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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
|X| EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number: 0-17353
FMS FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
- -------------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
- -------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
Based on the closing sales price of $9.00 per share of the registrant's
common stock on March 1, 1999, as reported on the Nasdaq National Market System
the aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $65.1 million. On such date, 7,231,767 shares of
the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of 1998 Annual Report to Stockholders (Parts II and IV)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
PART I
Forward-Looking Statements
FMS Financial Corporation (the "Corporation") may from time to time
make written or oral "forward-looking statements," including statements
contained in the Corporation's filings with the Securities and Exchange
Commission (including this Annual Report on Form 10-K and the exhibits thereto),
in its reports to stockholders and in other communications by the Corporation,
which are made in good faith by the Corporation pursuant to the "safe harbor"
provisions of the private securities litigation reform act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Corporation's plans, objectives, expectations, estimates
and intentions, that are subject to change based on various important factors
(some of which are beyond the Corporation's control). The following factors,
among others, could cause the Corporation's financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the
Corporation conducts operations; the effects of, and changes in, trade, monetary
and fiscal policies and laws, including interest rate policies of the board of
governors of the federal reserve system, inflation, interest rate, market and
monetary fluctuations; the timely development of and acceptance of new products
and services of the Corporation and the perceived overall value of these
products and services by users, including the features, pricing and quality
compared to competitors' products and services; the willingness of users to
substitute competitors' products and services for the Corporation's products and
services; the success of the Corporation in gaining regulatory approval of its
products and services, when required; the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance); technological changes, acquisitions; changes in
consumer spending and saving habits; and the success of the Corporation at
managing the risks involved in the foregoing.
The Corporation cautions that the foregoing list of important factors
is not exclusive. The Corporation does not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of the Corporation.
Item 1. Business
General
FMS Financial Corporation, a New Jersey corporation, headquartered in
Burlington, New Jersey, is the holding company for Farmers and Mechanics Bank
(the "Bank"). The Bank principally operates through its twenty-three branch
offices located throughout Burlington County, New Jersey.
The Bank is primarily engaged in the business of attracting deposits
from the general public and originating loans which are secured by residential
real estate. To a lesser extent, the Bank also originates consumer, commercial
business loans and construction loans and invests in U.S. government securities
and mortgage-related securities. The Bank has several subsidiaries which are
currently either inactive or not material to the operations of the Bank.
Competition
The Bank's primary market area consists of Burlington County, New
Jersey, and is one of many financial institutions serving this market area. The
competition for deposit products comes from other insured financial institutions
such as commercial banks, thrift institutions and credit unions in the Bank's
market area. Deposit competition also includes a number of insurance products
sold by local agents and investment products such as mutual funds and other
securities sold by local and regional brokers. Loan competition comes from other
insured financial institutions such as commercial banks, thrift institutions and
credit unions.
Lending Activities
Analysis of Loan Portfolio
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ -------------------- ------------------- ---------------- ------------------
Carrying Percent Carrying Percent Carrying Percent Carrying Percent Carrying Percent
Value of Total Value of Total Value of Total Value of Total Value of Total
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(In thousands)
Mortgage loans:
One-to-four family........$246,072 81.11% $253,001 82.43% $257,451 82.89% $249,278 85.30% $245,874 85.65%
Commercial real estate.... 45,938 15.14 42,974 14.00 39,177 12.61 34,721 11.88 32,228 11.23
Commercial construction... 2,609 .86 2,385 .78 4,395 1.42 -- -- -- --
Construction.............. 1,410 .46 3,258 1.06 3,712 1.20 2,116 .73 2,924 1.02
------ ------ ------- ------ ------- ------ ------- ----- ------- -------
Total mortgage loans.. 296,029 97.57 301,618 98.27 304,735 98.12 286,115 97.91 281,026 97.90
Consumer and other loans:
Consumer.................. 3,237 1.07 3,609 1.17 4,015 1.29 4,337 1.48 4,317 1.50
Commercial business....... 4,121 1.36 1,712 .56 1,830 .59 1,779 .61 1,712 .60
------ ------- ------- ------- ------- ------ ------ ------ ------- ------
Total consumer and other
loans............... 7,358 2.43 5,321 1.73 5,845 1.88 6,116 2.09 6,029 2.10
------ ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans...........$303,387 100.00% 306,939 100.00% 310,580 100.00% 292,231 100.00% 287,055 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Residential Loans. One of the primary lending activities of the Bank
has been the origination of conventional mortgage loans to enable borrowers to
purchase existing homes, refinance existing mortgage loans or construct new
homes. The Bank generally originates mortgage loans with terms of 15 to 30
years, amortized on a monthly basis, with principal and interest due each month.
Typically, residential real estate loans remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or
prepay loans at their option.
The Bank presently offers mortgage loans that adjust every year after
an initial fixed term of one, two, five or seven years, at an interest rate
indexed higher than the corresponding U.S. Treasury security index. The interest
rates on these mortgages adjust annually after the one, two, five or seven year
anniversary date of the loan with an interest rate adjustment cap of 1.5% per
year and presently not to exceed a rate of 11.5% over the life of the loan. At
December 31, 1998, adjustable-rate residential first mortgage loans amounted to
$55.1 million or 18.17% of the Bank's total loan portfolio. These loans are
generally not originated under terms, conditions and documentation which permit
their sale in the secondary mortgage market to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA").
Fixed-rate mortgage loans are generally underwritten according to FHLMC
and FNMA guidelines. The Bank sells fixed-rate loans in the secondary market
from time to time when such sales are consistent with the Bank's asset/liability
management goals and can be achieved on terms favorable
2
to the Bank. The Bank generally charges a higher interest rate on loans if the
property is not owner-occupied. At December 31, 1998, $166.8 million or 55% of
the Bank's total loan portfolio, consisted of long-term fixed-rate first
mortgage loans of which none were classified as held for sale.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on owner-occupied residential first mortgage loans to 95% of the lesser of
the appraised value or purchase price, with the condition that private mortgage
insurance is required on loans with loan-to-value ratios in excess of 80%.
Mortgage loans on investment properties are made by the Bank at loan-to-value
ratios up to 70%. The loan-to-value ratio, maturity and other provisions of the
loans made by the Bank have generally reflected the policy of making less than
the maximum loan permissible under applicable regulations, in accordance with
established lending practices, market conditions and underwriting standards
maintained by the Bank. The Bank requires fire and casualty insurance on all
properties securing real estate loans made by the Bank. The Bank also performs
title searches to ensure its lien position.
The Bank actively solicits and originates home equity loans and equity
reserve lines of credit secured by the equity in the borrower's primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust based upon the prime rate.
At December 31, 1998, the Bank had home equity loans in the amount of $14.8
million or 4.88% of its total loan portfolio. Also at December 31, 1998, the
Bank had approved $23.8 million in home equity lines of credit, of which $9.3
million was outstanding.
Construction Loans. The Bank originates loans to finance the
construction of one-to-four family dwellings and/or commercial real estate.
Generally, the Bank only makes interim construction loans to individuals if it
also makes the permanent mortgage loan on the property. Construction loans to
builders are generally made only if the Bank makes the permanent mortgage loan
or if the builder has a contract for sale and the purchaser has received a
permanent mortgage commitment. Interim construction loans to builders generally
have terms of up to nine months and interest rates which adjust above the prime
interest rate (generally 1% to 2%).
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Commercial Real Estate Loans. The Bank's commercial real estate loans
are loans secured by commercial real estate (e.g., shopping centers, medical
buildings, retail offices) and multi-family dwelling units (e.g., apartment
projects with more than four units), in the Bank's market area. Commercial real
estate loans and multi-family residential loans have been made in amounts up to
$3.8 million, with most of such loans ranging in size from $100,000 to $1.0
million. Permanent loans on commercial properties are generally originated in
amounts up to 75% of the appraised value of the property. The Bank's permanent
commercial real estate loans are secured by improved property such as office
buildings, retail stores, warehouse, church buildings and other non-residential
buildings, most of which are located in the Bank's primary market area.
Commercial real estate loans and multi-family residential loans are
3
generally made at rates which adjust above the prime interest rate (generally 1%
to 2%) or a specified treasury index or are balloon loans with fixed interest
rates which mature in three to five years with principal amortization for a
period of up to 25 years.
Loans secured by commercial real estate are generally larger and
involve a greater degree of risk than one-to-four family residential mortgage
loans. Of primary concern, in commercial and multi-family real estate lending,
is the borrower's creditworthiness and the feasibility and cash flow potential
of the project. Loans secured by income properties are generally larger and
involve greater risks than residential mortgage loans because payments on loans
secured by income properties are often dependent on successful operation or
management of the properties. As a result, repayment of such loans may be
subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy.
Consumer. Regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of the institution's assets.
The Bank makes various types of secured and unsecured consumer loans including
education loans, lines of credit, automobile loans (new and used) and loans
secured by deposit accounts. Consumer loans generally have terms of six months
to five years, some of which are at fixed rates and some of which have rates
that adjust periodically.
Consumer loans are advantageous to the Bank because of their interest
rate sensitivity, but they also involve more credit risk than residential
mortgage loans because of the higher potential of defaults and the difficulties
involved in disposing of the collateral, if any.
Commercial Business Loans. The Bank's commercial business loans are
underwritten on the basis of the borrower's ability to service such debt from
income. The Bank's commercial business loans are generally made to small and
mid-sized companies located within the Bank's primary lending area. In most
cases, the Bank requires additional collateral of equipment, chattel or other
assets before making a commercial business loan.
Loan Commitments. The Bank issues loan origination commitments to real
estate developers and qualified borrowers primarily for the construction,
purchase and refinancing of residential real estate and commercial real estate.
Such commitments are made on specified terms and conditions, including in most
cases, the payment of a non-refundable commitment fee based on a percentage of
the amount of committed funds. At December 31, 1998, the Bank had unused lines
of credit and outstanding loan origination commitments of approximately $29.8
million.
Loan Origination and Loan Servicing Fees. The Bank receives loan
origination fees or "points" for originating loans. Loan points are a percentage
of the principal amount of the mortgage loan which are charged to the borrower
for origination of the loan. The Bank's loan origination fees generally range
from 2% to 3% on conventional residential mortgages and 1% to 2% on commercial
real estate loans. All loan origination fees, net of incremental direct loan
origination costs, are deferred and amortized over the contractual life of the
related loans.
At December 31, 1998, the Bank serviced for others 492 loans with an
outstanding aggregate balance of $20.4 million. Loan servicing income for the
years ended December 31, 1998, 1997 and 1996, was $68 thousand, $83 thousand and
$98 thousand, respectively. Such loans were originated by the Bank and sold
through the secondary mortgage market with the servicing rights to those loans
retained
4
by the Bank. The loan servicing activities of the Bank include collecting and
remitting loan payments, holding escrow funds for the payment of real estate
taxes and insurance premiums and generally administering the loans.
Non-Performing and Problems Assets
When a loan is more than 30 days delinquent, the borrower will be
contacted by mail or phone and payment requested. If the delinquency continues,
subsequent efforts will be made to contact the delinquent borrower. In certain
instances, the Bank may modify the loan or grant a limited moratorium on loan
payments to enable the borrower to reorganize his financial affairs. If the loan
continues in a delinquent status for 90 days or more, the Bank generally will
initiate foreclosure proceedings.
Loans are generally placed on non-accrual status when either principal
or interest is 90 days or more past due. Interest accrued and unpaid at the time
a loan is placed on non-accrual status is charged against interest income by the
establishment of a reserve on uncollected interest. Such interest, when
ultimately collected, is credited to the income in the period received.
Non-Performing Assets. The following table sets forth information
regarding impaired loans, troubled debt restructured and real estate owned
assets by the Bank at the dates indicated.
At December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- ---------- -------- --------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family............................. $ 1,733 $2,394 $2,413 $2,502 $1,446
Commercial real estate......................... 1,205 1,163 1,663 1,604 1,040
Consumer and other............................. 282 80 15 6 469
----- ----- ----- ----- -----
Total mortgage non-accrual loans............. $ 3,220 $3,637 $4,091 $4,112 $2,955
----- ----- ----- ----- -----
Other nonaccrual loans........................... -- -- -- $ 354 --
Troubled debt restructuring...................... $ 477(1) $ 684(1) $ 560(1) 634(1) $1,143
Real estate owned, net........................... 168 446 622 669 1,812
Other non-performing assets...................... 644 644 1,228 1,228 1,428
----- ----- ----- ----- -----
Total non-performing assets...................... $ 4,509 $5,411 $6,501 $6,997 $7,338
====== ===== ===== ===== =====
Total non-accrual loans to net loans............. 1.08% 1.20% 1.33% 1.43% 1.04%
====== ==== ==== ==== ====
Total non-accrual loans to total assets.......... .47% .58% .76% 0.82% 0.61%
====== ==== ==== ==== ====
Total non-performing assets to total assets...... .65% .86% 1.20% 1.39% 1.52%
====== ==== ==== ==== ====
- ------------------------
(1) Loans restructured prior to SFAS Nos. 114 and 118 effective date and
performing in accordance with the terms of the restructuring agreement.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
5
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at December 31, 1998, the Bank had
$314 thousand, $6.8 million, and $9 thousand, classified as special mention,
substandard, and loss assets.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Bank's loan portfolio. Such evaluation, which
includes a review of all loans of which full collectibility of interest and
principal may not be reasonably assured, considers the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions.
6
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
For the Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
(Dollars in Thousands)
Balance at beginning of period .......... $ 3,138 $ 2,782 $ 2,767 $ 2,622 $ 2,589
Loans charged-off:
One-to-four family .................... (37) (8) (114) (13) (44)
Commercial real estate ................ -- -- -- -- --
Construction .......................... -- -- -- -- --
Consumer .............................. (1) (40) (1) (6) (37)
Commercial business ................... -- (1) -- -- (38)
------- ------- ------- ------- -------
Total charge-offs ................... (38) (49) (115) (19) (119)
Recoveries .............................. 2 5 10 44 86
------- ------- ------- ------- -------
Net loans charged-off ................... (36) (44) (105) 25 (33)
------- ------- ------- ------- -------
Provision for possible loan losses ...... 240 400 120 120 66
------- ------- ------- ------- -------
Balance at end of period ................ $ 3,342 $ 3,138 $ 2,782 $ 2,767 $ 2,622
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding during the period ......... 0.012% 0.014% 0.035% (0.009%) 0.012%
7
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.
At December 31,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------ ------------------- ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Loans: (Dollars in Thousands)
One-to-four family............... $1,929 81.11% $2,016 82.43% $1,716 82.89% $1,718 85.30% $1,656 85.65%
Commercial real estate........... 1,232 15.14 954 14.00 877 12.61 819 11.88 757 11.23
Commercial construction.......... 26 .86 24 .78 44 1.42 -- -- -- --
Construction..................... 14 .46 32 1.06 37 1.20 21 .73 29 1.02
Consumer and other............... 65 1.07 62 1.17 76 1.29 68 1.48 70 1.50
Commercial business.............. 76 1.36 50 .56 32 .59 141 .61 110 .60
------ ------ ------ ----- ------ ----- ------ ------- ----- -------
Total allowance for loan losses $3,342 100.00% $3,138 100.00% $2,782 100.00% $2,767 100.00% $2,622 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
8
Investment Activities and Mortgage-Backed Securities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short term
securities and certain other investments. The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities. The Bank classifies
its investments as securities available-for-sale or investments securities
held-to-maturity in accordance with SFAS No. 115. At December 31, 1998, the
Bank's investment portfolio policy allowed investments in instruments such as
U.S. Treasury obligations, U.S. federal agency or federally sponsored agency
obligations, municipal obligations, mortgage-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits, as well as investment grade corporate bonds, commercial paper
and the mortgage derivative products described below. The Bank's Board of
Directors may authorize additional investments.
The Bank's securities available-for-sale and investment securities
held-to-maturity portfolios at December 31, 1998 did not contain securities of
any issuer with an aggregate book value in excess of 10% of the Bank's equity,
excluding those issued by the United States Government or its agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities ("MBS"). Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages, the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
9
The following table sets forth the carrying value and market value of
the Bank's mortgage backed securities and investment securities held to maturity
and securities available for sale, FHLB stock, and interest bearing deposits and
overnight investments at the dates indicated.
At December 31,
-------------------------------------------------------------------
1998 1997 1996
-------------------- ---------------------- --------------------
Estimated Estimated Estimated
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
Investment securities held to maturity: (In Thousands)
U.S. government and agency securities....... $ 78,292 $ 78,242 $ 79,347 $ 79,498 $ 46,792 $ 46,156
Reverse repurchase agreements............... -- -- 30,185 30,185 20,000 20,000
Municipal bonds............................. 3,824 3,827 2,802 2,816 795 800
U.S. treasuries............................. -- -- 15 14 15 14
CMO's....................................... 47,302 47,297 -- -- -- --
MBS......................................... 90,593 92,262 92,021 94,307 104,313 105,558
Investment securities available for sale:
U.S. agencies............................... 18,501 18,501 7,871 7,871 4,997 4,997
U.S. treasuries............................. -- -- -- -- 1,999 1,999
CMO's....................................... 91,332 91,332 72,468 72,468 18,451 18,451
------- ------- ------- ------- ------ ------
Total investment securities............. 329,844 331,461 284,709 287,159 197,362 197,975
Federal Home Loan Bank of New York stock ... 4,861 4,861 3,631 3,631 3,621 3,621
Interest bearing deposits and overnight
investments............................... -- -- 827 827 347 347
-------- -------- -------- -------- ----- -----
Total investments........................ $334,705 $336,322 $289,167 $291,617 $201,330 $201,943
======= ======= ======= ======= ======= =======
10
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment securities at
December 31, 1998.
More than
One Year or Less One to Five Years Five to Ten Years Ten Years Total Investment Securities
------------------ ----------------- ----------------- ---------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
------- ------- ------- ------- ------- ------- ----- ----- ------- ------- -----
(Dollars in Thousands)
Investment securities held to
maturity:
U.S. government and
agency obligations........... $ -- --% $ 5,000 6.05% $53,387 6.33% $ 19,905 6.96% $ 78,292 $78,242 6.47%
Municipal bond............... 3,594 3.91 -- -- -- -- 230 5.60 3,824 3,827 4.01
CMO's -- -- -- -- 5,456 6.50 41,846 6.69 47,302 47,297 6.66
MBS.......................... 1,008 6.84 5,166 7.17 7,253 7.54 77,166 7.19 90,593 92,262 7.21
Investment securities available
for sale:
U.S. Government and
Agency...................... -- -- -- -- 17,503 6.46 998 7.00 18,501 18,501 6.49
CMO's........................ -- -- 354 7.00 9,537 5.85 81,442 6.84 91,332 91,333 6.73
----- ------- ------ ------- ------- ------
Total...................... $4,602 4.56% $10,520 6.63% $93,136 6.39% $221,587 6.94% $329,844 $331,461 6.74%
===== ==== ====== ===== ====== ===== ======= ===== ======= ======= ======
11
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions.
Deposits. Deposits are attracted from within the Bank's primary market
area of Burlington County, New Jersey, through the offering of a broad selection
of deposit instruments including regular checking accounts, non-interest
checking accounts, money market accounts, regular passbook accounts,
certificates of deposit and IRA accounts. Deposit account terms vary according
to the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. The Bank regularly evaluates
the internal cost of funds, surveys rates offered by competing institutions,
reviews the Bank's cash flow requirements for lending and liquidity and executes
rate changes when deemed appropriate. The Bank does not have any brokered
deposits and has no present intention to accept or solicit such deposits.
Certificates of Deposit in Excess of $100,000. The following table
indicates the amount of the Bank's certificates of deposit of $100,000 or more
by time remaining until maturity as of December 31, 1998.
Maturity Period of Deposits Certificates of
- --------------------------- ---------------
Deposit
-------
(In Thousands)
Three months or less............. $ 11,541
Three through six months......... 4,966
Six through twelve months........ 4,650
Over twelve months............... 5,647
------
Total....................... $ 26,804
======
12
Deposit Rate. The following table sets forth the distribution of the
Bank's average balance of deposit accounts at the dates indicated and the
weighted average nominal interest rates on each category of deposits presented.
At December 31,
1998 1997 1996
--------------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Percent of Average Percent Average Percent Average
Average Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ------ ------- -------- ------ ------- -------- -----
(Dollars In Thousands)
Passbook and regular savings.... $ 84,480 16.31% 2.53% $ 73,802 15.6% 2.56% $69,666 16.22% 2.52%
Checking accounts............... 128,259 24.76 1.89 89,418 18.8 .92 72,427 16.87 .96
Money market deposit accounts... 62,099 11.99 2.64 59,797 12.6 2.72 57,399 13.37 2.65
Certificates of deposit......... 234,471 45.26 5.35 243,381 51.3 5.32 228,974 53.32 5.30
Surrogate statement............. 8,714 1.68 5.80 7,860 1.7 5.80 947 .22 6.12
------- ------- ------- ------- --------- ------
Total Deposits................ $518,023 100.00% 3.49% $474,258 100.00% 3.74% $429,413 100.00% 3.77%
======= ====== ==== ======= ====== ==== ======= ====== ====
13
Personnel
As of December 31, 1998 the Corporation, including its subsidiaries,
had 226 full-time employees and 141 part-time employees. The employees are not
represented by a collective bargaining unit. Management believes its
relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which are
related to the regulation of the Corporation and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Corporation
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for
stockholders of the Corporation.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions,
provided the Bank satisfies the Qualified Thrift Lender ("QTL") test or a
somewhat similar test for domestic building and loan associations. If the
Corporation acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Corporation and any of its subsidiaries (other than the Bank
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL and were acquired in a supervisory acquisition. See
"-- Regulation of the Bank -- Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally-chartered, SAIF-insured savings bank, the Bank
is subject to extensive regulation by the OTS and the FDIC. Lending activities
and other investments must comply with various federal statutory and regulatory
requirements. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes
14
a comprehensive framework of activities in which an institution can engage and
is intended primarily for the protection of depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulations, whether by the OTS, the FDIC or the Congress could have a material
adverse impact on the Corporation, the Bank and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
Prior to January 1, 1997, as a member of the SAIF, the Bank paid an
insurance premium to the FDIC equal to a minimum of 0.23% of its total deposits.
The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. In 1996, the annual insurance
premium for most BIF members was lowered to $2,000. The lower insurance premiums
for BIF members placed SAIF members at a competitive disadvantage to BIF
members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for SAIF members was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period, BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Corporation declined
by approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions.
Dividend and Other Capital Distribution Limitations. Current OTS
regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Corporation and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Corporation.
Current OTS regulations impose limitations upon all capital
distributions by savings institutions, such as cash dividends, payments to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, based primarily on an
institution's capital level. An institution that exceeds all requirements before
and after a proposed capital distribution ("Tier 1 institution") and has not
15
been advised by the OTS that it is in need of more than the normal supervision
can, after prior notice, but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess over its capital requirements)
at the beginning of the calendar year, or (ii) 75% of its net income over the
most recent four quarter period. Any additional capital distributions require
prior regulatory approval. As of December 31, 1998, the Bank was a Tier 1
institution. In the event the Bank's capital fell below its requirement or the
OTS notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. If the Bank maintains an
appropriate level of Qualified Thrift Investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of New York. The required percentage of QTIs
is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. As of
December 31, 1998, the Bank was in compliance with its QTL requirement with
92.31% of its assets invested in QTIs.
Loans-to-One Borrower. Under the HOLA, as amended, savings institutions
are subject to the national bank limits on loans-to-one borrower. Generally, a
savings association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the association's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. The Bank does not have any loans-to-one borrower which
exceed these limits.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily non-interest checking and
interest-bearing checking accounts) and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy the liquidity requirements that are imposed by the OTS.
16
Item 2. Properties
The Bank conducts its business through its two administrative offices
located in Burlington, New Jersey and its 23 branch locations in Burlington
County, New Jersey. All of the Bank's office and branch facilities are owned by
the Bank, except for two branch office locations in Lumberton and Medford, New
Jersey. Management of the Bank considers the physical condition of each of the
Bank's administrative and branch offices to be good and adequate for the conduct
of the Bank's business.
Item 3. Legal Proceedings
The Bank is periodically involved as a plaintiff or defendant in
various legal actions, such as actions to enforce liens, condemnation
proceedings on properties in which the Bank holds mortgage interests, matters
involving the making and servicing of mortgage loans and other matters incident
to the Bank's business. In the opinion of management, none of these actions
individually or in the aggregate is believed to be material to the financial
condition or results of operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Stock Market
Information" in the Corporation's 1998 Annual Report to Stockholders (the
"Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Financial Highlights" in
the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Asset and Liability
Management" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Corporation's financial statements listed in Item 14 herein are
incorporated herein by reference.
17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nomineed for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and "- Biographical Information" in the 1999 Proxy
Statement are incorporated herein by reference.
Executive Officers of the Company Who Are Not Directors
Name and Title Age as of December 31, 1998
- -------------- ---------------------------
Channing L. Smith 55
Vice President and
Chief Financial Officer
James E. Igo 42
Senior Vice President and
Chief Lending Officer
Thomas M. Topley 38
Senior Vice President and
Corporate Secretary
Channing L. Smith has served as Vice President and Chief Financial Officer
of the Corporation and the Bank since October 1994. In this capacity, he is
responsible for the management of the accounting, treasury, and investments of
the Bank. From April 1994 to October 1994, he served as controller of the
Corporation and the Bank. From January 1990 to April 1993 he served as corporate
Controller for Circuit Foil USA.
James E. Igo has served as Senior Vice President and Senior Mortgage
Lending Officer of the Corporation and the Bank since November 1991. In that
capacity, he is responsible for overall loan production, credit quality, product
development, loan servicing and the creation of lending policies and procedures.
From September 1990 to November 1991, he served as the Vice President,
Commercial Lending of the Corporation and the Bank. Prior to 1990, Mr. Igo was
Senior Vice President and Senior Lending Officer for a commercial bank.
Thomas M. Topley has served as Senior Vice President of Operations since
April 1993 and as Corporate Secretary of the Corporation and the Bank since
April 1992. In that capacity, he is responsible for corporate records, retail
branch administration, human resources, data processing and accounting
operations. From June 1990 to April 1993, Mr. Topley served as Vice President
and Controller for the Bank.
18
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I --
Election of Directors - Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated statements of financial conditions of FMS
Financial Corporation and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the years in
the three year period ended December 31, 1998, together with the
related notes and the independent auditors' report of
PricewaterhouseCoopers, LLP, independent accountants.
2. Schedules omitted as they are not applicable.
19
3. Exhibits
The following Exhibits are filed as part of this report:
3.1 Certificate of Incorporation (Incorporated by reference
to the Registrant's Form S-1 Registration Statement No.
33-24340).
3.2 Bylaws (Incorporated by reference to the Registrant's
Form S-1 Registration Statement No. 33-24340).
4 Agreement to furnish copy to Securities and Exchange
Commission upon request of Indenture dated July 28,
1994, relating to 10% Subordinated Debentures due 2004
in aggregate principal amount of $10 million.
(Incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1994).
10.1 Stock Option and Incentive Plan (Incorporated by
reference to the Registrant's Form S-8 Registration
Statement No. 33-24340).
13 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule (electronic filing only)
(b) No Reports on Form 8-K were filed during the last quarter of
the fiscal year covered by this Report.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 26, 1999.
FMS FINANCIAL CORPORATION
By: /s/ Craig W. Yates
-------------------------------------
Craig W. Yates, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below on March 26, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ Charles B. Yates /s/ Craig W. Yates
- ----------------------------------- -------------------------------------------
Charles B. Yates Craig W. Yates
Chairman of the Board President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ George J. Barber /s/ Channing L. Smith
- ----------------------------------- -------------------------------------------
George J. Barber, Director Channing L. Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Edward J. Staats, Jr. /s/ Wayne H. Page
- ----------------------------------- -------------------------------------------
Edward J. Staats, Jr., Director Wayne H. Page, Director
/s/ James C. Lignana /s/ Dominic W. Flamini
- ----------------------------------- -------------------------------------------
James C. Lignana, Director Dominic W. Flamini, Director
/s/ Vincent R. Farias /s/ Ruppert A. Hall, Jr.
- ----------------------------------- -------------------------------------------
Vincent R. Farias, Director Ruppert A. Hall, Jr., Director
/s/ Mary Wells
- -----------------------------------
Mary Wells, Director