SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
|X| EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number: 0-17353
FMS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
- -------------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
- -------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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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 .
--- ---
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.[ ]
Based on the closing sales price of $9.00 per share of the registrant's
common stock on March 1, 1999, as reported on the Nasdaq National Market System
the aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $65.1 million. On such date, 7,231,767 shares of
the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of 1998 Annual Report to Stockholders (Parts II and IV)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Forward-Looking Statements
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
General
FMS Financial Corporation, a New Jersey corporation, headquartered in
Burlington, New Jersey, is the holding company for Farmers and Mechanics Bank
(the "Bank"). The Bank principally operates through its twenty-three branch
offices located throughout Burlington County, New Jersey.
The Bank 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
business loans and construction loans and invests in U.S. government securities
and mortgage-related securities. The Bank has several subsidiaries which are
currently either inactive or not material to the operations of the Bank.
Competition
The Bank's primary market area consists of Burlington County, New
Jersey, and is one of many financial institutions serving this market area. The
competition for deposit products comes from other insured financial institutions
such as commercial banks, thrift institutions and credit unions in the Bank's
<PAGE>
market area. Deposit competition also includes a number of insurance products
sold by local agents and investment products such as mutual funds and other
securities sold by local and regional brokers. Loan competition comes from other
insured financial institutions such as commercial banks, thrift institutions and
credit unions.
Lending Activities
Analysis of Loan Portfolio
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ -------------------- ------------------- ---------------- ------------------
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
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family........$246,072 81.11% $253,001 82.43% $257,451 82.89% $249,278 85.30% $245,874 85.65%
Commercial real estate.... 45,938 15.14 42,974 14.00 39,177 12.61 34,721 11.88 32,228 11.23
Commercial construction... 2,609 .86 2,385 .78 4,395 1.42 -- -- -- --
Construction.............. 1,410 .46 3,258 1.06 3,712 1.20 2,116 .73 2,924 1.02
------ ------ ------- ------ ------- ------ ------- ----- ------- -------
Total mortgage loans.. 296,029 97.57 301,618 98.27 304,735 98.12 286,115 97.91 281,026 97.90
Consumer and other loans:
Consumer.................. 3,237 1.07 3,609 1.17 4,015 1.29 4,337 1.48 4,317 1.50
Commercial business....... 4,121 1.36 1,712 .56 1,830 .59 1,779 .61 1,712 .60
------ ------- ------- ------- ------- ------ ------ ------ ------- ------
Total consumer and other
loans............... 7,358 2.43 5,321 1.73 5,845 1.88 6,116 2.09 6,029 2.10
------ ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans...........$303,387 100.00% 306,939 100.00% 310,580 100.00% 292,231 100.00% 287,055 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
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.
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, 1998, adjustable-rate residential first mortgage loans amounted to
$55.1 million or 18.17% of the Bank's total loan portfolio. These loans are
generally not originated under terms, conditions and documentation which permit
their sale in the secondary mortgage market to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA").
Fixed-rate mortgage loans are generally underwritten according to FHLMC
and 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
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to the Bank. The Bank generally charges a higher interest rate on loans if the
property is not owner-occupied. At December 31, 1998, $166.8 million or 55% of
the Bank's total loan portfolio, consisted of long-term fixed-rate first
mortgage loans of which none were classified as held for sale.
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, 1998, the Bank had home equity loans in the amount of $14.8
million or 4.88% of its total loan portfolio. Also at December 31, 1998, the
Bank had approved $23.8 million in home equity lines of credit, of which $9.3
million was outstanding.
Construction Loans. The Bank originates loans to finance the
construction of one-to-four family dwellings and/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. Interim construction loans to builders generally
have terms of up to nine months and interest rates which adjust above the prime
interest rate (generally 1% to 2%).
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. The Bank's commercial real estate loans
are 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), in the Bank's market area. 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
3
<PAGE>
generally made at rates which adjust above the prime interest rate (generally 1%
to 2%) 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.
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. 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.
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 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 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, 1998, the Bank had unused lines
of credit and outstanding loan origination commitments of approximately $29.8
million.
Loan Origination and Loan Servicing Fees. 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.
At December 31, 1998, the Bank serviced for others 492 loans with an
outstanding aggregate balance of $20.4 million. Loan servicing income for the
years ended December 31, 1998, 1997 and 1996, was $68 thousand, $83 thousand and
$98 thousand, respectively. Such loans were originated by the Bank and sold
through the secondary mortgage market with the servicing rights to those loans
retained
4
<PAGE>
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.
Non-Performing and Problems Assets
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.
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 by the
establishment of a reserve on uncollected interest. Such interest, when
ultimately collected, is credited to the income in the period received.
Non-Performing Assets. 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,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family............................. $ 1,733 $2,394 $2,413 $2,502 $1,446
Commercial real estate......................... 1,205 1,163 1,663 1,604 1,040
Consumer and other............................. 282 80 15 6 469
----- ----- ----- ----- -----
Total mortgage non-accrual loans............. $ 3,220 $3,637 $4,091 $4,112 $2,955
----- ----- ----- ----- -----
Other nonaccrual loans........................... -- -- -- $ 354 --
Troubled debt restructuring...................... $ 477(1) $ 684(1) $ 560(1) 634(1) $1,143
Real estate owned, net........................... 168 446 622 669 1,812
Other non-performing assets...................... 644 644 1,228 1,228 1,428
----- ----- ----- ----- -----
Total non-performing assets...................... $ 4,509 $5,411 $6,501 $6,997 $7,338
====== ===== ===== ===== =====
Total non-accrual loans to net loans............. 1.08% 1.20% 1.33% 1.43% 1.04%
====== ==== ==== ==== ====
Total non-accrual loans to total assets.......... .47% .58% .76% 0.82% 0.61%
====== ==== ==== ==== ====
Total non-performing assets to total assets...... .65% .86% 1.20% 1.39% 1.52%
====== ==== ==== ==== ====
</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. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
5
<PAGE>
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at December 31, 1998, the Bank had
$314 thousand, $6.8 million, and $9 thousand, classified as special mention,
substandard, and loss assets.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Bank's loan portfolio. Such evaluation, which
includes a review of all loans of which full collectibility of interest and
principal may not be reasonably assured, considers the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions.
6
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The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
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,
---------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .......... $ 3,138 $ 2,782 $ 2,767 $ 2,622 $ 2,589
Loans charged-off:
One-to-four family .................... (37) (8) (114) (13) (44)
Commercial real estate ................ -- -- -- -- --
Construction .......................... -- -- -- -- --
Consumer .............................. (1) (40) (1) (6) (37)
Commercial business ................... -- (1) -- -- (38)
------- ------- ------- ------- -------
Total charge-offs ................... (38) (49) (115) (19) (119)
Recoveries .............................. 2 5 10 44 86
------- ------- ------- ------- -------
Net loans charged-off ................... (36) (44) (105) 25 (33)
------- ------- ------- ------- -------
Provision for possible loan losses ...... 240 400 120 120 66
------- ------- ------- ------- -------
Balance at end of period ................ $ 3,342 $ 3,138 $ 2,782 $ 2,767 $ 2,622
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding during the period ......... 0.012% 0.014% 0.035% (0.009%) 0.012%
</TABLE>
7
<PAGE>
Analysis of the Allowance for Loan Losses
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,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------ ------------------- ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Loans: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family............... $1,929 81.11% $2,016 82.43% $1,716 82.89% $1,718 85.30% $1,656 85.65%
Commercial real estate........... 1,232 15.14 954 14.00 877 12.61 819 11.88 757 11.23
Commercial construction.......... 26 .86 24 .78 44 1.42 -- -- -- --
Construction..................... 14 .46 32 1.06 37 1.20 21 .73 29 1.02
Consumer and other............... 65 1.07 62 1.17 76 1.29 68 1.48 70 1.50
Commercial business.............. 76 1.36 50 .56 32 .59 141 .61 110 .60
------ ------ ------ ----- ------ ----- ------ ------- ----- -------
Total allowance for loan losses $3,342 100.00% $3,138 100.00% $2,782 100.00% $2,767 100.00% $2,622 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
8
<PAGE>
Investment Activities and Mortgage-Backed Securities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short term
securities and certain other investments. The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities. The Bank classifies
its investments as securities available-for-sale or investments securities
held-to-maturity in accordance with SFAS No. 115. At December 31, 1998, the
Bank's investment portfolio policy allowed investments in instruments such as
U.S. Treasury obligations, U.S. federal agency or federally sponsored agency
obligations, municipal obligations, mortgage-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits, as well as investment grade corporate bonds, commercial paper
and the mortgage derivative products described below. The Bank's Board of
Directors may authorize additional investments.
The Bank's securities available-for-sale and investment securities
held-to-maturity portfolios at December 31, 1998 did not contain securities of
any issuer with an aggregate book value in excess of 10% of the Bank's equity,
excluding those issued by the United States Government or its agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities ("MBS"). Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages, the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
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<PAGE>
The following table sets forth the carrying value and market value of
the Bank's mortgage backed securities and 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,
-------------------------------------------------------------------
1998 1997 1996
-------------------- ---------------------- --------------------
Estimated Estimated Estimated
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
Investment securities held to maturity: (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency securities....... $ 78,292 $ 78,242 $ 79,347 $ 79,498 $ 46,792 $ 46,156
Reverse repurchase agreements............... -- -- 30,185 30,185 20,000 20,000
Municipal bonds............................. 3,824 3,827 2,802 2,816 795 800
U.S. treasuries............................. -- -- 15 14 15 14
CMO's....................................... 47,302 47,297 -- -- -- --
MBS......................................... 90,593 92,262 92,021 94,307 104,313 105,558
Investment securities available for sale:
U.S. agencies............................... 18,501 18,501 7,871 7,871 4,997 4,997
U.S. treasuries............................. -- -- -- -- 1,999 1,999
CMO's....................................... 91,332 91,332 72,468 72,468 18,451 18,451
------- ------- ------- ------- ------ ------
Total investment securities............. 329,844 331,461 284,709 287,159 197,362 197,975
Federal Home Loan Bank of New York stock ... 4,861 4,861 3,631 3,631 3,621 3,621
Interest bearing deposits and overnight
investments............................... -- -- 827 827 347 347
-------- -------- -------- -------- ----- -----
Total investments........................ $334,705 $336,322 $289,167 $291,617 $201,330 $201,943
======= ======= ======= ======= ======= =======
</TABLE>
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<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, 1998.
<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........... $ -- --% $ 5,000 6.05% $53,387 6.33% $ 19,905 6.96% $ 78,292 $78,242 6.47%
Municipal bond............... 3,594 3.91 -- -- -- -- 230 5.60 3,824 3,827 4.01
CMO's -- -- -- -- 5,456 6.50 41,846 6.69 47,302 47,297 6.66
MBS.......................... 1,008 6.84 5,166 7.17 7,253 7.54 77,166 7.19 90,593 92,262 7.21
Investment securities available
for sale:
U.S. Government and
Agency...................... -- -- -- -- 17,503 6.46 998 7.00 18,501 18,501 6.49
CMO's........................ -- -- 354 7.00 9,537 5.85 81,442 6.84 91,332 91,333 6.73
----- ------- ------ ------- ------- ------
Total...................... $4,602 4.56% $10,520 6.63% $93,136 6.39% $221,587 6.94% $329,844 $331,461 6.74%
===== ==== ====== ===== ====== ===== ======= ===== ======= ======= ======
</TABLE>
11
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions.
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 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 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, 1998.
Maturity Period of Deposits Certificates of
- --------------------------- ---------------
Deposit
-------
(In Thousands)
Three months or less............. $ 11,541
Three through six months......... 4,966
Six through twelve months........ 4,650
Over twelve months............... 5,647
------
Total....................... $ 26,804
======
12
<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,
1998 1997 1996
--------------------------------- ----------------------------- ----------------------------
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
------- -------- ------ ------- -------- ------ ------- -------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and regular savings.... $ 84,480 16.31% 2.53% $ 73,802 15.6% 2.56% $69,666 16.22% 2.52%
Checking accounts............... 128,259 24.76 1.89 89,418 18.8 .92 72,427 16.87 .96
Money market deposit accounts... 62,099 11.99 2.64 59,797 12.6 2.72 57,399 13.37 2.65
Certificates of deposit......... 234,471 45.26 5.35 243,381 51.3 5.32 228,974 53.32 5.30
Surrogate statement............. 8,714 1.68 5.80 7,860 1.7 5.80 947 .22 6.12
------- ------- ------- ------- --------- ------
Total Deposits................ $518,023 100.00% 3.49% $474,258 100.00% 3.74% $429,413 100.00% 3.77%
======= ====== ==== ======= ====== ==== ======= ====== ====
</TABLE>
13
<PAGE>
Personnel
As of December 31, 1998 the Corporation, including its subsidiaries,
had 226 full-time employees and 141 part-time employees. The employees are not
represented by a collective bargaining unit. Management believes its
relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which are
related to the regulation of the Corporation and the Bank. 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.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions,
provided the Bank satisfies the Qualified Thrift Lender ("QTL") test or a
somewhat similar test for domestic building and loan associations. If the
Corporation acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Corporation and any of its subsidiaries (other than the Bank
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL and were acquired in a supervisory acquisition. See
"-- Regulation of the Bank -- Qualified Thrift Lender Test."
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
14
<PAGE>
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). 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.
Prior to January 1, 1997, as a member of the SAIF, the Bank paid an
insurance premium to the FDIC equal to a minimum of 0.23% of its total deposits.
The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. In 1996, the annual insurance
premium for most BIF members was lowered to $2,000. The lower insurance premiums
for BIF members placed SAIF members at a competitive disadvantage to BIF
members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for SAIF members was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period, BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF members should be the same. 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 the Corporation declined
by approximately 70%.
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
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions.
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.
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
15
<PAGE>
been advised by the OTS that it is in need of more than the normal supervision
can, after prior notice, but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess over its capital requirements)
at the beginning of the calendar year, or (ii) 75% of its net income over the
most recent four quarter period. Any additional capital distributions require
prior regulatory approval. As of December 31, 1998, 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.
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, 1998, the Bank was in compliance with its QTL requirement with
92.31% 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 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.
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.
16
<PAGE>
Item 2. Properties
The Bank conducts its business through its two administrative offices
located in Burlington, New Jersey and its 23 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.
Item 3. Legal Proceedings
The Bank is periodically involved as a plaintiff or defendant in
various legal actions, such as actions to enforce liens, condemnation
proceedings on properties in which the Bank holds mortgage interests, matters
involving the making and servicing of mortgage loans and other matters incident
to the Bank's business. In the opinion of management, none of these actions
individually or in the aggregate is believed to be material to the financial
condition or results of operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
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 1998 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.
17
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nomineed for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and "- Biographical Information" in the 1999 Proxy
Statement are incorporated herein by reference.
Executive Officers of the Company Who Are Not Directors
Name and Title Age as of December 31, 1998
- -------------- ---------------------------
Channing L. Smith 55
Vice President and
Chief Financial Officer
James E. Igo 42
Senior Vice President and
Chief Lending Officer
Thomas M. Topley 38
Senior Vice President and
Corporate Secretary
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, and investments 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.
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, human resources, data processing and accounting
operations. From June 1990 to April 1993, Mr. Topley served as Vice President
and Controller for the Bank.
18
<PAGE>
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) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated statements of financial conditions of FMS
Financial Corporation and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the years in
the three year period ended December 31, 1998, together with the
related notes and the independent auditors' report of
PricewaterhouseCoopers, LLP, independent accountants.
2. Schedules omitted as they are not applicable.
19
<PAGE>
3. Exhibits
The following Exhibits are filed as part of this report:
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 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule (electronic filing only)
(b) No Reports on Form 8-K were filed during the last quarter of
the fiscal year covered by this Report.
20
<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 as of March 26, 1999.
FMS FINANCIAL CORPORATION
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 on March 26, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ Charles B. Yates /s/ Craig W. Yates
- ----------------------------------- -------------------------------------------
Charles B. Yates Craig W. Yates
Chairman of the Board President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ George J. Barber /s/ Channing L. Smith
- ----------------------------------- -------------------------------------------
George J. Barber, Director Channing L. Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Edward J. Staats, Jr. /s/ Wayne H. Page
- ----------------------------------- -------------------------------------------
Edward J. Staats, Jr., Director Wayne H. Page, Director
/s/ James C. Lignana /s/ Dominic W. Flamini
- ----------------------------------- -------------------------------------------
James C. Lignana, Director Dominic W. Flamini, Director
/s/ Vincent R. Farias /s/ Ruppert A. Hall, Jr.
- ----------------------------------- -------------------------------------------
Vincent R. Farias, Director Ruppert A. Hall, Jr., Director
/s/ Mary Wells
- -----------------------------------
Mary Wells, Director
<PAGE>
CORPORATE PROFILE
FMS Financial Corporation is the holding company for Farmers & Mechanics
Bank. Farmers & Mechanics Bank, with total assets of $692 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-three 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.
1
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Financial Condition: (In Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 (a) 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $691,812 $628,403 $541,710 $501,550 $483,776
Loans receivable and loans held for sale, net 298,603 302,831 306,871 288,400 283,260
Deposits 536,310 489,440 453,277 428,809 429,431
Stockholders' equity 43,469 38,916 33,826 33,053 29,159
</TABLE>
Operations: (In Thousands, except earnings per share
data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 (a) 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $46,563 $40,813 $36,841 $35,201 $32,270
Interest expense 24,869 20,879 18,978 18,041 15,336
Net interest income 21,694 19,934 17,863 17,160 16,934
Net income 5,271 5,491 3,026 4,343 4,455
Basic earnings per common share 0.73 0.77 0.41 0.58 0.58
Diluted earnings per common share 0.72 0.75 0.40 0.56 0.56
Dividends declared per common share 0.11 0.08 0.07 0.07 0
Weighted average common shares outstanding 7,204 7,165 7,411 7,512 7,728
Weighted average common shares and common
stock equivalents outstanding 7,314 7,346 7,573 7,695 7,926
</TABLE>
<TABLE>
<CAPTION>
Other Selected Data:
- -----------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 (a) 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest rate spread 3.50% 3.60% 3.50% 3.49% 3.64%
Net interest margin 3.72
3.48 3.72 3.66 3.66
Return on average assets 0.85 0.98 0.60 0.89 0.94
Dividend payout ratio 15.28 10.67 17.50 12.43 0.00
Equity-to-asset ratio 6.28 6.19 6.24 6.59 6.03
</TABLE>
(a) Includes $2.7 million for the one-time assessment to recapitalize the SAIF.
2
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
To Our Shareholders:
Farmers & Mechanics Bank had satisfactory financial results for 1998
and continued to make progress in expanding our branch system and improving
customer service.
Deposits and assets continued to increase, but operating results
declined moderately due to the lower interest rate environment and higher
operating costs. We have continued to achieve significant growth in our core
deposit base of checking and savings accounts. Business and local government
deposits have also increased.
During December, 1998 we changed our computer system from a main frame
system which was once again approaching capacity limits to a new client-server
PC based system. This "conversion" required a year long process of preparation
and training. This change was virtually seamless to our customers but there
continues to be further work for our staff on changes and enhancements. The new
system will give us greater flexibility and allow further program additions and
improvements in the future.
We are continuing to improve our coverage of the Burlington County
market area. During 1998 we increased our branches to 22 with the opening of a
temporary branch in Browns Mills and construction of a new branch in
Cinnaminson, New Jersey. Early in 1999 we have opened additional branches in
Medford Village and Chesterfield, in facilities purchased from larger banks that
were consolidating. During April, we will open a temporary branch in Riverside
in a recently purchased old bank building that will get extensive further
renovation. Later in the year, we plan to begin construction of new branches in
Burlington and Pemberton, and remodel and open a branch in Mt. Holly. More
branch locations, combined with our long hours and seven day banking, increase
our cost of operations and reduce current profitability, but are an important
investment in the growth of our franchise.
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
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects", and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
effect of opening a new branch, the ability to control costs and expenses, and
general economic conditions. FMS Financial Corporation undertakes no obligation
to publicly release the results of any revisions to those forward looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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.
Market Risk
Market risk is the risk of loss from adverse changes in market risk
prices and rates. The Bank's market risk arises primarily from interest rate
risk inherent in its lending, investment and deposit taking activities. The
Bank's profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Bank's earnings
to the extent that the interest rates borne by assets and liabilities do not
change at the same speed, to the same extent or on the same basis. To that end,
management actively monitors and manages its interest rate risk exposure. The
Bank does not participate in hedging programs, interest rate swaps or other
activities involving the use of off-balance sheet derivative financial
instruments, but may do so in the future to mitigate interest rate risk. 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 1998, the total investment in MBS amounted
to $229 million, or 68% of total investments. These are instruments
collateralized by pools of residential and commercial mortgages which return
interest and principal payments to the investor. Approximately 39% 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. MBS are generally very
liquid issues with major brokerage houses providing ready markets. However, MBS
are subject to prepayment and extension risk which can adversely affect their
yields and expected maturities. MBS of $1.7 million and $1.2 million were used
to secure
4
<PAGE>
public funds on deposit at December 31, 1998 and 1997, respectively.
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.
4
<PAGE>
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,
1998, 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 $ 19,641 $ 104,399 $ 24,110 $ 11,736 $ 95,980 $ 255,866
Loans 8,007 56,178 93,860 70,386 74,956 303,387
Mortage-backed securities 15,564 26,236 18,015 11,842 18,936 90,593
---------- ----------- ----------- ------------ ----------- --------------
Total 43,212 186,813 135,985 93,964 189,872 649,846
---------- ----------- ----------- ------------ ----------- --------------
Interest-bearing liabilities:
Now, Super Now, Passbook and
Club accounts 12,563 27,388 50,179 27,070 53,675 170,875
Money market accounts 11,719 31,393 17,397 3,522 3,659 67,690
Certificates of Deposit 51,580 107,367 51,868 17,594 0 228,409
Borrowings 0 0 75,000 20,000 4,568 99,568
---------- ----------- ----------- ------------ ----------- --------------
Total 75,862 166,148 194,444 68,186 61,902 566,542
---------- ----------- ----------- ------------ ----------- --------------
Interest Rate Sensitivity GAP (32,650) 20,665 $ (58,459) $ 25,778 $ 127,970 $ 83,304
========== =========== =========== ============ =========== ==============
Cumulative Interest Rate
Sensitivity GAP (32,650) (11,985) $ (70,444) $ (44,666) $ 83,304
========== =========== ========== ============ ===========
Ratio of Interest Rate
Sensitive Assets to
Interest Rate Sensitive
Liabilities 56.96% 112.44% 69.94% 137.81% 306.73% 114.70%
========== =========== ========= ============ =========== ==============
Ratio of Cumulative GAP
to Total Bank Assets -4.72% -1.73% -10.19% -6.46% 12.05%
========== =========== ========= ============ ===========
</TABLE>
5
<PAGE>
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 21%;
fixed-rate mortgage loans have a prepayment rate that is constant through time
at 18%; 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
16%; mortgage-backed securities and CMOs and REMICs have a prepayment rate that
is constant over time at 21%. 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 and interest liabilities. 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
<PAGE>
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, 1998, the Bank would experience a 75 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 121 basis point decrease 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.
6
<PAGE>
Average Balances, Interest and
Yields/Rates
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------- -------------------------------- ----------------------------------
1998 1997 1996
------------------------------- -------------------------------- ----------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- --------- ---------- --------- -------- ----------- --------- ----------- ------------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $ 303,330 $ 24,316 8.02% $ 310,540 $ 25,038 8.06% $ 296,276 $ 23,797 8.03%
Mortgage-backed securities 88,339 6,376 7.22% 97,013 7,062 7.28% 107,268 7,499 6.99%
Investment securities 231,610 15,871 6.85% 127,937 8,713 6.81% 84,762 5,545 6.54%
---------- --------- --------- ----------- --------- ------- ----------- ----------- ---------
Total interest-earning
assets 623,279 46,563 7.47% 535,490 40,813 7.62% 488,306 36,841 7.54%
--------- --------- --------- ----------- --------- ------- ----------- ----------- ---------
Interest-bearing
liabilities:
Deposits 518,023 18,091 3.49% 474,258 17,755 3.74% 429,413 16,176 3.77%
Borrowings 98,459 5,721 5.81% 34,776 2,067 5.94% 29,450 1,745 5.93%
Subordinated debentures 10,000 1,057 10.57% 10,000 1,057 10.57% 10,000 1,057 10.57%
---------- --------- --------- ----------- --------- ------- ------------- ----------- ---------
Total interest-bearing
liabilities $ 626,482 24,869 3.97% $ 519,034 20,879 4.02% 468,863 18,978 4.05%
========= --------- --------- =========== --------- ------- =========== ----------- ---------
Net interest income $ 21,694 $ 19,934 $ 17,863
========= ========= ===========
Interest rate spread 3.50% 3.60% 3.50%
========= ======= =========
Net yield on average
interest-earning assets 3.48% 3.72% 3.66%
========= ======= =========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 99.49% 103.17% 104.15%
========= ========= ==========
</TABLE>
6
<PAGE>
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,
------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------------ ------------------------------------------
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 $ (141) $ (581) $ (722) $ 95 $ 1,146 $ 1,241
Mortgage-backed securities (55) (631) (686) 280 (717) (437)
Investment securities 97 7,061 7,158 344 2,824 3,168
-------- ------- ------- ------- ------- -------
Total change - interest
income (99) 5,849 5,750 719 3,253 3,972
-------- ------- ------- ------- ------- -------
Interest expense:
Deposits (1,302) 1,638 336 (110) 1,689 1,579
Borrowings (131) 3,785 3,654 6 316 322
Subordinated debentures 0 0 0 0 0 0
-------- ------- ------- ------- ------- -------
Total change - interest
expense (1,433) 5,423 3,990 (104) 2,005 1,901
-------- ------- ------- ------- ------- -------
Net change in net interest
income $ 1,334 $ 426 $ 1,760 $ 823 $ 1,248 $ 2,071
======== ======= ======= ======= ======= =======
</TABLE>
7
<PAGE>
Comparisons of Years Ended December 31, 1998 and 1997.
Net Income
The Corporation and its subsidiary recorded net income of $5.3 million
for the year ended December 31, 1998, or $.72 diluted earnings per share as
compared to net income of $5.5 million, or $.75 diluted earnings per share for
the year ended December 31, 1997. Net interest income was $21.7 million in 1998
compared to $19.9 million in 1997. Provisions for loan losses were $240 thousand
in 1998 compared to $400 thousand in 1997. Other income totaled $2.4 million in
1998 compared to $2.1 million for the same period in 1997. Total operating
expenses for the year ended December 31, 1998 were $15.6 million compared to
$13.0 million in the previous year. During 1998, the Corporation declared
dividends which totaled $.11 per share which resulted in a dividend payout ratio
of 15.28%. 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 $5.8 million to $46.6 million in 1998
from $40.8 million in 1997. The increase is attributable to increases in
interest income on investment securities of $7.2 million, partially offset by a
decrease in interest income on loans of $722 thousand and mortgage-backed
securities of $686 thousand.
The increase in interest income on investment securities was due to a
$103.7 million increase in the average balance of investment securities to
$231.6 million in 1998 from $127.9 million in 1997. The investment portfolio
increased primarily due to the net purchase in 1998 of $131.3 million in
collateralized mortgage obligations (CMOs), partially offset by $65.1 million in
principal paydowns and $9.6 million net reductions in U.S. Agency notes. The
increases in the average balance of investment securities resulted in an
increase in interest income of $7.1 million in 1998 from the previous year.
Average yields increased to 6.85% in 1998 from 6.81% in 1997, which resulted in
an increase in interest income of $97 thousand.
The average balance of the loan portfolio decreased $7.2 million to
$303.3 million in 1998 from $310.5 million in 1997. The decline in loan volume
during 1998 resulted in a decrease in interest income of $581 thousand. The
average yield on the loan portfolio decreased to 8.02% in 1998 from 8.06% in
1997 which resulted in a decrease in interest income of $141 thousand.
Interest income on mortgage-backed securities decreased $686 thousand
in 1998 primarily due to volume decreases in the portfolio. The average balance
of the portfolio decreased $8.7 million to $88.3 million in 1998 from $97.0
million in 1997, resulting in a decrease in interest income of $631 thousand.
The decline in the average balance is due to principal paydowns of $32.8
million, partially offset by purchases of $31.1 million during the year. The
average yield on the portfolio decreased to 7.22% in 1998 from 7.28% in 1997,
which resulted in a decrease in interest income of $55 thousand.
Interest Expense
Total interest expense increased $4.0 million to $24.9 million in 1998
from $20.9 million in 1997. The increase was due to an increase in interest
expense on borrowings and deposits.
7
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Interest expense on borrowings increased $3.7 million to $5.7 million
in 1998 from $2.1 million in 1997. This increase was due to an increase in the
average balance of borrowings, partially offset by a decline in the average
rate. The average balance of borrowings increased $63.7 million to $98.5 million
in 1998 from $34.8 million in 1997, resulting in a $3.8 million increase in
interest expense due to volume. This was primarily the result of a $70.7 million
increase in the average balance of repurchase agreements during the year. The
average rate on borrowings decreased to 5.81% in 1998 from 5.94% in 1997,
resulting in a $131 thousand decrease in interest expense due to rate.
Interest expense on deposits increased $336 thousand to $18.1 million
in 1998 from $17.8 million in 1997. The average balance of deposits increased
$43.8 million to $518.0 million in 1998 from $474.3 million in 1997, resulting
in an increase in interest expense of $1.6 million. Increases in deposits in
1998 are primarily due to an increase in the average balances of checking
accounts of $38.2 million and savings accounts of $11.5 million, partially
offset by a decline in the average balance of certificates of deposit of $8.9
million. These increases were partially offset by a decline in the average rate
paid on deposits of 25 basis points to 3.49% in 1998 from 3.74% in 1997,
resulting in a decrease in interest expense of $1.3 million. The lowering of the
average rate on deposits in 1998 was due to an increase in the average balance
of non-interest "Free Personal Checking" and "Free Business Checking" accounts
of $19.7 million.
Provision For Loan Losses
The provision for loan losses decreased $160 thousand to $240 thousand
in 1998 from $400 thousand in 1997. 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. The Corporation will
continue to monitor its allowance for loan losses and make future adjustments to
the allowance through the provision for loan losses as economic conditions
dictate. Although the Corporation maintains its allowance for loan losses at a
level that it considers to be adequate to provide for the inherent risk of loss
in its loan portfolio, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will not
be required in future periods due to the higher degree of credit risk which
might result form the change in the mix of the loan portfolio.
8
<PAGE>
Other Income (Expense)
Other income from operations increased $280 thousand to $2.4 million in
1998 compared with $2.1 million in 1997.
Loss on disposal of fixed assets of $210 thousand relates to the
write-off of obsolete computer hardware and software due to the computer system
conversion completed during 1998.
Real estate owned operations, net in 1998 resulted in a loss of $64
thousand, which was comprised of $57 thousand in real estate owned operating
expenses, $108 thousand of provisions for loss on real estate, net of
charge-offs, and realized gains of $101 thousand on the sale of real estate
owned properties.
Service charges on accounts increased $165 thousand to $2.4 million in
1998 from $2.2 million in 1997. The increase is the result of additional retail
banking fees due to higher transaction volume during the year.
Operating Expenses
Total operating expenses increased $2.6 million to $15.6 million in
1998 from $13.0 million in 1997.
Salaries and benefits increased $1.7 million to $9.0 million in 1998
from $7.3 million in 1997. The increase was due to additional staff in the new
branches opened during the year as well as an increase in branch staff for
extended weekday hours until 9:00 p.m. Average full time equivalent employees
during 1998 were 335 as compared to 299 during 1997.
Occupancy and equipment expense increased $281 thousand to $3.0 million
in 1998 from $2.7 million in 1997. This increase is due to additional
depreciation and occupancy expenses on two new branches opened in 1998, as well
as other facility and equipment additions and improvements during the year.
Purchased services expense increased $232 thousand to $1.3 million in
1998 from $1.1 million in 1997. Check processing costs increased $101 thousand
and MAC charges increased $94 thousand due to higher transaction volume in 1998.
Advertising expense increased by $77 thousand to $206 thousand in 1998
from $129 thousand in 1997. The Bank has engaged in a newspaper advertising
campaign emphasizing our twenty-three branch locations and increased hours of
operations.
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 $.75 diluted earnings per share as
compared to net income of $3.0 million, or $.40 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 $.08 per share
which resulted in a dividend payout ratio of 10.67%. The ability of the
Corporation to pay dividends to shareholders is directly dependent upon the
ability of the Bank to pay dividends to the Corporation. See Stockholders'
Equity footnote.
8
<PAGE>
Interest Income
Total interest income increased $4.0 million to $40.8 million in 1997
from $36.8 million in 1996. The increase is
8
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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.
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.
9
<PAGE>
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. 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.
9
<PAGE>
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.
9
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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 engaged in a newspaper advertising
campaign emphasizing our branch locations and increased hours of operations.
Impact of Inflation and Changing Prices
Unlike most industrial companies, substantially all the assets of the
Corporation are monetary in nature. As a result, interest rates have a greater
impact on the Corporation's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
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.
"99" for "1999"). 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. The program includes Year 2000 committees
consisting of directors and executive officers of the Bank. The purpose of the
committees are to oversee and manage the year 2000 compliance program providing
regular reports to the Board of Directors detailing progress with the Year 2000
issue. Management expects that it will be able to satisfy year 2000 compliance
issues by the end of 1999. Management intends to perform testing on all systems
throughout 1999.
The Bank replaced its core bank processing systems in December 1998 as
the existing systems had reached their limit in capacity and function. The new
systems provide Year 2000 compliance.
10
<PAGE>
The Bank has established a written Year 2000 Contingency Plan for all
vital mission critical applications. It states both the plans in the event of
non-compliance and the dates in which the contingency plans will be put into
effect. The scope of the plan includes five phases. They are as follows:
Awareness, Assessment, Renovation, Validation, and Implementation. As defined by
the Federal Financial Institutions Examination Council and the banking
regulatory agencies which regulate the Bank.
The Assessment of the impact of the Year 2000 issues on the Bank's
computer systems has been completed. Based on the assessment the Bank has
identified and prioritized those Systems deemed to be mission critical or those
that have significant impact on normal operations.
The Bank has contacted all significant vendors and suppliers regarding
their Year 2000 readiness. These third party vendors have delivered written
assurance that they are or expect to be Year 2000 prior to the end of 1999.
Their progress in meeting their targeted scheduled readiness is being monitored
for any indication that they may not be able to address their Year 2000 problems
in a timely fashion. Management testing on all banking systems is progressing
according to plan. Mission critical testing began in the second quarter of 1998
and will continue through the first quarter of 1999. At the current time
management estimates its Year 2000 readiness is 80%. The following table
provides a summary of the current status of the five phases involved in our Year
2000 readiness Plan.
Percent Projected Date
Project Phase Complete of Completion Comments
- --------------------------------------------------------------
Awareness 100% Complete
Assessment 85% March 1999 On Schedule
Renovation 85% March 1999 On Schedule
Validation 85% June 1999 On Schedule
Implementation 80% June 1999 On Schedule
Overall Completion 80% June 1999 On Schedule
The Bank has thus far primarily used and expects to continue to use
internal resources to implement its readiness plan. At this time management
currently estimates Year 2000 compliance costs at between $50,000 and $150,000
of which $48,000 was expensed in 1998. The Bank does not expect that these cost
will be material to its financial condition or results of operation.
Non-compliance with the Year 2000 issue could have an adverse affect on the
operation of the business. Successful and timely completion of the Year 2000
compliance are based upon management's best estimates, which were derived
10
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
using numerous assumptions of future events which are inherently uncertain
including the continued availability of certain resources, the progress and
results of the Bank's testing plans, and all vendors, suppliers and customer
readiness.
Based upon current information management has determined that the year
2000 issues will not pose significant operational problems for its Systems. This
is based on the ability of the Bank to renovate, in a timely manner, the
products and services on which the Bank's Systems rely. Bank management
believes, based on information and testing results from our mission critical
vendors, that these systems are and it is anticipated will remain Year 2000
compliant. The will continue to monitor compliance of the mission critical
systems.
The Bank is in the process of updating contingency plans for each
critical system, in the event one of those systems fail, despite our best
efforts. The Bank's contingency plans to provide resources during the weekend of
December 31, 1999 and for a period of time afterward. It is anticipated that the
Bank, and or its vendors will be able to overcome any unforeseen problems
associated with the millennium change.
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, 1998 the Bank had $80.0
million in repurchase agreements and $16.4 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. Liquidity may be adversely affected by
unexpected deposit outflows, excessive interest rates paid by competitors,
adverse publicity relating to the Banking industry and similar matters.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Company's commitment to make loans and
management's assessment of the Company's ability to generate funds. The Company
is also subject to federal regulations that impose certain minimum capital
requirements.
11
<PAGE>
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 Office of Thrift Supervision ("OTS") on November 24,
1997 changed the definition and calculation of liquidity. The December 31, 1998
regulatory liquidity number of 31.35% reflects these changes.
The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 1999 is approximately $158 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, 1998, the Bank had loan commitments outstanding of
$29.8 million, of which $6.6 million were for fixed-rate loans and $23.2 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 4% of assets, of
which 2% 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, 1998, the Bank exceeded all
three required regulatory capital levels. At December 31, 1998, the Bank's
regulatory tangible and core capital was $48.4 million or 7.02% of total bank
assets and risk-based capital was $51.5 million or 18.13% of risk-weighted
assets.
11
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Consolidated Summary of Quarterly Earnings (Unaudited)
The following table presents summarized quarterly data for 1998 and 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
1998 Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income $ 11,424 $ 11,805 $ 11,748 $ 11,586 $ 46,563
Total interest expense 6,136 6,365 6,290 6,078 24,869
------------- ------------ ------------ ------------ -----------
Net interest income 5,288 5,440 5,458 5,508 21,694
Provision for loan losses 60 60 60 60 240
------------- ------------ ------------ ------------ -----------
Net interest income after provision
for loan losses 5,228 5,380 5,398 5,448 21,454
Total other income 605 536 590 650 2,381
Total operating expenses 3,892 3,820 3,814 4,054 15,580
------------- ------------ ------------ ------------ -----------
Income before income taxes 1,941 2,096 2,174 2,044 8,255
Federal and state income taxes 700 761 785 738 2,984
------------- ------------ ------------ ------------ -----------
Net income $ 1,241 $ 1,335 $ 1,389 $ 1,306 $ 5,271
============= ============ ============ ============ ===========
Basic earnings per common share $ 0.17 $ 0.19 $ 0.19 $ 0.18 $ 0.73
============= ============ ============ ============ ===========
Diluted earnings per common share $ 0.17 $ 0.18 $ 0.19 $ 0.18 $ 0.72
============= ============ ============ ============ ===========
</TABLE>
<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 $ 0.19 $ 0.20 $ 0.19 $ 0.19 $ 0.77
============= ============ ============ ============ ===========
Diluted earnings per common share $ 0.18 $ 0.20 $ 0.19 $ 0.18 $ 0.75
============= ============ ============ ============ ===========
</TABLE>
12
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 18,142,316 $ 11,637,181
Interest-bearing deposits 0 826,823
Short term funds 11,754,075 167,618
-------------------- ------------------
Total cash and cash equivalents 29,896,391 12,631,622
Investment securities held to maturity 129,417,826 112,349,476
Investment securities available for sale 109,833,133 80,338,661
Loans, net 298,603,223 302,831,031
Mortgage-backed securities held to maturity 90,592,647 92,020,517
Accrued interest receivable:
Loans 1,839,217 1,750,966
Mortgage-backed securities 633,667 715,981
Investments 2,371,410 1,934,925
Federal Home Loan Bank stock 4,861,410 3,630,800
Real estate held for development, net 644,487 644,487
Real estate owned, net 167,541 446,361
Office properties and equipment, net 19,292,247 15,692,055
Deferred income taxes 2,015,772 1,507,307
Excess cost over fair value of net assets acquired 164,969 469,444
Prepaid expenses and other assets 1,156,573 1,061,125
Subordinated debentures issue costs, net 321,113 378,460
-------------------- ----------------
TOTAL ASSETS $ 691,811,626 $ 628,403,218
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 536,309,623 $ 489,439,980
Securities sold under agreements to repurchase 80,000,000 60,000,000
Advances from the Federal Home Loan Bank 16,368,321 24,496,476
10% Subordinated debentures, due 2004 10,000,000 10,000,000
Guarantee of employee stock ownership plan debt 0 33,481
Advances by borrowers for taxes and insurance 2,259,435 2,192,541
Accrued interest payable 1,304,742 1,114,304
Dividends payable 216,953 167,154
Other liabilities 1,883,887 2,043,465
------------------- ------------------
Total liabilities 648,342,961 589,487,401
------------------- ------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.10 par value 5,000,000
shares authorized; none issued
Common stock - $.10 par value 10,000,000 shares
authorized; shares issued 7,897,191* and 2,604,370,
and shares outstanding 7,231,767* and 2,387,916 as
of December 31, 1998 and 1997, respectively 789,719 260,437
Paid-in capital in excess of par* 8,216,820 8,419,167
Unrealized (loss)gain on securities available for
sale - net of deferred income taxes (21,793) 53,955
Guarantee of employee stock ownership plan debt 0 (33,481)
Retained earnings 37,860,291 33,406,060
Less: Treasury stock (665,424* and 216,454 shares,
at cost, as of December 31, 1998 and 1997,
respectively) (3,376,372) (3,190,321)
-------------------- ------------------
Total stockholders' equity 43,468,665 38,915,817
-------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 691,811,626 $ 628,403,218
==================== ==================
</TABLE>
* Common stock, paid-in capital in excess of par and treasury stock at December
31, 1998 reflect a three-for-one stock split paid in July 1998.
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, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest income on:
Loans $ 24,315,646 $ 25,037,855 $ 23,797,512
Mortgage-backed securities 6,375,729 7,062,459 7,499,231
Investments 15,871,239 8,712,928 5,544,668
--------------- --------------- --------------
Total interest income 46,562,614 40,813,242 36,841,411
--------------- --------------- --------------
INTEREST EXPENSE:
Interest expense on:
Deposits 18,090,683 17,754,531 16,176,223
Borrowings 5,720,876 2,066,929 1,745,032
Subordinated debentures 1,057,348 1,057,348 1,057,348
--------------- --------------- --------------
Total interest expense 24,868,907 20,878,808 18,978,603
--------------- --------------- --------------
NET INTEREST INCOME 21,693,707 19,934,434 17,862,808
PROVISION FOR LOAN LOSSES 240,000 400,000 120,000
--------------- --------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 21,453,707 19,534,434 17,742,808
--------------- --------------- --------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 147,080 170,766 219,639
Gain on sale of loans 5,423 9,804 8,432
Gain on sale of investment securities 0 1,711 54,406
Loss on disposal of fixed assets (209,935) 0 0
Loss from real estate held for development 0 (200,000) 0
Real estate owned operations, net (64,215) (179,879) (174,503)
Service charges on accounts 2,369,112 2,204,167 1,946,307
Other income 133,584 94,664 199,097
--------------- --------------- --------------
Total other income (expense) 2,381,049 2,101,233 2,253,378
--------------- --------------- --------------
OPERATING EXPENSES:
Salaries and employee benefits 8,971,707 7,319,822 7,043,584
Occupancy and equipment 2,996,435 2,715,513 2,541,296
Purchased services 1,303,637 1,071,697 916,803
Federal deposit insurance premiums 294,912 232,739 946,594
SAIF recapitalization assessment 0 0 2,720,765
Professional fees 369,987 331,436 285,972
Advertising 206,120 129,278 42,956
Other 1,436,937 1,216,951 1,192,896
--------------- --------------- --------------
Total operating expenses 15,579,735 13,017,436 15,690,866
--------------- --------------- --------------
INCOME BEFORE INCOME TAXES 8,255,021 8,618,231 4,305,320
INCOME TAXES:
Current 3,293,115 3,195,477 2,044,225
Deferred (309,582) (68,400) (764,726)
--------------- --------------- --------------
Total income taxes 2,983,533 3,127,077 1,279,499
NET INCOME $ 5,271,488 $ 5,491,154 $ 3,025,821
=============== =============== ==============
BASIC EARNINGS PER COMMON SHARE* $0.73 $0.77 $0.41
=============== =============== ==============
DILUTED EARNINGS PER COMMON SHARE* $0.72 $0.75 $0.40
=============== =============== ==============
Weighted average common shares outstanding* 7,203,862 7,165,455 7,411,083
Potential dilutive effect of the exercise
of stock options* 109,779 180,864 161,862
--------------- --------------- --------------
Adjusted weighted average common shares outstanding* 7,313,641 7,346,319 7,572,945
=============== =============== ==============
</TABLE>
* Basic and diluted earnings per common share, weighted average common shares
outstanding and the potential dilutive effect of the exercise of stock
options were restated to reflect a three-for-one stock split paid in July
1998.
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, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,271,488 $ 5,491,154 $ 3,025,821
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 240,000 400,000 120,000
Depreciation and amortization 1,999,005 1,876,773 1,639,469
Provision for real estate owned 108,102 142,630 124,315
Provision for real estate held for development 0 200,000 0
Realized (gains) and losses on:
Sale of loans and loans held for sale (5,423) (9,804) (8,432)
Sale of investments available for sale 0 (1,711) (54,406)
Disposal and sale of fixed assets 209,935 7,122 7,240
Sale of real estate owned (101,349) (10,630) 8,235
Proceeds from sale of loans held for sale 0 101,625 112,226
Loans originated for sale 0 (100,000) (110,000)
Increase in accrued interest receivable (442,422) (770,837) (24,702)
Increase in prepaid expenses and other assets (95,448) (171,226) (120,213)
Increase (Decrease) in accrued interest payable 190,438 253,759 (27,911)
(Decrease) Increase in other liabilities (61,539) (46,544) 241,148
Provision for deferred income taxes (465,972) (67,530) (705,382)
Other 33,481 72,982 75,981
------------ ------------- ------------
Net cash provided by operating activities 6,880,296 7,367,763 4,303,389
------------ ------------- ------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 1,658,700 953,442 846,443
Real estate held for development 0 333,245 0
Real estate owned 603,095 75,630 396,519
Office property and equipment 0 0 1,700
Principal collected and proceeds from maturities of investment
investment securities held to maturity 294,889,937 265,776,982 157,566,650
Proceeds from maturities of investment
securities available for sale 86,593,751 11,942,666 16,327,791
Principal collected and proceeds from
maturities of mortgage-backed securities 32,754,399 33,458,783 32,335,567
Principal collected on loans, net 60,258,471 53,020,808 52,372,663
Longer-term loans originated or acquired, net (58,185,394) (50,305,474) (72,113,495)
Purchase of investment securities and mortgage-
backed securities held to maturity (343,502,524) (320,005,763) (199,107,774)
Purchase of investment securities available for sale (116,472,554) (78,570,231) (26,797,361)
(Purchase) Redemption of Federal Home Loan Bank stock (1,230,610) (10,200) 437,500
Purchase of office property and equipment (4,912,791) (2,077,581) (3,271,960)
Net cash received from deposit and branch purchase, net 0 0 9,044,846
------------ ------------- ------------
Net cash used by investing activities (47,545,520) (85,407,693) (31,960,911)
------------ ------------- ------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 61,509,157 27,376,384 3,813,048
Net (decrease) increase in time deposits (14,639,514) 2,095,304 11,470,940
Net (decrease) increase in FHLB advances and advances from Bank (8,128,155) (8,053,524) 14,741,758
Proceeds from securities sold under agreement to repurchase 20,000,000 60,000,000 0
Principal repayment of employee stock ownership plan debt (33,481) (72,982) (75,981)
Increase in advances from borrowers for taxes and insurance 66,894 53,903 45,508
Purchase of treasury stock (186,051) (127,361) (1,913,191)
Dividends paid on common stock (767,461) (525,479) (495,434)
Net proceeds from issuance of common stock 108,604 5,758 4,843
------------ ------------- ------------
Net cash provided by financing activities 57,929,993 80,752,003 27,591,491
------------ ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,264,769 2,712,073 (66,031)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,631,622 9,919,549 9,985,580
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 29,896,391 $ 12,631,622 $ 9,919,549
============ ============= ============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 24,678,469 $ 20,625,049 $ 19,006,514
Income taxes 2,906,347 3,456,506 1,647,476
Non cash investing and financing activities:
Dividends declared and not paid at year end 216,953 167,154 119,636
Non-monetary transfers from loans to real estate acquired
through foreclosure 331,028 32,435 481,833
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantee of
employee
Accumulated stock Total
Common shares Common Paid-in comprehensive ownership Retained Treasury Stockholders'
outstanding stock capital income plan debt earnings stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 2,505,756 $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
Other comprehensive income, net of tax
Unrealized gain on securities
available for sale 70,002 70,002
---------
Total comprehensive income 3,095,823
Dividends declared (489,782) (489,782)
Decrease in guarantee of employee
stock ownership plan debt 75,981 75,981
Exercise of stock options 1,250 125 4,718 4,843
Purchase of common stock (114,299) (1,913,191) (1,913,191)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 2,392,707 260,288 8,413,558 (166,152) (106,463) 28,487,903 (3,062,960) 33,826,174
Net Income 5,491,154 5,491,154
Other comprehensive income, net of tax
Unrealized gain on securities
available for sale 220,107 220,107
---------
Total comprehensive income 5,711,261
Dividends declared (572,997) (572,997)
Decrease in guarantee of employee
stock ownership plan debt 72,982 72,982
Exercise of stock options 1,486 149 5,609 5,758
Purchase of common stock (6,277) (127,361) (127,361)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 2,387,916 260,437 8,419,167 53,955 (33,481) $33,406,060 (3,190,321) 38,915,817
Net Income 5,271,488 5,271,488
Other comprehensive income, net of tax
Unrealized gain (loss) on securities
available for sale (75,748) (75,748)
---------
Total comprehensive income 5,195,740
Dividends declared (817,257) (817,257)
Decrease in guarantee of
employee stock ownership plan debt 33,481 33,481
Exercise of stock options 47,451 4,745 103,859 108,604
Tax benefit from gains on stock
options exercised 218,331 218,331
Purchase of common stock (5,354) (186,051) (186,051)
Three-for-one stock split 4,801,754 524,537 (524,537) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 7,231,767 $789,719 $8,216,820 $ (21,793)$ 0 $37,860,291 $(3,376,372) 43,468,665
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
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, 1998 and
1997 were $11.0 million and $6.8 million, respectively. These requirements were
satisfied through the balance of vault cash and a balance at the Federal Home
Loan Bank.
17
<PAGE>
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
17
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
estimated future cash flows. While management uses the 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
$20.4 million and $25.6 million at December 31, 1998
18
<PAGE>
and 1997, respectively. Loan servicing fee income was approximately $70
thousand, $83 thousand and $98 thousand for the years ended December 31, 1998,
1997 and 1996, 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.
Reclassifications
Certain items in the 1997 and 1996 consolidated financial statements
have been reclassified to conform with the presentation in the 1998 consolidated
financial statements.
Earnings Per Share
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share", requires the dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to
18
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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.
Basic and diluted earnings per 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 the three-for-one
stock split that was paid to shareholders on July 14, 1998. A total of 5,245,370
additional shares were issued in conjunction with the stock split. The par value
of the Corporation's stock remained unchanged. As a result, $524,537 was
transferred from paid-in capital in excess of par to common stock.
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and estimated market value of investment
securities held to maturity at December 31, 1998 and 1997 are as follows:
December 31, 1998
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------
U.S. Gov't Agencies $ 78,291,686 $ 151,165 $ (201,073) $ 78,241,778
Municipal bonds 3,823,802 2,833 0 3,826,635
CMOs 47,302,338 53,888 (59,017) 47,297,209
- -------------------------------------------------------------------------------
Total $ 129,417,826 $ 207,886 $ (260,090) $ 129,365,622
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
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%.
19
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of investments held to
maturity at December 31, 1998, by contractual maturity are shown in the
following table. Expected maturities may differ as borrowers have the right to
call certain obligations. CMOs are shown separately due to the amortization and
prepayment of principal occurring throughout the life of these instruments.
December 31,1998
----------------------------------
Amortized Estimated
Cost Market Value
- ---------------------------------------------------------------------
Due one year or less $ 3,594,071 $ 3,596,635
Due one to five years 5,000,000 4,960,000
Due five to ten years 53,387,121 53,371,278
Due after ten years 20,134,296 20,140,500
CMO's 47,302,338 47,297,209
- ---------------------------------------------------------------------
Total 129,417,826 129,365,622
- ---------------------------------------------------------------------
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of investment securities
available for sale at December 31, 1998 and 1997 are as follows:
December 31, 1998
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------
U.S. Gov't Agencies $ 18,492,035 $ 26,683 $ (18,102) $ 18,500,616
CMOs 91,377,435 206,435 (251,353) 91,332,517
- ------------------------------------------------------------------------------
Total $ 109,869,470 $ 233,118 $ (269,455) $ 109,833,133
- ------------------------------------------------------------------------------
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 72,406,623 284,720 (223,263) 72,468,080
- ------------------------------------------------------------------------------
Total $ 80,256,758 $ 306,366 $ (224,463) $ 80,338,661
- ------------------------------------------------------------------------------
19
<PAGE>
The amortized cost and estimated market value of investments available
for sale at December 31, 1998, 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 are shown separately due to the
amortization and prepayment of principal occurring throughout the life of these
instruments.
December 31, 1998
--------------------------------------
Amortized Estimated
Cost Market Value
- ----------------------------------------------------------------------
Due five to ten years $ 17,492,036 $ 17,502,717
Due after ten years 1,000,000 997,900
CMOs 91,377,434 91,332,516
- ----------------------------------------------------------------------
Total $ 109,869,470 $ 109,833,133
- ----------------------------------------------------------------------
There were no sales during 1998. During 1997, FNMA-mortgage-backed
securities available for sale were sold which resulted in 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.
19
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
4. LOANS, NET
Loans, net at December 31, 1998 and 1997 consist of the following:
1998 1997
- ----------------------------------------------------------------------
Mortgage Loans $ 246,071,511 $ 253,000,504
Construction Loans 1,410,456 3,257,798
Commercial Construction 2,609,315 2,385,192
Consumer Loans 3,237,176 3,609,033
Commercial Real Estate 45,937,998 42,974,261
Commercial Business 4,120,967 1,712,099
- ----------------------------------------------------------------------
Subtotal 303,387,423 306,938,887
Less:
Deferred loan fees 1,441,926 970,075
Allowance for
possible loan losses 3,342,274 3,137,781
- ----------------------------------------------------------------------
Total loans, net $ 298,603,223 $ 302,831,031
- ----------------------------------------------------------------------
At December 31, 1998 and 1997 the recorded investment in loans for
which impairment had been recognized in accordance with SFAS Nos. 114 and 118
totaled $3.2 million and $3.6 million, respectively. At December 31, 1998,
impaired loans of $1.6 million related to loans that were individually measured
for impairment with a valuation allowance of $363 thousand and $1.6 million of
loans that were collectively measured for impairment with a valuation allowance
of $69 thousand. 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. For the years ended
December 31, 1998 and 1997, the average recorded investment in impaired loans
was approximately $3.4 million and $3.5 million, respectively. During the years
ended December 31, 1998 and 1997 the Corporation recognized $125 thousand and
$192 thousand, respectively, of interest on impaired loans, all of which was
recognized on the cash basis.
20
<PAGE>
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, 1998 and 1997 was $3.2
million and $3.6 million, respectively. Interest income on non-accrual loans
that would have been recorded in 1998 under the original terms of such loans was
$266 thousand, and the interest income actually recognized in 1998 for such
loans was $119 thousand. 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 actual interest income recognized in 1997 for such loans was $185
thousand.
The Bank originates and purchases both adjustable and fixed interest
rate loans. At December 31, 1998, the composition of these loans is as follows:
Maturing Maturing
during from 2000 Maturing
(In Thousands) 1999 through 2003 after 2003 Total
- -------------------------------------------------------------------------------
Mortgage Loans (1-4 dwelling) $ 1,715 $ 15,811 $ 228,546 $ 246,072
Construction Loans 1,264 0 146 1,410
Commercial Construction 1,640 24 945 2,609
Consumer Loans 1,635 1,201 401 3,237
Commercial Real Estate 5,829 18,233 21,876 45,938
Commercial Business 1,892 1,740 489 4,121
- -------------------------------------------------------------------------------
Total $ 13,975 $ 37,009 $ 252,403 $ 303,387
- -------------------------------------------------------------------------------
Interest sensitivity on the
above loans:
Loans with predetermined rates $ 8,281 $ 30,331 $ 173,568 $ 212,180
Loans with adjustable or
floating rates 5,695 6,678 78,834 91,207
- -------------------------------------------------------------------------------
Total $ 13,976 $ 37,009 $ 252,402 $ 303,387
- -------------------------------------------------------------------------------
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,
-------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------
Balance at beginning
of year $ 3,137,781 $ 2,781,937 $ 2,766,779
Provision charged to
operations 240,000 400,000 120,000
Charge-offs (37,876) (49,042) (115,253)
Recoveries 2,369 4,886 10,411
- ---------------------------------------------------------------------
Balance at end of year $ 3,342,274 $ 3,137,781 $ 2,781,937
- ---------------------------------------------------------------------
20
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at December 31, 1998 and
1997 are summarized as follows:
December 31, 1998
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Market Value
- ----------------------------------------------------------------------
GNMA $ 31,716,739 $ 599,765 $ (3,615) $ 32,312,889
FNMA 37,531,455 597,103 (49,100) 38,079,458
FHLMC 21,255,729 524,392 (476) 21,779,645
Private 88,724 1,610 (33) 90,301
- ----------------------------------------------------------------------
Total $ 90,592,647 $ 1,722,870 $ (53,224) $ 92,262,293
- ----------------------------------------------------------------------
December 31, 1997
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Market Value
- ----------------------------------------------------------------------
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
- ----------------------------------------------------------------------
The Bank has the intent and ability to hold these securities to
maturity. At December 31, 1998, neither a disposal, nor a condition that could
lead to a decision not to hold these securities to maturity were reasonably
foreseen.
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at December 31, 1998 and 1997 are
summarized by major classification, as follows:
December 31,
---------------------------------
1998 1997
- ------------------------------------------------------------------------
Land, buildings and improvements $ 18,900,216 $ 16,269,867
Furniture and equipment 4,153,118 3,665,361
Computers 3,629,926 2,316,398
- ------------------------------------------------------------------------
Total 26,683,260 22,251,626
Less accumulated depreciation (7,391,013) (6,559,571)
- ------------------------------------------------------------------------
Office properties and equipment, net $ 19,292,247 $ 15,692,055
- ------------------------------------------------------------------------
21
<PAGE>
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, 1998 and 1997, are summarized as follows:
December 31,
---------------------------------
1998 1997
- ------------------------------------------------------------------------
Real Estate held for development $ 933,256 $ 933,256
Valuation allowance (288,769) (288,769)
- ------------------------------------------------------------------------
Net $ 644,487 $ 644,487
- ------------------------------------------------------------------------
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 $168 thousand and $446 thousand, net at December
31, 1998 and 1997, respectively. Changes in allowance for real estate owned is
as follows:
Years ended December 31,
-------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Balance at
beginning of year $ 560,137 $ 437,507 $ 313,192
Provisions charged
to operations 108,102 142,630 153,482
Charge-offs 0 (20,000) (29,717)
Recoveries 0 0 550
- -----------------------------------------------------------------------------
Balance at end
of year $ 668,239 $ 560,137 $ 437,507
- -----------------------------------------------------------------------------
21
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
9. DEPOSITS
Deposits at December 31, 1998 and 1997 consisted of the following major
classifications and weighted average rates:
December 31, 1998
----------------------------------------------
Weighted Percent
Average Rate Amount of Total
- -----------------------------------------------------------------------
Non-interest checking 0.00 % $ 69,336,887 12.93 %
Checking accounts 1.89 75,280,395 14.04
Savings accounts 2.83 95,591,907 17.82
Money market accounts 2.64 67,690,222 12.62
Certificates 5.35 228,410,212 42.59
- -----------------------------------------------------------------------
Total 3.49 % $ 536,309,623 100.00 %
- -----------------------------------------------------------------------
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 %
- -----------------------------------------------------------------------
A summary of certificates by maturity at December 31, 1998 is as
follows:
Years ended December 31, Amount
------------------------------------------------
1999 $ 157,821,422
2000 37,135,760
2001 15,754,388
Thereafter 17,698,642
------------------------------------------------
Total $ 228,410,212
------------------------------------------------
22
<PAGE>
A summary of interest expense on deposits is as follows:
Years ended December 31,
-----------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------
Checking accounts $ 1,263,105 $ 825,672 $ 693,879
Savings accounts 2,591,626 2,347,193 1,816,081
Money market accounts 1,697,154 1,629,248 1,519,789
Certificates 12,538,798 12,952,418 12,146,474
- -----------------------------------------------------------------------
Total interest expense $ 18,090,683 $ 17,754,531 $ 16,176,223
- -----------------------------------------------------------------------
10. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1998, the Bank had advances from the Federal Home Loan
Bank of New York (FHLB) in the amount of $16.4 million with a weighted average
interest rate of 6.00%. Advances are collateralized by certain first mortgage
loans.
Years ended December 31,
- ------------------------------------------------------------
1998 1997
- ------------------------------------------------------------
Weighted Weighted
Average Maturity Average Maturity
Amount Rate Date Amount Rate Date
- ----------------------------------------------------------
$ 2,100,000 7.13% 1/2/98
1,000,000 4.95% 10/13/98
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
1,368,321 5.00% 10/9/07 1,396,476 5.00% 10/9/07
- -------------------------------------------------------------
$ 16,368,321 6.00% $ 24,496,476 6.08%
- -------------------------------------------------------------
22
<PAGE>
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1998, the Bank had securities sold under the agreements
to repurchase (repurchase agreements) in the aggregate amount of $80.0 million.
The repurchase agreements are collateralized by U.S. Agency Notes and CMOs with
a market value of $80.4 million. Accrued interest payable totaled $446 thousand
at December 31, 1998.
Year ended December 31, 1998
- ------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------
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
FHLB 20,000,000 5.13% 1/14/08 1/14/01
- ------------------------------------------------------------------------------
Total $80,000,000 5.57%
- ------------------------------------------------------------------------------
Year ended 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%
- ------------------------------------------------------------------------------
22
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
12. 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,
------------------------------
1998 1997
- ---------------------------------------------------------------------
Deferred income tax assets:
Allowance for possible loan losses $ 924,040 $ 677,181
Real estate losses 482,409 435,010
Deferred loan fees, net (2,225) (11,113)
Compensation and pension liability 49,822 49,822
Amortization of deposit premium 274,034 259,723
Post retirement benefits 185,000 185,000
Capitalized interest 284,690 274,951
Other 155,340 61,287
- ---------------------------------------------------------------------
Gross deferred tax assets 2,353,110 1,931,861
Deferred income tax liabilities:
Prepaid deposit insurance premium 48,912 26,936
Depreciation 288,426 397,618
- ---------------------------------------------------------------------
Gross deferred tax liabilities: 337,338 424,554
- ---------------------------------------------------------------------
Deferred income tax assets, net $ 2,015,772 $ 1,507,307
- ---------------------------------------------------------------------
23
<PAGE>
The following represents the components of income tax expense for the years
ended December 31, 1998, 1997 and 1996, respectively.
1998 1997 1996
- --------------------------------------------------------------------------
Current Federal tax provision $ 3,008,922 $ 2,903,256 $ 1,862,681
Current State tax provision 284,193 292,221 181,544
- --------------------------------------------------------------------------
Total Current provision 3,293,115 3,195,477 2,044,225
- --------------------------------------------------------------------------
Deferred Federal tax benefit (283,771) (62,697) (725,109)
Deferred State tax benefit (25,811) (5,703) (39,617)
- --------------------------------------------------------------------------
Total Deferred benefit (309,582) (68,400) (764,726)
- --------------------------------------------------------------------------
Total $ 2,983,533 $ 3,127,077 $ 1,279,499
- --------------------------------------------------------------------------
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.
23
<PAGE>
The Corporation's provision for income taxes differs from that computed by
applying the statutory federal income tax rate to income before income taxes as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------ ---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 2,806,707 34.00% $ 2,930,199 34.00% $ 1,463,808 34.00%
Increase (Decrease) from:
State income taxes, net
of federal income tax
benefit 170,531 2.07 189,102 2.19 93,672 2.18
Change in valuation
allowance 0 0.00 0 0 (289,588) -6.73
Other 6,295 0.00 7,776 0.09 11,607 0.27%
------------ ---------- ----------- ---------- ------------ ----------
Total $ 2,983,533 36.15% $ 2,127,077 36.28% $ 1,279,499 29.72%
============ ========== =========== ========== ============ ==========
</TABLE>
23
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
13. LEASES
The Bank leases two buildings and land to operate three branches 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, 1998 are as follows:
Fiscal Year Amount
----------------------------------------------------------
1999 $ 127,202
2000 76,826
2001 76,826
2002 76,826
2003 and beyond 1,133,643
----------------------------------------------------------
Total $ 1,491,323
----------------------------------------------------------
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 $105 thousand, $104 thousand and $107 thousand
for fiscal years 1998, 1997 and 1996, respectively.
14. 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 4%, tangible
capital equal to 2% and risk-based capital equal to 8%. At December 31, 1998,
the Bank exceeded all three regulatory capital levels required under FIRREA. The
Bank's regulatory tangible and core capital was $48.4 million or 7.02% of total
bank assets and risk-based capital was $51.5 million or 18.13% of risk-weighted
assets.
24
<PAGE>
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles ("GAAP") to regulatory capital at December 31,
1998:
Tangible Core Risk-based
Capital Capital Capital
- -------------------------------------------------------------------
Bank's GAAP Capital $ 49,695,061 49,695,061 49,695,061
Add:
Unrealized loss on
investments AFS 21,793 21,793 21,793
Less:
Subsidiary
investments not
eligible (965,474) (965,474) (965,474)
Goodwill (164,969) (164,969) (164,969)
REO greater than
5 years (149,541) (149,541) (149,541)
Supplementary
qualifying capital
item
General valuation
allowance 0 0 3,092,524
- -------------------------------------------------------------------
Regulatory capital
computed 48,436,870 48,436,870 51,529,394
Minimum regulatory
capital requirement 13,800,280 27,600,560 22,741,729
- -------------------------------------------------------------------
Regulatory capital
excess $ 34,636,590 $ 20,836,310 $ 28,787,665
- -------------------------------------------------------------------
15. PENSION PLAN
The Bank has a defined benefit pension plan for active employees. Net
pension expense was $371 thousand, $385 thousand and $412 thousand for years
ended December 31, 1998, 1997 and 1996, respectively. The components of net
pension cost are as follows:
Years ended December 31,
------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Service Cost $ 435,047 $ 401,818 $ 397,001
Interest Cost 270,772 232,376 204,457
Return on Assets (359,216) (286,070) (596,276)
Net Amortization
and Deferral 23,921 37,140 406,357
- ---------------------------------------------------------------------------
Net periodic
pension cost $ 370,524 $ 385,264 $ 411,539
- ---------------------------------------------------------------------------
24
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The following table presents a reconciliation of the funded status of the
defined benefit pension plan at December 31, 1998 and 1997:
December 31,
-----------------------------------
1998 1997
- ---------------------------------------------------------------------------
Projected benefit obligation 5,200,545 4,419,723
Fair value of plan assets 5,895,741 5,171,488
- ---------------------------------------------------------------------------
Excess of plan assets over
projected benefit obligation 695,196 751,765
Unrecognized net gain (1,153,817) (876,493)
Unrecognized prior service cost 76,135 81,860
Unrecognized net transition
obligation 162,569 193,475
- ---------------------------------------------------------------------------
(Accrued) Prepaid pension cost
included in the consolidated
balance sheet $ (219,917) $ 150,607
- ---------------------------------------------------------------------------
The following table presents a reconciliation of beginning and ending
balances of benefit obligations and plan assets.
December 31,
--------------------------------------
Change in Project Benefit Obligation 1998 1997
- ------------------------------------------------------------------------------
Projected Benefit Obligation
at Beginning of Year $4,419,723 $3,959,973
Service Cost 435,047 401,818
Interest Cost 270,772 232,376
Amendments 0 0
Actuarial loss (gain) 133,501 (48,603)
Benefits Paid (58,498) (125,841)
- ------------------------------------------------------------------------------
Projected Benefit Obligation
at End of Year $5,200,545 $4,419,723
- ------------------------------------------------------------------------------
Change in Plan Assets
- ------------------------------------------------------------------------------
Fair Value of Plan Assets
at Beginnning of Year $5,171,488 $4,105,395
Actual Return of Plan Assets 782,751 1,022,934
Employer Contribution 0 169,000
Plan Participants' Contributions 0 0
Benefits Paid (58,498) (125,841)
- ------------------------------------------------------------------------------
Fair Value of Plan Assets
at End of Year $5,895,741 $5,171,488
- ------------------------------------------------------------------------------
Actuarial assumptions used in determining pension cost are as follows:
Years ended December 31,
-------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------
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 %
- -----------------------------------------------------------------------
25
<PAGE>
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,
-----------------------------------
1998 1997
- -----------------------------------------------------------------------------
Service Cost $ 0 $ 0
Interest Cost 30,514 31,938
Amortization of prior service cost (14,499) (10,854)
Amortization of Gain (1,763) (5,229)
- -----------------------------------------------------------------------------
Net periodic post-retirement
benefit cost $ 14,252 $ 15,855
- -----------------------------------------------------------------------------
The assumed discount rate used in the calculation for net periodic
post-retirement benefit cost was 7.0% and 7.5% for 1998 and 1997, respectively.
The assumed health care cost trend rate for 1998 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, 1998
- --------------------------------------------------------------------------
Accumulated post-retirement obligation
at year end $487,849
Service and Interest Cost $32,847
- --------------------------------------------------------------------------
The following table summarizes the amounts recognized in the Bank's
balance sheet:
December 31,
-----------------------------------
1998 1997
- -----------------------------------------------------------------------------
Accumulated post-retirement
benefit obligation $ (451,181) $ (435,729)
Unrecognized prior service cost (99,076) (113,575)
Unrecognized net gain (59,101) (89,205)
- -----------------------------------------------------------------------------
Accrued post-retirement benefit
cost $ (609,358) $ (638,509)
- -----------------------------------------------------------------------------
The assumed discount rate used in the calculation for the accumulated
post-retirement benefit obligation as of December 31, 1998 and 1997 was 6.75%
and 7.0%, respectively.
25
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
16. SUBORDINATED DEBENTURES
The Corporation issued $10.0 million of subordinated debentures. 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.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the fair value of all financial instruments is
required, whether or not recognized on the balance sheet, for which it is
practical to estimate fair value. In cases where quoted market prices are not
available, fair values are based on assumptions including future cash flows and
discount rates. Accordingly, the fair value estimates cannot be substantiated,
may not be realized, and do not represent the underlying value of the
Corporation.
The Corporation uses the following methods and assumptions to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents: The carrying value is a reasonable estimate of fair
value.
Investment securities held to maturity, 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.
26
<PAGE>
At December 31, 1998 and December 31, 1997, the carrying amount and the
estimated market value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------------- -------------------------------------
Carrying Estimated Carrying Estimated
Amount Market Value Amount Market Value
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 29,896,391 $ 29,896,391 $ 12,631,622 $ 12,631,622
Investment securities held to maturity and
investment securities available for sale $ 239,250,959 $ 239,198,755 $ 192,688,137 $ 192,852,572
Mortgage-backed securities $ 90,592,647 $ 92,262,293 $ 92,020,517 $ 94,306,629
FHLB Stock $ 4,861,410 $ 4,861,410 $ 3,630,800 $ 3,630,800
Loans, net of unearned income $ 301,945,497 $ 309,708,000 $ 305,968,812 $ 310,340,000
Less: Allowance for possible loan losses (3,342,274) (3,342,274) (3,137,781) (3,137,781)
Loans, net $ 298,603,223 $ 306,365,726 $ 302,831,031 $ 307,202,219
Financial liabilities:
Deposits
Checking, passbook, and money market accounts $ 307,899,411 $ 307,899,411 $ 246,390,254 $ 246,390,254
Certificates $ 228,410,212 $ 229,028,000 $ 243,049,726 $ 241,393,000
Securities sold under agreements to repurchase $ 80,000,000 $ 83,705,000 $ 60,000,000 $ 58,560,000
Subordinated debentures $ 10,000,000 $ 10,500,000 $ 10,000,000 $ 10,600,000
Other borrowings $ 16,368,321 $ 16,467,000 $ 24,529,957 $ 23,941,238
Off-balance sheet financial instruments:
Commitments to extend credit $ 29,758,602 $ 29,758,602 $ 25,528,246 $ 25,528,246
Standby letters of credit $ 1,301,772 $ 1,301,772 $ 761,522 $ 761,522
</TABLE>
26
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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.
18. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT ("FDICIA")
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted into law on December 19, 1991. The statute includes a
number of additional supervisory measures. The additional supervisory powers and
regulations mandated by FDICIA include a "Prompt Corrective Action" program that
permits regulators to take increasingly harsh action against 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, 1998 management
of the Bank believes that it is in compliance with the regulations adopted
pursuant to FDICIA.
19. COMMITMENTS AND CONTINGENCIES
The Bank has outstanding loan commitments of $29.8 million as of
December 31, 1998. Of these commitments outstanding, the breakdown between fixed
and variable rate loans is as follows:
December 31, 1998
----------------------------------------
Fixed Variable
Rate Rate Total
- ---------------------------------------------------------------------
Commitments to:
fund loans $ 6,566,280 $ 6,203,400 $ 12,769,680
Unused lines:
Construction 0 1,796,435 1,796,435
Equity line of
credit loans 0 15,192,487 15,192,487
- ---------------------------------------------------------------------
$ 6,566,280 $ 23,192,322 $ 29,758,602
- ---------------------------------------------------------------------
27
<PAGE>
In addition to outstanding loan commitments, the Bank as of December
31, 1998, issued $1.3 million in standby letters of credit to guarantee
performance of a customer to a third party.
Commitments and standby letters of credit are issued in accordance with
the same loan policies and underwriting standards as settled loans. Since some
commitments and standby letters of credit are expected to expire without being
drawn down, these amounts do not necessarily represent future cash requirements.
20. LITIGATION
There are no significant pending legal proceedings at December 31, 1998
which will have a material impact on the Corporation's financial position or
results of operations.
21. LOANS TO OFFICERS AND DIRECTORS
Regulation O provides that all loans to executive officers and
directors be made on substantially the same terms and conditions as are
available to the general public. On November 11, 1996, Regulation O was amended
to allow executive officers to participate in any employee loan rate discount
benefit program available to all full-time employees. Since the Bank offers such
an employee benefit program, the policy governing loans to executive officers
was amended to allow the executive officers to participate in this loan program
and thereby receive rate discounts. These changes went into effect on January 1,
1997. The rate discounts are available to employees as long as they are employed
at the Bank. If employment is terminated, the rate discount ceases from the date
of termination. At December 31, 1998 and 1997, loans made to directors and
executive officers whose indebtedness exceeded $60 thousand amounted to $1.5
million and $764 thousand, respectively. During 1998 new loans to these
individuals totaled $785 thousand and repayments totaled $33 thousand.
22. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion to stock form, the Corporation
established an Employee Stock Ownership Plan ("ESOP"), which purchased
approximately $660 thousand worth of common stock. In order to make the
purchase, the ESOP borrowed approximately $660 thousand on December 8, 1988 from
a commercial bank. The debt, which accrues interest at 80% of the commercial
bank's base rate, has been guaranteed by the Corporation, and is payable and
expensed in ten annual installments of approximately $66 thousand. Additional
principal payments may be made from cash dividends paid on the unallocated ESOP
shares.
Annual contributions to the ESOP are made in amounts determined by the
Board of Directors. Because the Corporation's loan guarantee represents a
commitment either to make future contributions to the ESOP or to make the
principal payments when due, the guarantee has been reflected as a liability,
and an offsetting charge equivalent to the future contributions to be made has
been reflected as a reduction of stockholders' equity in the accompanying
consolidated statements of financial condition.
27
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
23. STOCK OPTIONS
The Corporation has established a stock compensation plan (the "Plan")
for executive officers and other selected employees of the Corporation. The Plan
consists of incentive stock options intended to qualify under Section 422A of
the Internal Revenue Code of 1986. These stock options may be surrendered and
stock appreciation rights may be granted in their place, with the approval of
the Corporation.
A total of 241,926 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, 1998, the option
exercise prices are $1.292, $5.333 and $10.00. 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,
1998, 1997 and 1996 and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------
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 235,995 $1.91 246,453 $1.88 287,469 $1.80
Options granted 93,000 10.00 0 0 0 0
Options exercised (84,081) 1.29 (4,458) 1.29 (3,750) 1.29
Options surrendered (34,296) 1.29 (6,000) 1.29 (37,266) 1.29
- -----------------------------------------------------------------------------------------
Outstanding at the
End of the Year 210,618 $6.83 235,995 $1.91 246,453 $1.88
- -----------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
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, 1998
-----------------------------------------------------------
As Reported Pro Forma
-----------------------------------------------------------
Net Income $ 5,271,488 $ 5,042,974
Basic Earnings per share $0.73 $0.70
Diluted Earnings per share $0.72 $0.69
-----------------------------------------------------------
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 .86%, expected volatility of 26.11%, discount rate of 6.0% and
an expected life of 10 years at December 31, 1998. There were no options granted
in 1997 or 1996.
24. RISKS AND UNCERTAINTIES
The earnings of the Corporation depend on the earnings of the Bank. The
earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations of the
Bank are subject to risks and uncertainties surrounding its exposure to changes
in the interest rate environment.
Most of the Bank's lending activity is with customers located within
southern New Jersey. Generally, the loans are secured by real estate consisting
of single family residential properties. While this represents a concentration
of credit risk, the credit losses arising from this type of lending compare
favorably with the Bank's credit loss experience on its portfolio as a whole.
The ultimate repayment of these loans is dependent to a certain degree on the
local economy and real estate market.
The financial statements of the Corporation are prepared in conformity
with generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the
allowance for possible loan losses and carrying values of real estate owned and
real estate held for development. Consideration is given to a variety of factors
in establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of 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.
28
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
25. 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 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 499,293 $ 397,911
Investment in Subsidiary 49,913,393 45,662,960
Investment Securities 1,000,000 1,000,000
Intercompany receivable, net 2,199,643 1,924,945
Subordinated debentures issue costs, net 321,113 378,460
Other 168,843 168,843
---------- ----------
Total Assets $54,102,285 $49,533,119
========== ==========
Liabilities:
10% Subordinated debentures due 2004 $10,000,000 $10,000,000
Guarantee of employee stock ownership plan debt 0 33,481
Dividends payable 216,953 167,154
Accrued interest payable 416,667 416,667
---------- ----------
Total Liabilities $10,633,620 $10,617,302
========== ==========
Stockholder's Equity:
Preferred stock -$.10 par value 5,000,000 shares authorized; none issued
Common stock - $.10 par value 10,000,000 shares authorized; shares
issued 7,897,191* and 2,604,370 and shares outstanding 7,231,916
as of December 31, 1998 and 1997, respectively 789,719 260,437
Paid-in capital in excess of par* 8,216,719 8,419,167
Unrealized (loss) gain on securities available for sale,
net of deferred income taxes (21,793) 53,955
Guarantee of employee stock ownership plan debt 0 (33,481)
Retained earnings 37,860,291 33,406,060
Less: Treasury stock (665,424* and 216,454 shares, at
cost at December 31, 1998 and 1997, respectively) (3,376,372) (3,190,321)
---------- ----------
Total Stockholder's equity 43,468,665 38,915,817
---------- ----------
Total Liabilities and Stockholder's Equity $54,102,285 $49,533,119
========== ==========
</TABLE>
* Common stock, paid-in capital in excess of par and treasury stock at
December 31, 1998 reflect a three-for-one stock split paid in July 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
FMS Financial Corporation Statements of Operations 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intercompany interest income $ 560,750 $ 560,750 $ 560,750
Interest expense (1,057,348) (1,057,348) (1,057,348)
Dividends from subsidiary 1,600,000 1,400,000 1,400,000
Equity in undistributed income of subsidiary 3,999,243 4,418,909 1,953,576
- --------------------------------------------------------------------------------------------------------------
Income before taxes 5,102,645 5,322,311 2,856,978
Income tax benefit 168,843 168,843 168,843
- --------------------------------------------------------------------------------------------------------------
Net Income $ 5,271,488 $ 5,491,154 $ 3,025,821
- --------------------------------------------------------------------------------------------------------------
</TABLE>
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
29
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Years Ended December 31,
----------------------------------------------------------------
FMS Financial Corporation Statements of Cash Flows 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 5,271,488 $ 5,491,154 $ 3,025,821
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the subsidiary (3,999,243) (4,418,909) (1,953,576)
Amortization of bond issue costs 57,347 57,349 57,348
Decrease in interest payable 0 0 0
Decrease (Increase) in intercompany receivable, net (274,698) (333,389) 1,452,440
Other operating activities 33,481 72,982 75,292
------------------- ------------------ ---------------
Net cash provided by operating activities 1,088,375 869,187 2,657,325
Financing Activities
Purchase of treasury stock (186,055) (127,361) (1,913,191)
Investment in subsidiary (108,603) (5,758) (4,843)
Cash dividends paid on common stock (767,457) (525,479) (495,434)
Principal repayment of employee stock ownership plan debt (33,481) (72,982) (75,981)
Proceeds from issuance of stock 108,603 5,758 4,843
------------------- ------------------ ---------------
Net cash used by financing activities (986,993) (725,822) (2,484,606)
------------------- ------------------ ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 101,382 143,365 172,719
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 397,911 254,546 81,827
------------------- ------------------ ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 499,293 $ 397,911 $ 254,546
------------------- ------------------ ---------------
</TABLE>
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
30
<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, 1998, 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, 1998. 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, 1998.
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, 1998.
/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 16, 1999
31
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of FMS Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, changes in stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of FMS
Financial Corporation and Subsidiary ("the Company") at December 31, 1998 and
1997, and the results of its operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 16, 1999
32
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
ANNUAL MEETING
The 1999 Annual Shareholders' Meeting of FMS Financial Corporation will
be held at 10:00 a.m., on the 29th day of April, 1999 at the Burlington Country
Club, Burrrs Road, Westampton, 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 1, 1999 was approximately 788, 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, 1998 and 1997:
1998
---------------------------------
QUARTER ENDED HIGH LOW
- --------------------------------------------------------------
March 31, $ 12.167 $ 11.167
June 30, $ 17.000 $ 12.201
September 30, $ 15.500 $ 9.500
December 31, $ 10.625 $ 6.875
- --------------------------------------------------------------
1997
---------------------------------
QUARTER ENDED HIGH LOW
- --------------------------------------------------------------
March 31, $ 6.917 $ 6.125
June 30, $ 8.500 $ 6.250
September 30, $ 10.500 $ 7.833
December 31, $ 11.833 $ 9.083
- --------------------------------------------------------------
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.
33
<PAGE>
The Bank's ability to pay cash 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, 1998 the Bank was a Tier 1 institution and
had available $18.3 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.
33
<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
RUPERT A. HALL, JR.
JAMES C. LIGNANA
EDWARD J. STAATS, JR.
MARY WELLS
CRAIG W. YATES
DIRECTORS EMERITUS
ADOLPH N. BRIGHT
KAREN S. OLEKSA
HILYARD S. SIMPKINS
34
<PAGE>
BANK OFFICERS
CHARLES B. YATES*
Chairman of the Board
CRAIG W. YATES*
President
JAMES E. IGO*
Sr. Vice President and Chief Lending Officer
CHANNING L. SMITH*
Vice President and Chief Financial Officer
THOMAS M. TOPLEY*
Sr. Vice President of Operations and
Corporate Secretary
DOUGLAS B. HALEY
Vice President, Consumer Lending
KAREN R. KOENIG
Vice President, Business Development
NANCY L. PARKER
Vice President, Human Resources
PETER S. SCHOENFELD
Vice President, Investments
KAREN D. SHINN
Vice President, Operations
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
34
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MARKET MAKERS
The following companies were making a market in the Corporation's common stock
at December 31, 1998:
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
(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, 1998, 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 PricewaterhouseCoopers LLP
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
35
<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
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
CHESTERFIELD
305 Bordentown-Chesterfield Road
Chesterfield, NJ 08620
(609) 324-1256
CINNAMINSON
1703 Highland Avenue
Cinnaminson, NJ 08077
(609) 303-1870 *
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 Route 38 & Eayrestown Road
Lumberton, NJ 08048
(609) 267-6811
36
<PAGE>
MEDFORD
200 Tuckerton Road
Medford, NJ 08055
(609) 596-4300 *
MEDFORD LAKES
712 Stokes Road
Medford, NJ 08055
(609) 654-6373
MEDFORD VILLAGE
1 S. Main Street at Bank Street
Medford, NJ 08055
(609) 714-1115
MOORESTOWN
53 East Main Street
Moorestown, NJ 08057
(609) 235-0544 *
MOUNT LAUREL
4522 Church Road
Mount Laurel, NJ 08054
(609) 235-4445 *
RIVERSIDE
Scott Street & Pavilion Avenue
Riverside, NJ 08075
(609) 461-4333 *
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
John F. Kennedy Way & Charleston Rd.
Willingboro, NJ 08046
(609) 877-2888
WILLINGBORO EAST
611 Beverly-Rancocas Road
One East Ridge Shopping Center
Willingboro, NJ 08046
(609) 871-4900
WILLINGBORO WEST
1 Rose Street & Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 835-4700
(609) 654-6373
* Effective 6/12/99 the area code for these branches will be changed
to #856.
36
EXHIBIT 21
Subsidiaries of the Registrant(1)
State of Percentage
Incorporation Ownership
------------- ---------
Farmers and Mechanics Bank United States 100%
FMS Financial Services, Inc.(2)(4) New Jersey 100%
Land Financial Services, Inc.(2) New Jersey 100%
First Plunge, Inc. (3)(4) New Jersey 100%
Fishpond, Inc. (3)(4) New Jersey 100%
Angell Ayes, Inc. (3)(4) New Jersey 100%
Peter's Passion, Inc. (3)(4) 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.
(4) Currently an inactive subsidiary.
EXHIBIT 23
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 16, 1999 on our audits of the consolidated
financial statements of FMS Financial Corporation and Subsidiary as of
December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, which report is incorporated by
reference in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
--------------------------------------------
PRICEWATERHOUSECOOPERS LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 18,142
<INT-BEARING-DEPOSITS> 11,754
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