SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-17353
FMS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
Based on the closing sales price of $8.00 per share of the registrant's
common stock on March 1, 2000, as reported on the Nasdaq National Market System
the aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $57.0 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of 1999 Annual Report to Stockholders (Parts II and IV)
2. Portions of Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Forward-Looking Statements
FMS Financial Corporation (the "Corporation" or "Registrant") may from
time to time make written or oral "forward-looking statements," including
statements contained in the Corporation's filings with the Securities and
Exchange Commission (including this Annual Report on Form 10-K and the exhibits
thereto), in its reports to stockholders and in other communications by the
Corporation, which are made in good faith by the Corporation pursuant to the
"safe harbor" provisions of the private securities litigation reform act of
1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Corporation's plans, objectives, expectations, estimates
and intentions, that are subject to change based on various important factors
(some of which are beyond the Corporation's control). The following factors,
among others, could cause the Corporation's financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the
Corporation conducts operations; the effects of, and changes in, trade, monetary
and fiscal policies and laws, including interest rate policies of the board of
governors of the federal reserve system, inflation, interest rate, market and
monetary fluctuations; the timely development of and acceptance of new products
and services of the Corporation and the perceived overall value of these
products and services by users, including the features, pricing and quality
compared to competitors' products and services; the willingness of users to
substitute competitors' products and services for the Corporation's products and
services; the success of the Corporation in gaining regulatory approval of its
products and services, when required; the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance); technological changes, acquisitions; changes in
consumer spending and saving habits; and the success of the Corporation at
managing the risks involved in the foregoing.
The Corporation cautions that the foregoing list of important factors
is not exclusive. The Corporation does not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of the Corporation.
Item 1. Business
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General
FMS Financial Corporation, a New Jersey corporation, headquartered in
Burlington, New Jersey, is the holding company for Farmers and Mechanics Bank
(the "Bank"). The Corporation conducts no significant business or operations of
its own other than holding all of the outstanding common stock of the Bank. As a
result, references to the Corporation or Registrant generally refers to the
consolidated entity which includes the main operating company, the Bank, unless
the context indicates otherwise.
The Registrant principally operates through its twenty-six branch
offices located throughout Burlington County, New Jersey. The Registrant is
primarily engaged in the business of attracting deposits from the general public
and originating loans which are secured by residential real estate. To a lesser
extent, the Registrant also originates consumer, commercial business loans and
construction loans and invests in U.S. government securities and
mortgage-related securities.
<PAGE>
Competition
The Registrant's primary market area consists of Burlington County, New
Jersey, and is one of many financial institutions serving this market area. The
competition for deposit products comes from other insured financial institutions
such as commercial banks, thrift institutions and credit unions in the
Registrant's market area. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
comes from other insured financial institutions such as commercial banks, thrift
institutions and credit unions.
Lending Activities
Analysis of Loan Portfolio
The following table sets forth the composition of the Registrant's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
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1999 1998 1997 1996 1995
----------------- ------------------ ------------------ ------------------- ---------------------
Carrying Percent Carrying Percent Carrying Percent Carrying Percent Carrying Percent
Value of Total Value of Total Value of Total Value of Total Value of Total
------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family..... $236,912 77.82% $245,415 81.07% $253,001 82.43% $257,451 82.89% $249,278 85.30%
Commercial real estate. 52,544 17.26 45,938 15.18 42,974 14.00 39,177 12.61 34,721 11.88
Commercial construction 3,935 1.29 2,609 .86 2,385 .78 4,395 1.42 -- --
Construction........... 973 .32 1,390 .46 3,258 1.06 3,712 1.20 2,116 .73
------- ------ ------- ------ ------- ----- ------- ----- ------- ------
Total Mortgage Loans 294,364 96.69 295,352 97.57 301,618 98.27 304,735 98.12 286,115 97.91
------- ------ ------- ------ ------- ----- ------- ----- ------- ------
Consumer and other loans:
Consumer.............. 3,274 1.08 3,237 1.07 3,609 1.17 4,015 1.29 4,337 1.48
Commercial business... 6,790 2.23 4,121 1.36 1,712 .56 1,830 .59 1,779 .61
------- ------ ------- ------ ----- ------ ----- ------ ------- ------
Total consumer and
other loans......... 10,064 3.31 7,358 2.43 5,321 1.73 5,845 1.88 6,116 2.09
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total Loans........ $304,428 100.00% $302,710 100.00% 306,939 100.00% 310,580 100.00% 292,231 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======== ======
</TABLE>
One-to-Four Family Loans. The Registrant's primary lending activity
consists of the origination of one-to-four family residential mortgage loans
("residential loans") secured by the property in the Registrant's market area.
The Registrant's residential loan portfolio also includes second mortgage loans
and home equity loans (including home equity lines of credit loans). The
Registrant generally originates mortgage loans with terms of 15 to 30 years,
amortized on a monthly basis, with principal and interest due each month.
Typically, residential loans remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option.
The Registrant presently offers residential loans that adjust every
year after an initial fixed term of one, two, five or seven years, at an
interest rate indexed higher than the corresponding U.S. Treasury security
index. The interest rates on these mortgages adjust annually after the one, two,
five or seven year anniversary date of the loan with an interest rate adjustment
cap of 1.5% per year and presently not to
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exceed a rate of 11.5% over the life of the loan. At December 31, 1999,
adjustable-rate residential first mortgage loans amounted to $54.2 million or
17.81% of the total residential loan portfolio. These loans are generally not
originated under terms, conditions and documentation which permit their sale in
the secondary mortgage market to Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Association ("FNMA").
Fixed-rate mortgage loans are generally underwritten according to FHLMC
and FNMA guidelines. The Registrant periodically sells selected fixed-rate
residential loans, without recourse, to provide additional funds for lending and
to restructure the loan portfolio to improve interest rate risk. Generally, if
the property is not owner-occupied, a higher rate of interest is charged on such
loans. At December 31, 1999, $167.2 million, or 54.93%, of the total residential
loan portfolio, consisted of long-term fixed-rate first mortgage loans, of which
none were classified as held for sale.
The Registrant's lending policies generally limit the maximum
loan-to-value ratio on owner-occupied residential first mortgage loans to 95% of
the lesser of the appraised value or purchase price, with the condition that
private mortgage insurance is required on loans with loan-to-value ratios in
excess of 80%. Mortgage loans on investment properties are made at loan-to-value
ratios up to 70%. The loan-to-value ratio, maturity and other provisions of the
loans made by the Registrant have generally reflected the policy of making less
than the maximum loan permissible under applicable regulations, in accordance
with established lending practices, market conditions and underwriting standards
maintained by the Registrant. The Registrant requires fire and casualty
insurance on all properties securing real estate loans and also performs title
searches to ensure its lien position.
The Registrant actively solicits and originates home equity loans and
home equity lines of credit secured by the equity in the borrower's primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust based upon the prime rate.
At December 31, 1999, the Registrant had home equity loans in the amount of
$15.5 million, or 6.4%, of its residential loan portfolio and has also approved
$21.8 million in home equity lines of credit, of which $8.2 million was
outstanding.
Commercial Real Estate Loans. Commercial real estate loans are loans
secured by commercial real estate (e.g., shopping centers, medical buildings,
retail offices) and multi-family dwelling units (e.g., apartment projects with
more than four units), in the Registrant's market area. Commercial real estate
loans and multi-family residential loans have been made in amounts up to $3.8
million, with most of such loans ranging in size from $100,000 to $1.0 million.
Loans on commercial properties are generally originated in amounts up to 75% of
the appraised value of the property. Commercial real estate loans and
multi-family residential loans are generally made at rates which adjust above
the prime interest rate (generally 1% to 2%) or a specified treasury index or
are balloon loans with fixed interest rates which mature in three to five years
with principal amortization for a period of up to 25 years. At December 31,
1999, the Registrant's commercial real estate loan portfolio consisted of $48.8
million of commercial real estate and $3.7 million of multi-family loans.
Loans secured by commercial real estate are generally larger and
involve a greater degree of risk than one-to-four family residential mortgage
loans. Of primary concern, in commercial and multi-family real estate lending,
is the borrower's creditworthiness and the feasibility and cash flow potential
of the project. Loans secured by income properties are generally larger and
involve greater risks than residential
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<PAGE>
mortgage loans because payments on loans secured by income properties are often
dependent on successful operation or management of the properties. As a result,
repayment of such loans may be subject to a greater extent than residential real
estate loans to adverse conditions in the real estate market or the economy.
Construction Loans. The Registrant originates loans to finance the
construction of one-to-four family dwellings and/or commercial real estate.
Construction loans to builders are generally made only if the Registrant makes
the permanent mortgage loan or if the builder has a contract for sale and the
purchaser has received a permanent mortgage commitment. Interim construction
loans to builders generally have terms of up to nine months and interest rates
which adjust above the prime interest rate (generally 1% to 2%).
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Registrant may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Registrant may be confronted, at or prior to
the maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Consumer Loans. Regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to 35% of the
institution's assets. The Registrant makes various types of secured and
unsecured consumer loans including education loans, lines of credit, automobile
loans (new and used) and loans secured by deposit accounts. Consumer loans
generally have terms of six months to five years, some of which are at fixed
rates and some of which have rates that adjust periodically.
Consumer loans may entail greater risk than residential loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Commercial Business Loans. Commercial business loans are underwritten
on the basis of the borrower's ability to service such debt from income and are
generally made to small and mid-sized companies located within the Registrant's
primary lending area. Generally, the Registrant requires additional collateral
of equipment, chattel or other assets before making a commercial business loan.
Loan Commitments. The Registrant issues loan origination commitments to
real estate developers and qualified borrowers primarily for the construction,
purchase and refinancing of residential real estate and commercial real estate.
Such commitments are made on specified terms and conditions, including in most
cases, the payment of a non-refundable commitment fee based on a percentage of
the amount of committed funds. Generally, the commitment requires acceptance
within 15 days of the date of issuance. At December 31, 1999, the Registrant had
$5.8 million of commitments to cover originations and $18.9 million in
undisbursed funds on outstanding lines of credit. Management believes that
virtually all of the Registrant's commitment will be funded.
4
<PAGE>
Origination of Loans
Commercial loan origination comes from a variety of sources, including
the Registrant's existing customer base, referrals from real estate offices,
accountants, financial advisers, attorneys, builders and walk in business as
well as solicitations by the Registrant's business development officers.
Residential mortgage loan customers are derived in a similar manner. Consumer
loans are directly obtained through the Registrant's network of branch offices
and advertising.
All applications are processed in accordance with established policies
of the Registrant, including the review of credit references, verification of
information provided and, where real estate is involved, the review of an
appraisal completed by an independent third party appraiser from a list of
approved appraisers that the Registrant maintains.
Loan approvals may be approved by loan officers up to their
individually assigned lending limit, which are established and modified
periodically to reflect the officer's expertise and experience. Certain officers
have joint lending authorities that exceed their individual authorities. The
Board of Directors approves loans above the individual and joint authorities of
the officers. The Board reviews on an annual basis the loan approval
authorities.
Non-Performing and Problems Assets
When a loan is more than 30 days delinquent, the borrower will be
contacted by mail or phone and payment requested. If the delinquency continues,
subsequent efforts will be made to contact the delinquent borrower. In certain
instances, the Registrant may modify the loan or grant a limited moratorium on
loan payments to enable the borrower to reorganize his financial affairs. If the
loan continues in a delinquent status for 90 days or more, the Registrant
generally will initiate foreclosure proceedings.
Loans are generally placed on non-accrual status when either principal
or interest is 90 days or more past due. Interest accrued and unpaid at the time
a loan is placed on non-accrual status is charged against interest income by the
establishment of a reserve on uncollected interest. Such interest, when
ultimately collected, is credited to the income in the period received.
5
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding impaired loans, troubled debt restructured and real estate owned
assets by the Registrant at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family.......................... $1,386 $1,733 $2,394 $2,413 $2,502
Commercial real estate...................... 1,510 1,205 1,163 1,663 1,604
Consumer and other.......................... 237 282 80 15 6
----- ----- ----- ----- -----
Total mortgage non-accrual loans.......... $3,133 $3,220 $3,637 $4,091 $4,112
----- ----- ----- ----- -----
Other non-accrual loans....................... -- -- -- -- $ 354
Troubled debt restructuring................... $ 462 $477 $684 $ 560(1) 634(1)
Real estate owned, net........................ 449 168 446 622 669
Other non-performing assets................... 88 644 644 1,228 1,228
----- ----- ----- ----- -----
Total non-performing assets................... $4,132 $4,509 $5,411 $6,501 $6,997
===== ===== ===== ===== =====
Total non-accrual loans to net loans.......... 1.05% 1.08% 1.20% 1.33% 1.43%
==== ==== ==== ==== ====
Total non-accrual loans to total assets....... .41% .47% .58% .76% 0.82%
==== ==== ==== ==== ====
Total non-performing assets to total assets... .53% .65% .86% 1.20% 1.39%
==== ==== ==== ==== ====
</TABLE>
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(1) Loans restructured prior to SFAS Nos. 114 and 118 effective date and
performing in accordance with the terms of the restructuring agreement.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or
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specific loss allowances. A portion of general loss allowances established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Management's evaluation of the classification of assets and the
adequacy of the reserve for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.
The following table sets forth the Registrant's classified assets in
accordance with its classification system.
At
December 31,
1999
---------------
(In thousands)
Special mention.............. $3,148
Substandard.................. 3,968
Doubtful..................... 25
Loss......................... --
-----
Total $7,141
=====
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Registrant's loan portfolio. Such evaluation,
which includes a review of all loans of which full collectibility of interest
and principal may not be reasonably assured, considers the Registrant's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and current economic conditions.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
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<PAGE>
The following table sets forth an analysis of the Registrant's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------ -------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $3,342 $3,138 $2,782 $2,767 $2,622
Loans charged-off:
One-to-four family........................ (77) (37) (8) (114) (13)
Commercial real estate.................... -- -- -- -- --
Construction.............................. (128) -- -- -- --
Consumer.................................. -- (1) (40) (1) (6)
Commercial business....................... (28) -- (1) -- --
----- ----- ----- ---- -----
Total charge-offs....................... (233) (38) (49) (115) (19)
Recoveries.................................. 78 2 5 10 44
----- ----- ----- ----- -----
Net loans charged-off....................... (155) (36) (44) (105) 25
----- ----- ----- ----- -----
Provision for possible loan losses.......... 654 240 400 120 120
----- ----- ----- ----- -----
Balance at end of period.................... $3,841 $3,342 $3,138 $2,782 $2,767
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period............. .051% .012% .014% .035% (.009%)
==== ==== ==== ==== =====
</TABLE>
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<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percent of loans in each category to total loans
receivable for the periods indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowances to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------- ----------------- ------------------ ------------------
Percent of Percent of Percent of Percent Percent of
Loans to Loans to Loans to of Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
One-to-four family......... $2,506 77.82% $1,929 81.11% $2,016 82.43% $1,716 82.89% $1,718 85.30%
Commercial real estate..... 1,063 17.26 1,232 15.14 954 14.00 877 12.61 819 11.88
Commercial construction.... 39 1.29 26 .86 24 .78 44 1.42 -- --
Construction............... 10 .32 14 .46 32 1.06 37 1.20 21 .73
Consumer and other......... 65 1.08 65 1.07 62 1.17 76 1.29 68 1.48
Commercial business........ 158 2.23 76 1.36 50 .56 32 .59 141 .61
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total allowance for loan $3,841 100.00% $3,342 100.00% $3,138 100.00% $2,782 100.00% $2,767 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
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<PAGE>
Investment Activities
The Registrant is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. The level of liquid assets varies
depending upon several factors, including: (i) the yields on investment
alternatives, (ii) management's judgment as to the attractiveness of the yields
then available in relation to other opportunities, (iii) expectation of future
yield levels, and (iv) management's projections as to the short-term demand for
funds to be used in loan origination and other activities. Investment
securities, including mortgage-backed securities, are classified at the time of
purchase, based upon management's intentions and abilities, as securities held
to maturity or securities available for sale. Debt securities acquired with the
intent and ability to hold to maturity are classified as held to maturity and
are stated at cost and adjusted for amortization of premium and accretion of
discount, which are computed using the level yield method and recognized as
adjustments of interest income. All other debt securities are classified as
available for sale to serve principally as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Registrant to
categorize securities as "held to maturity," "available for sale" or "trading."
As of December 31, 1999, Registrant had securities classified as "held to
maturity" and "available for sale" in the amount of $341.7 million and $49.3
million, respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with net changes in the market value from period to
period included as a separate component of stockholders' equity, net of income
taxes. At December 31, 1999, the Registrant's securities available for sale had
an amortized cost of $51.1 million and market value of $49.3 million (unrealized
loss of $1.8 million, net of deferred income taxes). The changes in market value
in the Registrant's available for sale portfolio reflect normal market
conditions and vary, either positively or negatively, based primarily on changes
in general levels of market interest rates relative to the yields of the
portfolio. Additionally, changes in the market value of securities available for
sale do not affect the Corporation's income nor does it affect the Bank's
regulatory capital requirements or its loan-to-one borrower limit.
At December 31, 1999, the Registrant's investment portfolio policy
allowed investments in instruments such as: (i) U.S. Treasury obligations, (ii)
U.S. federal agency or federally sponsored agency obligations, (iii) local
municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, and (vii) investment grade corporate
bonds, and commercial paper. The board of directors may authorize additional
investments.
As a source of liquidity and to supplement Registrant's lending
activities, the Registrant has invested in residential mortgage-backed
securities. Mortgage-backed securities can serve as collateral for borrowings
and, through repayments, as a source of liquidity. Mortgage-backed securities
represent a participation interest in a pool of single-family or other type of
mortgages. Principal and interest payments are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities, to
investors, like us. The quasi-governmental agencies guarantee the payment of
principal and interest to investors and include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and
Federal National Mortgage Association ("FNMA").
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<PAGE>
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FHLMC, GNMA, and FNMA make up a majority of
the pass-through certificates market.
The Registrant also invests in mortgage-related securities, primarily
collateralized mortgage obligations ("CMOs"), issued or sponsored by GNMA, FNMA,
FHLMC, as well as private issuers. CMOs are a type of debt security that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage backed securities as opposed to pass through
mortgage backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. CMOs attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity. Management believes these securities represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.
11
<PAGE>
The following table sets forth the carrying value of the Registrant's
investment securities held to maturity, securities available for sale, FHLB
stock, and interest bearing deposits and overnight investments at the dates
indicated.
At December 31,
---------------------------
1999 1998 1997
---- ---- ----
Investment securities held to maturity: (In Thousands)
U.S. government and agency securities........ $170,611 $ 78,292 $ 79,347
Reverse repurchase agreements................ -- -- 30,185
Municipal bonds.............................. 1,509 3,824 2,802
U.S. treasuries.............................. -- -- 15
CMO's........................................ 48,187 47,302 --
Mortgage-backed securities.................... 121,424 90,593 92,021
Investment securities available for sale:
U.S. government and agency securities........ 9,725 18,501 7,871
CMO's........................................ 36,817 91,332 72,468
Mortgage-backed securities.................... 2,766 -- --
------- ------- -------
Total investment securities.............. 391,039 329,844 284,709
FHLB stock.................................... 4,861 4,861 3,631
Interest bearing deposits and overnight
investments................................ 25,786 -- 827
------- ------- -------
Total investments........................ $421,686 $334,705 $289,167
======= ======= =======
12
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Registrant's investment
securities at December 31, 1999. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
repayments.
<TABLE>
<CAPTION>
Five to More than Total
One Year or Less One to Five Years Ten Years Ten Years Investment Securities
------------------- ----------------- ---------------- ----------------- ------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
----------- ------- ------ -------- ------- ------- -------- ------- -------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held to
maturity:
U.S. government and
agency obligations............... $ -- --% $19,140 6.45% $100,274 6.63% $51,197 7.58% $170,611 $161,851 6.89%
Municipal bonds.................. 1,279 3.88 -- -- -- -- 230 5.60 1,509 1,510 4.14
CMO's............................ -- -- -- -- 3,641 6.55 44,546 6.68 48,187 46,481 6.65
Mortgage-backed securities 644 6.35 1,887 7.62 10,633 9.90 108,260 6.77 121,424 119,815 7.05
Investment securities available for sale:
U.S. government and
agency obligations............. -- -- 5,088 6.06 2,815 6.57 1,822 6.94 9,725 9,725 6.38
CMO's............................ -- -- 483 6.64 4,672 6.30 31,662 6.73 36,817 36,817 6.68
Mortgage-backed securities....... -- -- -- -- -- -- 2,766 7.50 2,766 2,766 7.50
FHLB stock....................... -- -- -- -- -- -- 4,861 6.85 4,861 4,861 6.85
Interest-bearing deposits
and overnight investments......... 25,786 5.70 -- -- -- -- -- -- 25,786 25,786 5.70
------ ------ ------- ------- ------- -------
Total.......................... $27,709 5.63% $26,598 6.46% $122,035 6.90%$245,344 6.93% $421,686 $409,612 6.80%
====== ==== ====== ===== ======= ==== ======= ==== ======= ======= ====
</TABLE>
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Registrant's
funds for lending and other investment purposes. Funds are derived from
amortization and prepayment of loans and, to a lesser extent, maturities of
investment securities, borrowings, mortgage-backed securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
Deposits. Deposits are attracted from within the Registrant's primary
market area of Burlington County, New Jersey, through the offering of a broad
selection of deposit instruments including regular checking accounts,
non-interest checking accounts, money market accounts, regular passbook
accounts, certificates of deposit and IRA accounts. Deposit account terms vary
according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. The Registrant
regularly evaluates the internal cost of funds, surveys rates offered by
competing institutions, reviews the Registrant's cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. The
Registrant does not have any brokered deposits and has no present intention to
accept or solicit such deposits.
Certificates of Deposit in Excess of $100,000. The following table
indicates the amount of the Registrant's certificates of deposit of $100,000 or
more by time remaining until maturity as of December 31, 1999.
Maturity Period of Deposits Certificates of
- --------------------------- ---------------
Deposit
-------
(In Thousands)
Three months or less ....... $20,719
Three through six months.... 4,692
Six through twelve months... 6,894
Over twelve months ......... 6,073
------
Total ................. $38,378
======
14
<PAGE>
Deposit Rate. The following table sets forth the distribution of the
Registrant's average balance of deposit accounts at the dates indicated and the
weighted average nominal interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Percent of Average Percent of Average Percent of Average
Average Total Nominal Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- -------- ------- -------- ------- -------- -------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and regular savings .......... $ 95,370 16.82% 2.43% $ 84,480 16.31% 2.53% $ 73,802 15.6% 2.56%
Checking accounts ..................... 162,484 28.66 1.25 128,259 24.76 .99 89,418 18.8 .92
Money market deposit accounts ......... 65,964 11.63 2.76 62,099 11.99 2.64 59,797 12.6 2.72
Certificates of deposit ............... 234,367 41.33 4.92 234,471 45.26 5.35 243,381 51.3 5.32
Surrogate statement ................... 8,816 1.56 5.33 8,714 1.68 5.80 7,860 1.7 5.80
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total Deposits ...................... $567,001 100.00% 3.20% $518,023 100.00% 3.49% $474,258 100.00% 3.74%
======== ====== ==== ======= ====== ==== ======= ====== ====
</TABLE>
15
<PAGE>
Personnel
As of December 31, 1999 the Registrant had 261 full-time employees and
172 part-time employees. The employees are not represented by a collective
bargaining unit. Management believes its relationship with its employees is
good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Corporation and the Bank. The description does not purport
to be complete and is qualified in its entirety by reference to applicable laws
and regulations.
Recent Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
Despite its sweeping reform of the nation's banking industry, however,
the Act will have few direct effects on the operations or powers of most savings
associations or savings and loan holding companies. The Act terminates the
"unitary thrift holding company exemption on a prospective basis and generally
prohibits new savings and loan holding companies from engaging in nonfinancial
activities or affiliating with a nonfinancial entity. However, as a
grandfathered unitary thrift holding company, the Corporation will retain its
authority to engage in nonfinancial activities.
The Act also imposes significant new financial privacy obligations and
reporting requirements on all financial institutions, including federal savings
associations. Specifically, the statute, among other things, will require
financial institutions (a) to establish privacy policies and disclose them to
customers both at the commencement of a customer relationship and on an annual
basis and (b) to permit customers to opt out of a financial institution's
disclosure of financial information to nonaffiliated third parties. The Act
requires the federal financial regulators to promulgate regulations implementing
these provisions within six months of enactment, and the statute's privacy
requirements will take effect one year after enactment.
Regulation of the Corporation
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries, should such
subsidiaries be formed, which
16
<PAGE>
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Corporation.
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions, provided the Bank satisfies
the Qualified Thrift Lender ("QTL") test. The Act terminated the "unitary thrift
holding company exemption" for all companies that applied to acquire savings
associations after May 4, 1999. Since the Corporation is grandfathered under
this provision of the Act, its unitary holding company powers and authorities
were not affected. However, if the Corporation were to acquire control of an
additional savings association, its business activities would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Corporation
were in the future to sell control of the Bank to any other company, such
company would not succeed to the Corporation's grandfathered status under the
Act and would be subject to the same business activity restrictions.
See "- Regulation of the Bank - Qualified Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
17
<PAGE>
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF. The
FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. The FDIC has set the deposit
insurance assessment rates for SAIF-member institutions for the first six months
of 2000 at 0% to .027% of insured deposits on an annualized basis, with the
assessment rate for most savings institutions set at 0%.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statute, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at
least 65% of its "portfolio assets" in certain"Qualified Thrift Investments"
(defined to include residential mortgages and related equity investments,
certain mortgage-related securities, small business loans, student loans and
credit card loans, and 50% of certain community development loans). For purposes
of the
18
<PAGE>
statutory QTL test, portfolio assets are defined as total assets minus
intangible assets, property used by the institution in conducting its business,
and liquid assets equal to 10% of total assets. A savings institution must
maintain its status as a QTL on a monthly basis in at least nine out of every 12
months. A failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions and a restriction on
obtaining additional advances from its FHLB. At December 31, 1999, the Bank was
in compliance with its QTL requirement, with 80.49% of its assets invested in
Qualified Thrift Investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1999, the Bank's liquid asset
ratio was 54.02%.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
December 31, 1999, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Properties
- -------------------
The Registrant conducts its business through its two administrative
offices located in Burlington, New Jersey and its 26 branch locations in
Burlington County, New Jersey. All of the Registrant's office and branch
facilities are owned by the Registrant, except for two branch office locations
in Lumberton and Medford, New Jersey. Management of the Registrant considers the
physical condition of each of the Registrant's administrative and branch offices
to be good and adequate for the conduct of the Registrant's business.
Item 3. Legal Proceedings
- --------------------------
The Registrant is periodically involved as a plaintiff or defendant in
various legal actions, such as actions to enforce liens, condemnation
proceedings on properties in which the Registrant holds mortgage interests,
matters involving the making and servicing of mortgage loans and other matters
incident to the
19
<PAGE>
Registrant's business. In the opinion of management, none of these actions
individually or in the aggregate is believed to be material to the financial
condition or results of operations of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Stock Market
Information" in the Corporation's 1999 Annual Report to Stockholders (the
"Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the table captioned "Financial Highlights"
in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained in the section captioned "Asset and Liability
Management" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
The Registrant's financial statements listed in Item 14 herein are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominee for Director, Directors Continuing
20
<PAGE>
in Office, and Executive Officers - Election of Directors" and "- Biographical
Information" in the 2000 Proxy Statement are incorporated herein by reference.
Executive Officers of the Corporation Who Are Not Directors
Name and Title Age as of December 31, 1999
- -------------- ---------------------------
Channing L. Smith 56
Vice President and
Chief Financial Officer
James E. Igo 43
Senior Vice President and
Chief Lending Officer
Thomas M. Topley 39
Senior Vice President and
Corporate Secretary
Channing L. Smith has served as Vice President and Chief Financial
Officer of the Corporation and the Bank since October 1994. In this capacity, he
is responsible for the management of the accounting, treasury, and investments
of the Corporation and the Bank. From April 1994 to October 1994, Mr. Smith
served as controller of the Corporation and the Bank.
James E. Igo has served as Senior Vice President and Senior Mortgage
Lending Officer of the Corporation and the Bank since November 1991.
Thomas M. Topley has served as Senior Vice President of Operations since
April 1993 and as Corporate Secretary of the Corporation and the Bank since
April 1992. From June 1990 to April 1993, Mr. Topley served as Vice President
and Controller for the Bank.
Item 11. Executive Compensation
- ---------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors - Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
21
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
- -----------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated statements of financial condition of FMS
Financial Corporation and subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the years in
the three year period ended December 31, 1999, together with the
related notes and the independent auditors' report of
PricewaterhouseCoopers, LLP, independent accountants.
2. Schedules omitted as they are not applicable.
22
<PAGE>
3. Exhibits
The following Exhibits are filed as part of this report:
3.1 Certificate of Incorporation*
3.2 Bylaws*
4 Agreement to furnish copy to Securities and Exchange
Commission upon request of Indenture dated July 28, 1994,
relating to 10% Subordinated Debentures due 2004 in
aggregate principal amount of $10 million**
10.1 Stock Option and Incentive Plan***
13 Portions of the 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule (electronic filing only)
-----------------------------
* Incorporate by reference to the Registrant's Form S-1
Registration Statement No. 33-24340.
** Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
*** Incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-24340.
(b) No Reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 24, 2000.
FMS FINANCIAL CORPORATION
/s/Craig W. Yates
By: -------------------------------
Craig W. Yates, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below on March 24, 2000, by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/Charles B. Yates /s/Craig W. Yates
- ------------------------------ ---------------------------------------
Charles B. Yates Craig W. Yates
Chairman of the Board President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/George J. Barber /s/Channing L. Smith
- ------------------------------ --------------------------------------
George J. Barber, Director Channing L. Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Edward J. Staats /s/Wayne H. Page
- ------------------------------ --------------------------------------
Edward J. Staats, Jr., Director Wayne H. Page, Director
/s/James C. Lignana
- ------------------------------ --------------------------------------
James C. Lignana, Director Dominic W. Flamini, Director
/s/Vincent R. Farias /s/Ruppert A. Hall
- ------------------------------ --------------------------------------
Vincent R. Farias, Director Ruppert A. Hall, Jr., Director
/s/Mary Wells
- ------------------------------
Mary Wells, Director
</TABLE>
EXHIBIT 13
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Financial Condition: (In Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $772,501 $691,812 $628,403 $541,710 $501,550
Loans receivable and loans held for sale, net 299,695 298,603 302,831 306,871 288,400
Deposits 603,892 536,310 489,440 453,277 428,809
Stockholders' equity 46,097 43,469 38,916 33,826 33,053
</TABLE>
<TABLE>
<CAPTION>
Operations: (In Thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $47,863 $46,563 $40,813 $36,841 $35,201
Interest expense 24,742 24,869 20,879 18,978 18,041
Net interest income 23,120 21,694 19,934 17,863 17,160
Net income 5,114 5,271 5,491 3,026 (a) 4,343
Basic earnings per common share 0.71 0.73 0.77 0.41 0.58
Diluted earnings per common share 0.70 0.72 0.75 0.40 0.56
Dividends declared per common share 0.12 0.11 0.08 (b) 0.07 (b) 0.07 (b)
Weighted average common shares outstanding 7,210 7,204 7,165 7,411 7,512
Weighted average common shares and common
stock equivalents outstanding 7,292 7,314 7,346 7,573 7,695
</TABLE>
Other Selected Data:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest rate spread 3.28% 3.50% 3.60% 3.50% 3.49%
Net interest margin 3.36 3.48 3.72 3.66 3.66
Return on average assets 0.61 0.79 0.98 0.60 0.89
Return on average equity 10.93 12.86 15.11 8.99 14.00
Dividend payout ratio 17.14 15.28 10.67 17.50 12.43
Equity-to-asset ratio 5.97 6.28 6.19 6.24 6.59
</TABLE>
(a) Includes $2.7 million for the one-time assessment to recapitalize the
SAIF.
(b) Adjusted for stock splits in 1998 and 1996, as applicable.
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects", and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
effect of opening a new branch, the ability to control costs and expenses, the
Year 2000 issues and general economic conditions. FMS Financial Corporation
undertakes no obligation to publicly release the results of any revisions to
those forward looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
FMS Financial Corporation ("the Corporation") is the parent company of
Farmers & Mechanics Bank ("the Bank"), its only subsidiary. Earnings of the
Corporation are primarily dependent on the earnings of the Bank as the
Corporation has engaged in no significant operations of its own. Accordingly,
the earnings of the Corporation are largely dependent on the receipt of earnings
from the Bank in the form of dividends.
The earnings of the Bank depend primarily on its net interest income.
Net interest income is affected by: (i) the volume of interest-earning assets
and interest-bearing liabilities (see "Rate Volume Analysis"), (ii) rates of
interest earned on interest-earning assets and rates paid on interest-bearing
liabilities and (iii) the difference ("interest rate spread") between average
rates of interest earned on interest-earning assets and average rates paid on
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.
The Bank also derives income from service charges on customer deposit
accounts and fees on loans. In addition to interest expense, the Bank incurs
operating expenses such as salaries, employee benefits, deposit insurance
premiums, depreciation, property maintenance and advertising.
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Bank's market risk arises primarily from interest rate risk
inherent in its lending, investment and deposit taking activities. The Bank's
profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Bank's earnings
to the extent that the interest rates borne by assets and liabilities do not
change at the same speed, to the same extent or on the same basis. To that end,
management actively monitors and manages its interest rate risk exposure. The
Bank does not participate in hedging programs, interest rate swaps or other
activities involving the use of off-balance sheet derivative financial
instruments, but may do so in the future to mitigate interest rate risk. The
Bank's policy allows investment only in securities which have a rating of AA or
better. The Bank holds a substantial component of its investment portfolio in
mortgage-backed securities and collateralized mortgage obligations
(collectively, "MBS"). At the end of 1999, the total investment in MBS amounted
to $209.2 million, or 53% of total investments. These are instruments
collateralized by pools of residential and commercial mortgages which return
interest and principal payments to the investor. Approximately 58% of the Bank's
MBS holdings are U.S. Government Agency securities (GNMA, FNMA and FHLMC), which
carry either direct government or quasi-government guarantees and are rated AAA
in terms of quality. The Bank also owns non-agency MBS, issued by major
financial institutions, which are rated AAA or AA. MBS are generally very liquid
issues with major brokerage houses providing ready markets. However, MBS are
subject to prepayment and extension risk which can adversely affect their yields
and expected maturities. MBS of $1.4 million and $1.7 million were used to
secure public funds on deposit at December 31, 1999 and 1998, respectively.
Interest rate risk is the risk of loss in value due to changes in
interest rates. This risk is addressed by the Bank's Asset Liability Management
Committee ("ALCO"), which includes senior management. The ALCO monitors and
considers methods of managing interest rate risk by monitoring changes in the
interest rate repricing GAP ("GAP"), the net portfolio values ("NPV") and net
interest income under various interest rate scenarios. The ALCO attempts to
manage the various components of the Bank's balance sheet to minimize the impact
of sudden and sustained changes in interest rates through GAP, NPV and net
interest income scenarios.
The Bank's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time.
The difference, or the interest rate repricing "GAP", provides an
indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates over a period of time. A GAP is considered
positive when the amount of interest-rate sensitive assets maturing or repricing
over a specified period of time exceeds the amount of interest-rate sensitive
liabilities maturing or repricing within that period and is considered negative
when the amount of interest-rate sensitive liabilities maturing or repricing
over a specified period of time exceeds the amount of interest-rate sensitive
assets maturing or repricing within that period. Generally, during a period of
rising interest rates, a negative GAP within a given period of time would
adversely affect net interest income, while a positive GAP within such period of
time may result in an increase in net interest income; during a period of
falling interest rates, a negative GAP within a given period of time may result
in an increase in net interest income while a positive GAP within such period of
time may have the opposite effect.
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FMS FINANCIAL CORPORATION
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GAP Table
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities and borrowings outstanding at December 31,
1999, which are expected to reprice or mature in each of the future time periods
shown. The amount of assets or liabilities shown which reprice or mature during
a particular period were determined by the contractual terms or assumed decay
rates of the asset or liability. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-backed securities, and
assumes that adjustable-rate mortgage loans will reprice at contractual
repricing intervals. There has been no adjustment for the impact of future loan
commitments.
<TABLE>
<CAPTION>
FARMERS & MECHANICS BANK 3 Months 3 Months 1 to 3 3 to 5 Over 5
GAP TABLE or Less to 1 year Years Years Years Total
-------------- --------------- -------------- --------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $ 32,573 $ 16,871 $ 23,038 $ 36,149 $ 188,864 $ 297,495
Loans 32,440 45,822 72,063 39,099 115,004 304,428
Mortage-backed securities 9,095 21,086 35,952 19,911 38,146 124,190
-------------- --------------- -------------- --------------- ------------- ------------
Total 74,108 83,779 131,053 95,159 342,014 726,113
-------------- --------------- -------------- --------------- ------------- ------------
Interest-bearing liabilities:
Checking, Savings and
Club accounts 19,529 50,642 48,211 29,669 65,697 213,748
Money market accounts 21,266 30,570 5,581 2,181 5,986 65,584
Certificates of deposit 64,407 98,867 57,607 19,389 1,786 242,056
Borrowings 10,000 50,000 45,000 3,185 1,337 109,522
-------------- --------------- -------------- --------------- ------------- ------------
Total 115,202 230,079 156,399 54,424 74,806 630,910
-------------- --------------- -------------- --------------- ------------- ------------
Interest Rate Sensitivity GAP $ (41,094) $ (146,300) $ (25,346) $ 40,735 $ 267,208 $ 95,203
============== =============== ============== =============== ============= ============
Cumulative Interest Rate Sensitivity GAP $ (41,094) $ (187,394) $ (212,740) $ (172,005) $ 95,203
============== =============== ============== ============= =============
Ratio of Interest Rate Sensitive Assets
to Interest Rate Sensitive Liabilities 64.33% 36.41% 83.79% 174.85% 457.20% 115.09%
============== =============== ============== =============== ============= ============
Ratio of Cumulative GAP to Total Bank
Assets -5.32% -24.25% -27.53% -22.26% 12.32%
============== =============== ============== =============== ============
</TABLE>
The Bank's analysis of its interest-rate sensitivity incorporates
certain assumptions concerning the amortization of loans and other
interest-earning assets and the repricing characteristics of deposits. The Bank
has made the following assumptions in calculating the values in the GAP table:
adjustable-rate mortgage loans have a constant prepayment rate of 2%; fixed-rate
mortgage loans have a prepayment rate that is constant through time at 6%; fixed
and adjustable rate commercial loans and consumer loans have no constant
prepayment rate; mortgage-backed securities and CMOs and REMICs have a
prepayment rate that is constant over time at 6%. Core savings and checking
deposits have a decay rate of 17% and money market accounts have a decay rate of
79% for the first year, 20% for the second and third year and 12% thereafter.
These decay rates are based on assumption rates using industry experience
adjusted by the Bank as needed to reflect our individual experience. The
interest-rate sensitivity of the Bank's assets and liabilities illustrated in
the table could vary substantially if different assumptions were used or if
actual experience differs from the assumptions used.
The table indicates the time period in which interest-earning assets
and interest-bearing liabilities will mature or reprice in accordance with their
contractual terms or assumed decay rates, as applicable. However, this table
does not necessarily indicate the impact of general interest rate movements on
the Bank's net interest income because the repricing of various categories of
assets and liabilities is discretionary and is subject to competition and other
pressures. As a result, various assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
Interest rate risk exposure is also measured using interest rate
sensitivity analysis to determine the Bank's change in NPV in the event of
hypothetical changes in interest rates and interest liabilities. The Board of
Directors may direct management to adjust its asset and liability mix to bring
interest rate risk within Board approved limits if potential changes to NPV and
net interest income resulting from hypothetical interest rate changes are not
within the limits established.
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.
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FMS FINANCIAL CORPORATION
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The Bank also measures its interest rate risk using the OTS's NPV
method. NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources. An institution's
interest rate risk is measured as the change to its NPV as a result of a
hypothetical immediate 200 basis point change in market interest rates. Based on
this analysis at December 31, 1999, the Bank would experience a 373 basis point
decrease in its NPV as a percent of assets if rates rise by 200 basis points in
comparison to a flat rate scenario and a 131 basis point decrease in NPV if
rates decline 200 basis points.
Although the NPV calculation provides an indication of the Bank's
interest rate risk at a particular point in time, such measurements are not
intended to and do not provide a precise forecast of the effect of changes in
market interest rates on the Bank's net interest income and will differ from
actual results.
Results of Operations
Net Interest Income
The earnings of the Corporation depend primarily upon the level of net
interest income, which is the difference between interest earned on its
interest-earning assets, such as loans and investments, and the interest paid on
interest-bearing liabilities, such as deposits including non-interest checking
accounts and borrowings. Net interest income is a function of the interest rate
spread, which is the difference between the weighted average yield earned on
interest-earning assets and the weighted average rate paid on interest-bearing
liabilities, as well as the average balance of interest-earning assets as
compared to interest-bearing liabilities. Net income is also affected by
non-interest income, such as gains (losses) on the sale of loans and
investments, provision for loan losses and real estate owned, service charges
and other fees, and operating expenses.
The following table sets forth certain information relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average rates paid on liabilities for the periods indicated. Such yields and
rates are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods presented.
<PAGE>
Average Balances, Interest and Yields/Rates
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------- ------------------------------------- -----------------------------
Average
Average Average Average Average Average Yield/
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Rate
----------- ----------- ---------- ----------- ------------- ----------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable $ 301,257 $ 23,408 7.77% $ 303,330 $ 24,316 8.02% $ 310,540 $25,038 8.06%
Mortgage-backed
securities 97,899 6,568 6.71% 88,339 6,376 7.22% 97,013 7,062 7.28%
Investment securities 289,359 17,887 6.18% 231,610 15,871 6.85% 127,937 8,713 6.81%
----------- ----------- ---------- ------------ ----------- ----------- ------------- -------- ---------
Total interest-
earning assets
688,515 47,863 6.95% 623,279 46,563 7.47% 535,490 40,813 7.62%
----------- ----------- ---------- --------- ----------- ----------- ----------- -------- ---------
Interest-bearing liabilities:
Deposits 567,001 18,172 3.20% 518,023 18,091 3.49% 474,258 17,755 3.74%
Borrowings 96,531 5,513 5.71% 98,459 5,721 5.81% 34,776 2,067 5.94%
Subordinated
debentures 10,000 1,057 10.57% 10,000 1,057 10.57% 10,000 1,057 10.57%
----------- ----------- ---------- ------------ ----------- ----------- ------------- -------- ---------
Total interest-bearing
liabilities
$ 673,532 24,742 3.67% $ 626,482 24,869 3.97% $ 519,034 20,879 4.02%
=========== ----------- ---------- ========= ----------- ----------- =========== -------- ---------
Net interest income $ 23,121 $ 21,694 $19,934
=========== =========== ========
Interest rate spread 3.28% 3.50% 3.60%
========== =========== =========
Net yield on average interest-earning assets 3.36% 3.48% 3.72%
========== =========== =========
Ratio of average interest-earning assets to
average interest -bearing liabilities 102.22% 99.49% 103.17%
========== =========== =========
</TABLE>
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FMS FINANCIAL CORPORATION
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Rate Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rates; (ii) changes in volume; (iii) total change in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). Because average balances on loans include
non-performing loans which reduce the computed yield, a higher level of
non-performing loans affects both the changes due to volume and rate.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------------- ------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to change in Due to change in
------------------------------------------- ------------------------------------------
Rate Volume Total Rate Volume Total
------------- ------------- ------------- ------------ ------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ (742) $ (166) $ (908) $ (141) $ (581) $ (722)
Mortgage-backed securities (498) 690 192 (55) (631) (686)
Investment securities (1,941) 3,957 2,016 97 7,061 7,158
------------- ------------- ------------- ------------ ------------- ------------
Total change - interest income (3,181) 4,481 1,300 (99) 5,849 5,750
------------- ------------- ------------- ------------ ------------- ------------
Interest expense:
Deposits (1,629) 1,710 81 (1,302) 1,638 336
Borrowings (96) (112) (208) (131) 3,785 3,654
Subordinated debentures 0 0 0 0 0 0
------------- ------------- ------------- ------------ ------------- ------------
Total change - interest expense (1,725) 1,598 (127) (1,433) 5,423 3,990
------------- ------------- ------------- ------------ ------------- ------------
Net change in net interest income $ (1,456) $ 2,883 $ 1,427 $ 1,334 $ 426 $ 1,760
============= ============= ============= ============ ============= ============
</TABLE>
Comparisons of Years Ended December 31, 1999 and 1998.
Net Income
The Corporation and its subsidiary recorded net income of $5.1 million for
the year ended December 31, 1999, or $.70 diluted earnings per share as compared
to net income of $5.3 million, or $.72 diluted earnings per share for the year
ended December 31, 1998. Net interest income was $23.1 million in 1999 compared
to $21.7 million in 1998. Provisions for loan losses were $654 thousand in 1999
and $240 thousand in 1998. Other income totaled $3.1 million in 1999 compared to
$2.4 million for the same period in 1998. Total operating expenses for the year
ended December 31, 1999 were $17.6 million compared to $15.6 million in the
previous year. During 1999, the Corporation declared dividends which totaled
$.12 per share which resulted in a dividend payout ratio of 17.14%.
Interest Income
Total interest income increased $1.3 million to $47.9 million in 1999
from $46.6 million in 1998. The increase is attributable to increases in
interest income on investment securities of $2.0 million and mortgage-backed
securities of $192 thousand, partially offset by a decrease in interest income
on loans of $908 thousand.
The increase in interest income on investment securities was due to a
$57.8 million increase in the average balance of investment securities to $289.4
million in 1999 from $231.6 million in 1998. The investment portfolio increased
primarily due to the net purchase in 1999 of $84.2 million in U.S. Agency notes
and $20.8 million in collateralized mortgage obligations (CMOs), partially
offset by $73.4 million in principal paydowns. The increases in the average
balance of investment securities resulted in an increase in interest income of
$4.0 million in 1999 from the previous year. Average yields decreased to 6.18%
in 1999 from 6.85% in 1998, which resulted in a decrease in interest income of
$1.9 million on investment securities.
<PAGE>
Interest income on mortgage-backed securities increased $192 thousand
in 1999 primarily due to volume increases in the portfolio. The average balance
of the portfolio increased $9.6 million to $97.9 million in 1999 from $88.3
million in 1998, resulting in an increase in interest income of $690 thousand.
The increase in the average balance is due to the purchase of $57.3 million in
FHLMC, FNMA and GNMA securities in 1999, partially offset by principal paydowns
of $26.5 million. The yield on the portfolio decreased to 6.71% in 1999 from
7.22% in 1998, which resulted in a decrease in interest income of $498 thousand.
The average balance of the loan portfolio decreased $2.0 million to
$301.3 million in 1999 from $303.3 million in 1998. The decline in loan volume
during 1999 resulted in a decrease in interest income of $166 thousand. The
average yield on the loan portfolio decreased to 7.77% in 1999 from 8.02% in
1998 which resulted in a decrease in interest income of $742 thousand.
Interest Expense
Total interest expense decreased $127 thousand to $24.7 million in 1999
from $24.9 million in 1998. The decrease was due to a decline in interest
expense on borrowings.
Interest expense on borrowings decreased $208 thousand to $5.5 million
in 1999 from $5.7 million in 1998.
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FMS FINANCIAL CORPORATION
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This decrease was due to a decline in both the average balance of borrowings and
the rate. The average balance of borrowings decreased $2.0 million to $96.5
million in 1999 from $98.5 million in 1998, resulting in a $112 thousand
decrease in interest expense due to volume. The average rate on borrowings
decreased to 5.71% in 1999 from 5.81% in 1998, resulting in a $96 thousand
decrease in interest expense due to changes in rate.
Interest expense on deposits increased $81 thousand to $18.2 million in
1999 from $18.1 million in 1998. The average balance of deposits increased $49.0
million to $567.0 million in 1999 from $518.0 million in 1998, resulting in an
increase in interest expense of $1.7 million. Increases in deposits in 1999 are
primarily due to an increase in the average balances of checking accounts of
$22.2 million, savings accounts of $11.0 million and money market accounts of
$3.4 million, partially offset by a decline in the average balance of
certificates of deposit of $104 thousand. These net balance increases were
partially offset by a decline in the average rate paid on deposits of 29 basis
points to 3.20% in 1999 from 3.49% in 1998, resulting in a decrease in interest
expense of $1.6 million. The lowering of the average rate on deposits was due to
an overall decline in the average interest rates on deposit products in 1999 and
an increase in the average balance of non-interest "Free Personal Checking" and
"Free Business Checking" accounts of $12.0 million.
Provision For Loan Losses
The provision for loan losses increased $414 thousand to $654 thousand
in 1999 from $240 thousand in 1998. The increase in 1999 was attributable to the
continued change in the mix of the loan portfolio. The determination of the
allowance level for loan losses is based on management's analysis of risk
characteristics of various classifications of loans, previous loan loss
experience, estimated fair value of the underlying collateral and current
economic conditions. The Corporation will continue to monitor its allowance for
loan losses and make future adjustments to the allowance through the provision
for loan losses as economic conditions dictate. 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.
Other Income (Expense)
Other income from operations increased $724 thousand to $3.1 million in
1999 compared with $2.4 million in 1998.
Gain on sale of fixed assets of $245 thousand relates to the sale of a
parcel of land located in Burlington Township. The loss on disposal of fixed
assets of $210 thousand in 1998 relates to the write-off of obsolete computer
hardware and software due to the computer system conversion completed during
1998.
Real estate owned operations, net, in 1999 resulted in a loss of $12
thousand, which was comprised of $37 thousand in real estate owned operating
expenses and realized gains of $25 thousand on the sale of real estate owned
properties.
Service charges on accounts increased $152 thousand to $2.5 million in
1999 from $2.4 million in 1998. The increase is the result of additional retail
banking fees due to higher transaction volumes during the year.
Operating Expenses
Total operating expenses increased $2.0 million to $17.6
million in 1999 from $15.6 million in 1998.
Salaries and benefits increased $1.2 million to $10.2 million
in 1999 from $9.0 million in 1998. The increase was due to additional staff in
the four new branches opened during the year as well as an increase in branch
staff for extended weekend hours until 3:00 p.m. Average full time equivalent
employees during 1999 were 382 as compared to 335 during 1998.
<PAGE>
Occupancy and equipment expense increased $501 thousand to
$3.5 million in 1999 from $3.0 million in 1998. This increase is due to
additional depreciation and occupancy expenses on four new branches opened in
1999, as well as other facility and equipment additions and improvements during
the year.
Purchased services expense increased $208 thousand to $1.5 million in
1999 from $1.3 million in 1998. Check processing costs increased $84 thousand
and MAC charges increased $99 thousand due to higher transaction volumes in
1999.
Comparisons of Years Ended December 31, 1998 and 1997.
Net Income
The Corporation and its subsidiary recorded net income of $5.3 million
for the year ended December 31, 1998, or $.72 diluted earnings per share as
compared to net income of $5.5 million, or $.75 diluted earnings per share for
the year ended December 31, 1997. Net interest income was $21.7 million in 1998
compared to $19.9 million in 1997. Provisions for loan losses were $240 thousand
in 1998 compared to $400 thousand in 1997. Other income totaled $2.4 million in
1998 compared to $2.1 million for the same period in 1997. Total operating
expenses for the year ended December 31, 1998 were $15.6 million compared to
$13.0 million in the previous year. During 1998, the Corporation declared
dividends which totaled $.11 per share which resulted in a dividend payout ratio
of 15.28%.
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FMS FINANCIAL CORPORATION
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Interest Income
Total interest income increased $5.8 million to $46.6 million in 1998
from $40.8 million in 1997. The increase is attributable to increases in
interest income on investment securities of $7.2 million, partially offset by a
decrease in interest income on loans of $722 thousand and mortgage-backed
securities of $686 thousand.
The increase in interest income on investment securities was due to a
$103.7 million increase in the average balance of investment securities to
$231.6 million in 1998 from $127.9 million in 1997. The investment portfolio
increased primarily due to the net purchase in 1998 of $131.3 million in
collateralized mortgage obligations (CMOs), partially offset by $65.1 million in
principal paydowns and $9.6 million net reductions in U.S. Agency notes. The
increases in the average balance of investment securities resulted in an
increase in interest income of $7.1 million in 1998 from the previous year.
Average yields increased to 6.85% in 1998 from 6.81% in 1997, which resulted in
an increase in interest income of $97 thousand.
The average balance of the loan portfolio decreased $7.2 million to
$303.3 million in 1998 from $310.5 million in 1997. The decline in loan volume
during 1998 resulted in a decrease in interest income of $581 thousand. The
average yield on the loan portfolio decreased to 8.02% in 1998 from 8.06% in
1997 which resulted in a decrease in interest income of $141 thousand.
Interest income on mortgage-backed securities decreased $686 thousand
in 1998 primarily due to volume decreases in the portfolio. The average balance
of the portfolio decreased $8.7 million to $88.3 million in 1998 from $97.0
million in 1997, resulting in a decrease in interest income of $631 thousand.
The decline in the average balance is primarily due to principal paydowns of
$32.8 million, partially offset by purchases of $31.1 million during the year.
The average yield on the portfolio decreased to 7.22% in 1998 from 7.28% in
1997, which resulted in a decrease in interest income of $55 thousand.
Interest Expense
Total interest expense increased $4.0 million to $24.9 million in 1998
from $20.9 million in 1997. The increase was due to an increase in interest
expense on borrowings and deposits.
Interest expense on borrowings increased $3.7 million to $5.7 million
in 1998 from $2.1 million in 1997. This increase was due to an increase in the
average balance of borrowings, partially offset by a decline in the average
rate. The average balance of borrowings increased $63.7 million to $98.5 million
in 1998 from $34.8 million in 1997, resulting in a $3.8 million increase in
interest expense due to volume. This was primarily the result of a $70.7 million
increase in the average balance of repurchase agreements during the year. The
average rate on borrowings decreased to 5.81% in 1998 from 5.94% in 1997,
resulting in a $131 thousand decrease in interest expense due to rate.
Interest expense on deposits increased $336 thousand to $18.1 million
in 1998 from $17.8 million in 1997. The average balance of deposits increased
$43.8 million to $518.0 million in 1998 from $474.3 million in 1997, resulting
in an increase in interest expense of $1.6 million. Increases in deposits in
1998 are primarily due to an increase in the average balances of checking
accounts of $38.2 million and savings accounts of $11.5 million, partially
offset by a decline in the average balance of certificates of deposit of $8.9
million. These increases were partially offset by a decline in the average rate
paid on deposits of 25 basis points to 3.49% in 1998 from 3.74% in 1997,
resulting in a decrease in interest expense of $1.3 million. The lowering of the
average rate on deposits in 1998 was due to an increase in the average balance
of non-interest "Free Personal Checking" and "Free Business Checking" accounts
of $19.7 million.
Provision For Loan Losses
The provision for loan losses decreased $160 thousand to $240 thousand
in 1998 from $400 thousand in 1997. The determination of the allowance level for
loan losses is based on management's analysis of risk characteristics of various
classifications of loans, previous loan loss experience, estimated fair value of
the underlying collateral and current economic conditions. The Corporation will
continue to monitor its allowance for loan losses and make future adjustments to
the allowance through the provision for loan losses as economic conditions
dictate. Although the Corporation maintains its allowance for loan losses at a
level that it considers to be adequate to provide for the inherent risk of loss
in its loan portfolio, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will not
be required in future periods due to the higher degree of credit risk which
might result from the change in the mix of the loan portfolio.
Other Income (Expense)
Other income from operations increased $280 thousand to $2.4 million in
1998 compared with $2.1 million in 1997.
Loss on disposal of fixed assets of $210 thousand relates to the
write-off of obsolete computer hardware and software due to the computer system
conversion completed during 1998.
Real estate owned operations, net in 1998 resulted in a loss of $64
thousand, which was comprised of $57 thousand in real estate owned operating
expenses, $108 thousand of provisions for loss on real estate, net of
charge-offs, and realized gains of $101 thousand on the sale of real estate
owned properties.
Service charges on accounts increased $165 thousand to $2.4 million in
1998 from $2.2 million in 1997. The increase is the result of additional retail
banking fees due to higher transaction volume during the year.
Operating Expenses
Total operating expenses increased $2.6 million to $15.6
million in 1998 from $13.0 million in 1997.
-9-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Salaries and benefits increased $1.7 million to $9.0 million
in 1998 from $7.3 million in 1997. The increase was due to additional staff in
the new branches opened during the year as well as an increase in branch staff
for extended weekday hours until 9:00 p.m. Average full time equivalent
employees during 1998 were 335 as compared to 299 during 1997.
Occupancy and equipment expense increased $281 thousand to
$3.0 million in 1998 from $2.7 million in 1997. This increase is due to
additional depreciation and occupancy expenses on new branches opened in 1998,
as well as other facility and equipment additions and improvements during the
year.
Purchased services expense increased $232 thousand to $1.3 million in
1998 from $1.1 million in 1997. Check processing costs increased $101 thousand
and MAC charges increased $94 thousand due to the higher transaction volume in
1998.
Advertising expense increased by $77 thousand to $206 thousand in 1998
from $129 thousand in 1997. The Bank has engaged in a newspaper advertising
campaign emphasizing our branch locations and increased hours of operations.
Impact of Inflation and Changing Prices
Unlike most industrial companies, substantially all the assets of the
Corporation are monetary in nature. As a result, movements in interest rates
have a greater impact on the Corporation's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Liquidity and Capital Resources
The Bank's liquidity is a measure of its ability to fund loans,
withdrawals of deposits and other cash outflows in a cost effective manner. The
Bank's primary sources of funds are deposits and scheduled amortization and
prepayments of loan principal. The Bank also obtains funds from the sale and
maturity of investment securities and short-term investments as well as the
maturity of mortgage-backed securities and funds provided by operations. During
the past several years, the Bank has used such funds primarily to meet its
ongoing commitments to fund maturing time deposits and savings withdrawals, to
fund existing and continuing loan commitments and to maintain liquidity. While
the Bank has been able to fund its operations internally during recent periods,
it has periodically supplemented its liquidity needs with securities sold under
agreements to repurchase (repurchase agreements) and advances from the Federal
Home Loan Bank of New York (FHLB). At December 31, 1999 the Bank had $90.0
million in repurchase agreements and $16.3 million in advances from the FHLB of
New York. While loan payments, maturing investments and mortgage-backed
securities are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank's liquidity is also influenced by the level
of demand for funding loan originations. Liquidity may be adversely affected by
unexpected deposit outflows, excessive interest rates paid by competitors,
adverse publicity relating to the Banking industry and similar matters.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Company's commitment to make loans and
management's assessment of the Company's ability to generate funds. The Company
is also subject to federal regulations that impose certain minimum capital
requirements.
The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 2000 is approximately $163.3 million. To
the extent these deposits do not remain at the Bank upon maturity, the Bank
believes it can replace these funds with deposits, FHLB advances or outside
borrowings. It has been the Bank's experience that a substantial portion of such
maturing deposits remain with the Bank.
At December 31, 1999, the Bank had loan commitments outstanding of
$24.7 million, of which $4.1 million were for fixed-rate loans and $20.6 million
were for adjustable-rate loans. Funds required to fulfill the commitments are
derived primarily from loan repayments, net deposit inflows or, when
appropriate, borrowings.
Year 2000
The Company relies on computers to conduct its business and information
systems processing. Industry experts were concerned that on January 1, 2000,
some computers might not be able to interpret the new year properly, causing
computer malfunctions. Some banking industry experts remain concerned that some
computers may not be able to interpret additional dates in the year 2000
properly. The Company has operated and evaluated its computer operating systems
following January 1, 2000 and has not identified any errors or experienced any
computer system malfunctions. The Company will continue to monitor its
information systems to assess whether its systems are at risk of misinterpreting
any future dates and will develop, if needed, appropriate contingency plans to
prevent any potential system malfunction or correct any system failures. The
Company has not been informed of any such problem experienced by its vendors or
its customers.
However, it is too soon to conclude that there will not be any problems
arising from the Year 2000 problem. The Company will continue to monitor its
significant vendors of goods and services and customers with respect to any Year
2000 problems they may encounter, as those issues may effect the Company's
ability to continue operations, or might adversely affect its financial
position, results of operations and cash flows. At this time, the Company does
not believe that these potential problems will materially impact the ability to
continue its operations or effect its financial statements. Any delays,
mistakes, or failures could have a significant impact on the Company's financial
condition and profitability.
-10-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Consolidated Summary of Quarterly Earnings (Unaudited)
The following table presents summarized quarterly data for 1999 and 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
1999 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income $ 11,154 $ 11,699 $ 12,385 $ 12,625 $ 47,863
Total interest expense 5,958 6,046 6,234 6,504 24,742
------------- ------------- ------------- ------------- -------------
Net interest income 5,196 5,653 6,151 6,121 23,121
Provision for loan losses 60 60 474 60 654
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 5,136 5,593 5,677 6,061 22,467
Total other income 651 953 754 747 3,105
Total operating expenses 4,238 4,367 4,387 4,575 17,567
------------- ------------- ------------- ------------- -------------
Income before income taxes 1,549 2,179 2,044 2,233 8,005
Federal and state income taxes 562 787 736 806 2,891
------------- ------------- ------------- ------------- -------------
Net income $ 987 $ 1,392 $ 1,308 $ 1,427 $ 5,114
============= ============= ============= ============= =============
Basic earnings per common share $ 0.14 $ 0.19 $ 0.18 $ 0.20 $ 0.71
============= ============= ============= ============= =============
Diluted earnings per common share $ 0.13 $ 0.19 $ 0.18 $ 0.20 $ 0.70
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
1998 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income $ 11,424 $ 11,805 $ 11,748 $ 11,586 $ 46,563
Total interest expense 6,136 6,365 6,290 6,078 24,869
------------- ------------- ------------- ------------- -------------
Net interest income 5,288 5,440 5,458 5,508 21,694
Provision for loan losses 60 60 60 60 240
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 5,228 5,380 5,398 5,448 21,454
Total other income 605 536 590 650 2,381
Total operating expenses 3,892 3,820 3,814 4,054 15,580
------------- ------------- ------------- ------------- -------------
Income before income taxes 1,941 2,096 2,174 2,044 8,255
Federal and state income taxes 700 761 785 738 2,984
------------- ------------- ------------- ------------- -------------
Net income $ 1,241 $ 1,335 $ 1,389 $ 1,306 $ 5,271
============= ============= ============= ============= =============
Basic earnings per common share $ 0.17 $ 0.19 $ 0.19 $ 0.18 $ 0.73
============= ============= ============= ============= =============
Diluted earnings per common share $ 0.17 $ 0.18 $ 0.19 $ 0.18 $ 0.72
============= ============= ============= ============= =============
</TABLE>
-11-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 20,489,516 $ 18,142,316
Interest-bearing deposits 82,493 0
Short term funds 25,703,862 11,754,075
------------------- -----------------
Total cash and cash equivalents 46,275,871 29,896,391
Investment securities held to maturity 220,307,242 129,417,826
Investment securities available for sale 49,307,116 109,833,133
Loans, net 299,694,517 298,603,223
Mortgage-backed securities held to maturity 121,424,419 90,592,647
Accrued interest receivable:
Loans 1,398,470 1,839,217
Mortgage-backed securities 836,699 633,667
Investments 3,628,622 2,371,410
Federal Home Loan Bank stock 4,861,410 4,861,410
Real estate held for development, net 87,926 644,487
Real estate owned, net 448,541 167,541
Office properties and equipment, net 20,686,272 19,292,247
Deferred income taxes 2,264,587 2,015,772
Excess cost over fair value of net assets acquired 55,328 164,969
Prepaid expenses and other assets 959,819 1,156,573
Subordinated debentures issue costs, net 263,765 321,113
------------------- -----------------
TOTAL ASSETS $ 772,500,604 $ 691,811,626
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 603,892,117 $ 536,309,623
Securities sold under agreements to repurchase 90,000,000 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 2,204,704 2,259,435
Accrued interest payable 1,437,348 1,304,742
Dividends payable 215,519 216,953
Other liabilities 2,316,882 1,883,887
------------------- -----------------
Total liabilities 726,403,601 648,342,961
------------------- -----------------
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 7,897,791 and 7,897,191, and shares outstanding 7,183,978
and 7,231,767 as of December 31, 1999 and 1998, respectively 789,779 789,719
Paid-in capital in excess of par 8,217,535 8,216,820
Accumulated comprehensive loss - net of deferred income taxes (1,167,810) (21,793)
Retained earnings 42,108,955 37,860,291
Less: Treasury stock (713,813 and 665,424 shares, at cost, as of
December 31, 1999 and 1998, respectively) (3,851,456) (3,376,372)
------------------- -----------------
Total stockholders' equity 46,097,003 43,468,665
------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 772,500,604 $ 691,811,626
=================== =================
</TABLE>
See notes to consolidated financial statements.
-12-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest income on:
Loans $ 23,408,176 $ 24,315,646 $ 25,037,855
Mortgage-backed securities 6,567,956 6,375,729 7,062,459
Investments 17,886,682 15,871,239 8,712,928
--------------------- -------------------- ----------------
Total interest income 47,862,814 46,562,614 40,813,242
--------------------- -------------------- ----------------
INTEREST EXPENSE:
Interest expense on:
Deposits 18,171,523 18,090,683 17,754,531
Borrowings 5,513,478 5,720,876 2,066,929
Subordinated debentures 1,057,348 1,057,348 1,057,348
--------------------- -------------------- ----------------
Total interest expense 24,742,349 24,868,907 20,878,808
--------------------- -------------------- ----------------
NET INTEREST INCOME 23,120,465 21,693,707 19,934,434
PROVISION FOR LOAN LOSSES 653,579 240,000 400,000
--------------------- -------------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 22,466,886 21,453,707 19,534,434
--------------------- -------------------- ----------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 152,856 147,080 170,766
Gain on sale of loans 3,849 5,423 9,804
Gain on sale of investment securities 0 0 1,711
Gain (Loss) on sale/disposal of fixed assets 244,731 (209,935) 0
Loss from real estate held for development 0 0 (200,000)
Real estate owned operations, net (11,802) (64,215) (179,879)
Service charges on accounts 2,520,929 2,369,112 2,204,167
Other income 194,041 133,584 94,664
--------------------- -------------------- ----------------
Total other income (expense) 3,104,604 2,381,049 2,101,233
--------------------- -------------------- ----------------
OPERATING EXPENSES:
Salaries and employee benefits 10,182,540 8,971,707 7,319,822
Occupancy and equipment 3,497,537 2,996,435 2,715,513
Purchased services 1,512,112 1,303,637 1,071,697
Federal deposit insurance premiums 309,679 294,912 232,739
Professional fees 461,378 369,987 331,436
Advertising 215,281 206,120 129,278
Other 1,388,071 1,436,937 1,216,951
--------------------- -------------------- ----------------
Total operating expenses 17,566,598 15,579,735 13,017,436
--------------------- -------------------- ----------------
INCOME BEFORE INCOME TAXES 8,004,892 8,255,021 8,618,231
INCOME TAXES:
Current 2,336,374 3,293,115 3,195,477
Deferred 555,012 (309,582) (68,400)
--------------------- -------------------- ----------------
Total income taxes 2,891,386 2,983,533 3,127,077
NET INCOME $ 5,113,506 $ 5,271,488 $ 5,491,154
===================== ==================== ================
BASIC EARNINGS PER COMMON SHARE $0.71 $0.73 $0.77
===================== ==================== ================
DILUTED EARNINGS PER COMMON SHARE $0.70 $0.72 $0.75
===================== ==================== ================
Weighted average common shares outstanding 7,210,038 7,203,862 7,165,455
Potential dilutive effect of the exercise of stock options 81,554 109,779 180,864
--------------------- -------------------- ----------------
Adjusted weighted average common shares outstanding 7,291,592 7,313,641 7,346,319
===================== ==================== ================
</TABLE>
See notes to consolidated financial statements
-13-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 5,113,506 $ 5,271,488 $ 5,491,154
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 653,579 240,000 400,000
Depreciation and amortization 2,016,259 1,999,005 1,876,773
Provision for real estate owned 0 108,102 142,630
Provision for real estate held for development 0 0 200,000
Realized (gains) and losses on:
Sale of loans and loans held for sale (3,849) (5,423) (9,804)
Sale of investments available for sale 0 0 (1,711)
(Sale) and Disposal of fixed assets (244,731) 209,935 7,122
Sale of real estate owned (25,097) (101,349) (10,630)
Proceeds from sale of loans held for sale 0 0 101,625
Loans originated for sale 0 0 (100,000)
Increase in accrued interest receivable (1,019,497) (442,422) (770,837)
Decrease (Increase) in prepaid expenses and other assets 196,754 (95,448) (171,226)
Increase in accrued interest payable 132,606 190,438 253,759
Increase (Decrease) in other liabilities 446,775 (61,539) (46,544)
Provision for deferred income taxes 395,258 (465,972) (67,530)
Other 0 33,481 72,982
-------------------- --------------- ----------------
Net cash provided by operating activities 7,661,563 6,880,296 7,367,763
-------------------- --------------- ----------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 750,565 1,658,700 953,442
Real estate held for development 556,561 0 333,245
Real estate owned 110,097 603,095 75,630
Office property and equipment 353,410 0 0
Principal collected and proceeds from maturities of investment
securities held to maturity 62,682,095 294,889,937 265,776,982
Proceeds from maturities of investment securities available for sale 107,709,603 86,593,751 11,942,666
Principal collected and proceeds from maturities of mortgage-backed
securities 26,545,021 32,754,399 33,458,783
Principal collected on loans, net 54,487,510 60,258,471 53,020,808
Longer-term loans originated or acquired, net (57,275,106) (58,185,394) (50,305,474)
Purchase of investment securities and mortgage-backed securities
held to maturity (256,292,451) (343,502,524) (320,005,763)
Purchase of investment securities available for sale (4,056,041) (116,472,554) (78,570,231)
Purchase of Federal Home Loan Bank stock 0 (1,230,610) (10,200)
Purchase of office property and equipment (3,009,232) (4,912,791) (2,077,581)
-------------------- --------------- ----------------
Net cash used by investing activities (67,437,968) (47,545,520) (85,407,693)
-------------------- --------------- ----------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 53,936,730 61,509,157 27,376,384
Net increase (decrease) in time deposits 13,645,764 (14,639,514) 2,095,304
Net decrease in FHLB advances (31,290) (8,128,155) (8,053,524)
Proceeds from securities sold under agreement to repurchase 10,000,000 20,000,000 60,000,000
Principal repayment of employee stock ownership plan debt 0 (33,481) (72,982)
(Decrease) Increase in advances from borrowers for taxes and
insurance (54,731) 66,894 53,903
Purchase of treasury stock (475,084) (186,051) (127,361)
Dividends paid on common stock (866,279) (767,461) (525,479)
Net proceeds from issuance of common stock 775 108,604 5,758
-------------------- --------------- ----------------
Net cash provided by financing activities 76,155,885 57,929,993 80,752,003
-------------------- --------------- ----------------
INCREASE IN CASH AND CASH EQUIVALENTS 16,379,480 17,264,769 2,712,073
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,896,391 12,631,622 9,919,549
-------------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 46,275,871 $ 29,896,391 $ 12,631,622
==================== =============== ================
<PAGE>
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 24,113,145 $ 24,678,469 $ 20,625,049
Income taxes 2,689,262 2,906,347 3,456,506
Non cash investing and financing activities:
Dividends declared and not paid at year end 215,519 216,953 167,154
Non-monetary transfers from loans to real estate acquired
through foreclosure 366,000 331,028 32,435
</TABLE>
See notes to consolidated financial statements.
-14-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantee of
employee
Common Accumulated stock Total
shares Common Paid-in comprehensive ownership Retained Treasury Stockholders'
outstanding stock capital income plan debt earnings stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 2,392,707 $260,288 $8,413,558 $(166,152) $(106,463) $28,487,903 $(3,062,960) $33,826,174
Net Income 5,491,154 5,491,154
Other comprehensive
income, net of tax
of $123,703
Unrealized gain on
securities available
for sale 220,107 220,107
--------------
Total comprehensive
income 5,711,261
Dividends declared (572,997) (572,997)
Decrease in guarantee
of employee stock
ownership plan debt 72,982 72,982
Exercise of stock options 1,486 149 5,609 5,758
Purchase of common stock (6,277) (127,361) (127,361)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1997 2,387,916 260,437 8,419,167 53,955 (33,481) 33,406,060 (3,190,321) 38,915,817
Net Income 5,271,488 5,271,488
Other comprehensive
income, net of tax
benefit of $42,492
Unrealized loss on
securities available
for sale (75,748) (75,748)
--------------
Total comprehensive
income 5,195,740
Dividends declared (817,257) (817,257)
Decrease in guarantee
of employee stock
ownership plan debt 33,481 33,481
Exercise of stock options 47,451 4,745 103,859 108,604
Tax benefit from gains on
stock options exercised 218,331 218,331
Purchase of common stock (5,354) (186,051) (186,051)
Three-for-one stock split 4,801,754 524,537 (524,537) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1998 7,231,767 789,719 8,216,820 (21,793) 0 37,860,291 (3,376,372) 43,468,665
Net Income 5,113,506 5,113,506
Other comprehensive
income, net of tax
benefit of $648,072
Unrealized loss on
securities available
for sale (1,146,017) (1,146,017)
--------------
Total comprehensive
income 3,967,489
Dividends declared (864,842) (864,842)
Exercise of stock options 600 60 715 775
Purchase of common stock (48,389) (475,084) (475,084)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1999 7,183,978 $789,779 $8,217,535 $(1,167,810) $0 $42,108,955 $(3,851,456) $46,097,003
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles. The consolidated financial statements
include the accounts of FMS Financial Corporation ("the Corporation"), Farmers &
Mechanics Bank, and its wholly-owned subsidiaries ("the Bank"). Material
intercompany accounts and transactions have been eliminated in consolidation.
Regulatory Authorities
The regulatory agency overseeing savings institutions is the Office of
Thrift Supervision ("OTS") and the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC").
At periodic intervals, both the OTS and the FDIC routinely examine the
Corporation as part of their legally prescribed oversight of the savings and
loan industry. Based on these examinations, the regulators can direct that the
Corporation's financial statements be adjusted in accordance with their
findings. In addition, the Corporation is subject to regulations of the
Securities and Exchange Commission ("SEC").
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits with an original maturity of 90 days or
less, money market funds and federal funds sold. Cash and cash equivalents
exclude reverse repurchase agreements which are generally classified as
investments held to maturity. Generally, federal funds are purchased and sold
for one-day periods. The Bank is required to maintain certain average reserve
balances as established by the Federal Reserve Bank. The amount of those
balances for the reserve computation periods which include December 31, 1999 and
1998 were $15.5 million and $11.0 million, respectively. These requirements were
satisfied through the balance of vault cash and a balance at the Federal Home
Loan Bank.
Investments and Mortgage-Backed Securities
In accordance with Statement of Financial Accounting Standards No. 115
(SFAS No. 115), "Accounting for Certain Investments in Debt and Equity
Securities" the Corporation classifies investments into three categories, as
applicable; trading, available for sale or held to maturity. Upon the adoption
of SFAS No. 115 on January 1, 1994, the Corporation categorized selected
investments and mortgage-backed securities that are part of the Corporation's
asset/liability management strategy and that may be sold in response to changes
in interest rates, prepayments and similar factors, as available for sale.
Investments classified as available for sale are reported at the current market
value with net unrealized gains and losses, net of applicable deferred tax
effects, added to or deducted from the Corporation's total stockholders' equity
until realized. Gains and losses on the sale of investment securities are
recognized utilizing the specific identification method.
Investment and mortgage-backed securities classified as held to
maturity are recorded at cost, adjusted for amortization of premiums or
accretion of discounts. Premiums are amortized over the average life of the
security. Discounts are amortized using a method which in total approximates the
interest method over the remaining contractual life of the security. The
Corporation has the intent and ability to hold these securities to maturity.
Securities Purchased under Agreements to Resell
The Bank invests excess funds in securities purchased under agreements
to resell (reverse repurchase agreements). Generally, the maturity date of the
reverse repurchase agreement is less than 90 days. Due to the short-term nature
of the agreement, the Bank does not take possession of the securities; instead,
the securities are held in safekeeping by the Bank's agent. The carrying value
of the agreements approximates fair market value because of the short maturity
of the investment.
Allowance for Possible Loan Losses
An allowance for possible loan losses is maintained at a level that
management considers adequate to provide for potential losses based upon the
portfolio's past loss experience, current economic conditions and other relevant
factors. When collection of a loan's principal balance or portion thereof is
considered doubtful, management charges the allowance for possible loan losses
based on their assessment of the loan's underlying collateral, if collateral
dependent, or present value of estimated future cash flows. While management
uses the best information available to make evaluations about the adequacy of
the allowance for loan losses, future adjustments to the allowance may be
necessary if conditions differ substantially from the assumptions used in making
evaluations.
Loans Held for Sale
The Bank periodically sells selected fixed-rate residential mortgage
loans, without recourse, to provide additional funds for lending and to
restructure the loan portfolio to improve interest rate risk. These loans are
carried at the lower of cost or estimated market value, determined on a net
aggregate basis.
Interest on Loans
The Bank recognizes interest income on loans when earned. Generally,
the Bank does not recognize interest income on loans three months or more
delinquent. Such interest ultimately collected is recorded as income in the
period of recovery.
-16-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Real Estate Owned
Real estate owned consists of properties acquired by or in-lieu of
foreclosure. These assets are carried at the lower of cost or estimated fair
value at the time the loan is foreclosed less estimated cost to sell. The
amounts recoverable from real estate owned could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the control of the Bank. Costs to improve the
property are capitalized, whereas costs of holding the property are charged to
expense.
Real Estate Held for Development
Real estate held for development is carried at cost not to exceed net
realizable value. Net realizable value is determined based on a discounted
estimate of the fair market value.
Office Properties and Equipment
Office properties and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets. The costs of maintenance and repairs are expensed as they are incurred.
Renewal and improvement costs are capitalized.
Deferred Loan Fees
All loan fees and related direct loan origination costs are deferred.
Deferred loan fees and costs are generally capitalized and amortized as a yield
adjustment over the life of the loan using the interest method.
Loans Serviced for Others
Servicing loans for others generally consists of collecting mortgage
payments, disbursing payments to investors and processing foreclosures. Loan
servicing income is recorded upon receipt and includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. The total amount of loans being serviced for the benefit of others was
$16.7 million and $20.4 million at December 31, 1999 and 1998, respectively.
Loan servicing fee income was approximately $56 thousand, $68 thousand and $83
thousand for the years ended December 31, 1999, 1998 and 1997, respectively.
Excess Cost over Fair Value of Net Assets Acquired
The excess costs over the fair value of assets acquired are being
amortized over a five year period using the straight-line method.
Income Taxes
The Corporation computes its taxable income for both financial
reporting and federal tax purposes on the accrual basis. The Corporation reports
certain items of income and expense in its consolidated financial statements in
periods different from those in which such items enter into the determination of
taxable income. In conformity with generally accepted accounting principles, the
Corporation provides for the tax effects of such timing differences in its
consolidated financial statements, subject to the deferred tax asset
realizability provisions of Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes". These differences between pretax
accounting income and taxable income for return purposes consist primarily of
the calculations for loan loss allowance, real estate losses, depreciation,
recognition of income and expenses associated with loan origination, profit
recognition on discounted mortgages and securities income.
Reclassifications
Certain items in the 1998 and 1997 consolidated financial statements
have been reclassified to conform with the presentation in the 1999 consolidated
financial statements.
Earnings Per Share
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share", requires the dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The Corporation has
presented both basic and diluted earnings per share as well as the
reconciliation of the denominator in the consolidated statement of operations.
Basic and diluted earnings per share and weighted average common shares
outstanding and common stock equivalents have been retroactively restated to
reflect the increased number of common shares resulting from the three-for-one
stock split that was paid to shareholders on July 14, 1998. A total of 5,245,370
additional shares were issued in conjunction with the stock split. The par value
of the Corporation's stock remained unchanged. As a result, $524,537 was
transferred from paid-in capital in excess of par to common stock.
-17-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and estimated market value of investment
securities held to maturity at December 31, 1999 and 1998 are as follows:
December 31, 1999
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------
U.S.
Gov't
Agencies $ 170,610,811 $ 51,318 $ (8,810,677) $161,851,452
Municipal
bonds 1,509,310 644 0 1,509,954
CMOs 48,187,121 0 (1,705,654) 46,481,467
- --------------------------------------------------------------------
Total $ 220,307,242 $ 51,962 $ (10,516,331) $209,842,873
- --------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------
U.S.
Gov't
Agencies $ 78,291,686 $ 151,165 $ (201,073) $ 78,241,778
Municipal
bonds 3,823,802 2,833 0 3,826,635
CMOs 47,302,338 53,888 (59,017) 47,297,209
- --------------------------------------------------------------------
Total $ 129,417,826 $ 207,886 $ (260,090) 129,365,622
- --------------------------------------------------------------------
The Bank has the intent and ability to hold these securities to
maturity. The amortized cost and estimated market value of investments held to
maturity at December 31, 1999, by contractual maturity are shown in the
following table. Expected maturities may differ as borrowers have the right to
call certain obligations. CMOs are shown separately due to the amortization and
prepayment of principal occurring throughout the life of these instruments.
December 31, 1999
----------------------------------
Amortized Estimated
Cost Market Value
- --------------------------------------------------------------
Due one year or less $ 1,279,310 $ 1,279,310
Due one to five years 19,139,522 18,645,821
Due five to ten years 100,274,387 94,554,046
Due after ten years 51,426,902 48,882,229
CMOs 48,187,121 46,481,467
- --------------------------------------------------------------
Total $ 220,307,242 $ 209,842,873
- --------------------------------------------------------------
<PAGE>
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of investment securities
available for sale at December 31, 1999 and 1998 are as follows:
December 31, 1999
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -----------------------------------------------------------------
U.S. Gov't
Agencies $ 10,291,646 $ 0 $ (566,615) $ 9,725,031
CMOs 38,024,766 4,699 (1,212,915) 36,816,550
MBSs 2,817,131 0 (51,596) 2,765,535
- -----------------------------------------------------------------
Total $ 51,133,543 $ 4,699 $ (1,831,126) $49,307,116
- -----------------------------------------------------------------
December 31, 1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -----------------------------------------------------------------
U.S.
Gov't
Agencies $ 18,492,035 $ 26,683 $ (18,102) $ 18,500,616
CMOs 91,377,435 206,435 (251,353) 91,332,517
- -----------------------------------------------------------------
Total $ 109,869,470 $ 233,118 $ (269,455) $ 109,833,133
- -----------------------------------------------------------------
The amortized cost and estimated market value of investments available for sale
at December 31, 1999, by contractual maturity are shown in the following table.
Expected maturities may differ as borrowers have the right to call or prepay
certain obligations. CMOs are shown separately due to the amortization and
prepayment of principal occurring throughout the life of these instruments.
December 31, 1999
--------------------------------------
Amortized Estimated
Cost Market Value
- ------------------------------------------------------------------
Due one to five years $ 5,295,000 $ 5,087,541
Due five to ten years 2,996,646 2,815,300
Due after ten years 4,817,131 4,587,725
CMOs 38,024,766 36,816,550
- ------------------------------------------------------------------
Total $ 51,133,543 $ 49,307,116
- ------------------------------------------------------------------
There were no sales of investment securities during 1999 and 1998.
During 1997, FNMA-mortgage-backed securities available for sale were sold which
resulted in a realized gain of $2 thousand.
-18-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
4. LOANS, NET
Loans, net at December 31, 1999 and 1998 consist of the following:
1999 1998
- -----------------------------------------------------------------
Mortgage Loans $ 236,912,182 $ 245,414,511
Construction Loans 972,533 1,390,456
Commercial Construction 3,934,937 2,609,315
Consumer Loans 3,273,792 3,237,176
Commercial Real Estate 52,543,711 45,937,998
Commercial Business 6,790,348 4,120,967
- -----------------------------------------------------------------
Subtotal 304,427,503 302,710,423
Less:
Deferred loan fees 892,019 764,926
Allowance for
possible loan
losses 3,840,967 3,342,274
- -----------------------------------------------------------------
Total loans, net $ 299,694,517 $ 298,603,223
- -----------------------------------------------------------------
At December 31, 1999 and 1998 the recorded investment in loans for
which impairment had been recognized in accordance with SFAS Nos. 114 and 118
totaled $3.1 million and $3.2 million, respectively. At December 31, 1999,
impaired loans of $1.7 million related to loans that were individually measured
for impairment with a valuation allowance of $516 thousand and $1.5 million of
loans that were collectively measured for impairment with a valuation allowance
of $63 thousand. At December 31, 1998 impaired loans of $1.6 million related to
loans that were individually measured for impairment with a valuation allowance
of $363 thousand and $1.6 million of loans that were collectively measured for
impairment with a valuation allowance of $69 thousand. For the years ended
December 31, 1999 and 1998, the average recorded investment in impaired loans
was approximately $3.6 million and $3.4 million, respectively. During the years
ended December 31, 1999 and 1998 the Corporation recognized $575 thousand and
$125 thousand, respectively, of interest on impaired loans.
Loans which are 90 days delinquent as to principal and/or interest are
placed on a non-accrual status and all previously accrued interest is reversed.
The principal amount of non-accrual loans at December 31, 1999 and 1998 was $3.1
million and $3.2 million, respectively. Interest income on non-accrual loans
that would have been recorded in 1999 under the original terms of such loans was
$265 thousand, and the interest income actually recognized in 1999 for such
loans was $556 thousand. Interest income on non-accrual loans that would have
been recorded in 1998 under the original terms of such loans was $266 thousand,
and the actual interest income recognized in 1998 for such loans was $119
thousand.
The Bank originates and purchases both adjustable and fixed interest
rate loans. At December 31, 1999, the composition of these loans is as follows:
Maturing
Maturing from 200 Maturing
during through after
(In Thousands) 2000 2004 2004 Total
- --------------------------------------------------------------------
Mortgage Loans
(1-4 dwelling) $ 1,310 $ 15,965 $ 219,637 $ 236,912
Construction Loans 973 0 0 973
Commercial Construction 551 0 3,384 3,935
Consumer Loans 1,346 1,569 359 3,274
Commercial Real Estate 4,411 15,881 32,252 52,544
Commercial Business 2,788 3,459 543 6,790
- --------------------------------------------------------------------
Total $ 11,379 $ 36,874 $ 256,175 $ 304,428
- --------------------------------------------------------------------
<PAGE>
Interest sensitivity
on the above loans:
Loans with
predetermined rates $ 7,151 $ 30,647 $ 184,441 $ 222,239
Loans with adjustable
or floating rates 4,228 6,227 71,734 82,189
- --------------------------------------------------------------------
Total $ 11,379 $ 36,874 $ 256,175 $ 304,428
- --------------------------------------------------------------------
Construction, commercial and land loans are generally indexed to the
prime rate plus a percentage (generally 1% to 2%). The adjustable rate mortgage
loans have interest rate adjustment limitations and are generally indexed to the
one year U.S. Treasury constant maturity yield. Future market factors may affect
the correlation of the interest rate adjustment with the rates the Bank pays on
the short-term deposits that have been primarily utilized to fund these loans.
Loans pledged as collateral for advances and lines of credit from the Federal
Home Loan Bank totaled $41.5 million at December 31, 1999.
Changes in the allowance for possible loan losses are as follows:
Years ended December 31,
-----------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Balance at beginning
of year $ 3,342,274 $ 3,137,781 $ 2,781,937
Provisions charged to
operations 653,579 240,000 400,000
Charge-offs (232,828) (37,876) (49,042)
Recoveries 77,942 2,369 4,886
- -------------------------------------------------------------------
Balance at end of year $ 3,840,967 $ 3,342,274 $ 3,137,781
- -------------------------------------------------------------------
-19-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at December 31, 1999 and
1998 are summarized as follows:
December 31, 1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- -------------------------------------------------------------------
GNMA $ 37,742,389 $ 253,470 $ (1,055,224) $ 36,940,635
FNMA 50,801,575 105,479 (1,061,964) 49,845,090
FHLMC 32,880,455 235,464 (86,612) 33,029,307
- -------------------------------------------------------------------
Total $ 121,424,419 $ 594,413 $ (2,203,800) $ 119,815,032
- -------------------------------------------------------------------
December 31, 1998
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- -------------------------------------------------------------------
GNMA $ 31,716,739 $ 599,765 $ (3,615) $ 32,312,889
FNMA 37,531,455 597,103 (49,100) 38,079,458
FHLMC 21,255,729 524,392 (476) 21,779,645
Private 88,724 1,610 (33) 90,301
- -------------------------------------------------------------------
Total $ 90,592,647 $ 1,722,870 $ (53,224) $ 92,262,293
- -------------------------------------------------------------------
The Bank has the intent and ability to hold these securities to maturity. At
December 31, 1999, neither a disposal, nor a condition that could lead to a
decision not to hold these securities to maturity were reasonably foreseen.
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at December 31, 1999 and 1998 are
summarized by major classification, as follows:
December 31,
-------------------------------
1999 1998
- -------------------------------------------------------------------
Land, buildings and improvements $ 21,036,089 $ 18,900,216
Furniture and equipment 4,356,086 4,153,118
Computers 4,128,761 3,629,926
- -------------------------------------------------------------------
Total 29,520,936 26,683,260
Less accumulated depreciation (8,834,664) (7,391,013)
- -------------------------------------------------------------------
Office properties and equipment, net $ 20,686,272 $ 19,292,247
- -------------------------------------------------------------------
7. REAL ESTATE HELD FOR DEVELOPMENT, NET
The Bank, through its wholly-owned subsidiary, Land Financial Services,
Inc., had entered into several real estate investments. Real estate held for
development is carried at the lower of cost or estimated net realizable value.
Intercompany loans from the Bank are the primary sources of funding and have
been eliminated in consolidation. Such investments in real estate at December
31, 1999 and 1998, are summarized as follows:
December 31,
---------------------------------------
1999 1998
- ----------------------------------------------------------------
Real estate held for
development $ 376,694 $ 933,256
Valuation allowance (288,768) (288,769)
- ----------------------------------------------------------------
Net $ 87,926 $ 644,487
- ----------------------------------------------------------------
<PAGE>
8. REAL ESTATE OWNED, NET
Real estate owned, which was acquired through foreclosure and deeds in
lieu of foreclosure, totaled $449 thousand and $168 thousand, net at December
31, 1999 and 1998, respectively. Changes in allowance for real estate owned is
as follows:
Years ended December 31,
---------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Balance at beginning
of year $ 668,239 $ 560,137 $ 437,507
Provisions charged
to operations 0 108,102 142,630
Charge-offs 0 0 (20,000)
- -------------------------------------------------------------------
Balance at end
of year $ 668,239 $ 668,239 $ 560,137
- -------------------------------------------------------------------
-20-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
9. DEPOSITS
Deposits at December 31, 1999 and 1998 consisted of the following major
classifications and weighted average rates:
December 31, 1999
---------------------------------------------
Weighted Percent
Average Rate Amount of Total
- -----------------------------------------------------------------------
Non-interest checking 0.00 % $ 82,504,184 13.66 %
Checking accounts 2.26 106,541,028 17.64
Savings accounts 2.67 107,207,225 17.76
Money market accounts 2.76 65,583,704 10.86
Certificates 4.92 242,055,976 40.08
- -----------------------------------------------------------------------
Total 3.20 % $ 603,892,117 100.00 %
- -----------------------------------------------------------------------
December 31, 1998
---------------------------------------------
Weighted Percent
Average Rate Amount of Total
- -----------------------------------------------------------------------
Non-interest checking 0.00 % $ 69,336,887 12.93 %
Checking accounts 1.89 75,280,395 14.04
Savings accounts 2.83 95,591,907 17.82
Money market accounts 2.64 67,690,222 12.62
Certificates 5.35 228,410,212 42.59
- -----------------------------------------------------------------------
Total 3.49 % $ 536,309,623 100.00 %
- -----------------------------------------------------------------------
A summary of certificates by maturity at December 31, 1999 is as follows:
Years ended December 31, Amount
- ----------------------------------------------------------
2000 $ 163,279,420
2001 37,325,167
2002 20,354,609
Thereafter 21,096,780
- ----------------------------------------------------------
Total $ 242,055,976
- ----------------------------------------------------------
A summary of interest expense on deposits is as follows:
Years ended December 31,
------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------
Checking accounts $ 2,029,980 $ 1,263,105 $ 825,672
Savings accounts 2,787,185 2,591,626 2,347,193
Money market accounts 1,817,465 1,697,154 1,629,248
Certificates 11,536,893 12,538,798 12,952,418
- ------------------------------------------------------------------------
Total interest expense $ 18,171,523 $ 18,090,683 $ 17,754,531
- ------------------------------------------------------------------------
<PAGE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1999, the Bank had advances from the Federal Home Loan
Bank of New York (FHLB) in the amount of $16.3 million with a weighted average
interest rate of 6.0%. Advances are collateralized by certain first mortgage
loans.
Years ended December 31,
- -------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------
Weighted Weighted
Average Maturity Average Maturity
Amount Rate Date Amount Rate Date
- -------------------------------------------------------------------
$ 10,000,000 6.32% 6/6/00 $ 10,000,000 6.32% 6/6/00
5,000,000 5.62% 2/15/01 5,000,000 5.62% 2/15/01
1,337,031 5.00% 10/9/07 1,368,321 5.00% 10/9/07
- -------------------------------------------------------------------
$ 16,337,031 6.00% $ 16,368,321 6.00%
- -------------------------------------------------------------------
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1999, the Bank had securities sold under the agreements
to repurchase (repurchase agreements) in the aggregate amount of $90.0 million.
The repurchase agreements are collateralized by U.S. Agency Notes and CMOs with
a market value of $92.5 million. Accrued interest payable on these agreements
totaled $457 thousand at December 31, 1999.
Year ended December 31, 1999
- --------------------------------------------------------------
Weighted Maturity Call
Counterparty Amount Average Rate Date Feature
- --------------------------------------------------------------
Merrill Lynch $20,000,000 5.79% 9/19/02 9/19/00
FHLB 10,000,000 6.03% 2/1/00 -
FHLB 20,000,000 5.65% 11/18/02 11/18/00
FHLB 20,000,000 5.72% 12/19/07 12/19/02
FHLB 20,000,000 5.13% 1/14/08 1/14/01
- --------------------------------------------------------------
Total $90,000,000 5.62%
- --------------------------------------------------------------
Year ended December 31, 1998
- --------------------------------------------------------------
Weighted Maturity Call
Counterparty Amount Average Rate Date Feature
- --------------------------------------------------------------
Merrill Lynch $20,000,000 5.79% 9/19/02 9/19/00
FHLB 20,000,000 5.65% 11/18/02 11/18/00
FHLB 20,000,000 5.72% 12/19/07 12/19/02
FHLB 20,000,000 5.13% 1/14/08 1/14/01
- --------------------------------------------------------------
Total $80,000,000 5.57%
- --------------------------------------------------------------
-21-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
12. INCOME TAXES
The Corporation's provision for income taxes differs from that computed
by applying the statutory federal income tax rate to income before income taxes
as follows:
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Amount Percent Amount Percent Amount Percent
--------------- ----------- ------------------ ---------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 2,721,663 34.00% $ 2,806,707 34.00% $ 2,930,199 34.00%
Increase from:
State income taxes, net
of federal income tax
benefit 165,583 2.07% 170,531 2.07% 189,102 2.19%
Other 4,140 0.05% 6,295 0.08% 7,776 0.09%
--------------- ----------- ------------------ ---------- ------------------- -----------
Total $ 2,891,386 36.12% $ 2,983,533 36.15% $ 3,127,077 36.28%
=============== =========== ================== ========== =================== ===========
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), deferred tax
assets and liabilities are established for the temporary differences between
accounting bases and tax bases of the Corporation's assets and liabilities at
the tax rates expected to be in effect when the temporary differences are
realized or settled. Management believes the existing net deductible temporary
differences which give rise to the net deferred income tax assets are realizable
on a more likely than not basis.
The temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities are as follows:
December 31,
------------------------------------
1999 1998
- ------------------------------------------------------------------------
Deferred income tax assets:
Allowance for possible loan $
losses 1,111,262 $ 924,040
Real estate losses 482,409 482,409
Deferred loan fees, net (24,926) (2,225)
Compensation and pension (asset)
liability (24,900) 49,822
Amortization of deposit premium 277,049 274,034
Post retirement benefits 185,000 185,000
Capitalized interest 305,209 284,690
Other 143,273 155,340
- ------------------------------------------------------------------------
Gross deferred tax assets 2,454,376 2,353,110
Deferred income tax liabilities:
Prepaid deposit insurance premium 11,148 48,912
Depreciation 178,641 288,426
- ------------------------------------------------------------------------
Gross deferred tax liabilities: 189,789 337,338
- ------------------------------------------------------------------------
Deferred income tax assets, net $ 2,264,587 $ 2,015,772
- ------------------------------------------------------------------------
<PAGE>
The following represents the components of income tax expense for the
years ended December 31, 1999, 1998 and 1997, respectively.
1999 1998 1997
- ------------------------------------------------------------------
Current Federal tax
provision $ 2,131,769 $ 3,008,922 $ 2,903,256
Current State tax
provision 204,605 284,193 292,221
- ------------------------------------------------------------------
Total current
provision 2,336,374 3,293,115 3,195,477
- ------------------------------------------------------------------
Deferred federal tax
(benefit) 508,734 (283,771) (62,697)
Deferred state tax
(benefit) 46,278 (25,811) (5,703)
- ------------------------------------------------------------------
Total deferred tax
(benefit) 555,012 (309,582) (68,400)
- ------------------------------------------------------------------
Total $ 2,891,386 $ 2,983,533 $ 3,127,077
- ------------------------------------------------------------------
13. LEASES
The Bank leases three buildings and land to operate four branches under
noncancelable leases which expire over the next 25 years. These leases generally
provide for the payment of taxes and maintenance by the lessee. Most of these
operating leases provide the Bank with the option to renew the lease after the
initial lease term. Future minimum rental payments under existing leases as of
December 31, 1999 are as follows:
Fiscal Year Amount
- -------------------------------------------------
2000 $ 180,535
2001 76,826
2002 76,826
2003 76,826
2004 and beyond 1,056,817
- -------------------------------------------------
Total $ 1,467,830
- -------------------------------------------------
-22-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The leases for the buildings contain cost of living adjustments based
on changes in the consumer price index. The minimum lease payments shown above
include base rentals exclusive of any future adjustments. Total rent expense for
all operating leases amounted to $127 thousand, $105 thousand and $104 thousand
for fiscal years 1999, 1998 and 1997, respectively.
14. STOCKHOLDERS' EQUITY
On December 14, 1988, the Bank converted to a state chartered stock
Savings Bank and simultaneously formed FMS Financial Corporation. At the time of
conversion, eligible deposit account holders were granted priority in the
unlikely event of a future liquidation of the Bank. The special reserve has been
decreased to the extent that the balances of eligible account holders were
reduced at annual determination dates. The Bank converted its charter to that of
a Federal Savings Bank on October 15, 1993.
The ability of the Corporation to pay dividends to stockholders is
directly dependent upon the ability of the Bank to pay dividends to the
Corporation. OTS regulations restrict the ability of the Bank to pay dividends
to the Corporation if such dividends reduce the net worth of the Bank below the
amount required in the special reserve account and based on the Bank's net
income and capital position.
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles ("GAAP") to regulatory capital at December 31,
1999:
Tangible Core Risk-based
Capital Capital Capital
- ---------------------------------------------------------------------
Bank's GAAP
Capital $ 52,609,415 $ 52,609,415 $ 52,609,415
Add:
Unrealized loss
on investments
AFS 1,167,810 1,167,810 1,167,810
Less:
Subsidiary
investments
not eligible (87,926) (87,926) (87,926)
Goodwill (55,328) (55,328) (55,328)
REO greater
than 5 years (149,541) (149,541) (149,541)
Supplementary
qualifying
capital item
General valuation
allowance 0 0 3,389,772
- ---------------------------------------------------------------------
Regulatory
capital
computed 53,484,430 53,484,430 56,874,202
Minimum
regulatory
capital
requirement 15,462,237 30,924,474 24,206,915
- ---------------------------------------------------------------------
Regulatory
capital
excess $ 38,022,193 $ 22,559,956 $ 32,667,287
- ---------------------------------------------------------------------
<PAGE>
15. PENSION PLAN
The Bank has a defined benefit pension plan for active employees. Net
pension expense was $462 thousand, $371 thousand and $385 thousand for years
ended December 31, 1999, 1998 and 1997, respectively. The components of net
pension cost are as follows:
Years ended December 31,
--------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------
Service cost $ 513,260 $ 435,047 $ 401,818
Interest cost 336,799 270,772 232,376
Return on assets (418,356) (359,216) (286,070)
Net amortization
and deferral 30,675 23,921 37,140
- ----------------------------------------------------------------------
Net periodic
pension cost $ 462,378 $ 370,524 $ 385,264
- ----------------------------------------------------------------------
The following table presents a reconciliation of the funded status of
the defined benefit pension plan at December 31, 1999 and 1998:
December 31,
----------------------------------------
1999 1998
- -------------------------------------------------------------------------
Projected benefit obligation $ 6,406,113 $ 5,200,545
Fair value of plan assets 7,520,267 5,895,741
- -------------------------------------------------------------------------
Excess of plan assets over
projected benefit obligation 1,114,154 695,196
Unrecognized net gain (1,423,841) (1,153,817)
Unrecognized prior service cost 70,794 76,135
Unrecognized net transition
obligation 131,663 162,569
- -------------------------------------------------------------------------
Accrued pension cost
included in the consolidated
balance sheet $ (107,230) $ (219,917)
- -------------------------------------------------------------------------
The following table presents a reconciliation of beginning and ending
balances of benefit obligations and plan assets:
December 31,
------------------------------
Change in Projected Benefit Obligation 1999 1998
- -----------------------------------------------------------------------
Projected benefit obligation
at beginning of year $5,200,545 $ 4,419,723
Service cost 513,260 435,047
Interest cost 336,799 270,772
Actuarial loss 464,723 133,501
Benefits paid (109,214) (58,498)
- -----------------------------------------------------------------------
Projected benefit obligation
at end of year $6,406,113 $ 5,200,545
- -----------------------------------------------------------------------
Change in Plan Assets
- -----------------------------------------------------------------------
Fair value of plan assets
at beginning of year $5,895,741 $ 5,171,488
Actual return of plan assets 1,158,675 782,751
Employer contribution 575,065 0
Benefits paid (109,214) (58,498)
- -----------------------------------------------------------------------
Fair value of plan assets
at end of year $7,520,267 $ 5,895,741
- -----------------------------------------------------------------------
-23-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Actuarial assumptions used in determining pension cost are as follows:
Years ended December 31,
------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------
Discount rate for
benefit obligation 6.00 % 6.00 % 6.00 %
Rate of increase in
compensation levels
and social security
wage base 4.00 % 4.00 % 4.00 %
Expected long-term
rate of return on
plan assets 7.00 % 7.00 % 7.00 %
- ----------------------------------------------------------------------
In addition to providing pension plan benefits, the Bank provides
certain health care and life insurance benefits to certain retired employees. In
accordance with the provisions of Statement of Financial Accounting Standards
No. 106, "Employer Accounting for Post Retirement Benefits other than Pensions"
(SFAS No. 106) the expected cost of such benefits must be actuarially determined
and accrued ratably from the date of hire to the date the employee is fully
eligible to receive benefits. The accumulated post-retirement benefit obligation
is not funded but is reflected in the statement of financial condition as a
liability.
The net periodic post-retirement benefit cost includes the following
components:
December 31,
------------------------------
1999 1998
- ---------------------------------------------------------------------
Interest cost $ 29,149 $ 30,514
Amortization of prior service cost (14,499) (14,499)
Amortization of gain (934) (1,763)
- ---------------------------------------------------------------------
Net periodic post-retirement
benefit cost $ 13,716 $ 14,252
- ---------------------------------------------------------------------
The assumed discount rate used in the calculation for net periodic
post-retirement benefit cost was 6.75% and 7.0% for 1999 and 1998, respectively.
The assumed health care cost trend rate for 1999 was 6% and was graded down in
1% increments per year to an ultimate rate of 5% per year. The impact of a 1%
increase in the assumed health care cost trend for each future year would be as
follows:
December 31, 1999
- ----------------------------------------------------------------------
Accumulated post-retirement obligation
at year end $434,747
Service and interest Cost $31,406
- ----------------------------------------------------------------------
The following table summarizes the amounts recognized in the Bank's
balance sheet:
December 31,
-----------------------------
1999 1998
- -----------------------------------------------------------------
Accumulated post-retirement
benefit obligation $ (403,766) $ (451,181)
Unrecognized prior service cost (84,577) (99,076)
Unrecognized net gain (89,647) (59,101)
- -----------------------------------------------------------------
Accrued post-retirement benefit
cost $ (577,990) $ (609,358)
- -----------------------------------------------------------------
The assumed discount rate used in the calculation for the accumulated
post-retirement benefit obligation as of December 31, 1999 and 1998 was 8.0% and
6.75%, respectively.
16. SUBORDINATED DEBENTURES
The Corporation issued $10.0 million of subordinated debentures in
1994. The debentures are unsecured, bear interest at a rate of 10% per annum and
mature on July 28, 2004. Interest payments are due semiannually on February 1
and August 1 commencing February 1, 1995. The debentures are redeemable, in
whole or in part, at any time at the option of the Corporation at redemption
prices ranging from 103% down to 100%. The net proceeds from the sale of the
debentures totaled $9.4 million and were used for the expansion of the Bank's
operations through branch acquisitions and general corporate purposes. The
Corporation is required to retain at all times cash, cash equivalents or
marketable securities in an amount not less than the aggregate amount of two
consecutive semi-annual interest payments that will be due and payable on the
debentures following such declaration date or redemption date.
-24-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the fair value of all financial instruments is
required, whether or not recognized on the balance sheet, for which it is
practical to estimate fair value. In cases where quoted market prices are not
available, fair values are based on assumptions including future cash flows and
discount rates. Accordingly, the fair value estimates cannot be substantiated,
may not be realized, and do not represent the underlying value of the
Corporation.
The Corporation uses the following methods and assumptions to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents: The carrying value is a reasonable estimate of fair
value.
Investment securities held to maturity, securities available for sale and
mortgage-backed securties: Fair value is equal to quoted market prices.
FHLB Stock: The stock of FHLB is issued only to FHLB member institutions and is
redeemable only by another member institution or the FHLB at its $100 per share
par value.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other categories of
loans such as residential mortgages, commercial and consumer loans, fair value
is estimated based on discounting the estimated future cash flows using the
current rates at which similar loans would be made to borrowers with similar
collateral and credit ratings and for similar remaining maturities.
Deposit liabilities: For checking, savings and money market accounts, fair value
is the amount payable on demand at the reporting date. For certificates of
deposits, fair value is estimated using the rates currently offered for deposits
with similar remaining maturities.
Securities sold under agreements to repurchase: For investment securities with a
quoted market price, fair value is equal to quoted market prices. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Subordinated debentures: Fair value is estimated using the quoted average of the
broker bid and ask prices at year end.
Other borrowings: Fair value is estimated using a discounted cash flow analysis.
Advances from FHLB: The carrying value is a reasonable estimate of fair value
due to the short term nature of these obligations.
Commitments to extend credit and standby letters of credit: For commitments and
standby letters of credit expiring within 90 days or with a variable rate, the
settlement amount is a reasonable estimate of fair value. For commitments and
standby letters of credit expiring beyond 90 days or with a fixed rate, the fair
value is the present value of the obligations based on current loan rates.
<PAGE>
At December 31, 1999 and December 31, 1998, the carrying amount and the
estimated value of the Corporation's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Market Value Amount Market Value
------------------ ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 46,275,871 $ 46,275,871 $ 29,896,391 $ 29,896,391
Investment securities held to maturity and
investment securities available for sale $ 269,614,358 $ 259,149,989 $ 239,250,969 $ 239,198,755
Mortgage-backed securities $ 121,424,419 $ 119,815,032 $ 90,592,647 $ 92,262,293
FHLB Stock $ 4,861,410 $ 4,861,410 $ 4,861,410 $ 4,861,410
Loans, net of unearned income $ 303,535,484 $ 295,018,000 $ 301,945,497 $ 309,708,000
Less: Allowance for possible loan losses (3,840,967) (3,840,967) (3,342,274) (3,342,274)
Loans, net $ 299,694,517 $ 291,177,033 $ 298,603,223 $ 306,365,726
Financial liabilities:
Deposits
Checking, passbook, and money market accounts $ 361,836,141 $ 361,836,141 $ 307,899,411 $ 307,899,411
Certificates $ 242,055,976 $ 239,077,000 $ 228,410,212 $ 229,028,000
Securities sold under agreements to repurchase $ 90,000,000 $ 88,806,000 $ 80,000,000 $ 83,705,000
Subordinated debentures $ 10,000,000 $ 10,300,000 $ 10,000,000 $ 10,500,000
Other borrowings $ 16,337,031 $ 16,120,000 $ 16,368,321 $ 16,467,000
Off-balance sheet financial instruments:
Commitments to extend credit $ 24,663,153 $ 24,663,153 $ 29,758,602 $ 29,758,602
Standby letters of credit $ 1,887,175 $ 1,887,175 $ 1,301,772 $ 1,301,772
</TABLE>
-25-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
18. COMMITMENTS AND CONTINGENCIES
The Bank has outstanding loan commitments of $24.7 million as of
December 31, 1999. Of these commitments outstanding, the breakdown between fixed
and variable rate loans is as follows:
December 31, 1999
------------------------------------------
Fixed Variable
Rate Rate Total
- -----------------------------------------------------------------------------
Commitments to fund loans $ 4,051,356 $ 1,752,600 $ 5,803,956
Unused lines:
Construction 0 1,446,881 1,446,881
Equity line of credit loans 0 13,575,842 13,575,842
Commercial 0 3,095,540 3,095,540
Consumer 0 740,934 740,934
- -----------------------------------------------------------------------------
Total $ 4,051,356 $ 20,611,797 $ 24,663,153
- -----------------------------------------------------------------------------
In addition to outstanding loan commitments, the Bank as of December
31, 1999, issued $1.1 million in standby letters of credit to guarantee
performance of a customer to a third party.
Commitments and standby letters of credit are issued in accordance with
the same loan policies and underwriting standards as settled loans. Since some
commitments and standby letters of credit are expected to expire without being
drawn down, these amounts do not necessarily represent future cash requirements.
19. LITIGATION
There are no significant pending legal proceedings at December 31, 1999
which will have a material impact on the Corporation's financial position or
results of operations.
20. LOANS TO OFFICERS AND DIRECTORS
Regulation O provides that all loans to executive officers and
directors be made on substantially the same terms and conditions as are
available to the general public. On November 11, 1996, Regulation O was amended
to allow executive officers to participate in any employee loan rate discount
benefit program available to all full-time employees. Since the Bank offers such
an employee benefit program, the policy governing loans to executive officers
was amended to allow the executive officers to participate in this loan program
and thereby receive rate discounts. These changes went into effect on January 1,
1997. The rate discounts are available to employees as long as they are employed
at the Bank. If employment is terminated, the rate discount ceases from the date
of termination. At December 31, 1999 and 1998, loans made to directors and
executive officers whose indebtedness exceeded $60 thousand amounted to $1.9
million and $1.5 million, respectively. During 1999 new loans to these
individuals totaled $414 thousand and repayments totaled $245 thousand.
21. STOCK OPTIONS
The Corporation has established a stock compensation plan (the "Plan")
for executive officers and other selected employees of the Corporation. The Plan
consists of incentive stock options intended to qualify under Section 422A of
the Internal Revenue Code of 1986. These stock options may be surrendered and
stock appreciation rights may be granted in their place, with the approval of
the Corporation.
A total of 241,926 shares of authorized but unissued common stock of
the Corporation has been reserved for future issuance under the Plan. The option
price per share for options granted may not be less than the fair market value
of the common stock on the date of grant. At December 31, 1999, the option
exercise prices were $1.292, $5.333 and $10.00. Options are fully vested at the
date of grant and must be exercised within ten years.
<PAGE>
A summary of the status of the Corporations's Stock Option Plan as of
December 31, 1999, 1998 and 1997 and changes during the years ending on those
dates is presented below.
Years Ended December 31,
--------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------
Outstanding at
the Beginning
of the year 210,618 $5.83 235,995 $ 1.91 246,453 $1.88
Options granted 0 0 93,000 10.00 0 0
Options exercised (600) 1.29 (84,081) 1.29 (4,458) 1.29
Options
surrendered (4,500) 1.29 (34,296) 1.29 (6,000) 1.29
- -------------------------------------------------------------------
Outstanding at
the End of the
year 205,518 $5.94 210,618 $ 5.83 235,995 $1.91
- -------------------------------------------------------------------
On January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standard No. 123, "Accounting for Stock Based Compensation" (SFAS No.
123). As permitted by SFAS No. 123, the Corporation has chosen to continue to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No.
25) and related interpretations in accounting for its Plan. Accordingly, no
compensation cost has been recognized for options granted under the Plan. If the
Corporation had adopted the fair value method of accounting for stock based
compensation the Corporation's net income and net income per share would have
been as follows:
December 31, 1998
- -----------------------------------------------------------
As Reported Pro Forma
- -----------------------------------------------------------
Net Income $ 5,271,488 $ 5,042,974
Basic Earnings per share $0.73 $0.70
Diluted Earnings per share $0.72 $0.69
- -----------------------------------------------------------
-26-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
dividend yield of .86%, expected volatility of 26.11%, discount rate of 6.0% and
an expected life of 10 years at December 31, 1998. There were no options granted
in 1999 or 1997.
22. RISKS AND UNCERTAINTIES
The earnings of the Corporation depend on the earnings of the Bank. The
earnings of the Bank depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations of the
Bank are subject to risks and uncertainties surrounding its exposure to changes
in the interest rate environment.
Most of the Bank's lending activity is with customers located within
southern New Jersey. Generally, the loans are secured by real estate consisting
of single family residential properties. While this represents a concentration
of credit risk, the credit losses arising from this type of lending compare
favorably with the Bank's credit loss experience on its portfolio as a whole.
The ultimate repayment of these loans is dependent to a certain degree on the
local economy and real estate market.
The financial statements of the Corporation are prepared in conformity
with generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the
allowance for possible loan losses and carrying values of real estate owned and
real estate held for development. Consideration is given to a variety of factors
in establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of loan
reviews, borrowers' perceived financial and managerial strengths, the adequacy
of underlying collateral, if collateral dependent, or present value of future
cash flows and other relevant factors. Since the allowance for possible loan
losses and carrying value of real estate assets and real estate held for
development is dependent, to a great extent, on the general economy and other
conditions that may be beyond the Bank's control, it is at least reasonably
possible that the estimates of the allowance for possible loan losses and the
carrying values of the real estate assets could differ materially in the near
term.
-27-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
23. PARENT COMPANY FINANCIAL INFORMATION
The financial statements for FMS Financial Corporation are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
FMS Financial Corporation Statements of Financial Condition 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 501,861 $ 499,293
Investment in subsidiary 52,609,414 49,913,393
Investment securities 1,000,000 1,000,000
Intercompany receivable, net 2,185,306 2,199,643
Subordinated debentures issue costs, net 263,765 321,113
Other 168,843 168,843
---------------------------------
Total Assets $ 56,729,189 $ 54,102,285
=================================
Liabilities:
10% Subordinated debentures due 2004 $ 10,000,000 $ 10,000,000
Dividends payable 215,519 216,953
Accrued interest payable 416,667 416,667
---------------------------------
Total liabilities 10,632,186 10,633,620
---------------------------------
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 7,897,791 and 7,897,191 and shares outstanding 7,183,978 and 7,231,767 as
of December 31, 1999 and 1998, respectively 789,779 789,719
Paid-in capital in excess of par 8,217,535 8,216,820
Accumulated comprehensive loss - net of deferred income taxes (1,167,810) (21,793)
Retained earnings 42,108,955 37,860,291
Less:Treasury Stock (713,813 and 665,424 shares, at cost at December 31, 1999 and
1998, respectively) (3,851,456) (3,376,372)
---------------------------------
Total stockholders' equity 46,097,003 43,468,665
---------------------------------
Total Liabilities and Stockholders' Equity $ 56,729,189 $ 54,102,285
=================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
FMS Financial Corporation Statements of Operations 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intercompany interest income $ 560,750 $ 560,750 $ 560,750
Interest expense (1,057,348) (1,057,348) (1,057,348)
Dividends from subsidiary 1,600,000 1,600,000 1,400,000
Equity in undistributed income of subsidiary 3,841,261 3,999,243 4,418,909
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes 4,944,663 5,102,645 5,322,311
Income tax benefit 168,843 168,843 168,843
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 5,113,506 $ 5,271,488 $ 5,491,154
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
These statements should be read in conjunction with the other notes
related to the consolidated financial statements.
-28-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Years Ended December 31,
------------------------------------------------------------------
FMS Financial Corporation Statements of Cash Flows 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 5,113,506 $ 5,271,488 $ 5,491,154
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the subsidiary (3,841,261) (3,999,243) (4,418,909)
Amortization of bond issue costs 57,348 57,347 57,349
Decrease (Increase) in intercompany receivable, net 14,337 (274,698) (333,389)
Other operating activities 0 33,481 72,982
-------------- --------------------- ------------------
Net cash provided by operating activities 1,343,930 1,088,375 869,187
Financing Activities
Purchase of treasury stock (475,084) (186,055) (127,361)
Investment in subsidiary (775) (108,603) (5,758)
Cash dividends paid on common stock (866,278) (767,457) (525,479)
Principal repayment of employee stock ownership plan debt 0 (33,481) (72,982)
Proceeds from issuance of stock 775 108,603 5,758
-------------- --------------------- ------------------
Net cash used by financing activities (1,341,362) (986,993) (725,822)
-------------- --------------------- ------------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,568 101,382 143,365
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 499,293 397,911 254,546
-------------- --------------------- ------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 501,861 $ 499,293 $ 397,911
-------------- --------------------- ------------------
</TABLE>
These statements should be read in conjunction with the other notes
related to the consolidated financial statements.
-29-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
[LOGO] PriceWaterhouseCoopers
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of FMS Financial Corporation:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows present fairly, in all material respects, the financial
position of FMS Financial Corporation and Subsidiary ("the Company") at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 10, 2000
-31-
<PAGE>
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
ANNUAL MEETING
The 2000 Annual Shareholders' Meeting of FMS Financial Corporation will
be held at 10:00 a.m., on the 27th day of April, 2000 at the Riverton Country
Club, Highland Avenue off of Route 130, Riverton, New Jersey.
STOCK MARKET INFORMATION
The common stock of FMS Financial Corporation is traded
over-the-counter and is listed on the Nasdaq National Market System under the
symbol "FMCO". Daily quotations are included in the Nasdaq National Market stock
tables published in the Wall Street Journal and other leading newspapers.
The number of record holders of common stock of the Corporation as of
March 1, 2000 was approximately 759, not including those shares registered in
names of various investment brokers held in account for their customers.
The following table sets forth the range of closing prices, as reported
by Nasdaq, for the periods ended December 31, 1999 and 1998:
1999
----------------------------------
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------
March 31, $ 10.500 $ 8.500
June 30, $ 11.000 $ 7.625
September 30, $ 10.000 $ 8.875
December 31, $ 10.250 $ 8.750
- ------------------------------------------------------------
1998
----------------------------------
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------
March 31, $ 12.167 $ 11.167
June 30, $ 17.000 $ 12.201
September 30, $ 15.500 $ 9.500
December 31, $ 10.625 $ 6.875
- ------------------------------------------------------------
The Corporation's sole operating assets are derived from its
subsidiary, Farmers & Mechanics Bank. Consequently, the ability of the
Corporation to accumulate cash for payment of cash dividends to stockholders is
directly dependent upon the ability of the Bank to pay dividends to the
Corporation. The Bank may not declare or pay a cash dividend on any of its stock
if the effect of the declaration or payment of dividends would cause their
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the mutual stock conversion,
or (2) the regulatory capital requirements imposed by the OTS. Additionally, the
Corporation must pay interest to holders of its debentures before payment of
cash dividends to its stockholders.
As of December 31, 1999 the Bank was a Tier 1 institution and had
available $22.8 million for dividends to the Corporation, subject to
nonobjection by the OTS. It is not likely that the Corporation would request a
dividend of that magnitude. The Corporation is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, but is subject to
the requirements of New Jersey law, which permits the Corporation to pay
dividends in cash or shares out of the Corporation's surplus, defined as the
excess of net assets of the Corporation over stated capital.
-32-
EXHIBIT 21
<PAGE>
Subsidiaries of the Registrant(1)
State of Percentage
Incorporation Ownership
------------- ---------
Farmers and Mechanics Bank United States 100%
FMS Financial Services, Inc.(2)(4) New Jersey 100%
Land Financial Services, Inc.(2) New Jersey 100%
First Plunge, Inc. (3)(4) New Jersey 100%
Fishpond, Inc. (3)(4) New Jersey 100%
Angell Ayes, Inc. (3)(4) New Jersey 100%
Peter's Passion, Inc. (3)(4) New Jersey 100%
Atlantic Adventures, Inc.(3) New Jersey 100%
- -----------------
(1) The operations of the subsidiaries are included in the consolidated
financial statements contained in the Annual Report to Stockholders
attached as Exhibit 13 to the Form 10-K.
(2) Subsidiary of Farmers and Mechanics Bank.
(3) Subsidiary of Land Financial Services, Inc.
(4) Currently an inactive subsidiary.
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (File No. 33-24340) of FMS
Financial Corporation of our report dated February 10, 2000 relating
to the financial statements, which appears in the Annual Report to
Shareholders, which is incorporated in this Annual Report on Form
10-K.
/s/ Pricewaterhouse Coopers LLP
-------------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,490
<INT-BEARING-DEPOSITS> 25,786
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,307
<INVESTMENTS-CARRYING> 341,732
<INVESTMENTS-MARKET> 329,658
<LOANS> 299,695
<ALLOWANCE> 3,841
<TOTAL-ASSETS> 772,501
<DEPOSITS> 603,892
<SHORT-TERM> 3,858
<LIABILITIES-OTHER> 2,317
<LONG-TERM> 116,337
0
0
<COMMON> 790
<OTHER-SE> 45,307
<TOTAL-LIABILITIES-AND-EQUITY> 772,501
<INTEREST-LOAN> 28,408
<INTEREST-INVEST> 24,455
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 47,863
<INTEREST-DEPOSIT> 18,172
<INTEREST-EXPENSE> 24,742
<INTEREST-INCOME-NET> 23,120
<LOAN-LOSSES> 654
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,462
<INCOME-PRETAX> 8,005
<INCOME-PRE-EXTRAORDINARY> 5,114
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,114
<EPS-BASIC> .71
<EPS-DILUTED> .70
<YIELD-ACTUAL> 3.36
<LOANS-NON> 3,108
<LOANS-PAST> 0
<LOANS-TROUBLED> 513
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,342
<CHARGE-OFFS> 233
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 3,841
<ALLOWANCE-DOMESTIC> 3,841
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,390
</TABLE>
