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 September 30, 2000
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 November 3, 2000 there were 6,752,268 shares outstanding of the
registrant's Common Stock, par value $.10 per share.
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------
QUARTERLY REPORT ON FORM 10-Q
-----------------------------
SEPTEMBER 30, 2000
------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - Financial Information
------------------------------
Item 1 - Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
September 30, 2000 and December 31, 1999............................................1
Consolidated Statements of Income (unaudited)
for the three and nine month periods ended
September 30, 2000 and September 30, 1999...........................................2
Consolidated Statements of Cash Flows (unaudited) for the nine
month periods ended September 30, 2000
and September 30, 1999..............................................................3
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 2000 (unaudited)................................4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................5 - 15
PART II - Other Information
---------------------------
Item 1 - Legal Proceedings.......................................................................16
Item 2 - Changes in Securities...................................................................16
Item 3 - Defaults Upon Senior Securities.........................................................16
Item 4 - Submission of Matters to a Vote of Security Holders.....................................16
Item 5 - Other Information.......................................................................16
Item 6 - Exhibits and Reports on Form 8-K........................................................16
</TABLE>
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 25,142,151 $ 20,489,516
Interest-bearing deposits 96,914 82,493
Short term funds 16,983,701 25,703,862
------------- -------------
Total cash and cash equivalents 42,222,766 46,275,871
Investment securities held to maturity 243,127,942 220,307,242
Investment securities and mortgage-backed securities available for sale 41,930,310 49,307,116
Loans receivable - net 295,822,866 299,694,517
Mortgage-backed securities held to maturity 115,393,826 121,424,419
Accrued interest receivable:
Loans 1,615,641 1,398,470
Mortgage-backed securities 815,832 836,699
Investments 3,102,225 3,628,622
Federal Home Loan Bank stock 4,861,410 4,861,410
Real estate held for development - net 87,926 87,926
Real estate owned - net 306,926 448,541
Office properties and equipment - net 24,983,383 20,686,272
Deferred income taxes 2,460,585 2,264,587
Excess cost over fair value of net assets acquired 34,580 55,328
Prepaid expenses and other assets 1,105,656 959,819
Subordinated debentures issue cost - net 220,754 263,765
------------- -------------
TOTAL ASSETS $ 778,092,628 $ 772,500,604
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 629,464,920 $ 603,892,117
Securities sold under agreements to repurchase 80,000,000 90,000,000
Advances from the Federal Home Loan Bank 6,305,644 16,337,031
10% Subordinated debentures, due 2004 10,000,000 10,000,000
Advances by borrowers for taxes and insurance 2,112,309 2,204,704
Accrued interest payable 1,152,316 1,437,348
Dividends payable 202,868 215,519
Other liabilities 2,773,097 2,316,882
------------- -------------
Total liabilities 732,011,154 726,403,601
------------- -------------
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 7,897,891 and 7,897,791 and shares outstanding 6,752,268 and
7,183,978 as of September 30, 2000 and December 31, 1999, respectively 789,789 789,779
Paid-in capital in excess of par 8,217,654 8,217,535
Accumulated comprehensive loss - net of deferred income taxes (918,539) (1,167,810)
Retained earnings 45,412,736 42,108,955
Less: Treasury stock (1,145,623 and 713,813 shares, at cost, as of
September 30, 2000 and December 31, 1999, respectively) (7,420,166) (3,851,456)
------------- -------------
Total stockholders' equity 46,081,474 46,097,003
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 778,092,628 $ 772,500,604
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------ -------------------------------
INTEREST INCOME: (Unaudited) (Unaudited)
Interest income on:
<S> <C> <C> <C> <C>
Loans $ 5,954,472 $ 6,072,203 $ 17,599,187 $ 17,646,423
Mortgage-backed securities 1,907,189 1,628,239 5,925,500 4,687,392
Investments 5,266,485 4,684,824 15,371,925 12,904,158
------------ ------------ -------------- ------------
Total interest income 13,128,146 12,385,266 38,896,612 35,237,973
------------ ------------ -------------- ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 5,278,804 4,581,534 15,279,151 13,326,141
Subordinated debentures 264,337 264,337 793,011 793,011
Borrowings 1,303,072 1,388,165 4,040,069 4,118,938
------------ ------------ -------------- ------------
Total interest expense 6,846,213 6,234,036 20,112,231 18,238,090
------------ ------------ -------------- ------------
NET INTEREST INCOME 6,281,933 6,151,230 18,784,381 16,999,883
PROVISION FOR LOAN LOSSES 60,000 474,000 180,000 594,000
------------ ------------ -------------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,221,933 5,677,230 18,604,381 16,405,883
------------ ------------ -------------- ------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 27,298 65,023 88,961 126,298
Gain on sale of loans 1,437 2,235 2,242 3,568
Gain on disposal of fixed assets 8,708 0 8,586 244,731
Real estate owned operations, net (14,784) (3,823) (15,951) (16,662)
Service charges on accounts 682,270 647,401 1,949,485 1,864,005
Other income 49,491 42,891 143,208 136,408
------------ ------------ -------------- ------------
Total other income 754,420 753,727 2,176,531 2,358,348
------------ ------------ -------------- ------------
OPERATING EXPENSES:
Salaries and employee benefits 2,936,824 2,581,629 8,675,115 7,496,118
Occupancy and equipment 1,086,736 872,138 3,039,769 2,615,541
Purchased services 477,505 387,286 1,353,767 1,120,055
Federal deposit insurance premiums 31,650 77,108 92,367 229,240
Professional fees 117,956 81,413 352,218 360,163
Advertising 53,494 57,885 164,729 161,341
Other 317,822 329,467 1,015,048 1,009,247
------------ ------------ -------------- ------------
Total operating expenses 5,021,987 4,386,926 14,693,013 12,991,705
------------ ------------ -------------- ------------
INCOME BEFORE INCOME TAXES 1,954,366 2,044,031 6,087,899 5,772,526
INCOME TAXES:
Current 972,233 896,267 2,463,790 1,897,126
Deferred (290,229) (160,543) (297,297) 188,170
------------ ------------ -------------- ------------
Total income taxes 682,004 735,724 2,166,493 2,085,296
NET INCOME $ 1,272,362 $ 1,308,307 $ 3,921,406 $ 3,687,230
============ ============ ============== ============
BASIC EARNINGS PER COMMON SHARE $ 0.19 $ 0.18 $ 0.57 $ 0.51
============ ============ ============== ============
DILUTED EARNINGS PER COMMON SHARE $ 0.19 $ 0.18 $ 0.56 $ 0.51
============ ============ ============== ============
Dividends declared per common share $ 0.03 $ 0.03 $ 0.09 $ 0.09
============ ============ ============== ============
Weighted average common shares outstanding 6,761,942 7,206,340 6,935,764 7,215,877
Potential dilutive effect of the exercise of
stock options 69,075 83,100 69,951 82,393
------------ ------------ -------------- ------------
Adjusted weighted average common shares outsanding 6,831,017 7,289,440 7,005,715 7,298,270
============ ============ ============== ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Nine Months ended
September 30,
--------------------------------
2000 1999
--------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,921,406 $ 3,687,230
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 180,000 594,000
Depreciation and amortization 1,511,021 1,547,985
Realized (gains) and losses on:
Sale of loans and loans held for sale (2,242) (3,568)
Disposal and sale of fixed assets (8,586) (244,731)
Sale of real estate owned (31,416) 0
Decrease (Increase) in accrued interest receivable 330,093 (430,170)
(Increase) Decrease in prepaid expenses and other assets (145,837) 232,945
Decrease in accrued interest payable (285,032) (171,578)
Increase in other liabilities 456,215 815,471
(Increase) Decrease in deferred income taxes (336,091) 28,416
Other 48,679 0
-------------- ---------------
Net cash provided by operating activities 5,638,210 6,056,000
-------------- ---------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 438,075 707,172
Real estate owned 570,073 0
Office property and equipment 12,436 348,731
Proceeds from maturities of investment securities held to maturity 119,660,360 78,984,657
Proceeds from maturities of investment securities available for sale 7,755,993 58,642,554
Principal collected on mortgage-backed securities 17,484,504 20,911,988
Principal collected on loans, net 40,097,204 41,408,212
Longer-term loans originated or aquired, net (37,245,081) (40,431,102)
Purchase of investment securities and mortgage-backed securities held to maturity 154,126,954) (202,705,135)
Purchase of investment securities and mortgage-backed securities available for sale 0 (4,056,040)
Purchase of office property and equipment (5,588,090) (1,593,223)
-------------- ---------------
Net cash used by investing activities (10,941,480) (47,782,186)
-------------- ---------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 24,289,506 34,025,274
Net increase in time deposits 1,283,297 12,112,925
Net decrease in FHLB advances (10,031,387) (31,290)
Repayment of securities sold under agreements to repurchase (10,000,000) 0
Decrease in advances from borrowers for taxes and insurance (92,395) (133,880)
Purchase of treasury stock (3,568,710) (284,337)
Dividends paid on common stock (630,275) (650,175)
Net proceeds from issuance of common stock 129 645
-------------- ---------------
Net cash provided by financing activities 1,250,165 45,039,162
-------------- ---------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,053,105) 3,312,976
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,275,871 29,896,391
-------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,222,766 $ 33,209,367
============== ===============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 20,397,263 $ 18,409,668
Income taxes 1,969,143 1,985,238
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 202,868 216,104
Non-monetary transfers from loans to real estate acquired
through foreclosure 445,722 146,000
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
other Total
Common shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital loss earnings stock Equity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 7,183,978 $ 789,779 $8,217,535 $(1,167,810) $ 42,108,955 $(3,851,456) $ 46,097,003
Net Income 3,921,406 3,921,406
Other comprehensive income
Unrealized loss
on securities available
for sale 249,271 249,271
--------------
Total comprehensive income 4,170,677
--------------
Dividends declared (617,625) (617,625)
Exercise of stock options 100 10 119 129
Purchase of common stock (431,810) (3,568,710) (3,568,710)
------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2000 6,752,268 $ 789,789 $8,217,654 $ (918,539) $ 45,412,736 $(7,420,166) $ 46,081,474
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 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
-------
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation contain all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of FMS's financial
condition, results of operations and cash flows and changes in stockholders'
equity for the periods and dates indicated. The results of operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the operating results for the full fiscal year or any other interim period.
Certain items in the consolidated financial statements have been reclassified
for comparative purposes.
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 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, 1999. The consolidated financial statements include the
Corporation's sole subsidiary, Farmers & Mechanics Bank ("the Bank").
5
<PAGE>
FINANCIAL CONDITION -
Total Assets - at September 30, 2000 were $778.1 million as compared with total
assets at December 31, 1999 of $772.5 million.
Investment Securities Held to Maturity - increased $22.8 million to $243.1
million at September 30, 2000 from $220.3 million at December 31, 1999 due to
purchases of $28.1 million in reverse repurchase agreements, $2.0 million in
U.S. Agency notes and $1.8 million in Municipal Bonds during the nine months
ended September 30, 2000. These increases were partially offset by the call of
$4.7 million of U.S. Agency notes, $1.1 million of Municipal Bonds matured and
$3.3 million of principal paydowns on CMO's. Investment securities held to
maturity at September 30, 2000 consisted entirely of fixed rate securities. A
comparison of cost and approximate market values of investment securities held
to maturity as of September 30, 2000 and December 31, 1999 follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------------------------------------------- ----------------------------------
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 $ 167,924,728 $ 2,102 $ (5,798,426) $ 162,128,404 $ 170,610,811 $ 161,851,452
CMO's 44,800,766 0 (1,533,247) 43,267,519 48,187,121 46,481,467
Reverse Repurchase 28,102,753 0 0 28,102,753 0 0
Municipal bonds 2,299,695 6,286 0 2,305,981 1,509,310 1,509,954
-------------------------------------------------------------------- -----------------------------------
Total $ 243,127,942 $ 8,388 $ (7,331,673) $ 235,804,657 $ 220,307,242 $ 209,842,873
==================================================================== ==================================
</TABLE>
Investment Securities and Mortgage-Backed Securities Available for Sale -
decreased $7.4 million to $41.9 million at September 30, 2000 from $49.3 million
at December 31, 1999 as a result of $7.8 million of principal paydowns on CMO's
and MBS's during the nine months ended September 30, 2000. Investments available
for sale consisted of $38.5 million in fixed rate securities and $3.4 million in
adjustable rate securities at September 30, 2000. A comparison of cost and
approximate market values of investment securities available for sale as of
September 30, 2000 and December 31, 1999 follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------------------------------------- -------------------------------
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 $ 10,292,280 $ 0 $ (342,700) $ 9,949,580 $ 10,291,646 $ 9,725,031
CMO's 30,485,373 3,467 (1,086,609) 29,402,231 38,024,766 36,816,550
MBS's 2,589,719 0 (11,220) 2,578,499 2,817,131 2,765,535
-------------------------------------------------------------- -------------------------------
Total $ 43,367,372 $ 3,467 $ (1,440,529) $ 41,930,310 $ 51,133,543 $ 49,307,116
============================================================== ===============================
</TABLE>
6
<PAGE>
Loans, net - decreased $3.9 million to $295.8 million at September 30, 2000 from
$299.7 million at December 31, 1999. This decrease was the result of
approximately $40.1 million of principal collected on loans, partially offset by
$37.2 million of loans originated during the nine months ended September 30,
2000. The following table sets forth certain information concerning the loan
portfolio at the dates indicated.
September 30, December 31,
2000 1999
--------------------------------------------
Mortgage loans (1-4 dwelling) $ 231,235,023 $ 236,912,182
Construction loans 37,440 972,533
Commercial construction 653,110 3,934,937
Consumer loans 3,583,286 3,273,792
Commercial real estate 55,864,244 52,543,711
Commercial business 9,097,598 6,790,348
--------------------------------------------
Subtotal 300,470,701 304,427,503
--------------------------------------------
Less:
Deferred loan fees 719,987 892,019
Allowance for possible
loan losses 3,927,848 3,840,967
--------------------------------------------
Net Loans Receivable $ 295,822,866 $ 299,694,517
============================================
At September 30, 2000, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $2.5 million of
which $1.1 million related to loans that were individually measured for
impairment with a valuation allowance of $425 thousand and $1.4 million of loans
that were collectively measured for impairment with a valuation allowance of $70
thousand. For the nine months ended September 30, 2000, the average recorded
investment in impaired loans was approximately $2.8 million. The Bank recognized
$136 thousand of interest income on impaired loans, all of which was recognized
on the cash basis. The Bank had $3.9 million in total reserves for possible loan
losses at September 30, 2000, representing approximately 160% of non-accrual
loans and 1.31% of total loans.
As of September 30, 2000 the Bank had outstanding loan commitments of $7.8
million, of which $3.9 million represented variable rate loans and $3.9 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.
7
<PAGE>
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans, troubled debt restructured and real estate owned assets by
the Bank.
Non-Performing Assets:
September 30, December 31,
2000 1999
------------- ------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 1,000,249 $ 1,386,096
Commercial real estate 1,460,732 1,510,167
Consumer and other 0 $ 236,781
----------- -----------
Total mortgage non-accrual loans $ 2,460,981 $ 3,133,044
----------- -----------
Troubled debt restructuring $ 855,266 $ 462,250
Real estate owned, net 306,926 448,541
Other non-performing assets 87,926 87,926
----------- -----------
Total non-performing assets, net $ 3,711,099 $ 4,131,761
----------- -----------
Total non-accrual loans to net loans 0.83% 1.05%
==== ====
Total non-accrual loans to total assets 0.32% 0.41%
==== ====
Total non-performing assets to total assets 0.48% 0.53%
==== ====
8
<PAGE>
Mortgage-Backed Securities Held to Maturity - decreased $6.0 million to $115.4
million at September 30, 2000 from $121.4 million at December 31, 1999. The
decrease is the result of $17.5 million in principal repayments, partially
offset by the purchase of $11.6 million in FHLMC, GNMA and FNMA adjustable rate
securities. Mortgage-backed securities at September 30, 2000 consisted of $67.0
million in fixed rate securities and $48.4 million in adjustable rate
securities. Mortgage-backed securities held to maturity at September 30, 2000
and December 31, 1999 are summarized below:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------------------------------------------------- ----------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
----------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA $ 34,635,833 $ 267,471 $ (554,605) $ 34,348,699 $ 37,742,389 $ 36,940,635
FNMA 52,184,458 274,253 (526,969) 51,931,742 50,801,575 49,845,090
FHLMC 28,573,535 483,374 (35,355) 29,021,554 32,880,455 33,029,307
----------------------------------------------------------------- ----------------------------------
Total $ 115,393,826 $ 1,025,098 $ (1,116,929) $ 115,301,995 $ 121,424,419 $ 119,815,032
================================================================= ==================================
</TABLE>
Deposits - increased $25.6 million to $629.5 million at September 30, 2000 from
$603.9 million at December 31, 1999 as a result of an increase in non-interest
checking accounts of $14.2 million, saving accounts of $5.6 million, certificate
of deposits of $1.3 million, interest bearing checking accounts of $1.9 million
and money market accounts of $2.6 million. Non-interest checking accounts
increased due to the promotion of "Free Personal" and "Free Business" checking
accounts. Interest credited to depositor's accounts for the nine months ended
September 30, 2000 amounted to $5.3 million. The following table sets forth
certain information concerning deposits at the dates indicated:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------------------------------------------------------------
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 $96,735,258 15.37% 0.00% $82,504,184 13.66% 0.00%
Checking accounts 108,407,035 17.22% 3.04% 106,541,028 17.64% 2.26%
Savings accounts 112,805,108 17.92% 2.70% 107,207,225 17.76% 2.67%
Money market accounts 68,178,245 10.83% 2.74% 65,583,704 10.86% 2.76%
Certificates 243,339,274 38.66% 5.05% 242,055,976 40.08% 4.92%
-------------------------------------------------------------------------------------
Total Deposits $629,464,920 100.00% 3.31% $603,892,117 100.00% 3.20%
=====================================================================================
</TABLE>
9
<PAGE>
Borrowings - at September 30, 2000 amounted to $96.3 million. Borrowings
included $10.0 million of 10% Subordinated Debentures, $80.0 million in
securities sold under agreements to repurchase with a weighted average interest
rate of 5.60% and $6.3 million in Federal Home Loan Bank Advances with a
weighted average interest rate of 5.49%. At December 31, 1999 borrowings
consisted of $10.0 million of 10% Subordinated Debentures, $90.0 million in
securities sold under agreements to repurchase with a weighted average rate of
5.62% and $16.3 million in Federal Home Loan Bank Advances with a weighted
average interest rate of 6.0%.
RESULTS OF OPERATIONS -
General
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: 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 September 30,
2000 of $1.3 million, or $.19 diluted earnings per share as compared to $1.3
million, or $.18 diluted earnings per share for the comparable period in 1999.
Earnings for the nine months ended September 30, 2000 were $3.9 million, or $.56
diluted earnings per share as compared to $3.7 million, or $.51 diluted earnings
per share for the comparable period in 1999.
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 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 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. Interest expense
on certificates of deposit changes due to their periodic maturity and the
prevailing current market interest rates.
10
<PAGE>
Average Balance of Interest-Earning Assets and Interest-Bearing Liabilities
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:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------ -------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------------- ---------------- ------------ ------------------ --------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 301,532 $ 5,954 7.90% $ 301,303 $ 6,072 8.06%
Mortgage-backed securities 111,323 1,907 6.85% 96,719 1,628 6.73%
Investment securities 313,670 5,267 6.72% 294,038 4,685 6.37%
------------------ ---------------- ------------ ------------------ --------------- -----------
Total interest-earning
assets 726,525 13,128 7.23% 692,060 12,385 7.16%
------------------ ---------------- ------------ ------------------ --------------- -----------
Interest-bearing liabilities:
Deposits 622,169 5,279 3.39% 581,169 4,582 3.15%
Borrowings 90,521 1,303 5.76% 96,434 1,388 5.76%
Subordinated debentures 10,000 264 10.56% 10,000 264 10.56%
------------------ ---------------- ------------ ------------------ --------------- -----------
Total interest-bearning
liabilities $ 722,690 6,846 3.79% $ 687,603 6,234 3.63%
================== ---------------- ------------ ================== --------------- -----------
Net interest income $ 6,282 $ 6,151
================ ===============
Interest rate spread 3.44% 3.53%
============ ===========
Net yield on average interest-earning assets 3.46% 3.56%
============ ===========
Ratio of average interest-
earning assets to average interest-bearing liabilities 100.53% 100.65%
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------ ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------------- ---------------- ----------- ----------------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 302,333 $ 17,599 7.76% $ 301,127 $ 17,646 7.81%
Mortgage-backed securities 117,176 5,926 6.74% 91,468 4,687 6.83%
Investment securities 309,750 15,372 6.62% 289,058 12,904 5.95%
------------------ ---------------- ----------- ----------------- ---------- -------------
Total interest-earning
assets 729,259 38,897 7.11% 681,653 35,237 6.89%
------------------ ---------------- ----------- ----------------- ---------- -------------
Interest-bearing liabilities:
Deposits 615,557 15,279 3.31% 556,860 13,326 3.19%
Borrowings 94,583 4,040 5.69% 96,448 4,119 5.69%
Subordinated debentures 10,000 793 10.57% 10,000 793 10.57%
------------------ ---------------- ----------- ----------------- ---------- -------------
Total interest-bearing
liabilities $ 720,140 20,112 3.72% $ 663,308 18,238 3.67%
================== ---------------- ----------- ================= ---------- -------------
Net interest income $ 18,785 $ 16,999
================ ==========
Interest rate spread 3.39% 3.23%
=========== =============
Net yield on average interest-earning assets 3.43% 3.32%
=========== =============
Ratio of average interest-
earning assets to average interest-bearing liabilities 101.27% 102.77%
=========== =============
</TABLE>
11
<PAGE>
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). Due to the fact that 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>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 compared to 1999 2000 compared to 1999
------------------------------ -------------------------------
Increase (Decrease) due to: Increase (Decrease) due to:
Rate Volume Total Rate Volume Total
------------------------------ -------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ (123) $ 5 $ (118) $ (118) $ 71 $ (47)
Mortgage-backed securities 33 246 279 (78) 1,317 1,239
Investment securities 269 313 582 1,544 924 2,468
----------------------------- -----------------------------
Total change - interest income 179 564 743 1,348 2,312 3,660
----------------------------- -----------------------------
Interest expense:
Deposits 402 295 697 548 1,405 1,953
Borrowings (44) (41) (85) 1 (80) (79)
Subordinated debentures 0 0 0 0 0 0
----------------------------- -----------------------------
Total change - interest expense 358 254 612 549 1,325 1,874
----------------------------- -----------------------------
Net change in net interest income $ (179) $ 310 $ 131 $ 799 $ 987 $ 1,786
============================= =============================
</TABLE>
12
<PAGE>
Net Interest Income - for the three and nine months ended September 30, 2000
totaled $6.3 million and $18.8 million, respectively. Net interest income for
the three months ended September 30, 2000 increased $131 thousand as compared to
the same period in 1999 due primarily to an increase in interest income on
investment securities of $582 thousand, an increase in mortgage backed
securities of $279 thousand, and a decrease on interest expense on borrowings of
$85 thousand, partially offset by an increase in interest expense on deposits of
$697 thousand and a decrease in interest income on loans of $118 thousand.
Investment securities increased $582 thousand to $5.3 million due to an increase
in the average balance of the portfolio of $19.6 million to $313.6 million for
the three months ended September 30, 2000 from $294.0 million for the same
period in 1999. This increase was primarily due to the net increase since
September 1999 in repurchase agreement investments of $28.0 million, which
resulted in a volume increase in interest income of $313 thousand. The average
yield on the investment portfolio increased 35 basis points to 6.72% for the
three months ended September 30, 2000 from 6.37% for the three months ended
September 30, 1999, which resulted in a increase in interest income of $269
thousand.
Interest income on mortgage backed securities increased $279 thousand to $1.9
million for the three months ended September 30, 2000 from $1.6 million for the
same period in 1999, which was primarily due to a $14.6 million increase in the
average balance of the portfolio to $111.3 million for the three months ended
September 30, 2000 from $96.7 million for the same period in 1999. The increase
since September 1999 in the mortgage backed securities portfolio was from the
purchases of $33.8 million of adjustable rate mortgage backed securities offset
by principal paydowns of $23.1 million. This resulted in a volume increase in
interest income of $246 thousand. The average yield of the portfolio increased
12 basis points to 6.85% for the three months ended September 30, 2000 from
6.73% for the same period in 1999, which resulted in an increase in interest
income of $33 thousand.
Interest income on loans decreased $118 thousand to $6.0 million for the three
months ended September 30, 2000 from $6.1 million for the same period in 1999
principally due to a decrease in the loan portfolio's average rate to 7.90% for
the three months ended September 30, 2000 from 8.06% for the three months ended
September 30, 1999. The decrease in the average yield for the current three
month period is primarily due to interest income on impaired loans. Average
interest rate on loans during the 1999 period includes $527 thousand of interest
income reorganized on impaired loans as compared to $136 thousand recognized in
2000. The average balance of the loan portfolio increased $229 thousand to
$301.5 million for the three months ended September 30, 2000 from $301.3 million
for the same period in 1999, which resulted in an increase in interest income of
$5 thousand.
Interest expense on deposits increased $697 thousand for the three months ended
September 30, 2000 compared to the same period in 1999. The average balance of
deposits increased $41.0 million to $622.2 million for the three months ended
September 30, 2000 from $581.2 million for the same period in 1999, which
resulted in a volume increase in interest expense of $295 thousand. The weighted
average rates paid on deposits increased 24 basis points to 3.39% for the three
months ended September 30, 2000 from 3.15% for the same period in 1999, which
resulted in an increase in interest expense of $402 thousand due to rate
changes. Average balances and interest rates on checking accounts tied to
treasury rates increased sharply during the third quarter due to a significant
rise in short-term interest rates and short-term certificates of deposit
repriced at higher costs.
Net interest income for the nine months ended September 30, 2000 increased $1.8
million to $18.8 million from $17.0 million for the same period in 1999, due
primarily to an increase in interest income on investment securities of $2.5
million and an increase in mortgage backed securities of $1.2 million, partially
offset by an increase in interest expense on deposits of $2.0 million.
13
<PAGE>
The increase in interest income on investment securities for the nine months
ended September 30, 2000 as compared to the same period in 1999 was due to an
increase in the average balance of the investment portfolio of $20.7 million to
$309.8 million for the nine months ended September 30, 2000 from $289.1 million
for the same period in 1999, which resulted in a volume increase in interest
income of $924 thousand. The average yield on the investment portfolio increased
67 basis points to 6.62% for the nine months ended September 30, 2000 from 5.95%
for the same period in 1999, which resulted in an increase in interest income of
$1.5 million.
Interest income on mortgage backed securities increased $1.2 million to $5.9
million for the nine months ended September 30, 2000 from $4.7 million for the
same time period in 1999, which was primarily due to a $25.7 million increase in
the average balance of the portfolio to $117.2 million for the nine months ended
September 30, 2000 from $91.5 million for the same period in 1999. The increase
in the mortgage backed securities portfolio was due to purchases of $33.8
million, partially offset by $23.1 million of principal paydowns from September
1999 through September 2000. This resulted in a volume increase in interest
income of $1.3 million. The average yield of the portfolio decreased 9 basis
points to 6.74% for the nine months ended September 30, 2000 from 6.83% for the
same time period in 1999, which resulted in a decrease in interest income of $78
thousand.
Interest expense on deposits increased $2.0 million to $15.3 million for the
nine months ended September 30, 2000 compared to $13.3 million for the same
period in 1999. The average balance on deposits increased $58.7 million to
$615.6 million for the nine months ended September 30, 2000 from $556.9 million
for the nine months ended September 30, 1999 which resulted in an increase in
interest expense of $1.4 million. Average interest rates on deposits increased
12 basis points to 3.31% for the nine months ended September 30, 2000 from 3.19%
for the same period in 1999 which resulted in an increase in interest expense of
$548 thousand.
Provision for Loan Losses - for the three months ended September 30, 2000
decreased $414 thousand to $60 thousand from $474 thousand for the same period
in 1999. For the nine months ended September 30, 2000 there was a decrease in
the provision for loan losses of $414 thousand to $180 thousand compared to $594
thousand for the same period in 1999. At September 30, 2000 non-performing loans
decreased $672 thousand from December 31, 1999. Such decreases precipitated the
decrease in the provision for loan losses. 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. 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. Management continues to offer a
wider variety of loan products coupled with the continued change in the mix of
the products offered in the loan portfolio from lower yielding loans (i.e., one
to four family loans) to higher yielding loans (i.e., commercial real estate
mortgage, commercial construction, consumer, and commercial business) which have
a higher degree of risk than one to four family loans. 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 from the change in the
mix of the loan portfolio. Most of the Bank's lending activity is with customers
located within southern New Jersey. Generally, the loans are secured by real
estate. 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.
14
<PAGE>
Other Income - for the three and nine months ended September 30, 2000 totaled
$754 thousand and $2.2 million, respectively, remaining constant for the three
month period and decreasing $182 thousand during the nine month period ending
September 30, 2000 compared to the same period in 1999. Gain on disposal of
fixed assets decreased $245 thousand for the nine months ended September 30,
2000 due to the sale in May 1999 of a two acre parcel of land. Loan servicing
fees during the third quarter of 1999 include $25 thousand in late charges
received from one commercial loan. Real estate owned expenses increased during
the third quarter of 2000 primarily due to expenditures of $9 thousand incurred
to prepare one property for sale.
Operating Expenses - for the three month and nine months ended September 30,
2000 amounted to $5.0 million and $14.7 million, respectively as compared to
$4.4 million and $13.0 million for the same periods in 1999.
Salaries and Employee Benefits - for the three and nine month periods ended
September 30, 2000 were $2.9 million and $8.7 million, respectively, as compared
to $2.6 million and $7.5 million for the same periods in 1999. The increase was
due to annual cost of living raises and additional staff in the four new
branches opened since September 30, 1999. Average full time equivalent employees
at September 30, 2000 were 423 as compared to 374 at September 30, 1999.
Occupancy and Equipment - for the three and nine month periods ended September
30, 2000 amounted to $1.1 million and $3.0 million, respectively, as compared to
$872 thousand and $2.6 million for the same periods in 1999. The increase is the
result of additional depreciation and occupancy expenses on the new branches
opened, as well as other facility improvements and equipment additions since
September 30, 1999.
Purchased Services - for the three and nine month periods ended September 30,
2000 amounted to $478 thousand and $1.4 million, respectively, as compared to
$387 thousand and $1.1 million for the same periods in 1999. ATM charges
increased $129 thousand and check processing costs have increased $73 thousand
for the nine months ended September 30, 2000 due to higher transaction volume
from an increase in the number of checking accounts.
Professional Fees - for the three and nine month period ended September 30, 2000
were $118 thousand and $352 thousand, respectively, as compared to $81 thousand
and $360 thousand for the same periods in 1999. Accounting and regulatory
supervision fees increased during the current quarter.
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the nine months ended September 30, 2000
from the information presented in the annual report on Form 10-K for the year
ended December 31, 1999.
15
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Changes in Securities
------- ---------------------
None
Item 3: Defaults Upon Senior Securities
------- -------------------------------
None
Item 4: Submission of Matters to Vote of Security of Holders
------- ----------------------------------------------------
None
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
None
16
<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: November 14, 2000 /s/ Craig W. Yates
--------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /s/ Channing L. Smith
--------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
