SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, DC 20549
----------------------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period ended March 31, 1999
OR
- --- Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
- ---------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
- ------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- ---
As of May 7, 1999 there were issued and outstanding shares 7,210,966
shares of the registrant's Common Stock, par value $.10 per share.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------
QUARTERLY REPORT ON FORM 10-Q
-----------------------------
MARCH 31, 1999
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TABLE OF CONTENTS
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Page
----
PART I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1999 (unaudited) and December 31, 1998........1
Consolidated Statements of Income (unaudited)
for the three months ended
March 31, 1999 and March 31, 1998.......................2
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1999
and March 31, 1998......................................3
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1999 (unaudited)...4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 5 - 14
Item 3 - Disclosure about Market Risk................................14
PART II - Other Information
- ---------------------------
Item 1 - Legal Proceedings...........................................15
Item 2 - Changes in Securities.......................................15
Item 3 - Defaults Upon Senior Securities.............................15
Item 4 - Submission of Matters to a Vote of Security Holders.........15
Item 5 - Other Information...........................................15
Item 6 - Exhibits and Reports on Form 8-K............................15
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 13,350,385 $ 18,142,316
Interest-bearing deposits 55,461 0
Federal Fund Sold 0 0
Short term funds 38,263,004 11,754,075
------------- ---------------
Total cash and cash equivalents 51,668,850 29,896,391
Investment securities held to maturity 145,409,391 129,417,826
Investment securities available for sale 79,557,961 109,833,133
Loans, net 297,495,386 298,603,223
Mortgage-backed securities held to maturity 93,976,502 90,592,647
Accrued interest receivable:
Loans 1,638,507 1,839,217
Mortgage-backed securities 636,453 633,667
Investments 2,280,738 2,371,410
Federal Home Loan Bank stock 4,861,410 4,861,410
Real estate held for development, net 644,487 644,487
Real estate owned, net 167,541 167,541
Office properties and equipment, net 19,675,476 19,292,247
Deferred income taxes 2,068,216 2,015,772
Excess cost over fair value of net assets acquired 88,851 164,969
Prepaid expenses and other assets 1,006,213 1,156,573
Subordinated debentures issue cost, net 306,776 321,113
------------- ---------------
TOTAL ASSETS $ 701,482,758 $ 691,811,626
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 545,904,151 $ 536,309,623
Securities sold under agreements to repurchase 80,000,000 80,000,000
Advances from the Federal Home Loan Bank 16,337,031 16,368,321
10% Subordinated debentures, due 2004 10,000,000 10,000,000
Advances by borrowers for taxes and insurance 2,300,143 2,259,435
Accrued interest payable 1,066,113 1,304,742
Dividends payable 216,953 216,953
Other liabilities 1,750,807 1,883,887
------------- ---------------
Total liabilities 657,575,198 648,342,961
------------- ---------------
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 7,897,191 and shares
outstanding 7,210,966 and 7,231,767 as of
March 31, 1999 and December 31, 1998, respectively 789,719 789,719
Paid-in capital in excess of par 8,216,820 8,216,820
Unrealized loss on securities available for sale
- net of deferred income taxes (144,565) (21,793)
Retained earnings 38,629,968 37,860,291
Less: Treasury stock (686,225 and 665,424 shares,
at cost, as of March 31, 1999 and December 31,
1998, respectively) (3,584,382) (3,376,372)
------------ ---------------
Total stockholders' equity 43,907,560 43,468,665
------------ ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 701,482,758 $ 691,811,626
============= ================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three Months ended
March 31,
--------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME: (Unaudited)
<S> <C> <C>
Interest income on:
Loans $ 5,659,643 $ 6,089,704
Mortgage-backed securities 1,496,043 1,655,563
Investments 3,997,879 3,678,814
----------------- ------------------
Total interest income 11,153,565 11,424,081
----------------- ------------------
INTEREST EXPENSE:
Interest expense on:
Deposits 4,333,906 4,434,238
Subordinated debentures 264,337 264,337
Borrowings 1,359,622 1,437,056
----------------- ------------------
Total interest expense 5,957,865 6,135,631
----------------- ------------------
NET INTEREST INCOME 5,195,700 5,288,450
PROVISION FOR LOAN LOSSES 60,000 60,000
----------------- ------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,135,700 5,228,450
----------------- ------------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 33,145 36,908
Gain on sale of loans 113 145
Loss on disposal of fixed assets 0 (30,000)
Real estate owned operations, net (6,965) (27,033)
Service charges on accounts 572,508 593,865
Other income (expense) 52,402 31,364
----------------- ------------------
Total other income (expense) 651,203 605,249
----------------- ------------------
OPERATING EXPENSES:
Salaries and employee benefits 2,419,921 2,319,797
Occupancy and equipment 884,126 720,007
Purchased services 366,996 301,582
Federal deposit insurance premiums 75,388 72,801
Professional fees 78,611 102,972
Advertising 48,448 40,737
Other 364,415 334,606
----------------- ------------------
Total operating expenses 4,237,905 3,892,502
----------------- ------------------
INCOME BEFORE INCOME TAXES 1,548,998 1,941,197
INCOME TAXES:
Current 469,997 746,587
Deferred 92,371 (46,271)
----------------- ------------------
Total income taxes 562,368 700,316
NET INCOME $ 986,630 $ 1,240,881
================= ==================
BASIC EARNINGS PER COMMON SHARE $ 0.14 $ 0.17
================= ==================
DILUTED EARNINGS PER COMMON SHARE $ 0.13 $ 0.17
================= ==================
Weighted average common shares outstanding 7,231,767 7,173,321
Potential dilutive effect of the exercise of stock options 89,409 161,181
----------------- ------------------
Adjusted weighted average common shares outstanding 7,321,176 7,334,502
================= ==================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months ended
March 31
---------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 986,630 $ 1,240,881
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 60,000 60,000
Depreciation and amortization 638,767 470,344
Provision for real estate owned 0 24,319
Realized (gains) and losses on:
Sale of loans and loans held for sale (13) (145)
Disposal and sale of fixed assets 11,756 0
Sale of real estate owned 0 (433,182)
Increase in prepaid expenses and other assets 150,360 (286,053)
Decrease in accrued interest payable (238,629) 23,984
Decrease in other liabilities (133,080) 1,202,969
Deferred income taxes 16,556 (89,109)
-------------------- --------------------
Net cash provided by operating activities 1,780,943 2,196,443
-------------------- --------------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 126 151,185
Real estate owned 0 245,848
Principal collected and proceeds from maturities of investment securities held to
maturity 21,961,317 83,642,082
Proceeds from maturities of investment securities available for sale 31,033,583 19,137,407
Principal collected on mortgage-backed securities held to maturity 7,684,565 6,187,753
Principal collected on longer-term loans, net 14,310,843 14,208,928
Longer-term loans originated or acquired, net (13,231,290) (11,287,897)
Purchase of investment securities and mortgage-backed securities held to maturity (49,165,133) (109,370,061)
Purchase of investment securities and mortgage-backed securities available for sale (1,000,000) (41,009,945)
Purchase of Federal Home Loan Bank stock 0 (1,230,600)
Purchase of office property and equipment (781,478) (341,589)
--------------------- ---------------------
Net cash used in investing activities 10,812,533 (39,666,889)
--------------------- ---------------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 5,656,165 14,611,346
Net (decrease) increase in time deposits 3,938,363 5,754,354
Net decrease in FHLB advances (31,290) (2,350,000)
Proceeds from securities sold under agreements to repurchase 0 20,000,000
Increase in advances from borrowers for taxes and insurance 40,708 136,926
Purchase of treasury stock (208,010) (186,051)
Dividends paid on common stock (216,953) (167,154)
Net proceeds from issuance of common stock 0 46,694
--------------------- ---------------------
Net cash provided by financing activities 9,178,983 37,846,115
--------------------- ---------------------
INCREASE IN CASH AND CASH EQUIVALENTS 21,772,459 375,669
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,896,391 12,631,622
--------------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,668,850 $ 13,007,291
===================== =====================
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 4,572,535 $ 6,111,647
Income taxes 425,238 445,787
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 216,953 167,623
Non-monetary transfers from loans to real estate acquired
through foreclosure 0 316,949
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital income earnings stock Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 7,231,767 $ 789,719 $8,216,820 $ (21,793) $37,860,291 $(3,376,372) $ 43,468,665
Net Income 986,630 986,630
Other comprehensive income,
net of tax
Unrealized gain on securities
available for sale (122,772) (122,772)
-------
Total comprehensive 863,858
income -------
Dividends declared (216,953) (216,953)
Exercise of stock options 0 0 0
-
Purchase of common stock (20,801) 0 0 (208,010) (208,010)
-
- -------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1999 7,210,966 789,719 8,216,820 (144,565) 38,629,968 (3,584,382) $ 43,907,560
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999.
FMS Financial Corporation (the "Corporation") may from time to time make written
or oral "forward-looking statements", including statements contained in the
Corporation's filings with the Securities and Exchange Commission (including
this quarterly report on form 10-Q and the exhibits thereto), in its reports to
stockholders and in other communications by the Corporation, which are made in
good faith by the Corporation pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Corporation's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Corporation's control). The following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: The strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Corporation and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Corporation's products and services;
the success of the Corporation in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services laws
and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
involved in the foregoing.
The Corporation cautions that the foregoing list of important factors is not
exclusive. The Corporation does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Corporation.
GENERAL
FMS Financial Corporation is the parent company of Farmers & Mechanics Bank
("the Bank"), its only subsidiary.
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation contain all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of FMS's financial
condition, results of operations, cash flows and changes in stockholders' equity
for the periods and dates indicated. The results of operations for the three
months ended March 31, 1999 are not necessarily indicative of the operating
results for the full fiscal year or any other interim period.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for FORM 10-Q, and therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles. These statements should be read in
conjunction with the
<PAGE>
consolidated statements and related notes which are incorporated by reference to
the Corporation's annual report on Form 10K for the year ended December 31,
1998.
FINANCIAL CONDITION -
Total Assets - at March 31, 1999 were $701.5 million as compared with total
assets at December 31, 1998 of $691.8
million.
Investment Securities Held to Maturity - increased $16.0 million to $145.4
million at March 31, 1999 from $129.4 million at December 31, 1998 primarily due
to the net purchase of $17.2 million in U.S. Agency notes during the three
months ended March 31, 1999. Investment securities held to maturity at March 31,
1999 consisted entirely of fixed rate securities. A comparison of cost and
approximate market values of investment securities held to maturity as of March
31, 1999 and December 31, 1998 follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------------------------------------------------------- ------------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
--------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Gov't Agencies $ 95,455,088 $ 69,782 $ (571,947) $ 94,952,923 $ 78,291,686 $ 78,241,778
CMOs 46,130,502 27,865 (265,721) 45,892,646 47,302,338 47,297,209
Municipal bonds 3,823,801 183 0 3,823,984 3,823,802 3,826,635
--------------------------------------------------------------------- ------------------------------------
Total $ 145,409,391 $ 97,830 $ (837,668) $ 144,669,553 $ 129,417,826 $ 129,365,622
===================================================================== ====================================
</TABLE>
Investment Securities Available for Sale - decreased $30.2 million to $79.6
million at March 31, 1999 from $109.8 million at December 31, 1998 as a result
of $7.2 million of U.S. Agency notes called, and $23.8 million of principal
paydowns on CMOs during the three months ended March 31, 1999. Investment
securities available for sale consisted of $74.5 million in fixed rate
securities and $5.1 million in adjustable rate securities at March 31, 1999. A
comparison of cost and approximate market values of investment securities
available for sale as of March 31, 1999 and December 31, 1998 follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------------------------------------------------- -----------------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
----------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Gov't Agencies $ 12,289,736 $ 130 $ (57,836) $ 12,232,030 $ 18,492,035 $ 18,500,616
CMOs 67,496,335 134,641 (305,045) 67,325,931 91,377,435 91,332,517
======================================================================= =========================================
Total $ 79,786,071 $ 134,771 $ (362,881) $ 79,557,961 $ 109,869,470 $ 109,833,133
======================================================================= =========================================
</TABLE>
<PAGE>
Loans, net - decreased $1.1 million to $297.5 million at March 31, 1999 from
$298.6 million at December 31, 1998. This decrease was the result of
approximately $14.3 million of principal collected on loans, partially offset by
$13.2 million of loans originated during the three months ended March 31, 1999.
The following table shows loans receivable by major categories at the dates
indicated.
Table 1 March 31, December 31,
1999 1998
----------------------------------------
Mortgage loans ( 1-4 dwelling) $ 244,344,195 $ 246,071,511
Construction loans 1,308,738 1,410,456
Commercial construction 548,844 2,609,315
Consumer loans 3,213,479 3,237,176
Commercial real estate 47,931,907 45,937,998
Commercial business 4,520,213 4,120,967
----------------------------------------
Subtotal 301,867,376 303,387,423
----------------------------------------
Less:
Deferred loan fees 949,321 1,441,926
Allowance for possible
loan losses 3,422,669 3,342,274
----------------------------------------
Net Loans Receivable $ 297,495,386 $ 298,603,223
========================================
As of March 31, 1999 the Bank had outstanding loan commitments of $12.4 million,
of which $5.1 million represented variable rate loans and $7.3 million
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled amortization of loans and mortgage-backed securities, additional
borrowings and if necessary the sale of investment securities available for
sale.
Mortgage-Backed Securities Held to Maturity - increased $3.4 million to $94.0
million at March 31, 1999 from $90.6 million at December 31, 1998. The increase
is the result of the purchase of $10.9 million GNMA and FNMA securities
partially offset by principal paydowns of $7.6 million in principal repayments.
Mortgage-backed securities at March 31, 1999 consisted of $71.9 million in fixed
rate securities and $22.1 million in adjustable rate securities. Mortgage-backed
securities held to maturity at March 31, 1999 and December 31, 1998 are
summarized below:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA $ 34,439,408 $ 745,083 $ (50,917) 35,133,574 $ 31,716,739 $ 32,312,889
FNMA 40,704,656 565,132 (81,603) 41,188,185 37,531,455 38,079,458
FHLMC 18,811,506 535,887 (7,732) 19,339,661 21,255,729 21,779,645
Private 20,932 (13) 20,919 88,724 90,301
-----------------------------------------------------------------------------------------
Total $ 93,976,502 $ 1,846,102 $ (140,265) 95,682,339 $ 90,592,647 $ 92,262,293
=========================================================================================
</TABLE>
<PAGE>
Asset Classifications - are monitored by management on a regular basis.
Classified assets generally consist of assets which have possible credit risk
and/or have a sufficient degree of risk or potential weakness to warrant
management's close attention. Total classified assets increased $561 thousand to
$7.4 million during the three months ended March 31, 1999 resulting from an
increase in one-to-four family of $424 thousand and a doubtful construction loan
of $232 thousand. The following table sets forth information with respect to the
Bank's classified assets at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- -------------------
<S> <C> <C>
Classified Assets:
Substandard Loans:
One-to-four family $2,368,910 $1,945,059
Commercial real estate 3,704,629 3,756,181
Consumer and other 239,905 282,740
----------------- -------------------
Total loans 6,313,444 5,983,980
Real estate held for development, net 644,488 644,487
Real Estate Owned, net 167,541 167,541
----------------- -------------------
Total Substandard 7,125,473 6,796,008
----------------- -------------------
Doubtful loans 232,126 0
----------------- -------------------
Total Doubtful 232,126 0
----------------- -------------------
Loss - Commercial Real Estate 8,099 9,121
----------------- -------------------
Total Loss 8,099 9,121
----------------- -------------------
TOTAL CLASSIFIED ASSETS $7,365,698 $6,805,129
================= ===================
</TABLE>
Deposits - increased $9.6 million to $545.9 million at March 31, 1999 from
$536.3 million at December 31, 1998 as a result of an increase in saving
accounts of $5.2 million, interest bearing checking accounts of $1.5 million,
non-interest checking accounts of $1.0 million, and certificate accounts of $3.9
million partially offset by a decrease in money market accounts of $2.0 million.
Non-interest checking accounts increased due to the promotions of "Free
Personal" and "Free Business" checking accounts. Interest credited to
depositor's accounts for the three months ended March 31, 1999 amounted to $4.3
million. The following tables set forth certain information concerning deposits
at the dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest checking $70,337,410 12.88% 0.00% $69,336,887 12.93% 0.00%
Checking accounts 76,735,565 14.06% 2.07% 75,280,395 14.04% 1.89%
Savings accounts 100,827,385 18.47% 2.64% 95,591,907 17.82% 2.83%
Money market accounts 65,655,216 12.03% 2.78% 67,690,222 12.62% 2.64%
Certificates 232,348,575 42.56% 5.05% 228,410,212 42.59% 5.35%
-------------------------------------------------------------------------------------
Total Deposits $545,904,151 100.00% 3.25% $536,309,623 100.00% 3.49%
=====================================================================================
</TABLE>
There are three (3) standards that a savings institution must satisfy in order
to meet its capital requirements under "FDICIA". The requirements include a
leverage ratio of tier 1 (core) capital to
<PAGE>
adjusted total assets of 4.0 percent, a tangible capital standard requirement of
2.0 percent of total adjusted assets, and a risk-based capital standard set at
8.0 percent of risk-weighted assets. At March 31, 1999, the Bank exceeded all
three regulatory capital levels required under FIRREA. The Bank's regulatory
tangible and core capital was $48.9 million or 6.98% of total bank assets and
risk-based capital was $52.3 million or 18.46% of risk weighted assets.
RESULTS OF OPERATIONS -
General
The earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits and borrowings. Net interest income is a function
of the interest rate spread (the difference between the weighted average yield
earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities) as well as the average balance of interest
earning-assets as compared to interest-bearing liabilities. Net income is also
affected by the provision for loan losses, non-interest income, such as gains
(losses) on sales of loans and investments, service charges and other fees. In
addition to interest expense, the Bank incurs operating expenses such as
salaries and employee benefits, deposit insurance premiums, depreciation,
occupancy and equipment expense and purchased services expense.
The Corporation recorded net income for the three months ended March 31, 1999 of
$987 thousand, or $.13 diluted earnings per share as compared to $1.2 million,
or $.17 diluted earnings per share for the comparable period in 1998.
Interest Rate Spread
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities
including non-interest checking accounts. Net interest income is affected by (i)
the spread between the yield earned on interest-earning assets and the interest
rates paid on interest-bearing savings deposits including non-interest checking
accounts and borrowings (liabilities), and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's interest
rate spread varies over time because money fund accounts and other flexible rate
accounts have become significant sources of savings deposits. Income from
investment securities and mortgage-backed securities depends upon the amount
invested during the period and the yields earned on such securities. The yield
on loans receivable changes principally as a result of existing mortgage loan
repayments, adjustable rate loan adjustments, sales and the interest rates and
volume of new mortgage loans.
The following table sets forth the Bank's weighted-average yields on its
interest-earning assets, weighted-average interest rates paid on its
interest-bearing liabilities and weighted-average interest rate spreads for the
periods indicated:
Three Months Ended
March 31,
--------------------------------
1999 1998
--------------------------------
Weighted-Average Yields Earned on:
Loans, net 7.53 % 8.00 %
Mortgage-Backed Securities 6.95 7.27
Investment Securities 6.22 6.65
------------------------------
Total Interest-Earning Assets 6.93 7.41
------------------------------
Weighted-Average Interest Rates Paid on:
Deposits 3.25 3.68
Borrowings 5.63 5.72
Subordinated debentures 10.56 10.56
------------------------------
Total Interest-Bearing Liabilities 3.72 4.14
------------------------------
Weighted-Average Interest Rate Spread
==============================
for the Period 3.21 % 3.27 %
==============================
<PAGE>
Average Balance of Interest-Earning Assets and Interest-Bearing Liabilities
The following table sets forth the Bank's average balance of interest-earning
assets in comparison to its average balance of interest-bearing liabilities
during the periods indicated:
Three Months Ended
March 31,
----------------------------------
1999 1998
----------------------------------
(In Thousands)
Average Interest-Earning Assets:
Loans, net $ 300,466 $ 304,492
Mortgage-Backed Securities 86,147 91,173
Investment Securities 257,112 221,298
----------------------------------
Total 643,725 616,963
----------------------------------
Average Interest-Bearing Liabilities:
Deposits 534,038 489,099
Borrowings 96,572 101,924
Subordinated debentures 10,000 10,000
----------------------------------
Total 640,610 601,023
----------------------------------
Excess of Interest-Earning Assets
over Interest-Bearing Liabilities $ 3,115 $ 15,940
==================================
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rate, (ii) changes in volume and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate).
Three Months Ended
March 31,
1999 compared to 1998
---------------------------------------
Increase (Decrease) due to:
Rate Volume Total
---------------------------------------
(In Thousands)
Interest income:
Loans receivable $ (350) $ (80) $ (430)
Mortgage-backed securities (69) (91) (160)
Investment securities (276) 595 319
---------------------------------------
Total change - interest income (695) 424 (271)
---------------------------------------
Interest expense:
Deposits (507) 407 (100)
Borrowings (2) (76) (78)
Subordinated debentures 0 0 0
---------------------------------------
Total change - interest expense (509) 331 (178)
---------------------------------------
Net change in net interest income $ (186) $ 93 $ (93)
=======================================
<PAGE>
Net Interest Income - the decrease in net interest income for the three months
ended March 31, 1999 totaled $93 thousand from the same period in 1998 was
primarily due to a decrease in interest income of $271 thousand, partially
offset by a decrease in interest expense of $178 thousand.
The decrease in interest income was primarily the result of a decrease in
interest income on loans of $430 thousand. The average balance of the loan
portfolio decreased $4.0 million to $300.5 million for the three months ended
March 31, 1999 from $304.5 million for the same period in 1998, which resulted
in a volume decrease in interest income of $80 thousand. The average yield on
the loan portfolio decreased 47 basis points to 7.53% for the three months ended
March 31, 1999 from 8.00% during the three months ended March 31, 1998, which
resulted in a decrease of $350 thousand in interest income due to rate changes.
Interest income increased $319 thousand on the investment portfolio. The Average
balance of the portfolio increased $35.8 million to $257.1 million for the three
months ended March 31, 1999 from $221.3 million for the same period in 1998,
which resulted in a volume increase in interest income of $595 thousand. The
average balance increase in investment was due to the net purchase of $37.4
million of CMOs. The average yield on the investment portfolio decreased 43
basis points to 6.22% for the three months ended March 31, 1999 from 6.65%
during the three months ended March 31, 1998, which resulted in a decrease in
interest income of $276 thousand due to rate changes.
The decrease in interest expense was primarily the result of a decrease in
interest expense on deposits of $100 thousand. The average balance of deposits
increased $44.9 million. Account balances in savings, money market and checking
increased a total of $52.6 million partially offset by declining balances in
CD's between March 31, 1999 and 1998, which resulted in a volume increase in
interest income of $407 thousand for the three months ended March 31, 1999 and
1998. The weighted average rates paid on deposits decreased 43 basis points to
3.25% for the three months ended March 31, 1999 from 3.68% for the same period
in 1998, which resulted in a decrease in interest expense of $507 thousand.
Provision for Loan Losses - for the first quarter of 1999 remained at $60
thousand. At March 31, 1999 the allowance for possible loan losses amounted $3.4
million or 1.13% of the total loans compared to $3.2 million or 1.05% of the
total loans at March 31, 1998. The determination of the allowance level for loan
losses is based on management's analysis of the risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying collateral and current economic conditions. Accordingly, there
can be no assurance that future provisions for loans losses will not increase or
be necessary. Most of the Bank's lending activity is with customers located
within southern New Jersey. Generally, the loans are secured by real estate
consisting of single family residential properties. While this represents a
concentration of credit risk, the credit losses arising from this type of
lending compare favorably with the Bank's credit loss experience on its
portfolio as a whole. The ultimate repayment of these loans is dependent to a
certain degree on the local economy and real estate market.
Operating Expenses - for the first quarter of 1999 totaled $4.2 million, as
compared to $3.9 million for the same period in 1998.
Salaries and Employee Benefits - for the first quarter of 1999 were $2.4
million, as compared to $2.3 million for the same period in 1998. The increase
was due to additional staff in the three new branches opened since the first
quarter of 1998. Average full time equivalent employees at March 31 1999 were
378 as compared to 323 at March 31, 1998.
<PAGE>
Occupancy and Equipment - for the first quarter of 1999 amounted to $884
thousand, compared to $720 thousand for the same period in 1998. The $164
thousand increase is the result of additional depreciation and occupation
expenses on the new branches opened as well as other facility improvements and
new computer equipment additions between the quarters ended March 31, 1999 and
March 31, 1998.
Purchased Services - for the first quarter of 1999 amounted to $367 thousand,
compared to $302 thousand for the same period of 1998. MAC charges increased $30
thousand, compared to the same time period in 1998. Check processing costs have
increased $34 thousand for three months ended March 31, 1999 due to higher
transaction volumes from an increase in the number of checking accounts opened.
Liquidity and Capital Resources
The Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits, and other cash outflows in a cost effective manner. The Bank's primary
sources of funds are deposits and scheduled amortization and prepayments of loan
principal. To a lesser extent, the Bank obtains funds from sales and maturities
of mortgage-backed securities, investment securities, and short-term investments
and borrowings. During the past several years, the Bank has used such funds
primarily to meet ongoing commitments to fund maturing time deposits and saving
withdrawals, fund existing and continuing loan commitments and to maintain
liquidity. While loan payments, maturing investments and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank's liquidity is also influenced by the level
of demand for funding loan originations.
<PAGE>
YEAR 2000
The Year 2000 issue concerns the potential impact of historic computer software
code that only utilizes two digits to represent the calendar year (e.g. "98" for
"1998"). Software so developed could produce inaccurate or unpredictable results
upon the change to January 1, 2000, when current and future dates represent a
lower two digit year number than dates in the prior century. The Bank, similar
to most financial institutions, is significantly subject to the potential impact
of the "Year 2000 issue" due to the nature of financial information. Potential
impact to the Bank may arise from software, hardware, and equipment both within
the Bank's direct control and outside of the Bank's ownership, yet with which
the Bank electronically or operationally interfaces (e.g. vendors providing
credit bureau information). Financial institution regulators have intensively
focused upon Year 2000 exposures, issuing guidance concerning an adequate Year
2000 program and the responsibilities of senior management and directors. 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
purposes 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. 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 compliant
prior to the end of 1999. At the current time management estimates its year 2000
readiness is at 85%. The following table provides a summary of the current
status of the five phases involved in our year 2000 readiness plan.
------------------------------------------------------------------------
Project Phase Percent Projected Date Comments
Complete of Completion
------------------------------------------------------------------------
Awareness 100% Complete
Assessment 90% June 1999 On Schedule
Renovation 85% June 1999 On Schedule
Validation 85% June 1999 On Schedule
Implementation 80% June 1999 On Schedule
Overall Completion 85% June 1999 On Schedule
At this time management currently estimates Year 2000 compliance cost at between
$50,000 and $150,000 of which $24,000 was expensed during the three months ended
March 31, 1999. The Bank does not expect that these costs will be material to
its financial condition or results of operations. Non-compliance with the year
2000 issue could have an adverse affect on the operations of the business.
Successful and timely completion of Year 2000 compliance is based upon
management's best estimate derived from various assumptions of future events
which are inherently uncertain, including the progress and results of the Bank's
testing plans, and all vendors, suppliers and customers readiness. The Bank
continues 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 the 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.
<PAGE>
ITEM 3: DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The Bank's financial performance is impacted by, among other factors, interest
rate risk. Interest rate risk is the risk of loss in value due to changes in
interest rates. This risk is addressed by the Bank's Asset Liability Management
Committee ("ALCO"), which includes senior management. The ALCO monitors and
considers methods of managing interest rate risk by monitoring changes in the
interest rate repricing GAP, the net portfolio values ("NPV") and net interest
income under various interest rate scenarios. The ALCO attempts to manage the
various components of the Bank's balance sheet to minimize the impact of sudden
and sustained changes in interest rates through GAP, NPV and net interest income
scenarios. The Bank's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO. The principal objective of the
ALCO is to maximize income within acceptable levels as established by the risk
policy. The Board of Directors may direct management to adjust its asset and
liability mix to bring interest rate risk within Board approved limits. The Bank
has developed strategies to manage its liquidity, shorten the effective
maturities of certain interest-earning assets and increase the effective
maturities of certain liabilities, to reduce the exposure to interest rate
fluctuations. These strategies include focusing its investment activities on
short and medium-term securities, maintaining and increasing the transaction
deposit accounts, as these accounts are considered to be relatively resistant to
changes in interest rates and utilizing FHLB borrowings and deposit marketing
programs to adjust the term or repricing of its liabilities. There were no
significant changes for the three months ended March 31, 1999 from the
information presented in the annual report on Form 10-K for the year ended
December 31, 1998.
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Changes in Securities
------- ---------------------
None
Item 3: Defaults Upon Senior Securities
------- -------------------------------
None
Item 4: Submission of Matters to Vote of Security of Holders
------- ----------------------------------------------------
None
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
(a) (27) Financial Data Schedule (Electronic data filing
only)
(b) On April 29, 1999,the Company filed a form 8-K (item 5)
disclosing its intent to repurchase up to 5% of its
outstanding shares of common stock in the open market.
<PAGE>
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: May 12, 1999
/s/ Craig W. Yates
------------------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1999
/s/ Channing L. Smith
------------------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,350
<INT-BEARING-DEPOSITS> 55
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,558
<INVESTMENTS-CARRYING> 145,409
<INVESTMENTS-MARKET> 144,670
<LOANS> 297,495
<ALLOWANCE> 3,423
<TOTAL-ASSETS> 701,483
<DEPOSITS> 545,904
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,334
<LONG-TERM> 106,337
0
0
<COMMON> 790
<OTHER-SE> 43,118
<TOTAL-LIABILITIES-AND-EQUITY> 701,483
<INTEREST-LOAN> 5,659
<INTEREST-INVEST> 3,998
<INTEREST-OTHER> 1,496
<INTEREST-TOTAL> 11,154
<INTEREST-DEPOSIT> 4,334
<INTEREST-EXPENSE> 5,958
<INTEREST-INCOME-NET> 5,196
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,587
<INCOME-PRETAX> 1,549
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 987
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 3.21
<LOANS-NON> 3,825
<LOANS-PAST> 0
<LOANS-TROUBLED> 504
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,342
<CHARGE-OFFS> 0
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 3,423
<ALLOWANCE-DOMESTIC> 3,423
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,174
</TABLE>
