,878,808 18,978,603 18,041,168
------------- ------------------- --------------
NET INTEREST INCOME 19,934,434 17,862,808 17,159,773
PROVISION FOR LOAN LOSSES 400,000 120,000 120,000
------------- ------------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 19,534,434 17,742,808 17,039,773
------------- ------------------- --------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 170,766 219,639 269,977
Gain on sale of loans 9,804 8,432 8,836
Gain on sale of investment securities 1,711 54,406 0
Loss from real estate held for development (200,000) 0 (200,000)
Real estate owned operations, net (179,879) (174,503) (91,986)
Service charges on accounts 2,204,167 1,946,307 1,519,078
Other income 94,664 199,097 184,687
------------- ------------------- --------------
Total other income (expense) 2,101,233 2,253,378 1,690,592
------------- ------------------- --------------
OPERATING EXPENSES:
Salaries and employee benefits 7,319,822 7,043,584 6,285,898
Occupancy and equipment 2,715,513 2,541,296 2,053,513
Purchased services 1,071,697 916,803 1,021,442
Federal deposit insurance premiums 232,739 946,594 973,503
SAIF recapitalization assessment 0 2,720,765 0
Professional fees 331,436 285,972 367,160
Advertising 129,278 42,956 25,250
Other 1,216,951 1,192,896 1,189,114
------------- ------------------- --------------
Total operating expenses 13,017,436 15,690,866 11,915,880
------------- ------------------- --------------
INCOME BEFORE INCOME TAXES 8,618,231 4,305,320 6,814,485
------------- ------------------- --------------
INCOME TAXES:
Current 3,195,477 2,044,225 2,526,805
Deferred (68,400) (764,726) (55,724)
------------- ------------------- --------------
Total income taxes 3,127,077 1,279,499 2,471,081
------------- ------------------- --------------
NET INCOME $ 5,491,154 $ 3,025,821 $ 4,343,404
============= =================== ==============
BASIC EARNINGS PER COMMON SHARE $2.30 $1.22 $1.73
===== ===== =====
DILUTED EARNINGS PER COMMON SHARE $2.24 $1.20 $1.69
===== ===== =====
Weighted average common shares outstanding 2,388,485 2,470,361 2,504,322
Potential dilutive effect of the exercise of stock options 60,288 53,954 60,844
--------- --------- ---------
Adjusted weighted average common shares outstanding 2,448,773 2,524,315 2,565,166
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
-14-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,491,154 $ 3,025,821 $ 4,343,404
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 400,000 120,000 120,000
Depreciation and amortization 1,876,773 1,639,469 1,622,710
Provision for real estate owned 142,630 124,315 354,453
Provision for real estate held for development 200,000 0 200,000
Realized (gains) and losses on:
Sale of loans and loans held for sale (9,804) (8,432) (8,836)
Sale of investments available for sale (1,711) (54,406) 0
Disposal and sale of fixed assets 7,122 7,240 3,836
Sale of real estate owned (10,630) 8,235 (177,197)
Proceeds from sale of loans held for sale 101,625 112,226 257,989
Loans originated for sale (100,000) (110,000) (254,000)
Increase in accrued interest receivable (770,837) (24,702) (533,227)
(Increase) Decrease in prepaid expenses and other assets (171,226) (120,213) 348,840
Increase (Decrease) in accrued interest payable 253,759 (27,911) 50,762
(Decrease) Increase in other liabilities (46,544) 241,148 (15,899)
Provision for deferred income taxes (67,530) (705,382) (55,724)
Other 72,982 75,981 75,981
--------------- --------------- -------------
Net cash provided by operating activities 7,367,763 4,303,389 6,333,092
--------------- --------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 953,442 846,443 868,725
Real estate held for development 333,245 0 0
Real estate owned 75,630 396,519 1,022,006
Office properties and equipment 0 1,700 0
Proceeds from maturities of investment securities held to maturity 265,776,982 157,566,650 35,549,229
Proceeds from maturities of investment securities available for sale 11,942,666 16,327,791 13,767,144
Principal collected and proceeds from sale of mortgage-backed securities 33,458,783 32,335,567 21,454,381
Principal collected on loans, net 53,020,808 52,372,663 40,393,832
Longer-term loans originated or acquired, net (50,305,474) (72,113,495) (46,373,552)
Purchase of investment securities and mortgage-backed securities held to maturity (320,005,763) (199,107,774) (62,865,500)
Purchase of investment securities available for sale (78,570,231) (26,797,361) (21,317,509)
(Purchase) Redemption of Federal Home Loan Bank stock (10,200) 437,500 (329,700)
Purchase of office property and equipment (2,077,581) (3,271,960) (3,037,422)
Net cash received from deposit and branch purchase, net 0 9,044,846 0
--------------- --------------- -------------
Net cash used by investing activities (85,407,693) (31,960,911) (20,868,366)
--------------- --------------- -------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 27,376,384 3,813,048 (5,609,287)
Net increase in time deposits 2,095,304 11,470,940 4,987,853
Net (decrease) increase in FHLB advances and advances from Bank (8,053,524) 14,741,758 14,430,000
Proceeds from securities sold under agreements to repurchase 60,000,000 0 0
Principal repayment of employee stock ownership plan debt (72,982) (75,981) (75,981)
Increase (Decrease) in advances from borrowers for taxes and insurance 53,903 45,508 (12,151)
Purchase of treasury stock (127,361) (1,913,191) (249,219)
Dividends paid on common stock (525,479) (495,434) (375,213)
Net proceeds from issuance of common stock 5,758 4,843 44,307
--------------- --------------- -------------
Net cash provided by financing activities 80,752,003 27,591,491 13,140,309
--------------- --------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,712,073 (66,031) (1,394,965)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,919,549 9,985,580 11,380,545
--------------- --------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,631,622 $ 9,919,549 $ 9,985,580
=============== =============== =============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 20,625,049 $ 19,006,514 $ 17,990,406
Income taxes 3,456,506 1,647,476 2,503,591
Non cash investing and financing activities:
Transfer of securities to available for sale during FASB 115
suspension period 0 0 4,979,408
Dividends declared and not paid at year end 167,154 119,636 125,288
Non-monetary transfers from loans to real estate acquired
through foreclosure 32,435 481,833 56,527
</TABLE>
See notes to consolidated financial statements.
-15-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GUARANTEE OF
GAIN (LOSS) ON EMPLOYEE
SECURITIES STOCK TOTAL
COMMON PAID-IN AVAILABLE OWNERSHIP RETAINED TREASURY STOCKHOLDER
STOCK CAPITAL FOR SALE, NET PLAN DEBT EARNINGS STOCK EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 129,510 $8,495,186 $ (415,872)$ (258,425)$ 22,108,961 $ (900,550) $ 29,158,810
Net Income 4,343,404 4,343,404
Dividends declared (500,501) (500,501)
Gain on securities available
for sale, net 179,718 179,718
Decrease in guarantee of
employee stock ownership plan debt 75,981 75,981
Exercise of stock options 572 43,735 44,307
Purchase of common stock (249,219) (249,219)
Two-for-one stock split 130,081 (130,081) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 260,163 8,408,840 (236,154) (182,444) 25,951,864 (1,149,769) 33,052,500
Net Income 3,025,821 3,025,821
Dividends declared (489,782) (489,782)
Gain on securities available
for sale, net 70,002 70,002
Decrease in guarantee of
employee stock ownership plan debt 75,981 75,981
Exercise of stock options 125 4,718 4,843
Purchase of common stock (1,913,191) (1,913,191)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 260,288 8,413,558 (166,152) (106,463) 28,487,903 (3,062,960) 33,826,174
Net Income 5,491,154 5,491,154
Dividends declared (572,997) (572,997)
Gain on securities available
for sale, net 220,107 220,107
Decrease in guarantee of
employee stock ownership plan debt 72,982 72,982
Exercise of stock options 149 5,609 5,758
Purchase of common stock (127,361) (127,361)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 260,437 $8,419,167 $ 53,955 $(33,481)$ 33,406,060 $ (3,190,321) $ 38,915,817
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
-16-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles. The consolidated financial statements
include the accounts of FMS Financial Corporation ("the Corporation"), Farmers
& Mechanics Bank, and its wholly-owned subsidiaries ("the Bank"). Material
intercompany accounts and transactions have been eliminated in consolidation.
REGULATORY AUTHORITIES
The regulatory agency overseeing savings associations is the Office of
Thrift Supervision ("OTS") and the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC").
At periodic intervals, both the OTS and the FDIC routinely examine the
Corporation as part of their legally prescribed oversight of the savings and
loan industry. Based on these examinations, the regulators can direct that the
Corporation's financial statements be adjusted in accordance with their
findings. In addition, the Corporation is subject to regulations of the
Securities and Exchange Commission ("SEC").
SAIF RECAPITALIZATION ASSESSMENT
Legislation was signed by the President on September 30, 1996 requiring
savings institutions with SAIF insured deposits to pay a one-time special
assessment to facilitate the recapitalization of the SAIF. The assessment was
based on 65.7 cents per $100 of deposits at March 31, 1995. This assessment
resulted in a charge of approximately $2.7 million to operating expenses during
the year ended December 31, 1996.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits with an original maturity of 90 days or
less, money market funds and federal funds sold. Cash and cash equivalents
exclude reverse repurchase agreements which are generally classified as
investments held to maturity. Generally, federal funds are purchased and sold
for one-day periods. The Bank is required to maintain certain average reserve
balances as established by the Federal Reserve Bank. The amount of those
balances for the reserve computation periods which include December 31, 1997 and
1996 were $6.8 million and $4.7 million, respectively. These requirements were
satisfied through the balance of vault cash and a balance at the Federal Home
Loan Bank.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115
(SFAS No. 115), "Accounting for Certain Investments in Debt and Equity
Securities" the Corporation classifies investments into three categories, as
applicable; trading, available for sale or held to maturity. Upon the adoption
of SFAS No. 115 on January 1, 1994, the Corporation categorized selected
investments and mortgage-backed securities that are part of the Corporation's
asset/liability management strategy and that may be sold in response to changes
in interest rates, prepayments and similar factors, as available for sale.
Investments classified as available for sale are reported at the current market
value with net unrealized gains and losses, net of applicable deferred tax
effects, added to or deducted from the Corporation's total stockholders' equity
until realized. Gains and losses on the sale of investment securities are
recognized utilizing the specific identification method.
Investment and mortgage-backed securities classified as held to maturity
are recorded at cost, adjusted for amortization of premiums or accretion of
discounts. Premiums are amortized over the average life of the security.
Discounts are amortized using a method which in total approximates the interest
method over the remaining contractual life of the security. The Corporation has
the intent and ability to hold these securities to maturity.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank invests excess funds in securities purchased under agreements to
resell (reverse repurchase agreements). Generally, the maturity date of the
reverse repurchase agreement is less than 90 days. Due to the short-term nature
of the agreement, the Bank does not take possession of the securities, instead,
the securities are held in safekeeping by the Bank's agent. The carrying value
of the agreements approximates fair market value because of the short maturity
of the investment.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
An allowance for possible loan losses is maintained at a level that
management considers adequate to provide for potential losses based upon the
portfolio's past loss experience, current economic conditions and other relevant
factors. When collection of a loan's principal balance or portion thereof is
considered doubtful, management charges the allowance for possible loan losses
based on their assessment of the loan's underlying collateral, if collateral
dependent, or present value of estimated future cash flows. While management
uses the
-17-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
best information available to make evaluations about the adequacy of the
allowance for loan losses, future adjustments to the allowance may be necessary
if conditions differ substantially from the assumptions used in making
evaluations.
LOANS HELD FOR SALE
The Bank periodically sells selected fixed-rate residential mortgage loans,
without recourse, to provide additional funds for lending and to restructure the
loan portfolio to improve interest rate risk. These loans are carried at the
lower of cost or estimated market value, determined on a net aggregate basis.
INTEREST ON LOANS
The Bank recognizes interest income on loans when earned. Generally, the
Bank does not recognize interest income on loans three months or more
delinquent. Such interest ultimately collected is recorded as income in the
period of recovery.
REAL ESTATE OWNED
Real estate owned consists of properties acquired by or in-lieu of
foreclosure. These assets are carried at the lower of cost or estimated fair
value at the time the loan is foreclosed less estimated cost to sell. The
amounts recoverable from real estate owned could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the control of the Bank. Costs to improve the
property are capitalized, whereas costs of holding the property are charged to
expense.
REAL ESTATE HELD FOR DEVELOPMENT
Real estate held for development is carried at cost not to exceed net
realizable value. Net realizable value is determined based on a discounted
estimate of the fair market value.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets. The costs of maintenance and repairs are expensed as they are incurred.
Renewal and improvement costs are capitalized.
DEFERRED LOAN FEES
The Bank defers all loan fees and related direct loan origination costs.
Deferred loan fees and costs are generally capitalized and amortized as a yield
adjustment over the life of the loan using the interest method.
LOANS SERVICED FOR OTHERS
Servicing loans for others generally consists of collecting mortgage
payments, disbursing payments to investors and processing foreclosures. Loan
servicing income is recorded upon receipt and includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. The total amount of loans being serviced for the benefit of others was
$25.6 million and $29.3 million at December 31, 1997 and 1996, respectively.
Loan servicing fee income was approximately $83 thousand, $98 thousand and $113
thousand for the years ended December 31, 1997, 1996 and 1995, respectively.
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess costs over the fair value of assets acquired are being amortized
over a five year period using the straight-line method.
INCOME TAXES
The Corporation computes its taxable income for both financial reporting
and federal tax purposes on the accrual basis. The Corporation reports certain
items of income and expense in its consolidated financial statements in periods
different from those in which such items enter into the determination of taxable
income. In conformity with generally accepted accounting principles, the
Corporation provides for the tax effects of such timing differences in its
consolidated financial statements, subject to the deferred tax asset
realizability provisions of Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes". These differences between
pretax accounting income and taxable income for return purposes consist
primarily of the calculations for loan loss allowance, real estate losses,
depreciation, recognition of income and expenses associated with loan
origination, profit recognition on discounted mortgages and securities income.
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 Extinguishments of Liabilities" for which certain
provisions are 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. SFAS No. 125,
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the concept of
control. The adoption of SFAS No. 125 did not have a material effect on the
financial position or results of operation of the Corporation.
In March 1997, the FASB issued the Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), "Earnings per Share", which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share", was adopted
by the Corporation for the fiscal year ended December 31, 1997. This statement
requires restatement of all prior-period Earnings per Share data presented.
SFAS No. 128 establishes standards by simplifying the computation and
presentation of earnings per share (EPS), and applies to entities with publicly
held common stock or potential common stock. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires 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
-18-
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FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), "Reporting Comprehensive Income", which is effective
for the Corporation beginning January 1, 1998, and requires restatement of all
prior-period financial statements presented for comparative purposes. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It is anticipated that the
adoption of SFAS No. 130 in 1998 will not have a material effect on the combined
financial position or results of operation of the Corporation.
RECLASSIFICATIONS
Certain items in the 1996 and 1995 consolidated financial statements have
been reclassified to conform with the presentation in the 1997 consolidated
financial statements.
EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share and weighted average common
shares outstanding and common stock equivalents have been retroactively restated
to reflect the increased number of common shares resulting from a two-for-one
stock split paid to shareholders on January 12, 1996. A total of 1,300,817
additional shares were issued in conjunction with the stock split. The par value
of the Corporation's stock remained unchanged. As a result, $130,081 was
transferred from paid-in capital in excess of par to common stock.
-19-
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FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and estimated market value of investment
securities held to maturity at December 31, 1997 and 1996 are as follows:
DECEMBER 31, 1997
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------- ---------- ------------
U.S. Gov't Agencies $ 79,347,265 $ 220,876 $ (70,550) $ 79,497,591
Reverse Repos 30,185,402 0 0 30,185,402
Municipal bonds 2,801,809 14,609 0 2,816,418
U.S. Treasury 15,000 0 (500) 14,500
-------------- ------------- ---------- ------------
Total $ 112,349,476 $ 235,485 $ (71,050) $112,513,911
============== ============= ========== ============
December 31, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ------------- ---------- ------------
U.S. Gov't Agencies $ 46,791,618 $ 39,819 $ (675,831) $ 46,155,606
Reverse Repos 20,000,000 0 0 20,000,000
Municipal bonds 794,725 5,734 (26) 800,433
U.S. Treasury 15,000 0 (1,000) 14,000
-------------- ------------- ---------- ------------
Total $ 67,601,343 $ 45,553 $ (676,857) $ 66,970,039
============== ============= ========== ============
The Bank has the intent and ability to hold these securities to maturity.
During December 1997 the Bank purchased $30.2 million of reverse repurchase
agreements with Paine Webber and Merrill Lynch, with an average maturity of 29
days and a weighted average yield of 6.17%.
The amortized cost and estimated market value of investments held to
maturity at December 31, 1997, by contractual maturity are shown in the
following table. Expected maturities may differ as borrowers have the right to
call certain obligations.
DECEMBER 31, 1997
-----------------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
------------------ ---------------------
Due one year or less $ 33,672,042 $ 33,669,042
Due one to five years 101,481 102,220
Due five to ten years 38,163,527 38,260,220
Due after ten years 40,412,426 40,482,429
------------------ ---------------------
$ 112,349,476 $ 112,513,911
================== =====================
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of investment securities
available for sale at December 31, 1997 and 1996 are as follows:
DECEMBER 31, 1997
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------------- -------------- ---------- ------------
U.S. Gov't Agencies $ 7,850,135 $ 21,646 $ (1,200) $ 7,870,581
CMOs 62,033,734 278,936 (42,546) 62,270,124
REMICs 10,372,889 5,784 (180,717) 10,197,956
---------------- -------------- ---------- ------------
Total $ 80,256,758 $ 306,366 $ (224,463) $ 80,338,661
================ ============== ========== ============
December 31, 1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- -------------- ---------- ------------
U.S. Gov't Agencies $ 5,000,000 $ 10,060 $ (13,100) $ 4,996,960
U.S. Treasury 1,997,757 803 0 1,998,560
CMOs 12,683,603 24,400 (86,504) 12,621,499
REMICs 6,027,067 0 (197,566) 5,829,501
---------------- -------------- ---------- ------------
Total $ 25,708,427 $ 35,263 $ (297,170) $ 25,446,520
================ ============== ========== ============
The amortized cost and estimated market value of investments available for
sale at December 31, 1997, by contractual maturity are shown in the following
table. Expected maturities may differ as borrowers have the right to call or
prepay certain obligations. CMOs and REMICs are shown separately due to the
amortization and prepayment of principal occurring throughout the life of these
instruments.
DECEMBER 31, 1997
-----------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
---------------- -----------------
Due one year or less $ 1,000,000 $ 998,800
Due one to five years 2,000,000 2,008,750
Due five to ten years 4,850,135 4,863,031
CMOs 62,033,734 62,270,124
REMICs 10,372,889 10,197,956
---------------- -----------------
$ 80,256,758 $ 80,338,661
================ =================
During 1997, FNMA-mortgage-backed securities available for sale were sold
which resulted in a realized gain of $2 thousand. During 1996, Common Stock and
FHLMC-REMICs were sold which resulted in realized gains of $51 thousand and $3
thousand, respectively.
-20-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
4. LOANS, NET
Loans, net at December 31, 1997 and 1996 consist of the following:
1997 1996
------------- ----------------
Mortgage Loans $ 253,000,504 $ 257,450,607
Construction Loans 3,257,798 3,711,666
Commercial Construction 2,385,192 4,394,901
Consumer Loans 3,609,033 4,015,403
Commercial Real Estate 42,974,261 39,177,194
Commercial Business 1,712,099 1,829,956
------------- ----------------
Subtotal 306,938,887 310,579,727
------------- ----------------
Less:
Deferred loan fees 970,075 926,974
Allowance for
possible loan losses 3,137,781 2,781,937
------------- ----------------
Total loans, net $ 302,831,031 $ 306,870,816
============= ================
The Corporation adopted SFAS Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan" during the first quarter of 1995. At December 31,
1997 and 1996 the recorded investment in loans for which impairment had been
recognized in accordance with SFAS Nos. 114 and 118 totaled $3.6 million and
$4.1 million, respectively. At December 31, 1997, impaired loans of $1.6 million
related to loans that were individually measured for impairment with a valuation
allowance of $319 thousand and $2.0 million of loans that were collectively
measured for impairment with a valuation allowance of $97 thousand. At December
31, 1996 impaired loans of $1.8 million related to loans that were individually
measured for impairment with a valuation allowance of $274 thousand and $2.3
million of loans that were collectively measured for impairment with a valuation
allowance of $130 thousand. For the years ended December 31, 1997 and 1996, the
average recorded investment in impaired loans was approximately $3.5 million and
$4.0 million, respectively. During the years ended December 31, 1997 and 1996
the Corporation recognized $192 thousand and $296 thousand, respectively, of
interest on impaired loans, all of which was recognized on the cash basis.
Loans which are 90 days delinquent as to principal and/or interest are
placed on a non-accrual status and all previously accrued interest is reversed.
The principal amount of non-accrual loans at December 31, 1997 and 1996 was $3.6
million and $4.1 million, respectively. Interest income on non-accrual loans
that would have been recorded in 1997 under the original terms of such loans was
$354 thousand, and the interest income actually recognized in 1997 for such
loans was $185 thousand. Interest income on non-accrual loans that would have
been recorded in 1996 under the original terms of such loans was $364 thousand,
and the actual interest income recognized in 1996 for such loans was $201
thousand.
The Bank originates and purchases both adjustable and fixed interest rate
loans. At December 31, 1997, the composition of the loan portfolio is as
follows:
<TABLE>
<CAPTION>
Maturing
Maturing from 1999 Maturing
(In Thousands) during through after
1998 2002 2002 Total
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Mortgage Loans (1-4 dwelling) $ 1,332 $ 13,907 $ 237,762 $ 253,001
Construction Loans 3,258 0 0 3,258
Commercial Construction 1,844 11 530 2,385
Consumer Loans 1,471 740 1,398 3,609
Commercial Real Estate 9,240 16,366 17,368 42,974
Commercial Business 1,138 361 213 1,712
----------- ---------- ----------- ---------
Total $ 18,283 $ 31,385 $ 257,271 $ 306,939
=========== ========== =========== =========
Interest sensitivity on the
above loans:
Predetermined rates $ 18,086 $ 29,688 $ 172,223 $ 219,997
Adjustable or
floating rates 197 1,697 85,048 86,942
----------- ---------- ----------- ---------
Total $ 18,283 $ 31,385 $ 257,271 $ 306,939
=========== ========== =========== =========
</TABLE>
Construction, commercial and land loans are generally indexed to the prime
rate plus a percentage (generally 1% to 2%). The adjustable rate mortgage loans
have interest rate adjustment limitations and are generally indexed to the one
year U.S. Treasury constant maturity yield. Future market factors may affect
the correlation of the interest rate adjustment with the rates the Bank pays on
the short-term deposits that have been primarily utilized to fund these loans.
Changes in the allowance for possible loan losses are as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
-------------- ----------- -----------
Balance at beginning
of year $ 2,781,937 $ 2,766,779 $ 2,621,512
Provision charged to
operations 400,000 120,000 120,000
Charge-offs (49,042) (115,253) (18,475)
Recoveries 4,886 10,411 43,742
-------------- ----------- -----------
Balance at end of year $ 3,137,781 $ 2,781,937 $ 2,766,779
============== =========== ===========
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FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at December 31, 1997 and 1996
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C>
GNMA $ 22,586,373 $ 785,155 $ (6) $ 23,371,522
FNMA 35,648,943 604,826 (54,848) 36,198,921
FHLMC 33,379,272 968,264 (23,500) 34,324,036
PRIVATE 405,929 6,221 0 412,150
---------------- ---------------- ------------ ---------------
TOTAL $ 92,020,517 $ 2,364,466 $ (78,354) $ 94,306,629
================ ================ ============ ===============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
---------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C>
GNMA $ 23,216,175 $ 548,034 $ (19,890) $ 23,744,319
FNMA 37,958,391 308,922 (244,978) 38,022,335
FHLMC 42,586,038 752,658 (104,912) 43,233,784
Private 551,977 6,041 0 558,018
---------------- ---------------- ------------ ---------------
Total $ 104,312,581 $ 1,615,655 $ (369,780) $ 105,558,456
================ ================ ============ ===============
</TABLE>
The Bank has the intent and ability to hold these securities to maturity.
At December 31, 1997, neither a disposal, nor a condition that could lead to a
decision not to hold these securities to maturity were reasonably foreseen.
Mortgage-backed securities of $1.2 million and $859 thousand were used to secure
public funds on deposit at December 31, 1997 and 1996, respectively.
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at December 31, 1997 and 1996 are
summarized by major classification, as follows:
DECEMBER 31,
-----------------------------
1997 1996
-------------- ------------
Land, buildings and improvements $ 16,269,867 $ 14,675,111
Furniture and equipment 3,665,361 3,413,347
Computers 2,316,398 2,285,858
-------------- ------------
Total 22,251,626 20,374,316
-------------- ------------
Less accumulated depreciation (6,559,571) (5,618,078)
-------------- ------------
Office properties and equipment, net $ 15,692,055 $ 14,756,238
============== ============
7. REAL ESTATE HELD FOR DEVELOPMENT, NET
The Bank, through its wholly-owned subsidiary, Land Financial Services,
Inc., has entered into several real estate investments. Real estate held for
development is carried at the lower of cost or estimated net realizable value.
Intercompany loans from the Bank are the primary sources of funding and have
been eliminated in consolidation. Such investments in real estate at December
31, 1997 and 1996, are summarized as follows:
DECEMBER 31,
--------------------------------
1997 1996
-------------- ---------------
Real Estate held for
development $ 933,256 $ 4,898,782
Valuation allowance (288,769) (3,671,050)
-------------- ---------------
Net $ 644,487 $ 1,227,732
============== ===============
During 1997, the Bank recorded an additional $200 thousand provision on the
real estate held for development. The losses were reflected as a charge to
income in the other income section of the consolidated statements of operations.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the Bank is required to deduct from capital its investments
in and advances to subsidiaries engaged in activities not permissible for
national banks (i.e. real estate development).
8. REAL ESTATE OWNED, NET
Real estate owned, which was acquired through foreclosure and deeds in lieu
of foreclosure, totaled $446 thousand and $622 thousand, net at December 31,
1997 and 1996, respectively. The Bank maintains an allowance for possible
losses, on real estate owned. The changes in the allowance for real estate owned
is as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------- ----------- ------------
Balance at
beginning of year $ 437,507 $ 313,192 $ 79,000
Provisions charged
to operations 142,630 153,482 354,453
Charge-offs (20,000) (29,717) (120,261)
Recoveries 0 550 0
------------- ----------- ------------
Balance at end
of year $ 560,137 $ 437,507 $ 313,192
============= =========== ============
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FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
9. DEPOSITS
Deposits at December 31, 1997 and 1996 consisted of the following major
classifications and weighted average rates:
DECEMBER 31, 1997
------------------------------------
WEIGHTED PERCENT
AVERAGE RATE AMOUNT OF TOTAL
------------ ------ --------
Non-interest checking 0.00 % $ 49,875,981 10.19%
Checking accounts 1.69 54,688,332 11.17
Savings accounts 2.87 83,824,897 17.13
Money market accounts 2.72 58,001,044 11.85
Certificates 5.32 243,049,726 49.66
---- -------------- ------
Total 3.74 % $ 489,439,980 100.00%
==== ============== ======
December 31, 1996
-------------------------------------
Weighted Percent
Average Rate Amount of Total
------------ ------ --------
Non-interest checking 0.00 % $ 37,552,269 8.28%
Checking accounts 1.57 46,750,659 10.31
Savings accounts 2.57 71,057,835 15.68
Money market accounts 2.65 56,961,349 12.57
Certificates 5.30 240,954,422 53.16
---- -------------- ------
Total 3.77 % $ 453,276,534 100.00%
==== ============== ======
A summary of certificates by maturity at December 31, 1997 is as follows:
YEARS ENDED DECEMBER 31, AMOUNT
- ------------------------ ------
1998 $ 102,252,316
1999 47,425,121
2000 18,809,243
Thereafter 74,563,046
----------------
Total $ 243,049,726
================
A summary of interest expense on deposits is as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------ ---------------
Checking accounts $ 825,672 $ 693,879 $ 704,815
Savings accounts 2,347,193 1,816,081 1,750,873
Money market accounts 1,629,248 1,519,789 1,571,079
Certificates 12,952,418 12,146,474 11,934,343
------------- ------------ ---------------
Total interest expense $ 17,754,531 $ 16,176,223 $ 15,961,110
============= ============ ===============
10. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1997, the Bank had advances from the Federal Home Loan Bank
of New York (FHLB) in the amount of $24.5 million with a weighted average
interest rate of 6.08%. Advances are collateralized by certain first mortgage
loans.
DECEMBER 31,
- -----------------------------------------------------------------------------
1997 1996
- --------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE MATURITY AVERAGE MATURITY
AMOUNT RATE DATE AMOUNT RATE DATE
------ ---- ---- ------ ---- ----
$ 4,050,000 7.13% 1/2/97
$ 2,100,000 7.13% 1/2/98 5,000,000 6.05% 6/6/97
1,000,000 4.95% 10/13/98 2,000,000 4.81% 10/13/98
5,000,000 6.14% 6/8/98 5,000,000 6.14% 6/8/98
10,000,000 6.32% 6/6/00 10,000,000 6.32% 6/6/00
5,000,000 5.62% 2/15/01 5,000,000 5.62% 2/15/01
1,396,476 5.00% 10/9/07 1,500,000 5.00% 10/9/07
- --------------- ---- --------------- ----
$ 24,496,476 6.08% $ 32,550,000 6.09%
=============== ==== =============== ====
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1997, the Bank had securities sold under the agreements to
repurchase (repurchase agreements) in the aggregate amount of $60.0 million.
The repurchase agreements are collateralized by U.S. Agency Notes and CMOs with
a market value of $63.0 million. Accrued interest payable totaled $221 thousand
at December 31, 1997.
DECEMBER 31,
1997
- -------------------------------------------------------------------
WEIGHTED MATURITY CALL
COUNTERPARTY AMOUNT AVERAGE RATE DATE FEATURE
- ------------ ------ ------------ ---- -------
Merrill Lynch $20,000,000 5.79% 9/19/02 9/19/00
FHLB 20,000,000 5.65% 11/18/02 11/18/00
FHLB 20,000,000 5.72% 12/19/07 12/19/02
----------- ----
Total $60,000,000 5.72%
=========== ====
12. ADVANCES FROM BANK
At December 31, 1996, the Bank had advances from financial institutions of
$6.7 million. These advances matured in 1997 and were used to fund the
acquisition of deposits.
-23-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
13. SUBORDINATED DEBENTURES
The Corporation issued $10.0 million of Subordinated Debentures in 1994.
The Debentures are unsecured, bear interest at a rate of 10% per annum and
mature on July 28, 2004. Interest payments are due semiannually on February 1
and August 1 commencing February 1, 1995. The Debentures are redeemable, in
whole or in part, at any time at the option of the Corporation at specified
redemption prices, except that the debentures could not be redeemed prior to
August 1, 1997. The net proceeds from the sale of the Debentures totaled $9.4
million and were used for the expansion of the Bank's operations through branch
acquisitions and general corporate purposes. The Corporation is required to
retain at all times cash, cash equivalents or marketable securities in an amount
not less than the aggregate amount of two consecutive semi-annual interest
payments that will be due and payable on the Debentures following such
declaration date or redemption date.
14. INCOME TAXES
In accordance with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), deferred tax
assets and liabilities are established for the temporary differences between
accounting bases and tax bases of the Corporation's assets and liabilities at
the tax rates expected to be in effect when the temporary differences are
realized or settled. Management believes the existing net deductible temporary
differences which give rise to the net deferred income tax assets are realizable
on a more likely than not basis.
The temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liability are as follows:
DECEMBER 31,
------------------------------
1997 1996
------------- ---------------
Deferred income tax assets:
Allowance for possible loan losses $ 677,181 $ 508,394
Real estate losses 435,010 339,600
Deferred loan fees, net (11,113) 27,927
Compensation and pension liability 49,822 78,652
Amortization of deposit premium 259,723 201,791
Post retirement benefits 185,000 185,000
Capitalized interest 274,951 540,411
Other 61,287 44,829
------------- ---------------
Gross deferred tax assets 1,931,861 1,926,604
------------- ---------------
Deferred income tax liabilities:
Prepaid deposit insurance premium 26,936 5,839
Depreciation 397,618 357,285
------------- ---------------
Gross deferred tax liabilities: 424,554 363,124
------------- ---------------
Deferred income tax assets, net $ 1,507,307 $ 1,563,480
============= ===============
The following represents the components of income tax expense for the years
ended December 31, 1997, 1996 and 1995, respectively.
1997 1996 1995
------------- ------------ -------------
Current Federal tax provision $ 2,903,256 $ 1,862,681 $ 2,305,857
Current State tax provision 292,221 181,544 220,948
------------- ------------ -------------
Total Current provision 3,195,477 2,044,225 2,526,805
------------- ------------ -------------
Deferred Federal tax benefit (62,697) (725,109) (51,078)
Deferred State tax benefit (5,703) (39,617) (4,646)
------------- ------------ -------------
Total Deferred benefit (68,400) (764,726) (55,724)
------------- ------------ -------------
Total $ 3,127,077 $ 1,279,499 $ 2,471,081
============= ============ =============
-24-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
On August 21, 1996, the Small Business Job Protection Act was signed into
law which repealed the favorable reserve method available to savings banks. The
Bank was required to change its tax bad debt method to the specific charge-off
method effective for the fiscal year ended December 31, 1996. The change in
method resulted in taxable income of approximately $2.4 million representing the
excess of the Bank's tax bad debt reserve at December 31, 1995 over the base
year reserve amount that arose in tax years beginning before December 31, 1987.
The income will be recognized for tax purposes ratably over a six year period.
The Company has not provided deferred income taxes for the Bank's tax
return reserve for bad debts that arose in tax years beginning before December
31, 1987 because it is not expected that this difference will reverse in the
foreseeable future. A deferred tax liability has been recognized for the portion
of the tax bad debt reserves which arose in years 1988 through 1995.
The Corporation's provision for income taxes differs from that computed by
applying the statutory federal income tax rate to income before income taxes as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- --------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 2,930,199 34.00% $1,463,808 34.00% $ 2,316,925 34.00%
Increase (Decrease) from:
State income taxes, net
of federal income tax
benefit 189,102 2.19 93,672 2.18 142,759 2.09
Change in valuation
allowance 0 0.00 (289,588) -6.73 0 0.00
Other 7,776 0.09 11,607 0.27 11,397 0.17
------------ ----- ---------- ----- ----------- -----
Total $ 3,127,077 36.28% $1,279,499 29.72% $ 2,471,081 36.26%
============ ===== ========== ===== =========== =====
</TABLE>
15. LEASES
The Bank leases a building and land to operate two branches and certain
equipment under noncancelable leases which expire over the next 25 years. These
leases generally provide for the payment of taxes and maintenance by the lessee.
Most of these operating leases provide the Bank with the option to renew the
lease after the initial lease term. Future minimum rental payments under
existing leases as of December 31, 1997 are as follows:
FISCAL YEAR AMOUNT
----------- ------
1998 $ 104,084
1999 53,708
2000 53,708
2001 53,708
2002 and beyond 984,647
-------------
Total $ 1,249,855
=============
The leases for the buildings contain cost of living adjustments based on
changes in the consumer price index. The minimum lease payments shown above
include base rentals exclusive of any future adjustments. Total rent expense
for all operating leases amounted to $104 thousand, $107 thousand and $104
thousand for fiscal years 1997, 1996 and 1995, respectively.
16. STOCKHOLDERS' EQUITY
On December 14, 1988, the Bank converted to a state chartered stock Savings
Bank and simultaneously formed FMS Financial Corporation. At the time of
conversion, eligible deposit account holders were granted priority in the
unlikely event of a future liquidation of the Bank. The special reserve has
been decreased to the extent that the balances of eligible account holders were
reduced at annual determination dates. The Bank converted its charter to that of
a Federal Savings Bank on October 15, 1993.
The ability of the Corporation to pay dividends to stockholders is directly
dependent upon the ability of the Bank to pay dividends to the Corporation. OTS
regulations restrict the ability of the Bank to pay dividends to the Corporation
if such dividends reduce the net worth of the Bank below the amount required in
the special reserve account and based on the Bank's net income and capital
position.
Under FIRREA the Bank must have core capital equal to 3%, tangible capital
equal to 1.5% and risk-based capital equal to 8%. At December 31, 1997, the Bank
exceeded all three regulatory capital levels required under FIRREA. The Bank's
regulatory tangible and core capital was $44.1 million or 7.05% of total bank
assets and risk-based capital was $47.0 million or 15.85% of risk-weighted
assets.
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles ("GAAP") to regulatory capital at December 31,
1997:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------ ---------- ----------
Bank's GAAP Capital $ 45,629,479 $ 45,629,479 $ 45,629,479
------------ ---------- ----------
Less:
Unrealized gain on
investments AFS (53,955) (53,955) (53,955)
Subsidiary
investments not
eligible (976,125) (976,125) (976,125)
Goodwill (469,444) (469,444) (469,444)
Supplementary
qualifying capital item:
General valuation
allowance 0 0 2,881,819
------------ ---------- ----------
Regulatory capital
computed 44,129,955 44,129,955 47,011,774
Minimum regulatory
capital requirement 9,395,346 18,790,692 23,731,073
------------ ---------- ----------
Regulatory capital
excess $ 34,734,609 $ 25,339,263 $ 23,280,701
============ ============ =============
17. PENSION PLAN
The Bank has a defined benefit pension plan for active employees. Net
pension expense was $385 thousand, $412 thousand and $279 thousand for years
ended December 31, 1997, 1996 and 1995, respectively. The components of net
pension cost are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------- ---------- -----------
Service Cost $ 401,818 $ 397,001 $ 253,640
Interest Cost 232,376 204,457 163,002
Return on Assets (1,022,934) (596,276) (616,173)
Net Amortization
and Deferral 774,004 406,357 478,773
------------- ---------- -----------
Net periodic
pension cost $ 385,264 $ 411,539 $ 279,242
============= ========== ===========
-25-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The following table presents a reconciliation of the funded status of the
defined benefit pension plan at December 31, 1997 and 1996:
DECEMBER 31,
--------------------------------------
1997 1996
---------------- -----------------
Actuarial present value of
benefit obligation:
Vested $ 3,114,197 $ 2,689,892
Nonvested 244,101 265,891
---------------- -----------------
Accumulated benefit obligation 3,358,298 2,955,783
Projected benefit obligation 4,419,723 3,959,973
Fair value of plan assets 5,171,488 4,105,395
---------------- -----------------
Excess of plan assets over
projected benefit obligation 751,765 145,422
Unrecognized net gain (876,493) (91,026)
Unrecognized prior service cost 81,860 88,094
Unrecognized net transition
obligation 193,475 224,381
---------------- -----------------
Prepaid pension liability
included in the consolidated
balance sheets $ 150,607 $ 366,871
================ =================
Actuarial assumptions used in determining pension cost are as follows:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Discount rate for
benefit obligation 6.00% 6.00% 6.00 %
Rate of increase in
compensation levels
and social security
wage base 4.00% 4.00% 4.00 %
Expected long-term
rate of return on
plan assets 7.00% 7.00% 7.00 %
In addition to providing pension plan benefits, the Bank provides certain
health care and life insurance benefits to certain retired employees. In
accordance with the provisions of Statement of Financial Accounting Standards
No. 106, "Employer Accounting for Post Retirement Benefits other than
Pensions" (SFAS No. 106) the expected cost of such benefits must be actuarially
determined and accrued ratably from the date of hire to the date the employee is
fully eligible to receive benefits. The accumulated post-retirement benefit
obligation is not funded but is reflected in the statement of financial
condition as a liability.
The net periodic post-retirement benefit cost includes the following
components:
DECEMBER 31,
---------------------------
1997 1996
----------- --------------
Service Cost $ 0 $ 0
Interest Cost 31,938 33,489
Amortization of prior service cost (10,854) (9,123)
Amortization of Gain (5,229) (3,677)
----------- --------------
Net periodic post-retirement
benefit cost $ 15,855 $ 20,689
=========== ==============
The assumed discount rate used in the calculation for net periodic post-
retirement benefit cost was 7.5% and 7.0% for 1997 and 1996, respectively. The
assumed health care cost trend rate for 1997 was 6% and was graded down in 1%
increments per year to an ultimate rate of 5% per year. The impact of a 1%
increase in the assumed health care cost trend for each future year would be as
follows:
December 31, 1997
-----------------
Accumulated post-retirement obligation
at year end $471,634
Service Cost $ 0
Interest Cost $ 34,387
The following table summarizes the amounts recognized in the Bank's balance
sheet:
DECEMBER 31,
--------------------------------
1997 1996
------------ ---------------
Accumulated post-retirement
benefit obligation $ (435,729) $ (472,895)
Unrecognized prior service cost (113,575) (89,709)
Unrecognized net gain (89,205) (103,217)
------------ ---------------
Accrued post-retirement benefit cost $ (638,509) $ (665,821)
============ ===============
The assumed discount rate used in the calculation for the accumulated post-
retirement benefit obligation as of December 31, 1997 and 1996 was 7.0% and
7.5%, respectively.
-26-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available,
fair values are based on assumptions including future cash flows and discount
rates. Accordingly, the fair value estimates cannot be substantiated, may not
be realized, and do not represent the underlying value of the Corporation.
The Corporation uses the following methods and assumptions to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS: The carrying value is a reasonable estimate of fair
value.
INVESTMENT SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE AND
MORTGAGE-BACKED SECURTIES: Fair value is equal to quoted market prices.
FHLB STOCK: The stock of FHLB is issued only to FHLB member institutions and is
redeemable only by another member institution or the FHLB at its $100 per share
par value.
LOANS: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other
categories of loans such as residential mortgages, commercial and consumer
loans, fair value is estimated based on discounting the estimated future cash
flows using the current rates at which similar loans would be made to borrowers
with similar collateral and credit ratings and for similar remaining maturities.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair
value is the amount payable on demand at the reporting date. For certificates
of deposits, fair value is estimated using the rates currently offered for
deposits with similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: For investment securities with a
quoted market price, fair value is equal to quoted market prices. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
SUBORDINATED DEBENTURES: Fair value is estimated using the quoted average of
the broker bid and ask prices at year end.
OTHER BORROWINGS: Fair value is estimated using a discounted cash flow
analysis.
ADVANCES FROM BANK: The carrying value is a reasonable estimate of fair value
due to the short term nature of these obligations.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: For commitments and
standby letters of credit expiring within 90 days or with a variable rate, the
settlement amount is a reasonable estimate of fair value. For commitments and
standby letters of credit expiring beyond 90 days or with a fixed rate, the fair
value is the present value of the obligations based on current loan rates.
- --------------------------------------------------------------------------------
At December 31, 1997 and December 31, 1996, the carrying amount and the
estimated market value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT MARKET VALUE AMOUNT MARKET VALUE
------------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 12,631,622 $ 12,631,622 $ 9,919,549 $ 9,919,549
Investment securities held to maturity and
investment securities available for sale $ 192,688,137 $ 192,852,572 $ 93,047,863 $ 92,416,559
Mortgage-backed securities $ 92,020,517 $ 94,306,629 $ 104,312,581 $ 105,558,456
FHLB Stock $ 3,630,800 $ 3,630,800 $ 3,620,600 $ 3,620,600
Loans, net of unearned income $ 305,968,812 $ 310,340,000 $ 309,652,753 $ 311,325,000
Less: Allowance for possible loan losses (3,137,781) (3,137,781) (2,781,937) (2,781,937)
Loans, net $ 302,831,031 $ 307,202,219 $ 306,870,816 $ 308,543,063
Financial liabilities:
Deposits
Checking, passbook, and money market accounts $ 246,390,254 $ 246,390,254 $ 212,322,112 $ 212,322,112
Certificates $ 243,049,726 $ 241,393,000 $ 240,954,422 $ 238,005,000
Securities sold under agreements to repurchase $ 60,000,000 $ 58,560,000 $ 0 $ 0
Subordinated debentures $ 10,000,000 $ 10,600,000 $ 10,000,000 $ 10,300,000
Other borrowings $ 24,529,957 $ 23,941,238 $ 32,656,463 $ 32,343,000
Advances from Bank $ 0 $ 0 $ 6,691,758 $ 6,691,758
Off-balance sheet financial instruments:
Commitments to extend credit $ 25,528,246 $ 25,528,246 $ 26,199,447 $ 26,199,447
Standby letters of credit $ 761,522 $ 761,522 $ 1,094,381 $ 1,094,381
</TABLE>
-27-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
19. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT ("FDICIA")
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted into law on December 19, 1991. The statute includes a
number of additional supervisory measures. The additional supervisory powers
and regulations mandated by FDICIA include a "Prompt Corrective Action"
program that permits regulators to take increasingly harsh action against
institutions that fail to meet certain new capital-based requirements. Various
other sections of FDICIA impose substantial new audit and reporting
requirements.
FDICIA also requires each regulatory agency to institute non-capital safety
and soundness standards for each institution it regulates. These standards
cover (1) internal controls, (2) loan documentation, (3) credit underwriting,
(4) interest rate exposure, (5) asset growth, (6) compensation, fees and
benefits paid to employees, officers and directors, (7) operational and
managerial standards, and (8) asset quality, earnings and stock valuation
standards for preserving a minimum ratio of market value to book value for
publicly traded shares (if feasible). Many of the regulations required by
FDICIA have been promulgated by federal regulators. As of December 31, 1997
management of the Bank believes that it is in compliance with the regulations
adopted pursuant to FDICIA.
20. COMMITMENTS AND CONTINGENCIES
The Bank has outstanding loan commitments of $25.5 million as of December
31, 1997. Of these commitments outstanding, the breakdown between fixed and
variable rate loans is as follows:
DECEMBER 31, 1997
--------------------------------------------
FIXED VARIABLE
RATE RATE TOTAL
------------- ------------ ---------------
Commitments to fund loans $ 3,647,376 $ 1,142,495 $ 4,789,871
Unused lines:
Construction 0 3,336,430 3,336,430
Equity line of credit loans 0 17,401,945 17,401,945
------------- ------------ ---------------
Total $ 3,647,376 $ 21,880,870 $ 25,528,246
============= ============ ===============
In addition to outstanding loan commitments, the Bank as of December 31,
1997, issued $762 thousand in standby letters of credit to guarantee performance
of a customer to a third party.
Commitments and standby letters of credit are issued in accordance with the
same loan policies and underwriting standards as settled loans. Since some
commitments and standby letters of credit are expected to expire without being
drawn down, these amounts do not necessarily represent future cash requirements.
21. LITIGATION
There are no significant pending legal proceedings at December 31, 1997
which will have a material impact on the Corporation's financial position or
results of operations.
22. LOANS TO OFFICERS AND DIRECTORS
Regulation O provides that all loans to executive officers and directors be
made on substantially the same terms and conditions as are available to the
general public. On November 11, 1996, Regulation O was amended to allow
executive officers to participate in any employee loan rate discount benefit
program available to all full-time employees. Since the Bank offers such an
employee benefit program, the policy governing loans to executive officers was
amended to allow the executive officers to participate in this loan program and
thereby receive rate discounts. These changes went into effect on January 1,
1997. The rate discounts are available to employees as long as they are employed
at the Bank. If employment is terminated, the rate discount ceases from the date
of termination. At December 31, 1997 and 1996, loans made to directors and
executive officers whose indebtedness exceeded $60 thousand amounted to $764
thousand and $770 thousand, respectively. During 1997 new loans to these
individuals totaled $18 thousand and repayments totaled $24 thousand.
23. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion to stock form, the Corporation
established an Employee Stock Ownership Plan ("ESOP"), which purchased
approximately $660 thousand worth of common stock. In order to make the
purchase, the ESOP borrowed approximately $660 thousand on December 8, 1988 from
a commercial bank. The debt, which accrues interest at 80% of the commercial
bank's base rate, has been guaranteed by the Corporation, and is payable and
expensed in ten annual installments of approximately $66 thousand. Additional
principal payments may be made from cash dividends paid on the unallocated ESOP
shares.
Annual contributions to the ESOP are made in amounts determined by the
Board of Directors. Because the Corporation's loan guarantee represents a
commitment either to make future contributions to the ESOP or to make the
principal payments when due, the guarantee has been reflected as a liability,
and an offsetting charge equivalent to the future contributions to be made has
been reflected as a reduction of stockholders' equity in the accompanying
consolidated statements of financial condition.
-28-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
24. STOCK OPTIONS
The Corporation has established a stock compensation plan (the "Plan")
for executive officers and other selected employees of the Corporation. The
Plan consists of incentive stock options intended to qualify under Section 422A
of the Internal Revenue Code of 1986. These stock options may be surrendered
and stock appreciation rights may be granted in their place, with the approval
of the Corporation.
A total of 111,642 shares of authorized but unissued common stock of the
Corporation has been reserved for future issuance under the Plan. The option
price per share for options granted may not be less than the fair market value
of the common stock on the date of grant. At December 31, 1997, the option
exercise prices are $3.88 and $16.00. Options are fully vested at the date of
grant and must be exercised within ten years.
A summary of the status of the Bank's Stock Option Plan as of December 31,
1997, 1996 and 1995 and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
Beginning of the year 82,151 $ 5.65 95,823 $ 5.40 100,958 $ 3.88
Options granted 0 0 0 0 12,000 16.00
Options exercised (1,486) 3.88 (1,250) 3.88 (11,435) 3.88
Options surrendered (2,000) 3.88 (12,422) 3.88 (5,700) 3.88
------ ---------- ------ ---------- ------ ----------
Outstanding at the
End of the year 78,665 $ 5.72 82,151 $ 5.65 95,823 $ 5.40
====== ========== ====== ========== ====== ==========
</TABLE>
On January 1, 1996, the Bank adopted Statement of Financial Accounting
Standard No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). As
permitted by SFAS No. 123, the Bank has chosen to continue to apply APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its Plan. Accordingly, no compensation cost
has been recognized for options granted under the Plan. If the Bank had adopted
the fair value method of accounting for stock based compensation the Bank's net
income and net income per share would have been as follows:
DECEMBER 31, 1995
---------------------------------------
AS REPORTED PRO FORMA
----------- ---------
Net Income $ 4,343,404 $ 4,300,435
Basic Earnings per share $1.73 $1.72
Diluted Earnings per share $1.69 $1.68
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: dividend
yield of 2.35%, expected volatility of 20.64%, discount rate of 6.0% and an
expected life of 10 years at December 31, 1995. There were no options granted in
1997 or 1996.
25. RISKS AND UNCERTAINTIES
The earnings of the Corporation depend on the earnings of the Bank. The
earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations of the
Bank are subject to risks and uncertainties surrounding its exposure to changes
in the interest rate environment.
Most of the Bank's lending activity is with customers located within
southern New Jersey. Generally, the loans are secured by real estate consisting
of single family residential properties. While this represents a concentration
of credit risk, the credit losses arising from this type of lending compare
favorably with the Bank's credit loss experience on its portfolio as a whole.
The ultimate repayment of these loans is dependent to a certain degree on the
local economy and real estate market.
The financial statements of the Corporation are prepared in conformity with
generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the allowance
for possible loan losses and carrying values of real estate owned and real
estate held for development. Consideration is given to a variety of factors in
establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of loan
reviews, borrowers' perceived financial and managerial strengths, the adequacy
of underlying collateral, if collateral dependent, or present value of future
cash flows and other relevant factors. Since the allowance for possible loan
losses and carrying value of real estate assets and real estate held for
development is dependent, to a great extent, on the general economy and other
conditions that may be beyond the Bank's control, it is at least reasonably
possible that the estimates of the allowance for possible loan losses and the
carrying values of the real estate assets could differ materially in the near
term.
-29-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
26. PARENT COMPANY FINANCIAL INFORMATION
The financial statements for FMS Financial Corporation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF FINANCIAL CONDITION 1997 1996
- ----------------------------------------------------------- ---- ----
ASSETS:
<S> <C> <C>
Cash $ 397,911 $ 254,546
Investment in subsidiary 45,662,960 41,018,186
Investment securities 1,000,000 1,000,000
Intercompany receivable, net 1,924,945 1,591,556
Subordinated Debentures issue costs, net 378,460 435,809
Other 168,843 168,843
------------- --------------
TOTAL ASSETS $ 49,533,119 $ 44,468,940
============= ==============
LIABILITIES:
10% Subordinated Debentures due 2004 $ 10,000,000 $ 10,000,000
Guarantee of employee stock ownership plan debt 33,481 106,463
Dividends payable 167,154 119,636
Accrued interest payable 416,667 416,667
------------- --------------
TOTAL LIABILITIES 10,617,302 10,642,766
------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock - $.10 par value 5,000,000 shares authorized; none issued
Common stock - $.10 par value 10,000,000 shares authorized; shares
issued 2,604,370 and 2,602,884 and shares outstanding 2,387,916 and
2,392,707 as of December 31, 1997 and 1996, respectively 260,437 260,288
Paid-in capital in excess of par 8,419,167 8,413,558
Unrealized gain (loss) on securities available for sale,
net of deferred income taxes 53,955 (166,152)
Guarantee of employee stock ownership plan debt (33,481) (106,463)
Retained earnings 33,406,060 28,487,903
Less:Treasury Stock (216,454 and 210,177 shares, at cost at
December 31, 1997 and 1996, respectively) (3,190,321) (3,062,960)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 38,915,817 33,826,174
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,533,119 $ 44,468,940
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS 1997 1996 1995
------------- ------------ -----------------
<S> <C> <C> <C>
Intercompany interest income $ 560,750 $ 560,750 $ 537,030
Interest expense (1,057,348) (1,057,348) (1,049,013)
Dividends from subsidiary 1,400,000 1,400,000 1,350,000
Equity in undistributed income of subsidiary 4,418,909 1,953,576 3,337,233
------------- ------------ -----------------
Income before taxes 5,322,311 2,856,978 4,175,250
Income tax benefit 168,843 168,843 168,154
------------- ------------ -----------------
NET INCOME $ 5,491,154 $ 3,025,821 $ 4,343,404
============= ============ =================
</TABLE>
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
-30-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
------------------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS 1997 1996 1995
---------------- -------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 5,491,154 $ 3,025,821 $ 4,343,404
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the subsidiary (4,418,909) (1,953,576) (3,337,233)
Amortization of bond issue costs 57,349 57,348 57,348
Decrease in interest payable 0 0 (16,666)
Decrease (Increase) in intercompany receivable, net (333,389) 1,452,440 (229,477)
Other operating activities 72,982 75,292 (35,136)
----------- -------------- ---------------
Net cash provided by operating activities 869,187 2,657,325 782,240
----------- -------------- ---------------
INVESTING ACTIVITIES
Purchase of marketable security 0 0 (1,000,000)
----------- -------------- ---------------
Net cash used by investing activities 0 0 (1,000,000)
----------- -------------- ---------------
FINANCING ACTIVITIES
Purchase of treasury stock (127,361) (1,913,191) (249,219)
Investment in subsidiary (5,758) (4,843) (44,307)
Cash dividends paid on common stock (525,479) (495,434) (375,213)
Principal repayment of employee stock ownership plan debt (72,982) (75,981) (75,981)
Proceeds from issuance of stock 5,758 4,843 44,307
----------- -------------- ---------------
Net cash used by financing activities (725,822) (2,484,606) (700,413)
----------- -------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 143,365 172,719 (918,173)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 254,546 81,827 1,000,000
----------- -------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 397,911 $ 254,546 $ 81,827
=========== ============== ===============
</TABLE>
- --------------------------------------------------------------------------------
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
-31-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT REPORT
To the Federal Deposit Insurance Corporation and the Office of Thrift
Supervision:
FINANCIAL STATEMENTS
Management of FMS Financial Corporation and Subsidiary ("the Corporation") is
responsible for the preparation, integrity, and fair presentation of its
published consolidated financial statements, and Thrift Financial Report (TFR)
filed with the Office of Thrift Supervision, as of December 31, 1997, and for
the year then ended. The published consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, and the
Thrift Financial Report has been prepared in accordance with the Office of
Thrift Supervision reporting instructions, and, as such, include some amounts
that are based upon judgments and estimates of management.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to consolidated financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 1997. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control-
Integrated Framework" issued by the Committee of Sponsoring Organization of the
Treadway Commission. Based on this assessment, management believes that the
Corporation maintained an effective internal control structure over financial
reporting as of December 31, 1997.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with federal and state laws and
regulations concerning dividend restrictions and federal laws and regulations
concerning loans to insiders designated by the Federal Deposit Insurance
Corporation as safety and soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that the Corporation has complied, in all significant respects, with the
designated laws and regulations related to safety and soundness for the year
ended December 31, 1997.
/s/Craig W. Yates /s/Channing L. Smith
- ------------------------------------- ---------------------------------
Craig W. Yates Channing L. Smith
President and Chief Executive Officer Vice President and Chief
Financial Officer
FMS Financial Corporation
Burlington, New Jersey
February 9, 1998
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<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
COOPERS Coopers & Lybrand, L.L.P.
& LYBRAND a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF FMS FINANCIAL CORPORATION:
We have audited the accompanying consolidated statements of financial condition
of FMS Financial Corporation and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FMS
Financial Corporation and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
- ---------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 9, 1998
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<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
ANNUAL MEETING
The 1998 Annual Shareholders' Meeting of FMS Financial Corporation will be
held at 10:00 a.m., on the 30th day of April, 1998 at the Riverton Country Club,
Highland Avenue off of Route 130, Cinnaminson, New Jersey.
STOCK MARKET INFORMATION
The common stock of FMS Financial Corporation is traded over-the-counter
and is listed on the Nasdaq National Market System under the symbol "FMCO".
Daily quotations are included in the Nasdaq National Market stock tables
published in the Wall Street Journal and other leading newspapers.
The number of record holders of common stock of the Corporation as of March
2, 1998 was approximately 790, not including those shares registered in names of
various investment brokers held in account for their customers.
The following table sets forth the range of closing prices, as reported by
Nasdaq, for the periods ended December 31, 1997 and 1996:
1997
------------------------------------
QUARTER ENDED HIGH LOW
- ------------- ---- ---
March 31, $ 20.750 $ 18.375
June 30, $ 25.500 $ 18.750
September 30, $ 31.500 $ 23.500
December 31, $ 35.500 $ 27.250
1996
-------------------------------------
QUARTER ENDED HIGH LOW
- ------------- ---- ---
March 31, $ 17.500 $ 16.250
June 30, $ 17.500 $ 14.750
September 30, $ 16.500 $ 15.500
December 31, $ 18.250 $ 15.500
The Corporation's sole operating assets are derived from its subsidiary,
Farmers & Mechanics Bank. Consequently, the ability of the Corporation to
accumulate cash for payment of cash dividends to stockholders is directly
dependent upon the ability of the Bank to pay dividends to the Corporation.
There are regulatory limitations on the ability of the Bank to pay cash
dividends to the Corporation which could, in turn, be used by the Corporation to
pay cash dividends to its stockholders. Interest on savings accounts must be
paid by the Bank prior to payment of dividends on the common stock.
Additionally, the Corporation must pay interest to holders of its debentures
before payment of cash dividends to its stockholders. Under the regulations of
the OTS, the Bank is not permitted to pay dividends on its stock if its
regulatory capital would be reduced below the amount required for the
liquidation account established in connection with its mutual-to-stock
conversion. The Bank will not be permitted to pay dividends on its capital
stock if its regulatory capital would be reduced below the regulatory capital
requirements prescribed for institutions regulated by the OTS. Further, income
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used to pay cash dividends without the payments of federal income
taxes on the amount of such income removed from reserves for such purpose at the
then current income tax rate.
The Bank's ability to pay dividends or make other capital
distributions to the Corporation is also governed by OTS regulations. Under
these regulations, "capital distributions" are defined as cash dividends,
payments by savings associations to repurchase or otherwise acquire its shares,
payments to shareholders of another entity in a cash-out merger, and other
distributions charged against capital. An institution that has regulatory
capital that is at least equal to its capital requirement and that has not been
notified that it "is in need of more than normal supervision," is a Tier 1
institution. A Tier 1 institution is permitted under OTS regulations, after
prior notice to (and no objection by) the OTS, to make capital distributions
during a calendar year up to 100% of its year to date net income plus the amount
that would reduce by one-half its "surplus capital ratio", which is the
percentage by which the ratio of its regulatory capital to assets exceeds the
ratio of its fully phased-in capital requirement to assets at the beginning of
the calendar year. As of December 31, 1997 the Bank was a Tier 1 institution
and had available $17.2 million for dividends to the Corporation, subject to
nonobjection by the OTS. It is not likely that the Corporation would request a
dividend of that magnitude.
The Corporation is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, although the source of such dividends
is dependent upon dividends received by it from the Bank. The Corporation is
subject, however, to the requirements of New Jersey law, which permits the
Corporation to pay dividends in cash or shares out of the Corporation's surplus,
defined as the excess of net assets of the Corporation over stated capital.
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<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
CHARLES B. YATES
Chairman of the Board
WAYNE H. PAGE
Vice Chairman
GEORGE J. BARBER
DOMINIC W. FLAMINI
VINCENT R. FARIAS
JAMES C. LIGNANA
EDWARD J. STAATS, JR.
CRAIG W. YATES
DIRECTORS EMERITUS
ADOLPH N. BRIGHT
KAREN S. OLEKSA
HILYARD S. SIMPKINS
BANK OFFICERS
CHARLES B. YATES*
Chairman of the Board
CRAIG W. YATES*
President
JAMES E. IGO*
Sr. Vice President and Chief Lending Officer
CHANNING L. SMITH*
Vice President and Chief Financial Officer
THOMAS M. TOPLEY*
Sr. Vice President of Operations and
Corporate Secretary
MICHAEL J. HAGELGANS
Vice President, Commercial Lending
DOUGLAS B. HALEY
Vice President, Consumer Lending
KAREN R. KOENIG
Vice President, Business Development
NANCY L. PARKER
Vice President, Human Resources
PETER S. SCHOENFELD
Vice President, Investments
KAREN D. SHINN
Vice President, Operations
FRANK E. SMITH
Vice President, Facilities and Design
MERLE A. BROWN
Security Officer
AMY J. HANNIGAN
Controller
MARCELLA F. HATCHER*
Assistant Secretary
* Officers of Bank and Holding Company
-35-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MARKET MAKERS
The following companies were making a market in the Corporation's common stock
at December 31, 1997:
ADVEST, INC. RYAN BECK & CO.
280 Trumbull Street 80 Main Street
1 Commercial Plaza W. Orange NJ 07052
Hartford, CT 06103 (973) 597-6000
(203) 541-5441
ROBERT W. BAIRD & CO., INC. TRIDENT SECURITIES
4300 W. Cypress Street 1275 Peachtree Street, NE
Tampa, FL 33607 Suite 460
(813) 877-4000 Atlanta, GA 30309
(404) 249-7700
FORM 10-K AND OTHER FINANCIAL INQUIRIES
The Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, as filed with the Securities and Exchange Commission will be furnished
to shareholders of the Corporation upon written request without charge.
Shareholders, analysts and others seeking this and other requests for
information relating to stock, annual shareholders' meeting and related matters
on FMS Financial Corporation, should contact the Corporate Secretary at the
Executive Offices.
TRANSFER AGENT AND REGISTRAR AUDITORS
American Stock Transfer and Trust Company Coopers & Lybrand L.L.P.
40 Wall Street 2400 Eleven Penn Center
New York, NY 10005 Philadelphia, PA 19103
SPECIAL COUNSEL
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
-36-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
OFFICE LOCATIONS
EXECUTIVE AND ADMINISTRATIVE OFFICES
3 Sunset Road and 811 Sunset Road
Burlington NJ 08016
(609) 386-2400
MAIN BRANCH
3 Sunset Road & Route 541
Burlington, NJ 08016
(609) 387-2728
BEVERLY
414 Cooper Street
Beverly, NJ 08010
(609) 239-4066
BORDENTOWN
335 Farnsworth Ave.
Bordentown, NJ 08505
(609) 291-8200
BROWNS MILLS
93 Pemberton-Browns Mills Road
Browns Mills, NJ 08015
(609) 893-5540
BURLINGTON CITY
352 High Street
Burlington, NJ 08016
(609) 386-4643
BURLINGTON TOWNSHIP
809 Sunset Road
Burlington, NJ 08016
(609) 387-1150
DELRAN
3002 Route 130 North
Delran, NJ 08075
(609) 764-3740
EASTAMPTON
1191 Woodlane Road
Eastampton, NJ 08060
(609) 261-6400
EDGEWATER PARK
1149 Cooper Street
Edgewater Park, NJ 08010
(609) 387-0046
LARCHMONT
3220 Route 38
Mount Laurel, NJ 08054
(609) 235-6666
LUMBERTON
1636-61 Eayrestown Road and Route 38
Lumberton, NJ 08048
(609) 267-6811
MEDFORD
200 Tuckerton Road
Medford, NJ 08055
(609) 596-4300
MEDFORD LAKES
712 Stokes Road
Medford, NJ 08055
(609) 654-6373
MOORESTOWN
53 East Main Street
Moorestown, NJ 08057
(609) 235-0544
<PAGE>
MOUNT LAUREL
4522 Church Road
Mount Laurel, NJ 08054
(609) 235-4445
RIVERTON
604 Main Street
Riverton, NJ 08077
(609)786-5333
SOUTHAMPTON
1841 Route 70
Southampton, NJ 08088
(609) 859-2700
TABERNACLE
1507 Route 206
Tabernacle, NJ 08088
(609) 268-5993
WILLINGBORO
399 Charleston Road
Willingboro, NJ 08046
(609) 877-2888
WILLINGBORO EAST
611 Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 871-4900
WILLINGBORO WEST
1 Rose Street & Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 835-4700
-37-
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant(1)
State of Percentage
Incorporation Ownership
------------- ---------
Farmers and Mechanics Bank United States 100%
FMS Financial Services, Inc.(2) New Jersey 100%
Land Financial Services, Inc.(2) New Jersey 100%
First Plunge, Inc. (3) New Jersey 100%
Fishpond, Inc. (3) New Jersey 100%
Angell Ayes, Inc. (3) New Jersey 100%
Peter's Passion, Inc. (3) New Jersey 100%
Atlantic Adventures, Inc.(3) New Jersey 100%
- ---------------
(1) The operations of the subsidiaries are included in the consolidated
financial statements contained in the Annual Report to Stockholders
attached as Exhibit 13 to the Form 10-K.
(2) Subsidiary of Farmers and Mechanics Bank.
(3) Subsidiary of Land Financial Services, Inc.
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement of FMS Financial Corporation on Form S-8 (File No. 33-24340)
of our report dated February 9, 1998 on our audits of the consolidated
financial statements of FMS Financial Corporation and Subsidiary as of
December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997, which report is incorporated by
reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 27, 1998
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