FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CORPORATE PROFILE
Originally founded in 1871 under the name of Farmers' and Mechanics' Building
and Loan Association, Farmers & Mechanics Bank is a wholly owned subsidiary of
FMS Financial Corporation. The Corporation is listed on the Nasdaq National
Market System under the trading symbol of FMCO. With total assets of $1.2
billion, the Corporation employs 380 full-time and 237 part-time employees who
service over 154 thousand deposit accounts. The Bank, which currently operates
42 branches in Burlington, Camden and Mercer County, is open seven days a week
and offers free on-line banking, bill pay, telephone banking and coin counting.
The Bank's goal is to provide convenient, personal, full service banking so as
to remain your "Hometown Bank."
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS BANK OFFICERS
ROY D. YATES CRAIG W. YATES*
Chairman of the Board President
WAYNE H. PAGE JAMES E. IGO*
Vice Chairman Sr. Vice President and Chief Lending Officer
GEORGE J. BARBER CHANNING L. SMITH*
Vice President and Chief Financial Officer
JOSEPH W. CLARKE, Jr.
THOMAS M. TOPLEY*
VINCENT R. FARIAS Sr. Vice President of Operations and
Corporate Secretary
DOMINIC W. FLAMINI
MERLE A. BROWN
EDWARD J. STAATS, Jr. Vice President, Branch Administration and
Security Officer
MARY WELLS
AMY J. HANNIGAN
CRAIG W. YATES Vice President and Controller
JOHN J. JARUSZEWSKI
Vice President, Information Systems
CATHERINE A. MARSHALL
Vice President, Loan Servicing
PETER S. SCHOENFELD
Vice President, Investments
KAREN D. SHINN
Vice President, Operations
FRANK E. SMITH
Vice President, Facilities and Design
MARCELLA F. HATCHER*
Assistant Secretary
MARK R. JORGENSEN
Assistant Vice President, Commercial Lending
* Officers of Bank and Holding Corporation
-1-
- --------------------------------------------------------------------------------
To Our Shareholders:
Farmers & Mechanics Bank had satisfactory financial results for 2005
and continued to make progress in building a community banking franchise by
working to provide the best local service from numerous convenient branches
in Burlington County, New Jersey, and nearby areas.
For the past decade, we have worked to attract checking and savings
transactional accounts. Certificates of Deposit now represent less than 20%
of our deposit base. CD's have a higher interest cost to the bank and are
subject to rate competition. Transaction accounts have lower interest
costs, and generate significant transaction and service income, but
generally have higher operating and servicing costs. Most importantly, they
represent a more significant relationship with depositors, generating more
branch visits and closer ties through the use of direct deposit, ATM's,
check cards, telephone, computer banking, and internet bill paying.
In addition to our traditional branches, we now have seven Wal-Mart
branches with the opening of the Cherry Hill and Audubon stores. The
Wal-Mart branches provide extra convenience for our existing account
holders, as well as an opportunity to meet shoppers who don't bank with us
yet.
Our earnings in 2005 were lower than 2004 because operating costs
continued to increase, while deposit growth slowed, and interest expense
rose substantially more than interest income. After several years of low
interest rates to stimulate the economy, the Fed has now been regularly
increasing short term rates, and yet long term rates have lagged
significantly. Higher short term rates raise our costs for interest
sensitive deposits in certificate, money market, and government unit
accounts. Long term rates are still quite low, and our portfolio of loans
and investments are generally longer term commitments that do not reprice
quickly. This reduced our profit in 2005 and will continue to hurt earnings
until the markets return to a more traditional spread between long and
short term rates.
Some economists believe that when long term rates stay low as short
term rates rise, that it may portend a slowing of the economy. Our loan
policies are conservative and we regularly add to our loan loss reserves
for possible future market conditions and portfolio growth.
We continue to believe that a community bank can compete successfully
against the larger financial institutions and build significant value for
shareholders. The directors, officers, and staff thank you for your
continued interest and support.
Sincerely,
/s/Craig W. Yates
Craig W. Yates
President
-3-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Financial Condition: (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $1,231,263 $1,250,006 $1,225,557 $1,126,557 $966,537 $839,076 $772,501 $691,812 $628,403 $541,710
Loans receivable, net 442,571 418,799 402,606 361,674 336,544 290,179 299,695 298,603 302,831 306,871
Deposits 947,067 941,507 893,006 800,340 729,506 648,539 603,892 536,310 489,440 453,277
Stockholders' equity 75,082 70,337 62,830 57,638 52,203 47,410 46,097 43,469 38,916 33,826
Operations: (In Thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $57,847 $55,762 $50,814 $57,748 $55,300 $52,349 $47,863 $46,563 $40,813 $36,841
Interest expense 21,537 18,414 19,362 24,756 28,752 27,398 24,742 24,869 20,879 18,978
Net interest income 36,310 37,348 31,452 32,992 26,548 24,951 23,120 21,694 19,934 17,863
Net income 6,718 8,768 6,201 7,961 5,459 5,112 5,114 5,271 5,491 3,026(a)
Basic earnings per common share 1.03 1.35 0.96 1.22 0.81 0.74 0.71 0.73 0.77 0.41
Diluted earnings per common share 1.03 1.34 0.95 1.21 0.81 0.74 0.70 0.72 0.75 0.40
Dividends declared per common share 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.11 0.08(b) 0.07(b)
Weighted average common shares outstanding 6,504 6,495 6,477 6,548 6,701 6,888 7,210 7,204 7,165 7,411
Weighted average common shares and common
stock equivalents outstanding 6,521 6,529 6,515 6,577 6,714 6,947 7,292 7,314 7,346 7,573
Other Selected Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.22% 3.28% 2.98% 3.44% 3.24% 3.40% 3.28% 3.50% 3.60% 3.50%
Net interest margin 3.21 3.25 2.92 3.40 3.22 3.42 3.36 3.48 3.72 3.66
Return on average assets 0.55 0.71 0.49 0.77 0.56 0.66 0.61 0.79 0.98 0.60
Return on average equity 9.22 13.21 9.52 14.61 10.02 11.16 10.93 12.86 15.11 8.99
Dividend payout ratio 11.65 8.95 12.63 9.92 14.81 16.22 17.14 15.28 10.67 17.50
Equity-to-asset ratio 6.10 5.63 5.13 5.12 5.40 5.65 5.97 6.28 6.19 6.24
Number of employees (full-time equivalents) 525 515 522 480 439 427 382 335 299 236
(a) Includes $2.7 milion for the one-time assessment to recapitalize the SAIF.
(b) Adjusted for stock splits in 1998 and 1996, as applicable.
-4- and -5-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, credit risk, risks associated with the effect of
opening a new branch, the ability to control costs and expenses, and general
economic conditions. FMS Financial Corporation undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
FMS Financial Corporation (the "Corporation") is the parent company of
Farmers & Mechanics Bank (the "Bank"), its only subsidiary. Earnings of the
Corporation are primarily dependent on the earnings of the Bank because the
Corporation engages 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 and Liquidity 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 including interest rate swaps or
other activities involving the use of off-balance sheet derivative financial
instruments. The Bank's investment policy allows investment only in securities
which have a rating of AA or better. U.S. Government agency investments are
callable notes issued by Fannie Mae (FNMA), Freddie Mac (FHLMC) and the Federal
Home Loan Bank (FHLB), which carry either a direct government or
quasi-government guarantee. The Bank holds a substantial component of its
investment portfolio in mortgage-backed securities and collateralized mortgage
obligations (collectively, "MBS and CMO"). At the end of 2005, the total
investment in MBSs and CMOs amounted to $375.9 million, or 54.7% of total
investments. These are instruments collateralized by pools of residential and
commercial mortgages which return interest and principal payments to the
investor when performing in accordance with their terms. Approximately 55.6% 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 credit quality. The Bank also owns non-agency CMOs,
issued by major financial institutions, which are rated AAA or AA. CMOs are
generally very liquid issues with major brokerage houses providing ready
markets. However, CMOs are subject to prepayment and extension risk, which can
adversely affect their yields and expected average life. MBSs and CMOs of $54.1
million and $45.4 million were used to secure public funds on deposit at
December 31, 2005 and 2004, respectively.
Interest Rate Risk
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Funds Managment Committee ("FMC"), which
includes senior management. The FMC 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 FMC 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 FMC. Interest rate sensitivity is a measure of
the difference between amounts of interest-earning assets and interest-bearing
liabilities which either reprice or future within a given period of time.
-6-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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. At December 31, 2005, the Bank's GAP position
for net assets repricing for one year cumulative totaled a negative $57.9
million or 4.71%.
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. 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 Federal Home Loan Bank ("FHLB")
borrowings and deposit marketing programs to adjust the repricing intervals of
its liabilities.
The Bank measures its interest rate risk using the Office of Thrift
Supervision's ("OTS") 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, 2005, the Bank would
experience a 389 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. Due to the
abnormally low interest rate environment in 2004 decreases of 200 basis points
or more have been omitted.
December 31, 2005
-------------------------------------------------
Net Portfolio Value
-------------------------------------------------
Changes in
Interest Rates $ Amount $ Change % Change NPV Ratio (a)
(basis points) -------------------------------------------------
+300 $69,534 $(84,249) (55%) 5.78%
+200 98,609 (55,174) (36%) 8.00%
+100 128,179 (25,604) (17%) 10.14%
0 153,783 0 0 11.89%
(100) 161,736 7,953 (5%) 12.37%
(200) 153,229 (554) 0% 11.73%
- -----------------------------------------------------------------
December 31, 2004
-------------------------------------------------
Net Portfolio Value
-------------------------------------------------
Changes in
Interest Rates $ Amount $ Change % Change NPV Ratio (a)
(basis points) -------------------------------------------------
+300 $56,922 $ (87,216) (61%) 4.69%
+200 89,649 (54,488) (38%) 7.17%
+100 122,667 (21,471) (15%) 9.52%
0 144,138 0 0 10.96%
(100) 143,993 (145) 0% 10.88%
- -----------------------------------------------------------------
(a) Calculated as the estimated NPV divided by present value of total assets.
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.
Financial Condition
Total assets of the Corporation decreased $18.7 million or 1.5% to $1.2
billion at December 31, 2005 from $1.3 billion at December 31, 2004. Short-term
funds decreased $24.8 million or 38.7% to $39.3 million at December 31, 2005
from $64.1 million at December 31, 2004, primarily due to a decrease in
short-term money market accounts. Investment securities held to maturity
increased $20.5 million or 8.0% to $275.3 million at December 31, 2005 from
$254.8 million at December 31, 2004. The increase in investment securities held
to maturity during the year is due to purchases of $123.0 million of U.S.
Government agency notes (U.S. Gov't agencies), $11.5 million of municipal bonds
and $9.4 million of CMOs, partially offset by investment calls and maturities of
$97.9 million and principal paydowns of $25.2 million. Investment securities
available for sale increased $13.6 million or 9.6% to $155.6 million during the
year ended December 31, 2005 from $142.0 million
-7-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
at December 31, 2004, due to purchases of $44.0 million in U.S. Government
agency notes, $18.0 million in MBSs available for sale and $5.0 million in CMOs,
partially offset by principal paydowns of $36.7 million and calls and maturities
of $14.0 million. Mortgage-backed securities held to maturity decreased $61.0
million or 22.7% to $208.2 million during the year ended December 31, 2005 from
$269.2 million at December 31, 2004, as a result of principal paydowns on MBSs
of $63.1 million, partially offset by purchases of $3.0 million in MBS pass thru
securities. Loans receivable increased $23.8 million or 5.7% to $442.6 million
at December 31, 2005 from $418.8 million at December 31, 2004. The increase in
loans receivable during the year ended December 31, 2005 was due to $117.4
million of loans originated, partially offset by $93.3 million of principal
collected on loans.
Total liabilities decreased $23.5 million or 2.0% to $1.2 billion at
December 31, 2005 from $1.2 billion at December 31, 2004. Deposits increased
$5.6 million or 0.6% to $947.1 million at December 31, 2005 from $941.5 million
at December 31, 2004. The increase in deposits during the year was due to
increases in checking accounts of $23.3 million and time deposits of $1.1
million, partially offset by decreases in money market accounts of $12.6 million
and savings accounts of $6.2 million. Securities sold under agreements to
repurchase decreased $20.0 million or 10.3% to $175.0 million at December 31,
2005 from $195.0 million at December 31, 2004. These borrowings are
collateralized by U.S. Government agency notes, MBSs and CMOs and had a weighted
average rate of 4.93% and 4.49% at December 31, 2005 and 2004, respectively.
Stockholders' equity increased $4.7 million or 6.7% to $75.1 million at
December 31, 2005 from $70.3 million at December 31, 2004. The increase was due
to net income of $6.7 million and the exercise of stock options of $213
thousand, partially offset by $781 thousand of dividends declared on common
stock and a decrease of $1.4 million in accumulated comprehensive income (net
unrealized gain and loss on available for sale securities).
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 noninterest bearing
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 noninterest income and expenses, such as gains and losses on the sale of
investments, provision for loan losses, 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 interest income or expense by the average balance
of interest-earning assets or interest-bearing liabilities, respectively for the
periods presented.
Years Ended December 31,
----------------------------------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- -------- ----------- ---------- --------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $436,338 $25,847 5.92% $418,354 $24,577 5.87% $388,201 $24,363 6.28%
Interest-bearing deposits 46,693 1,338 2.87% 50,928 667 1.31% 33,529 462 1.38%
Mortgage-backed securities 308,078 14,630 4.75% 396,962 17,389 4.38% 419,461 16,805 4.01%
Investment securities 340,922 16,032 4.70% 281,314 13,129 4.67% 234,442 9,184 3.92%
----------------------------------------------------------------------------------------------
Total interest-earning assets 1,132,031 57,847 5.11% 1,147,558 55,762 4.86% 1,075,633 50,814 4.72%
----------------------------- ------------------------------- -----------------------------
Interest-bearing liabilities:
Checking deposits 399,956 4,125 1.03% 366,338 1,717 0.47% 313,492 915 0.29%
Savings deposits 196,030 1,149 0.59% 194,246 1,071 0.55% 179,673 1,249 0.70%
Money market deposits 142,137 1,266 0.89% 139,038 1,001 0.72% 130,822 1,020 0.78%
Time deposits 208,825 4,878 2.34% 216,906 3,965 1.83% 225,240 5,401 2.40%
Borrowings 167,402 8,293 4.95% 221,883 9,291 4.19% 236,199 9,481 4.01%
Long-term debt 25,774 1,826 7.08% 25,774 1,369 5.31% 25,774 1,296 5.03%
----------------------------------------------------------------------------------------------
Total interest-bearing liabilities $1,140,124 21,537 1.89% $1,164,185 18,414 1.58% $1,111,200 19,362 1.74%
=========== ------- ----- ========== ------- ----- ========== ------- -----
Net interest income $36,310 $37,348 $31,452
======= ======= =======
Interest rate spread 3.22% 3.28% 2.98%
===== ====== =====
Net yield on average interest-earning assets 3.21% 3.25% 2.92%
====== ====== ======
Ratio of average interest-earning assets
to average interest -bearing liabilities 99.29% 98.57% 96.80%
====== ====== ======
-8-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Rate Volume Analysis
The following table sets forth certain information regarding changes in interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rates; (ii)
changes in volume; (iii) total change in rate and volume (the combined effect of
changes in both volume and rate, not separately identified, has been allocated
to rate). Because average balances on loans include non-performing loans which
reduce the computed yield, a higher level of non-performing loans affects both
the changes due to volume and rate.
Years Ended December 31,
--------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
--------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to change in Due to change in
------------------------------ ------------------------------
Rate Volume Total Rate Volume Total
-------- --------- --------- --------- ---------- -------
(In Thousands)
Interest income:
Loans $213 $1,057 $1,270 $(1,678) $1,892 $214
Interest-bearing deposits 726 (55) 671 (35) 240 205
Mortgage-backed securities 1,135 (3,894) (2,759) 1,485 (901) 584
Investment securities 121 2,782 2,903 2,109 1,836 3,945
------- ------- ------- ------- ------- -------
Total change - interest income 2,195 (110) 2,085 1,881 3,067 4,948
------- ------- ------- ------- ------- -------
Interest expense:
Checking deposits 2,250 158 2,408 648 154 802
Savings deposits 68 10 78 (279) 101 (178)
Money market deposits 243 22 265 (83) 64 (19)
Time deposits 1,061 (148) 913 (1,236) (200) (1,436)
Borrowings 1,283 (2,281) (998) 385 (575) (190)
Long-term debt 457 0 457 73 0 73
------- ------- ------- ------- ------- -------
Total change - interest expense 5,362 (2,239) 3,123 (492) (456) (948)
------- ------- ------- ------- ------- -------
Net change in net interest income $(3,167) $ 2,129 $(1,038) $ 2,373 $ 3,523 $ 5,896
======= ======= ======= ======= ======= =======
Comparisons of Years Ended December 31, 2005 and 2004.
Net Income
The Corporation and its subsidiary recorded net income of $6.7 million for
the year ended December 31, 2005, or $1.03 diluted earnings per share, as
compared to net income of $8.8 million, or $1.34 diluted earnings per share for
the year ended December 31, 2004. Net interest income was $36.3 million in 2005
compared to $37.3 million in 2004. Provisions for loan losses were $360 thousand
in 2005 and $330 thousand in 2004. Noninterest income was $5.5 million in 2005
compared to $6.1 million in 2004. Total noninterest expenses for the year ended
December 31, 2005 were $30.1 million compared to $28.4 million in the previous
year. During 2005, the Corporation declared cash dividends, which totaled $0.12
per share which resulted in a dividend payout ratio of 11.65%.
Interest Income
Total interest income increased $2.1 million to $57.8 million in 2005 from
$55.7 million in 2004. The increase in 2005 is attributable to increases in
interest income on investment securities of $2.9 million, loans of $1.3 million
and interest-bearing deposits of $671 thousand, partially offset by a decrease
in interest income on mortgage-backed securities of $2.8 million.
Interest income on investment securities increased $2.9 million in 2005.
The average balance of the portfolio increased $59.6 million to $340.9 million
in 2005 from $281.3 million in 2004. The investment portfolio increased
primarily due to purchases of $123.0 million of U. S. Government agency notes
and $9.4 million of CMOs. These increases were partially offset by calls of
$94.7 million of U.S. Government agency notes and principal paydowns of CMOs of
$25.2 million. The increase in the average balance of investment securities
resulted in an increase in interest income of $2.8 million in 2005. The average
yield on the portfolio increased 3 basis points to 4.70% in 2005 from 4.67% in
2004, which resulted in an increase in interest income of $121 thousand.
Interest income on loans increased $1.3 million to $25.9 million in 2005
from $24.6 million in 2004. The average balance of the loan portfolio increased
$17.9 million to $436.3 million in 2005 from $418.4 million in 2004. Loans
originated during the year totaled $117.4 million and principal collected on
loans totaled $93.3 million in 2005. The increase in the loan volume during 2005
resulted in a volume increase in interest income of $1.1 million. The average
yield on the loan portfolio increased 5 basis points to 5.92% in 2005 from 5.87%
in 2004, which resulted in an increase in interest income of $213 thousand.
-9-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Interest income on interest-bearing deposits increased $671 thousand to
$1.3 million in 2005 from $667 thousand in 2004. The increase was due to an
increase in the average yield on the portfolio of 156 basis points to 2.87% in
2005 from 1.31% in 2004, which resulted in an increase in interest income of
$726 thousand. The average balance decreased $4.2 million to $46.7 million in
2005 from $50.9 million in 2004. This decrease was primarily due to a $5.8
million decline in the average balance of the money market investment account
during the year, which resulted in a decrease in interest income of $55
thousand.
Interest income on mortgage-backed securities decreased $2.8 million in
2005 due to volume decreases in the portfolio. The average balance of the
portfolio decreased $88.9 million to $308.1 million in 2005 from $397.0 million
in 2004, resulting in a decrease in interest income of $3.9 million. The average
balance decrease in 2005 was due to principal paydowns on mortgage-backed
securities of $63.1 million, partially offset by purchases of $3.0 million in
FHLMC securities. The average yield on the portfolio increased 37 basis points
to 4.75% in 2005 from 4.38% in 2004, which resulted in an increase in interest
income of $1.1 million.
Interest Expense
Total interest expense increased $3.1 million to $21.5 million in 2005 from
$18.4 million in 2004. The increase in interest expense on checking deposits,
time deposits, long-term debt, money market deposits and savings deposits, was
partially offset by a decrease in interest expense on borrowings.
Interest expense on checking deposits increased $2.4 million to $4.1
million in 2005 from $1.7 million in 2004. The average rate on time deposits
increased 56 basis points to 1.03% in 2005 from 0.47% in 2004, which resulted in
an increase in interest expense of $2.3 million from higher rates. The average
balance of checking deposits increased $33.7 million to $400.0 million in 2005
from $366.3 million in 2004, which resulted in an increase in interest expense
of $158 thousand.
Interest expense on time deposits increased $913 thousand to $4.9 million
in 2005 from $4.0 million in 2004. The average rate on time deposits increased
51 basis points to 2.34% in 2005 from 1.83% in 2004, resulting in a $1.1 million
increase in interest expense due to changes in rate. The average balance of time
deposits decreased $8.1 million to $208.8 million in 2005 from $216.9 million in
2004, resulting in a $148 thousand decrease in interest expense due to volume.
Interest expense on long-term debt increased $457 thousand to $1.8 million
in 2005 from $1.4 million in 2004. The average rate on long-term debt increased
177 basis points to 7.08% in 2005 from 5.31% in 2004, which resulted in an
increase in interest expense of $457 thousand. The average balance of long-term
debt remained constant at $25.8 million in 2005 and 2004.
Interest expense on money market deposits increased $265 thousand to $1.3
million in 2005 from $1.0 million in 2004. The average rate on money market
deposits increased 17 basis points to 0.89% in 2005 from 0.72% in 2004, which
resulted in an increase in interest expense of $243 thousand. The average
balance of money market deposits increased $3.1 million to $142.1 million in
2005 from $139.0 million in 2004, which resulted in an increase in interest
expense of $22 thousand.
Interest expense on savings deposits increased $78 thousand to $1.1 million
in 2005 from $1.1 million in 2004. The average rate on savings deposits
increased 4 basis points to 0.59% in 2005 from 0.55% in 2004, which resulted in
an increase in interest expense of $68 thousand. The average balance of savings
deposits increased $1.8 million to $196.0 million in 2005 from $194.2 million in
2004, which resulted in an increase in interest expense of $10 thousand.
Interest expense on borrowings decreased $998 thousand to $8.3 million in
2005 from $9.3 million in 2004. The average balance of borrowings decreased
$54.5 million to $167.4 in 2005 from $221.9 in 2004, resulting in a $2.3 million
volume decrease in interest expense. The average rate on borrowings increased 76
basis points to 4.95% in 2005 from 4.19% in 2004, resulting in a $1.3 million
increase in interest expense due to rate changes.
Critical Accounting Estimate-Provision For Loan Losses
A critical accounting estimate of the Bank is the provision for loan
losses. The provision for loan losses increased $30 thousand to $360 thousand in
2005 from $330 thousand in 2004. The increase in the provision was due to
increases in the total loan portfolio and particularly increases in commercial
business and commercial real estate loans, which have a higher risk of loss than
residential mortgages. The amount of the allowance 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 net charge-offs for 2005 and
2004 totaled $16 thousand and $18 thousand, respectively. The Bank will continue
to monitor its allowance for loan losses and make future adjustments to the
allowance through the provision for loan losses. 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 Bank
maintains its allowance for loan losses at a level that it considers to be
adequate to provide for the probable existing loss in the 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.
-10-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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.
Noninterest Income
Noninterest income from operations decreased $635 thousand to $5.5 million
in 2005 compared with $6.1 million in 2004. The decrease is primarily due to the
absence of a $683 thousand gain on the sale of investment securities recorded in
2004.
Service charges on accounts increased $109 thousand to $5.3 million in 2005
from $5.2 million in 2004. This is primarily the result of an increase in check
card income of $218 thousand to $1.6 million in 2005 from $1.4 million in 2004,
partially offset by a $90 thousand reduction in returned item charges to $1.8
million in 2005 from $1.9 million in 2004.
Noninterest Expense
Noninterest expense increased $1.7 million to $30.1 million in 2005 from
$28.4 million in 2004.
Salaries and benefits increased $1.1 million to $18.0 million in 2005 from
$16.9 million in 2004. The increase was primarily due to annual pay rate
increases of $359 thousand and an increase of $472 thousand in retirement and
health insurance costs in 2005. Average full time equivalent employees during
2005 were 525 as compared to 515 during 2004.
Occupancy and equipment expense increased $203 thousand to $5.6 million in
2005 from $5.4 million in 2004. Furniture, fixture and equipment expense
increased $104 thousand, light, heat and utilities expense increased $58
thousand and maintenance expense increased $57 thousand. These increases were
due to the addition of the Cherry Hill Walmart branch opened in 2005, and other
facility and equipment additions and improvements during the year.
Telecommunications expense increased $153 thousand to $456 thousand in 2005
from $303 thousand in 2004. This increase was due to enhancing our network to
provide more efficient service to our customers.
Noninterest expenses are expected to continue increasing in future periods
as the Bank pursues its branch expansion strategy.
Comparisons of Years Ended December 31, 2004 and 2003.
Net Income
The Corporation and its subsidiary recorded net income of $8.8 million for
the year ended December 31, 2004, or $1.34 diluted earnings per share, as
compared to net income of $6.2 million, or $0.95 diluted earnings per share for
the year ended December 31, 2003. Net interest income was $37.3 million in 2004
compared to $31.5 million in 2003. Provisions for loan losses were $330 thousand
in 2004 and $270 thousand in 2003. Noninterest income remained constant at $6.1
million in 2004 and 2003. Total noninterest expenses for the year ended December
31, 2004 were $28.4 million compared to $27.0 million in the previous year.
During 2004, the Corporation declared cash dividends which totaled $0.12 per
share which resulted in a dividend payout ratio of 8.95%.
Interest Income
Total interest income increased $5.0 million to $55.8 million in 2004 from
$50.8 million in 2003. The increase is attributable to increases in interest
income on investment securities of $3.9 million, mortgage-backed securities of
$584 thousand, loans of $214 thousand and interest-bearing deposits of $205
thousand.
Interest income on investment securities increased $3.9 million in 2004.
The increase in interest income on the investment securities was primarily due
to rate increases in the portfolio. The average yield on the portfolio increased
75 basis points to 4.67% in 2004 from 3.92% in 2003, which resulted in an
increase in interest income of $2.1 million. The average balance of the
portfolio increased $46.9 million to $281.3 million in 2004 from $234.4 million
in 2003. The investment portfolio increased primarily due to purchases of $189.1
million of U.S. Government agency notes and $26.0 million of CMOs. These
increases were partially offset by calls of $97.0 million of U.S. Government
agency notes and principal paydowns of CMOs of $49.1 million. The increase in
the average balance of investment securities resulted in an increase in interest
income of $1.8 million in 2004.
Interest income on mortgage-backed securities increased $584 thousand in
2004 due to rate increases in the portfolio. The average yield on the portfolio
increased 37 basis points to 4.38% in 2004 from 4.01% in 2003, which resulted in
an increase in interest income of $1.5 million. The average balance of the
portfolio decreased $22.5 million to $397.0 million in 2004 from $419.5 million
in 2003, resulting in a decrease in interest income of $901 thousand. The
decrease in the average balance was due to principal paydowns on mortgage-backed
securities of $101.5 million, partially offset by purchases of $13.4 million in
MBS pass thru securities in 2004.
Interest income on loans increased $214 thousand to $24.6 million at
December 31, 2004 from $24.4 million at December 31, 2003. The average balance
of the loan portfolio increased $30.2 million to $418.4 million in 2004 from
$388.2 million in 2003. Loans originated during the
-11-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
year totaled $126.7 million and principal collected on loans totaled $110.1
million in 2004. The increase in the loan volume during 2004 resulted in an
increase in interest income of $1.9 million. The average yield on the loan
portfolio decreased 41 basis points to 5.87% in 2004 from 6.28% in 2003, which
resulted in a decrease in interest income of $1.7 million.
Interest income on interest-bearing deposits increased $205 thousand to
$667 thousand in 2004 from $462 thousand in 2003. The increase was due to an
increase in the average balance of $17.4 million to $50.9 million in 2004 from
$33.5 million in 2003. The increase in the average balance was due to an
increase in money market investment account of $33.0 million during the year,
which resulted in an increase in interest income of $240 thousand. The average
yield on the portfolio decreased 7 basis points to 1.31% in 2004 from 1.38% in
2003, which resulted in a decrease in interest income of $35 thousand.
Interest Expense
Total interest expense decreased $948 thousand to $18.4 million in 2004
from $19.4 million in 2003. The decrease in interest expense on time deposits,
borrowings, savings and money market deposits was partially offset by increases
in interest expense on checking deposits and long-term debt.
Interest expense on time deposits decreased $1.4 million to $4.0 million in
2004 from $5.4 million in 2003. The average rate on time deposits decreased 57
basis points to 1.83% in 2004 from 2.40% in 2003, which resulted in a decrease
in interest expense of $1.2 million from lower rates. The average balance of
time deposits decreased $8.3 million to $216.9 million in 2004 from $225.2
million in 2003, which resulted in a decrease in interest expense of $200
thousand.
Interest expense on borrowings decreased $190 thousand to $9.3 million in
2004 from $9.5 million in 2003. The average balance on borrowings decreased
$14.3 million to $221.9 million in 2004 from $236.2 million in 2003, resulting
in a $575 thousand decrease in interest expense due to volume. The average rate
on borrowings increased 18 basis points to 4.19% in 2004 from 4.01% in 2003,
resulting in a $385 thousand increase in interest expense due to changes in
rate.
Interest expense on savings deposits decreased $178 thousand to $1.1
million in 2004 from $1.2 million in 2003. The average rate on savings deposits
decreased 15 basis points to 0.55% in 2004 from 0.70% in 2003, which resulted in
a decrease in interest expense of $279 thousand. The average balance of savings
deposits increased $14.5 million to $194.2 million in 2004 from $179.7 million
in 2003, which resulted in an increase in interest expense of $101 thousand.
Interest expense on money market deposits decreased $19 thousand to $1.0
million in 2004 from $1.0 million in 2003. The average rate on money market
deposits decreased 6 basis points to 0.72% in 2004 from 0.78% in 2003, which
resulted in a decrease in interest expense of $83 thousand. The average balance
of money market deposits increased $8.2 million to $139.0 million in 2004 from
$130.8 million in 2003, which resulted in an increase in interest expense of $64
thousand.
Interest expense on checking deposits increased $802 thousand to $1.7
million in 2004 from $915 thousand in 2003. The average rate on checking
deposits increased 18 basis points to 0.47% in 2004 from 0.29% in 2003, which
resulted in an increase in interest expense $648 thousand. The average balance
on checking deposits increased $52.8 million to $366.3 million in 2004 from
$313.5 million in 2003, which resulted in an increase in interest expense of
$154 thousand.
Interest expense on long-term debt increased $73 thousand to $1.4 million
in 2004 from $1.3 million in 2003. The average rate on long-term debt increased
28 basis points to 5.31% in 2004 from 5.03% in 2003, resulting in a $73 thousand
increase in interest expense due to rate changes. The average balance of
long-term debt remained constant at $25.8 million in 2004 compared to the same
period in 2003.
Critical Accounting Estimate-Provision For Loan Losses
A critical accounting estimate of the Bank is the provision for loan
losses. The provision for loan losses increased $60 thousand to $330 thousand in
2004 from $270 thousand in 2003. The increase in the provision was due to
increases in the total loan portfolio and particularly increases in commercial
construction and commercial real estate loans which have a higher risk of loss
than residential mortgages. The net charge-offs for 2004 and 2003 totaled $18
thousand and $180 thousand, respectively.
Noninterest Income
Noninterest income from operations increased $61 thousand to $6.1 million
in 2004 compared with $6.1 million in 2003.
Gain on sale of investment securities increased $397 thousand to $683
thousand in 2004 from $286 thousand in 2003. The Bank sold $17.0 million of MBS
and CMO securities and equity securities during 2004, which resulted in a
realized gain of $683 thousand.
Service charges on accounts increased $557 thousand to $5.1 million in 2004
from $4.6 million in 2003. The increase is the result of higher transaction
volume on retail accounts during the year.
Noninterest Expense
Noninterest expense increased $1.4 million to $28.4 million in 2004 from
$27.0 million in 2003.
Salaries and benefits increased $1.4 million to $16.9 million in 2004 from
$15.5 million in 2003. The increase was due to annual pay rate increases of $338
thousand and an increase of $575 thousand in retirement and health insurance
costs in 2004. Average full time equivalent employees during 2004 were 515 as
compared to 522 during 2003.
-12-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Amortization of core deposit intangible increased $443 thousand to $716
thousand in 2004 from $273 thousand in 2003. The increase is due to a full year
of amortization recorded in 2004.
Purchased services expense increased $8 thousand to $2.9 million in 2004
from $2.8 million in 2003. Computer bill payment processing costs increased $70
thousand and check processing costs increased $42 thousand both due to higher
transaction volume in 2004, partially offset by decreases in ATM charges of $163
thousand.
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 repayments 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. The Bank has
periodically supplemented its funding needs with securities sold under
agreements to repurchase ("repurchase agreements") and advances from the FHLB.
At December 31, 2005 the Bank had $175.0 million in repurchase agreements. 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 time deposit accounts which are scheduled to mature during
the twelve months ending December 31, 2006 is approximately $153.0 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.
CONTRACTUAL OBLIGATIONS
The Corporation is subject to certain contractual obligations at December 31,
2005 as shown in the table below:
Contractual Obligations Less than 1-3 3-5 More than
(In thousands) 1 year years years 5 years Total
- --------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase* $0 $40,000 $80,000 $55,000 $175,000
FMS Statutory Trust 1 debentures 0 0 0 25,774 25,774
Operating leases 324 684 637 2,055 3,700
Commitments to fund loans 22,790 0 0 0 22,790
Unused lines of credit 0 0 0 31,323 31,323
Standby letters of credit 6,905 0 0 0 6,905
Software maintenance contracts 456 0 0 0 456
*Subject to prepayment calls, which may accelerate the payment of these
obligations.
-13-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Consolidated Summary of Quarterly Earnings (Unaudited)
The following table presents summarized quarterly data for 2005 and 2004:
- -------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
2005 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------
(In Thousands, except per share amounts)
Total interest income $14,003 $14,308 $14,586 $14,950 $57,847
Total interest expense 4,967 5,134 5,420 6,016 21,537
------- ------- ------- ------- -------
Net interest income 9,036 9,174 9,166 8,934 36,310
Provision for loan losses 90 90 90 90 360
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 8,946 9,084 9,076 8,844 35,950
Total noninterest income 1,322 1,435 1,385 1,340 5,482
Total noninterest expenses 7,382 7,395 7,585 7,705 30,067
------- ------- ------- ------- -------
Income before income taxes 2,886 3,124 2,876 2,479 11,365
Income taxes 1,185 1,282 1,170 1,010 4,647
------- ------- ------- ------- -------
Net income $ 1,701 $ 1,842 $ 1,706 $ 1,469 $ 6,718
======= ======= ======= ======= =======
Basic earnings per common share $ 0.26 $ 0.28 $ 0.26 $ 0.23 $ 1.03
======= ======= ======= ======= =======
Diluted earnings per common share $ 0.26 $ 0.28 $ 0.26 $ 0.23 $ 1.03
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
2004 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------
(In Thousands, except per share amounts)
Total interest income $13,641 $13,585 $14,150 $14,386 $55,762
Total interest expense 4,439 4,507 4,601 4,867 18,414
------- ------- ------- ------- -------
Net interest income 9,202 9,078 9,549 9,519 37,348
Provision for loan losses 75 75 90 90 330
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 9,127 9,003 9,459 9,429 37,018
Total noninterest income 1,362 1,430 1,799 1,526 6,117
Total noninterest expenses 7,028 6,973 7,070 7,314 28,385
------- ------- ------- ------- -------
Income before income taxes 3,461 3,460 4,188 3,641 14,750
Income taxes 1,383 1,387 1,680 1,532 5,982
------- ------- ------- ------- -------
Net income $ 2,078 $ 2,073 $ 2,508 $ 2,109 $ 8,768
======= ======= ======= ======= =======
Basic earnings per common share $ 0.32 $ 0.32 $ 0.39 $ 0.32 $ 1.35
======= ======= ======= ======= =======
Diluted earnings per common share $ 0.32 $ 0.32 $ 0.38 $ 0.32 $ 1.34
======= ======= ======= ======= =======
-14-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $54,544,693 $46,435,050
Interest-bearing deposits 27,874 30,950
Short-term funds 39,268,382 64,111,356
-------------- --------------
Total cash and cash equivalents 93,840,949 110,577,356
Investment securities held to maturity 275,340,435 254,833,749
Investment securities available for sale 155,632,095 141,999,280
Loans, net 442,571,357 418,798,633
Mortgage-backed securities held to maturity 208,195,874 269,221,897
Accrued interest receivable 6,224,371 6,322,107
Federal Home Loan Bank stock 8,248,420 10,250,120
Office properties and equipment, net 34,801,087 30,747,227
Deferred income taxes 2,607,641 2,150,442
Core deposit intangible 1,875,822 2,592,030
Prepaid expenses and other assets 1,440,857 1,950,913
FMS Statutory Trust 1 issue costs, net 484,467 562,311
-------------- --------------
TOTAL ASSETS $1,231,263,375 $1,250,006,065
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest-bearing deposits $759,991,442 $765,459,098
Noninterest-bearing deposits 187,075,982 176,047,722
-------------- --------------
Total deposits 947,067,424 941,506,820
Securities sold under agreements to repurchase 175,000,000 195,000,000
Advances from the Federal Home Loan Bank 0 10,000,000
FMS Statutory Trust 1 debentures 25,774,000 25,774,000
Advances by borrowers for taxes and insurance 2,132,320 2,200,357
Accrued interest payable 1,378,353 1,246,661
Dividends payable 195,486 195,029
Other liabilities 4,633,516 3,746,579
-------------- --------------
Total liabilities 1,156,181,099 1,179,669,446
-------------- --------------
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 8,006,392 and 7,991,292, and shares outstanding 6,515,110
and 6,502,110 as of December 31, 2005 and 2004, respectively 800,639 799,129
Paid-in capital in excess of par 8,767,381 8,555,506
Accumulated comprehensive income- net of deferred income taxes (1,099,630) 270,784
Retained earnings 77,583,683 71,646,199
Less: Treasury stock (1,491,282 and 1,489,182 shares, at cost, as of
December 31, 2005 and 2004, respectively) (10,969,797) (10,934,999)
-------------- --------------
Total stockholders' equity 75,082,276 70,336,619
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,231,263,375 $1,250,006,065
============== ==============
See notes to consolidated financial statements.
-15-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest income on:
Loans $25,847,280 $24,576,705 $24,362,749
Mortgage-backed securities 14,629,526 17,388,728 16,805,015
Investments 17,370,287 13,796,220 9,646,233
----------- ----------- -----------
Total interest income 57,847,093 55,761,653 50,813,997
----------- ----------- -----------
INTEREST EXPENSE:
Interest expense on:
Deposits 11,418,289 7,754,391 8,585,202
Borrowings 8,293,015 9,290,862 9,480,985
Long-term debt 1,826,092 1,368,591 1,295,928
----------- ----------- -----------
Total interest expense 21,537,396 18,413,844 19,362,115
----------- ----------- -----------
NET INTEREST INCOME 36,309,697 37,347,809 31,451,882
PROVISION FOR LOAN LOSSES 360,000 330,000 270,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 35,949,697 37,017,809 31,181,882
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on accounts 5,258,385 5,149,878 4,592,540
Other income 155,667 137,136 131,805
Loan service charges and other fees 75,167 105,828 85,759
(Loss) Gain on disposal/sale of fixed assets (6,769) 46,080 (115,658)
Gain on sale of loans and real estate owned 0 229 495,831
Gain on sale of investment securities 0 682,880 285,846
Gain on sale of real estate held for development 0 0 600,780
Real estate owned operations, net 0 (4,586) (20,365)
----------- ----------- -----------
Total noninterest income 5,482,450 6,117,445 6,056,538
----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 18,012,670 16,877,722 15,512,202
Occupancy and equipment 5,587,270 5,383,883 5,399,414
Purchased services 2,810,218 2,850,118 2,841,868
Professional fees 754,127 662,180 654,197
Amortization of core deposit intangible 716,208 716,208 272,802
Office supplies 669,130 573,447 673,356
Other expenses 632,481 588,887 802,241
Telecommunications 456,107 303,586 345,140
Advertising 429,263 429,093 469,070
----------- ----------- -----------
Total noninterest expenses 30,067,474 28,385,124 26,970,290
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 11,364,673 14,750,130 10,268,130
INCOME TAXES 4,646,441 5,981,901 4,066,716
----------- ----------- -----------
NET INCOME $6,718,232 $8,768,229 $6,201,414
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $1.03 $1.35 $0.96
=========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE $1.03 $1.34 $0.95
=========== =========== ===========
DIVIDENDS PER COMMON SHARE $0.12 $0.12 $0.12
=========== =========== ===========
Weighted average common shares outstanding 6,504,143 6,495,218 6,476,938
Potential dilutive effect of the exercise of stock options 16,495 34,251 37,996
----------- ----------- -----------
Adjusted weighted average common shares outstanding 6,520,638 6,529,469 6,514,934
=========== =========== ===========
See notes to consolidated financial statements.
-16-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $6,718,232 $8,768,229 $6,201,414
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 360,000 330,000 270,000
Amortization and accretion of premiums and discounts on investments, net 1,751,762 4,382,268 5,225,397
Amortization and accretion of other fees and costs 807,312 769,567 356,500
Depreciation 2,007,918 1,965,197 2,014,677
Realized (gains) and losses on:
Sale of loans 0 (229) (335)
Disposal and Sale of fixed assets 6,769 (46,080) 115,658
Sale of investment securities 0 (682,880) (285,846)
Sale of real estate owned 0 (654) (495,496)
Sale of real estate held for development 0 0 (600,780)
Decrease (Increase) in accrued interest receivable 97,736 (1,118,359) 75,910
Decrease (Increase) in prepaid expenses and other assets 510,056 (347,619) 176,528
Increase (Decrease) in accrued interest payable 131,692 (72,840) (63,553)
Increase (Decrease) in other liabilities 1,833,368 (21,078) 653,619
(Benefit) Provision for deferred income taxes (457,199) (106,533) 928,663
------------- ------------ -------------
Net cash provided by operating activities 13,767,646 13,818,989 14,572,356
------------- ------------ -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 0 60,279 103,399
Real estate held for development 0 0 688,706
Real estate owned 0 48,948 1,192,294
Office property and equipment 3,111 238,871 308,814
Investment securities available for sale 0 22,870,336 0
Principal collected and proceeds from maturities of investment securities
held to maturity 203,104,176 148,740,093 206,997,534
Principal collected and proceeds from maturities of investment securities
available for sale 112,499,244 71,614,876 123,532,241
Principal collected and proceeds from maturities of mortgage-backed securities 63,068,576 101,548,462 202,995,009
Principal collected on loans, net 93,277,149 110,121,450 137,639,469
Loans originated or acquired (117,423,133) (126,679,593) (179,403,933)
Purchase of investment securities and mortgage-backed securities held to maturity (226,985,664) (232,157,961) (455,768,535)
Purchase of investment securities and mortgage-backed securities available for sale (128,868,417) (88,703,074) (156,532,806)
Redemption of Federal Home Loan Bank stock 2,001,700 1,559,500 252,100
Purchase of office property and equipment (6,071,651) (1,476,146) (4,775,248)
Net cash received from deposit purchase 0 0 36,540,170
------------- ------------ -------------
Net cash (used) provided by investing activities (5,394,909) 7,786,041 (86,230,786)
------------- ------------ -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 4,417,156 65,584,898 67,749,707
Net increase (decrease) in time deposits 1,143,448 (17,084,576) (11,623,601)
Net decrease in FHLB advances (10,000,000) (1,191,047) (41,056)
Repayment from securities sold under agreement to repurchase (20,000,000) (30,000,000) 0
(Decrease) Increase in advances from borrowers for taxes and insurance (68,037) 57,858 92,686
Purchase of treasury stock (34,798) 0 (48,419)
Dividends paid on common stock (780,298) (779,240) (776,929)
Net proceeds from issuance of common stock 213,385 49,796 230,333
------------- ------------ -------------
Net cash (used) provided by financing activities (25,109,144) 16,637,689 55,582,721
------------- ------------ -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,736,407) 38,242,719 (16,075,709)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 110,577,356 72,334,637 88,410,346
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $93,840,949 $110,577,356 $72,334,637
============= ============ =============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 21,405,704 $ 18,486,684 $ 19,425,668
Income taxes 4,727,200 5,450,000 2,469,200
Non cash investing and financing activities:
Dividends declared and not paid at year end 195,486 195,063 194,576
Non-monetary transfers from loans to real estate owned through foreclosure 0 0 453,892
See notes to consolidated financial statements.
-17-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated Total
shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital income (loss) earnings stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2002 6,463,811 $794,981 $8,279,525 $1,216,053 $58,233,840 $(10,886,580) $57,637,819
Net income 6,201,414 6,201,414
Other comprehensive
income, net of tax
benefit of $275,187
Unrealized loss
on securities available
for sale (413,814) (413,814)
-----------
Total comprehensive
income 5,787,600
Dividends declared (777,590) (777,590)
Exercise of stock options 25,250 2,525 227,808 230,333
Purchase of common stock (3,184) (48,419) (48,419)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2003 6,485,877 797,506 8,507,333 802,239 63,657,664 (10,934,999) 62,829,743
Net income 8,768,229 8,768,229
Other comprehensive
income, net of tax
benefit of $331,228
Unrealized loss
on securities available
for sale (531,455) (531,455)
-----------
Total comprehensive
income 8,236,774
Dividends declared (779,694) (779,694)
Exercise of stock options 16,233 1,623 48,173 49,796
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2004 6,502,110 799,129 8,555,506 270,784 71,646,199 (10,934,999) 70,336,619
Net income 6,718,232 6,718,232
Other comprehensive
income, net of tax
benefit of $946,428
Unrealized loss
on securities available
for sale (1,370,414) (1,370,414)
-----------
Total comprehensive
income 5,347,818
Dividends declared (780,748) (780,748)
Exercise of stock options 15,100 1,510 211,875 213,385
Purchase of common stock (2,100) (34,798) (34,798)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2005 6,515,110 $800,639 $8,767,381 $(1,099,630) $77,583,683 $(10,969,797) $75,082,276
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
-18-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
FMS Financial Corporation, a New Jersey corporation, headquartered in
Burlington, New Jersey, is the holding company for Farmers & Mechanics Bank
("Bank"). The Bank's principal business is attracting customer deposits from the
general public through its forty two branches and investing these deposits,
together with funds generated from operations, primarily in residential and
commercial mortgage loans, consumer, commercial business and construction loans
and U.S. Government agency notes and mortgage-related securities.
Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America. The
consolidated financial statements include the accounts of FMS Financial
Corporation ("Corporation") and Farmers & Mechanics Bank. Material intercompany
accounts and transactions have been eliminated from the consolidated financial
statements.
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 interest-bearing amounts due
from depository institutions and short-term funds. Interest-bearing deposits are
deposits with banks that have an original maturity of 90 days or less.
Short-term funds are money market funds and federal funds sold. Generally,
federal funds are purchased and sold for one day periods. Cash and cash
equivalents exclude reverse repurchase agreements which are generally classified
as investments held to maturity. 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,
2005 and 2004 were $21.8 million and $22.4 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
Investments classified as available for sale are reported at the current
market value with net unrealized gains and losses, net of applicable tax
effects, added to or deducted from the Corporation's total stockholders' equity
and comprehensive income 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 and discounts are amortized using a method which in total
approximates the interest method. 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.
Loans, net
Loans are reported at principal outstanding balance net of deferred loan
origination costs and the allowance for loan losses. The Bank recognizes
interest income on loans when earned. All 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. Such interest ultimately collected is
recorded as income in the period of recovery. Loans classified as impaired or
trouble debt restructured, excluding loans classified as non-accrual, accrue
interest daily under their original or modified terms.
Allowance for Loan Losses
An allowance for loan losses is maintained at a level that management
considers adequate to provide for probable losses inherent in the portfolio
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 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
the evaluations.
-19-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The Bank considers a loan impaired, based on current information and
events, if it is probable that the Bank will be unable to collect the scheduled
payments on principal or interest when due according to the contractual terms of
the loan agreement. Loans are measured for impairment based on the loans
underlying collateral, if collateral dependent, or present value of estimated
future cash flows. Loans continue to be classified as impaired unless they are
brought fully current and the collection of scheduled interest and principal is
considered probable.
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.
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 expected useful lives of assets are as follows: buildings and
improvements range from 10 to 30 years, furniture, fixtures, and equipment range
from 3 to 10 years, computers are 3 years and leasehold improvements are over
the shorter of the useful life or the term of the lease. The costs of
maintenance and repairs are expensed as they are incurred. Renewal and
improvement costs are capitalized. In accordance with SFAS No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets," long-lived assets are
evaluated for impairment by management on an ongoing basis. Impairment may occur
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Deferred Loan Fees
All loan fees and related direct loan origination costs are deferred.
Deferred loan fees and costs are capitalized and amortized as a yield adjustment
over the life of the loan using the interest method. Amortization of deferred
loan fees cease while a loan is on non-accrual status.
Core Deposit Intangible
Core deposit intangible assets are amortized over their useful life of five
years using the straight-line method. Intangibles are tested for impairment
annually. There has been no impairment recorded.
Income Taxes
The Corporation computes its taxable income for both financial reporting
and federal and state tax purposes on the accrual basis. Income taxes for
financial reporting purposes are recorded in accordance with SFAS No. 109,
"Accounting for Income Taxes". The asset and liability approach underlying SFAS
No. 109 requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and tax basis of the Company's assets and liabilities. 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.
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.
Securities Sold under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as debt and are
reflected as a liability in the Consolidated Statements of Financial Condition.
The book value of securities pledged to secure the repurchase agreements remain
in the securities portfolio.
Reclassifications
Certain items in the 2004 and 2003 consolidated financial statements have
been reclassified to conform with the presentation in the 2005 consolidated
financial statements. There was no impact on net income or stockholders' equity
for the reclassifications.
Earnings Per Share
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share" ("EPS"), 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 Statements of Operations.
Stock Repurchase Plan
A Stock Repurchase Plan was announced by the Corporation on September 28,
2005. The Board of Directors of the Corporation authorized the repurchase of up
to 200,000 shares of common stock in the open market. The timing of shares
repurchased will depend on a number of factors including, without limitation,
price, corporate and regulatory requirements and market conditions. The stock
repurchase program does not have an expiration date and may be limited or
terminated without prior notice.
-20-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Recently Issued Accounting Standards
In March 2005, Staff Accounting Bulletin No. 107 (SAB 107) was issued. SAB
107 summarizes the views of the staff regarding the interaction between
Statement of Financial Accounting Standards Statement No. 123R (SFAS No. 123R),
share-based payment and certain Securities and Exchange Commission rules and
regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123R, a revision
of SFAS No.123 "Accounting for Stock-Based Compensation", establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods and services. The adoption of this standard will have no
effect on the Corporation's Consolidated Statements of Financial Condition or
the Consolidated Statements of Operation, as all options that have been issued
are fully vested.
In May 2005, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Standards No. 154 (SFAS No. 154) "Accounting Changes and
Errors Corrections - a replacement of Accounting Principles Board ("APB")
Opinion No. 20 and FASB Statement No. 3", which changes the requirements for the
accounting for and reporting of a change in accounting principle. It also
applies to all voluntary changes in accounting principle. Opinion 20 previously
required that most changes in accounting principle be recognized by including in
net income of the period of the change, the cumulative effect of changing to the
new principle. This Statement requires retrospective application to prior
period's financial statements of changes in accounting principle. This Statement
becomes effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The adoption of this standard is
not expected to have a material impact on the Corporation's Consolidated
Statements of Financial Condition or the Consolidated Statements of Operations.
-21-
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, 2005 and 2004 are as follows:
December 31, 2005
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
U.S. Gov't agencies $192,328,423 $20,699 $(2,164,668) $190,184,454
CMOs 71,621,287 0 (1,973,989) 69,647,298
Municipal bonds 11,390,725 2,302 0 11,393,027
- --------------------------------------------------------------------------------------------
Total $275,340,435 $23,001 $(4,138,657) $271,224,779
- --------------------------------------------------------------------------------------------
December 31, 2004
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
U.S. Gov't agencies $164,381,425 $283,445 $(631,629) $164,033,241
CMOs 87,413,111 164,677 (804,188) 86,773,600
Municipal bonds 3,039,213 4,241 0 3,043,454
- --------------------------------------------------------------------------------------------
Total $254,833,749 $452,363 $(1,435,817) $253,850,295
- --------------------------------------------------------------------------------------------
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, 2005 are shown in the following table. The contractual maturity is
used for U.S. Government agency notes and Municipal bonds. The estimated average
life based on current cash flows is used for CMOs. Expected maturities may
differ as borrowers have the right to call certain obligations.
December 31, 2005
-----------------------------------------
Amortized Estimated
Cost Market Value
- --------------------------------------------------------------------------
Due one year or less $11,326,059 $11,326,059
Due one to five years 86,747,853 84,845,313
Due five to ten years 88,879,117 87,479,171
Due after ten years 88,387,406 87,574,236
- --------------------------------------------------------------------------
$275,340,435 $271,224,779
- --------------------------------------------------------------------------
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of investment securities
available for sale at December 31, 2005 and 2004 are as follows:
December 31, 2005
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
U.S. Gov't agencies $60,411,063 $0 $(829,667) $59,581,396
CMOs 22,350,620 0 (360,253) 21,990,367
MBSs 52,082,272 79,909 (519,495) 51,642,686
Pass thru 22,647,193 2,042 (231,589) 22,417,646
- -------------------------------------------------------------------------------------------
Total $157,491,148 $81,951 $(1,941,004) $155,632,095
- -------------------------------------------------------------------------------------------
December 31, 2004
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
U.S. Gov't agencies $30,537,053 $37,975 $(258,293) $30,316,735
CMOs 37,677,754 201,851 (278,029) 37,601,576
MBSs 61,557,132 820,480 (131,401) 62,246,211
Pass thru 11,769,552 65,206 0 11,834,758
- ----------------------------------------------------------------------------------------
Total $141,541,491 $1,125,512 $(667,723) $141,999,280
- ----------------------------------------------------------------------------------------
The amortized cost and estimated market value of investments available for
sale at December 31, 2005 are shown in the following table. The contractual
maturity is used for U.S. Government agency notes and MBSs. The average life
based on current cash flows is used for CMOs. Expected maturities may differ as
borrowers have the right to call or prepay certain obligations.
December 31, 2005
-------------------------------------
Amortized Estimated
Cost Market Value
- ------------------------------------------------------------------
Due one year or less $958,194 $955,786
Due one to five years 117,994,801 116,642,054
Due five to ten years 32,907,167 32,469,574
Due after ten years 5,630,986 5,564,680
- ------------------------------------------------------------------
Total $157,491,148 $155,632,094
- ------------------------------------------------------------------
There were no sales of investment securities during 2005. During 2004, the
Bank sold $17.0 million of MBSs, CMOs and equity securities available for sale
in 2004, which resulted in a realized gain of $683 thousand. During 2003, the
Bank sold $7.2 million of MBSs and CMOs available for sale which resulted in a
realized gain of $286 thousand.
-22-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The following table presents the gross unrealized losses and fair value of
the Bank's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that the individual securities have been in continuous unrealized loss
position at December 31, 2005. The Bank has the intent and ability to hold
temporarily impaired available for sale securities either until maturity or
until interest rates reach a level that would eliminate a loss on a sale.
Less than 12 Months 12 Months or Greater Total
-------------------------------------- --------------------------- ---------------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
-------------------- ------------- ------------- ---------- -------------- ---------------
Investment Securities Available for Sale:
U.S. Gov't agencies $31,273,892 $(234,233) $28,307,503 $(595,434) $59,581,395 $(829,667)
MBSs 45,215,857 (491,240) 7,269,777 (259,844) 52,485,634 (751,084)
CMOs 14,535,813 (137,462) 7,454,554 (222,791) 21,990,367 (360,253)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 91,025,562 (862,935) 43,031,834 (1,078,069) 134,057,396 (1,941,004)
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity:
U.S. Gov't agencies 139,585,718 (1,357,242) 40,621,535 (807,426) 180,207,253 (2,164,668)
MBSs 79,679,792 (1,179,819) 58,463,468 (1,861,513) 138,143,260 (3,041,332)
CMOs 21,410,198 (348,401) 48,201,767 (1,625,588) 69,611,965 (1,973,989)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 240,675,708 (2,885,462) 147,286,770 (4,294,527) 387,962,478 (7,179,989)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $331,701,270 $(3,748,397) $190,318,604 $(5,372,596) $522,019,374 $(9,120,993)
- ----------------------------------------------------------------------------------------------------------------------------------
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at December 31, 2005 and 2004
are summarized as follows:
December 31, 2005
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- ----------------------------------------------------------------------------
GNMA $4,837,341 $201,037 $0 $5,038,378
FNMA 100,492,309 855,129 (960,873) 100,386,565
FHLMC 51,765,939 254,570 (829,777) 51,190,732
Pass thru 51,100,285 9,879 (1,250,682) 49,859,482
- ----------------------------------------------------------------------------
Total $208,195,874 $1,320,615 $(3,041,332) $206,475,157
- ----------------------------------------------------------------------------
December 31, 2004
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- ----------------------------------------------------------------------------
GNMA $7,598,918 $377,275 $(215) $7,975,978
FNMA 136,076,364 2,791,763 (147,922) 138,720,205
FHLMC 63,157,460 840,775 (287,315) 63,710,920
Pass thru 62,389,155 262,887 (532,927) 62,119,115
- ----------------------------------------------------------------------------
Total $269,221,897 $4,272,700 $(968,379) $272,526,218
- ----------------------------------------------------------------------------
5. LOANS, NET
Loans, net at December 31, 2005 and 2004 consist of the following:
2005 2004
- -------------------------------------------------------------------------
Mortgage Loans $286,476,251 $275,842,765
Construction Loans 1,774,630 897,264
Commercial Construction 6,942,091 11,971,241
Consumer Loans 2,355,697 2,471,624
Commercial Real Estate 127,704,281 116,380,045
Commercial Business 22,550,190 16,311,618
- -------------------------------------------------------------------------
Subtotal 447,803,140 423,874,557
Less:
Deferred loan fees 168,998 356,732
Allowance for loan losses 5,062,785 4,719,192
- -------------------------------------------------------------------------
Total loans, net $442,571,357 $418,798,633
- -------------------------------------------------------------------------
At December 31, 2005 and 2004 the recorded investment in loans for which
impairment had been recognized in accordance with SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures",
totaled $1.8 million and $2.6 million, respectively. At December 31, 2005,
impaired loans of $985 thousand related to loans that were individually measured
for impairment with a valuation allowance of $414 thousand and $794 thousand of
loans that were collectively measured for impairment with a valuation allowance
of $16 thousand. At December 31, 2004, impaired loans of $985 thousand related
to loans that were individually measured for impairment with a valuation
allowance of $414 thousand and $1.7 million of loans that were collectively
measured for impairment with a valuation allowance of $33 thousand. For the
years ended December 31, 2005 and 2004,
-23-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
the average recorded investment in impaired loans was approximately $2.2 million
and $2.1 million, respectively. During the years ended December 31, 2005 and
2004, the Corporation recognized $231 thousand and $136 thousand, respectively,
of interest on impaired loans.
The principal amount of non-accrual loans at December 31, 2005 and 2004
was $1.8 million and $2.6 million, respectively. Interest income on non-accrual
loans that would have been recorded in 2005 under the original terms of such
loans was $133 thousand, and the interest income actually recognized in 2005 for
such loans was $101 thousand. Interest income on non-accrual loans that would
have been recorded in 2004 under the original terms of such loans was $130
thousand, and the actual interest income recognized in 2004 for such loans was
$106 thousand.
The Bank originates and purchases both adjustable and fixed interest rate
loans. At December 31, 2005, the composition of these loans is as follows:
Maturing Maturing
during from 2007 Maturing
(In Thousands) 2006 through 2010 after 2010 Total
- ---------------------------------------------------------------------------------------------
Mortgage Loans $4,847 $14,427 $267,202 $286,476
Construction Loans 1,775 0 0 1,775
Commercial Construction 3,442 0 3,500 6,942
Consumer Loans 980 877 499 2,356
Commercial Real Estate 8,640 9,480 109,584 127,704
Commercial Business 11,409 7,634 3,507 22,550
- ---------------------------------------------------------------------------------------------
Total $31,093 $32,418 $384,292 $447,803
- ---------------------------------------------------------------------------------------------
Interest sensitivity on the above loans:
Loans with
predetermined rates $15,547 $27,810 $268,278 $311,635
Loans with adjustable
or floating rates 15,546 4,608 116,014 136,168
- ---------------------------------------------------------------------------------------------
Total $31,093 $32,418 $384,292 $447,803
- ---------------------------------------------------------------------------------------------
Loans pledged as collateral for advances and lines of credit from the
Federal Home Loan Bank totaled $41.4 million at December 31, 2005.
Changes in the allowance for loan losses are as follows:
Years ended December 31,
-------------------------------------------------
2005 2004 2003
- ------------------------------------------------------------------------------
Balance at beginning
of year $4,719,192 $4,407,552 $4,317,475
Provision charged
to operations 360,000 330,000 270,000
Charge-offs (58,587) (22,860) (189,177)
Recoveries 42,180 4,500 9,254
- ------------------------------------------------------------------------------
Balance at end of year $5,062,785 $4,719,192 $4,407,552
- ------------------------------------------------------------------------------
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at December 31, 2005 and 2004 are
summarized by major classification, as follows:
December 31,
--------------------------------------
2005 2004
- ------------------------------------------------------------------------------
Land, buildings and improvements $39,687,711 $35,327,023
Furniture and equipment 7,945,004 7,145,542
Computers 6,318,293 5,930,623
- ------------------------------------------------------------------------------
Total 53,951,008 48,403,188
Less accumulated depreciation (19,149,921) (17,655,961)
- ------------------------------------------------------------------------------
Office properties and equipment, net $34,801,087 $30,747,227
- ------------------------------------------------------------------------------
Depreciation expense totaled $2.0 million, $1.9 million and $2.0 million
for the years ended December 31, 2005, 2004 and 2003, respectively.
-24-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
7. DEPOSITS
Deposits at December 31, 2005 and 2004 consisted of the following major
classifications and weighted average interest rates:
December 31, 2005
--------------------------------------------------
Weighted Percent
Average Rate Amount of Total
- --------------------------------------------------------------------------------
Noninterest checking 0.00% $187,075,982 19.75%
Checking accounts 1.88 226,271,954 23.89
Savings accounts 0.59 188,866,936 19.94
Money market accounts 0.89 132,960,782 14.04
Time deposits 2.34 211,891,770 22.38
- --------------------------------------------------------------------------------
Total 1.21% $947,067,424 100.00%
- --------------------------------------------------------------------------------
December 31, 2004
--------------------------------------------------
Weighted Percent
Average Rate Amount of Total
- --------------------------------------------------------------------------------
Noninterest checking 0.00% $176,047,722 18.70%
Checking accounts 0.86 214,059,142 22.74
Savings accounts 0.55 195,039,302 20.71
Money market accounts 0.72 145,612,332 15.47
Time deposits 1.83 210,748,322 22.38
- --------------------------------------------------------------------------------
Total 0.84% $941,506,820 100.00%
- --------------------------------------------------------------------------------
The aggregate amount of time deposits in excess of $100 thousand totaled
$36.0 million. Deposits from related parties totaled $1.2 million and $1.5
million at December 31, 2005 and 2004, respectively. A summary of time deposits
by maturity at December 31, 2005 is as follows:
Years ended December 31, Amount
- -------------------------------------------------------------------
2006 $152,952,156
2007 33,136,786
2008 10,570,268
2009 8,749,657
2010 6,482,476
Thereafter 427
- -------------------------------------------------------------------
Total $211,891,770
- -------------------------------------------------------------------
A summary of interest expense on deposits is as follows:
Years ended December 31,
-------------------------------------------------
2005 2004 2003
- -----------------------------------------------------------------------------
Checking accounts $ 4,124,244 $1,717,164 $914,739
Savings accounts 1,149,484 1,070,861 1,248,755
Money market accounts 1,266,737 1,001,238 1,020,353
Time deposits 4,877,824 3,965,128 5,401,355
- -----------------------------------------------------------------------------
Total interest expense $11,418,289 $7,754,391 $8,585,202
- -----------------------------------------------------------------------------
8. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 2004, the Bank had advances from the Federal Home Loan Bank
of New York (FHLB) which were collateralized by certain first mortgage loans.
Years ended December 31,
- --------------------------------------------------------------------------------
2005 2004
- --------------------------------------------------------------------------------
Weighted Weighted
Average Maturity Average Maturity
Amount Rate Date Amount Rate Date
- --------------------------------------------------------------------------------
$ 0 0.00% n/a $10,000,000 2.53% 4/15/05
- --------------------------------------------------------------------------------
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 2005, the Bank had securities sold under the agreements to
repurchase (repurchase agreements) in the aggregate amount of $175.0 million.
The repurchase agreements are collateralized by U.S. Government agency notes,
MBSs, CMOs and loans with a market value of $175.1 million. Accrued interest
payable totaled $1.0 million at December 31, 2005.
Year ended December 31, 2005
- --------------------------------------------------------------------------------
Weighted Maturity Call
Counterparty Amount Average Rate Date Feature
- --------------------------------------------------------------------------------
FHLB $ 20,000,000 5.72% 12/19/07 03/19/06
FHLB 20,000,000 5.13% 01/14/08 01/14/06
FHLB 20,000,000 5.95% 08/30/10 03/01/06
FHLB 20,000,000 5.54% 10/18/10 01/18/06
FHLB 20,000,000 4.85% 12/20/10 03/20/06
FHLB 20,000,000 5.22% 12/20/10 03/20/06
FHLB 10,000,000 4.18% 02/28/11 02/28/06
FHLB 15,000,000 3.84% 04/06/11 01/06/06
Merrill Lynch 10,000,000 3.81% 11/02/15 11/02/06
Merrill Lynch 10,000,000 3.89% 11/04/15 11/04/06
Merrill Lynch 10,000,000 3.91% 11/08/15 11/08/06
- --------------------------------------------------------------------------------
Total $175,000,000 4.93%
- --------------------------------------------------------------------------------
Year ended December 31, 2004
- --------------------------------------------------------------------------------
Weighted Maturity Call
Counterparty Amount Average Rate Date Feature
- --------------------------------------------------------------------------------
FHLB $ 20,000,000 5.72% 12/19/07 12/19/05
FHLB 20,000,000 5.13% 01/14/08 12/14/05
FHLB 20,000,000 5.95% 08/30/10 08/30/05
FHLB 20,000,000 5.54% 10/18/10 11/18/05
FHLB 20,000,000 5.22% 12/20/10 12/20/05
FHLB 20,000,000 4.85% 12/20/10 12/20/05
FHLB 10,000,000 4.18% 02/28/11 02/28/05
FHLB 15,000,000 3.84% 04/06/11 01/06/05
FHLB 10,000,000 3.49% 08/10/11 08/10/05
FHLB 10,000,000 1.98% 11/14/11 02/14/05
FHLB 10,000,000 2.32% 01/31/12 01/31/05
FHLB 10,000,000 2.28% 02/07/12 02/07/05
FHLB 10,000,000 2.68% 04/24/07 04/24/05
- --------------------------------------------------------------------------------
Total $195,000,000 4.49%
- --------------------------------------------------------------------------------
-25-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
10. 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:
2005 2004 2003
---------------------- --------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tax at federal tax rate: $3,863,989 34.00% $5,162,546 35.00% $3,491,164 34.00%
Increase (Decrease) from:
State income taxes, net of federal income tax benefit 813,465 7.16 925,297 6.27 678,950 6.61
Tax exempt interest income (45,275) (0.40) (10,680) (0.07) (53,353) (0.52)
Other 14,262 0.13 (95,262) (0.65) (50,045) (0.49)
---------- ----- ---------- ----- ---------- -----
Total $4,646,441 40.89% $5,981,901 40.55% $4,066,716 39.60%
========== ===== ========== ===== ========== =====
The temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities are as follows:
December 31
-----------------------
2005 2004
- -------------------------------------------------------------------------
Deferred income tax assets:
Allowance for loan losses $2,068,148 $1,927,790
Compensation and pension asset 82,876 65,878
Amortization of deposit premiums 635,674 482,086
Post retirement benefits 204,250 204,250
Accrued expenses 137,566 127,318
Other 24,461 37,967
---------- ----------
Deferred tax asset 3,152,975 2,845,289
---------- ----------
Deferred income tax liabilities:
Prepaid deposit insurance premium 13,129 13,129
Depreciation 168,544 332,361
Deferred loan fees, net 363,661 349,357
---------- ----------
Gross deferred tax liabilities: 545,334 694,847
---------- ----------
Deferred income tax asset, net $2,607,641 $2,150,442
========== ==========
There was no change in the valuation allowance for the year ended December
31, 2005, 2004 and 2003.
The following represents the components of income tax expense for the years
ended December 31, 2005, 2004 and 2003, respectively.
2005 2004 2003
- ------------------------------------------------------------------------------------
Current federal tax provision $3,831,359 $4,645,184 $2,247,455
Current state tax provision 1,272,280 1,443,252 890,598
- ------------------------------------------------------------------------------------
Total current provision 5,103,639 6,088,436 3,138,053
Deferred federal tax (benefit) provision (417,440) (86,817) 790,549
Deferred state tax (benefit) provision (39,758) (19,718) 138,114
- ------------------------------------------------------------------------------------
Total deferred tax (benefit) provision (457,198) (106,535) 928,663
- ------------------------------------------------------------------------------------
Total $4,646,441 $5,981,901 $4,066,716
========== ========== ==========
11. LEASES
The Bank leases eleven branch locations under noncancelable leases which
expire over the next 18 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, 2005 are as
follows:
Fiscal Year Amount
- -----------------------------------------------------------------
2006 $ 323,777
2007 332,721
2008 352,071
2009 318,447
2010 and beyond 2,373,391
- -----------------------------------------------------------------
Total $ 3,700,407
- -----------------------------------------------------------------
The leases 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 $363 thousand, $329 thousand and $298 thousand for
fiscal years 2005, 2004 and 2003, respectively.
-26-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
12. 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 Bank is considered "well capitalized" by OTS regulation at December 31,
2005 and 2004. The following table presents the capital ratios of the Bank at
December 31, 2005 and 2004.
Minimum
to be Well
Capitalized
Under Prompt
Minimum Corrective
Capital Action
Actual Requirement Provisions
------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------
December 31, 2005 (thousands)
- -------------------------------------------------------------------------------------------------------
Tier 1 (Core) Capital $89,616 7.29% $49,170 4.0% $61,463 5.0%
Risk-Based Capital $94,265 18.13% $41,572 8.0% $51,966 10.0%
Tier 1 Risk-Based Capital $89,616 17.24% $20,794 4.0% $31,191 6.0%
Tangible Equity $89,616 7.29% $18,442 1.5% $24,589 2.0%
- -------------------------------------------------------------------------------------------------------
December 31, 2004 (thousands)
- -------------------------------------------------------------------------------------------------------
Tier 1 (Core) Capital $82,244 6.60% $49,832 4.0% $62,290 5.0%
Risk-Based Capital $86,554 17.21% $40,235 8.0% $50,294 10.0%
Tier 1 Risk-Based Capital $82,244 16.35% $20,117 4.0% $30,176 6.0%
Tangible Equity $82,244 6.60% $18,687 1.5% $24,916 2.0%
- -------------------------------------------------------------------------------------------------------
13. RETIREMENT PLANS
The Bank has a defined benefit pension plan for active employees. Net
pension expense was $1.1 million, $822 thousand and $800 thousand for years
ended December 31, 2005, 2004 and 2003, respectively. The components of net
pension cost are as follows:
Years ended December 31,
---------------------------------------------------------
2005 2004 2003
- --------------------------------------------------------------------------------
Service cost $947,524 $871,039 $716,613
Interest cost 742,271 563,963 486,386
Return on assets (487,280) (659,381) (461,454)
Net amortization and deferral (191,135) 46,634 58,912
- --------------------------------------------------------------------------------
Net periodic pension cost $1,011,380 $822,255 $800,457
- --------------------------------------------------------------------------------
The following table presents a reconciliation of the funded status of the
defined benefit pension plan at December 31, 2005 and 2004:
December 31,
-------------------------------------------
2005 2004
- ------------------------------------------------------------------------------
Projected benefit obligation $13,952,999 $10,844,831
Fair value of plan assets 12,146,662 10,712,030
- ------------------------------------------------------------------------------
Unfunded of plan assets over
projected benefit obligation 1,806,337 132,801
Unrecognized net (loss) gain (21,883) 235,689
Unrecognized prior service cost (1,551,445) (47,537)
- ------------------------------------------------------------------------------
Accrued pension cost
included in the consolidated
balance sheet $233,009 $320,953
- ------------------------------------------------------------------------------
The following table presents a reconciliation of beginning and ending
balances of benefit obligations and plan assets:
December 31,
----------------------------------
Change in Projected Benefit Obligation 2005 2004
- ---------------------------------------------------------------------------
Projected benefit obligation
at beginning of year $10,844,831 $9,221,994
Service cost 947,524 871,039
Interest cost 742,271 563,963
Actuarial loss 1,570,345 356,986
Benefits paid (151,972) (169,151)
- ---------------------------------------------------------------------------
Projected benefit obligation
at end of year $13,952,999 $10,844,831
- ---------------------------------------------------------------------------
Change in Plan Assets
- ---------------------------------------------------------------------------
Fair value of plan assets
at beginning of year $10,712,030 $8,714,389
Actual return of plan assets 487,280 1,300,467
Employer contribution 1,099,324 866,325
Benefits paid (151,972) (169,151)
- ---------------------------------------------------------------------------
Fair value of plan assets
at end of year $12,146,662 $10,712,030
- ---------------------------------------------------------------------------
-27-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Actuarial assumptions used in determining pension amounts are as follows:
Years ended December 31,
-------------------------------------
2005 2004 2003
- -------------------------------------------------------------------
Discount rate for
periodic pension cost 6.00% 6.00% 6.00%
Discount rate for
benefit obligation 5.50% 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 accordance with the provisions to the Statement of Financial Accounting
Standards No. 132 (revised) "Employer's Disclosure about Pension and Other
Postretirement Benefits" disclosures have been increased to include investment
strategy, asset allocation mix, contributions, measurement dates and accumulated
benefit obligation levels for pension plans.
The Pension Investment Committee of the Corporation in conjunction with the
Board of Directors oversees the investment of the plan assets. During 2005, the
committee conducted a review of the portfolio structure and the strategic asset
allocation including the relationship of plan assets to plan liabilities. The
goals of the asset investment strategy are to:
* Maximize the return on assets, over the long-term, by investing primarily
in equities. The inclusion of additional asset classes with differing rates of
return, volatility and correlation are utilized to reduce risk by providing
diversification relative to equities.
* Diversify investments within asset classes to maximize preservation of
principal and minimize over-exposure to any one investment, thereby minimizing
the impact of losses in single investments.
*Provide a total return that, over the long-term, provides sufficient
assets to fund its liabilities subject to an appropriate level of risk,
contributions and pension expense.
The plan asset allocation percentage and market values at December 31, 2005
are as follows:
Percent of
Market Value Assets
- -----------------------------------------------------------------
Cash $743,066 6.1%
Equity securities 11,379,171 93.7
Preferred stock securities 24,564 0.2
- -----------------------------------------------------------------
Total Plan Assets $12,146,801 100.00%
- -----------------------------------------------------------------
The Bank regularly monitors our pension asset allocation. Senior management
review performance results at least quarterly. As of December 31, 2005, our
target asset allocation was 94% U.S. common stock equities, 0.5% preferred stock
equities and 5.5% in cash and cash equivalents.
Funding policy for the qualified plan is to make annual contributions that
satisfy the minimum funding requirements of Employee Retirement Income Security
Act 1974 ("ERISA") but that do not exceed the maximum deductible limits of the
Internal Revenue Code. The contributions to the pension plan are determined each
year as a result of an actuarial valuation of the plan. In 2005 and 2004, $1.1
million and $866 thousand, respectively were contributed by the Corporation to
meet the pension funding requirements. The contribution to the pension plan for
2006 is expected to be approximately $802 thousand. The pension plan will
maintain compliance with the ERISA as amended, and any applicable regulations
and laws. Total pension benefits expected to be paid in each year from 2006
through 2010 are $224 thousand, $356 thousand, $418 thousand, $440 thousand, and
$470 thousand, respectively. The aggregate expected benefits to be paid in the
five years from 2011 through 2015 are $2.9 million.
The Bank also maintains a 401(k) plan, which is a defined contribution plan
established in 2003. All employees are eligible to participate in this plan
after completing one year of service and are age twenty one or older. The Bank's
contribution equals the first 3% of the employees' contributions and match 50%
above 3% up to 7% of their compensation for the plan year. Participant's are
vested in their and the Bank's contribution immediately. Plan expense, included
in salaries and employee benefits was $302 thousand, $281 thousand and $239
thousand for the years ended December 31, 2005, 2004 and 2003.
In addition to providing retirement 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 Postretirement 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 postretirement benefit obligations
are not funded but are reflected in the statement of financial condition as a
liability.
The net periodic postretirement benefit costs includes the following
components:
December 31,
-----------------------------------------
2005 2004 2003
- -------------------------------------------------------------------------------
Interest cost $25,163 $51,547 $47,209
Amortization of prior service cost (11,339) (11,339) (11,339)
Amortization of loss 19,517 15,776 13,110
- -------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $33,341 $55,984 $48,980
- -------------------------------------------------------------------------------
-28-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The assumed discount rate used in the calculation for net periodic
postretirement benefit costs was 5.50% for 2005 and 6.50% for 2004. The assumed
health care cost trend rate for 2005 was 10.0% and was graded down in 0.5%
increments per year to an ultimate rate of 5.0% per year. The impact of a 1.0%
increase and decreases in the assumed health care cost trend for each future
year would be as follows:
December 31, 2005
------------------------------------
1.0% Increase 1.0% Decrease
- ------------------------------------------------------------------------
Accumulated postretirement
obligation $38,916 $(35,259)
Service and Interest Cost $2,029 $(1,838)
- ------------------------------------------------------------------------
The following table summarizes the amounts recognized in the Bank's balance
sheet:
December 31,
-----------------------------
2005 2004
- --------------------------------------------------------------------
Accumulated postretirement
benefit obligation $(480,053) $(744,827)
Unrecognized prior service cost (7,063) (18,402)
Unrecognized net loss (70,969) 195,173
- --------------------------------------------------------------------
Accrued postretirement benefit
cost $(558,085) $(568,056)
- --------------------------------------------------------------------
The assumed discount rate used in the calculation for the accumulated
postretirement benefit obligations was 5.50% as of December 31, 2005 and 6.50%
for 2004.
The following table presents a reconciliation of beginning and ending
balance of benefit obligations and plan assets:
December 31,
------------------------------------
Change in Projected Benefit Obligation 2005 2004
- ----------------------------------------------------------------------------
Projected benefit obligation
at beginning of year $744,827 $687,004
Service cost 0 0
Interest cost 25,163 51,547
Actuarial (gain) loss (246,625) 53,063
Benefits paid (43,312) (46,787)
- ----------------------------------------------------------------------------
Projected benefit obligation
at end of year $480,053 $744,827
- ----------------------------------------------------------------------------
Change in Plan Assets
- --------------------------------
Fair value of plan assets
at beginning of year $ 0 $ 0
Actual return of plan assets 0 0
Employer contribution 43,312 46,787
Benefits paid (43,312) (46,787)
Fair value of plan assets
at end of year $ 0 $ 0
- ----------------------------------------------------------------------------
The expected cost of postretirement benefits for 2006 is estimated to be
approximately $47 thousand.
14. LONG-TERM DEBT
The Corporation established FMS Statutory Trust 1 ("Trust") in March 2002.
The trust issued $25.0 million of floating rate capital securities to
institutional investors and $774 thousand of common securities to the
Corporation. The proceeds of these were used by the Trust to purchase
subordinated debentures issued by the Corporation. The Corporation used the
debenture proceeds to pay down the $10.0 million of 10% subordinated debentures,
expansion of the Bank's operations and general corporate purposes. The Trust's
capital securities are fully guaranteed by the Corporation's debentures. The
interest rates reset every three months to LIBOR plus 360 basis points and will
not exceed 11.0% through the first five years from issuance. As of December 31,
2005 and 2004, the interest rate was 8.12% and 6.15%, respectively. The
debentures are redeemable at the Corporation's option any time after March 2007.
The redemption of the debentures would result in the mandatory redemption of the
Trust's capital and common securities at par.
As a result of the deconsolidation of the Trust under FIN 46R as of
December 31, 2003, the Corporation recognized in its Consolidated Statement of
Financial Condition its investment in FMS Statutory Trust 1, which is presented
in other assets and the subordinated debenture liability owed to the Trust. The
deconsolidation of the Trust did not have any other impact in the consolidated
financial statements.
-29-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
15. 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 securities: 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 fixed rate 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 time 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.
Advances from FHLB: The carrying value is a reasonable estimate of fair value
due to the short-term nature of these obligations.
FMS Statutory Trust 1 debentures: Fair value is estimated using quoted market
prices for similar securities.
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.
- --------------------------------------------------------------------------------
At December 31, 2005 and December 31, 2004, the carrying amount and the
estimated market value of the Corporation's financial instruments are as
follows:
December 31, 2005 December 31, 2004
----------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Market Value Amount Market Value
------------ -------------- ------------ --------------
Financial assets:
Cash and cash equivalents $ 93,840,949 $ 93,840,949 $ 110,577,356 $ 110,577,356
Investment securities held to maturity and investment
securities available for sale $ 430,972,530 $ 426,856,874 $ 396,833,029 $ 395,849,575
Mortgage-backed securities $ 208,195,874 $ 206,475,158 $ 269,221,897 $ 272,526,218
FHLB Stock $ 8,248,420 $ 8,248,400 $ 10,250,120 $ 10,250,120
Loans, net of unearned income $ 447,634,142 $ 445,616,000 $ 423,517,825 $ 425,138,000
Less: Allowance for possible loan losses $ (5,062,785) $ (5,062,785) $ (4,719,192) $ (4,719,192)
Loans, net $ 442,571,357 $ 440,553,215 $ 418,798,633 $ 420,418,808
Financial liabilities:
Deposits
Checking, passbook, and money market accounts $ 735,175,654 $ 735,175,655 $ 730,758,498 $ 730,758,498
Time deposits $ 211,891,770 $ 210,789,000 $ 210,748,322 $ 211,448,000
Securities sold under agreements to repurchase $ 175,000,000 $ 178,419,000 $ 195,000,000 $ 204,920,000
Advances from the Federal Home Loan Bank $ 0 $ 0 $ 10,000,000 $ 10,000,000
FMS Statutory Trust 1 debentures $ 25,774,000 $ 26,670,935 $ 25,774,000 $ 26,660,625
Off-balance sheet financial instruments:
Commitments to extend credit $ 54,113,170 $ 54,113,170 $ 46,668,731 $ 46,668,731
Standby letters of credit $ 6,905,486 $ 6,905,486 $ 7,030,943 $ 7,030,943
-30-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENCIES
The Bank has outstanding loan commitments of $54.1 million as of December
31, 2005. Of these commitments outstanding, the breakdown between fixed and
variable rate loans is as follows:
December 31, 2005
------------------------------------------------
Fixed Variable
Rate Rate Total
- ------------------------------------------------------------------------------
Commitments to fund loans $13,530,656 $9,259,100 $22,789,756
Unused lines:
Construction 3,218,348 895,823 4,114,171
Equity line of credit loans 0 27,209,243 27,209,243
- ------------------------------------------------------------------------------
Total $16,749,004 $37,364,166 $54,113,170
- ------------------------------------------------------------------------------
In addition to outstanding loan commitments, the Bank as of December 31,
2005, issued $6.9 million in standby letters of credit to guarantee performance
of bank customers to third parties.
Commitments and standby letters of credit are issued in accordance with the
same loan policies and underwriting standards, including collateral 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.
17. LITIGATION
In the normal course of business, the Corporation is subjected to various
legal proceedings. There were no significant pending legal proceedings at
December 31, 2005 which are expected to have a material impact on the
Corporation's financial position or results of operations.
18. LOANS TO EXECUTIVE 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. However, executive officers are permitted to participate in rate
discount programs available to all employees. 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, 2005 and 2004, loans made to directors and executive officers whose
indebtedness exceeded $60 thousand amounted to $5.2 million and $5.6 million,
respectively. During 2005, new loans to these individuals totaled $85 thousand
and repayments totaled $465 thousand.
19. 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.
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. All stock options
are dilutive and included in the calculation of earnings per share. All stock
options have been adjusted for all stock splits. At December 31, 2005, the
option exercise prices were $10.00. Options are fully vested at the date of
grant and must be exercised within ten years. There were no options granted
during 2005, 2004 and 2003.
The following table summarizes information about stock options outstanding
at December 31, 2005.
Exercise Outstanding Average Exercisable
Price Options Life * Options
- ----------------------------------------------------------------------
$10.00 36,500 2.8 36,500
- ----------------------------------------------------------------------
* Average contractual life in years
A summary of the status of the Corporation's Stock Option Plan as of
December 31, 2005, 2004 and 2003 and changes during the years ending on those
dates is presented below.
Years Ended December 31,
------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------
Outstanding at the
Beginning of the year 65,600 $8.31 75,250 $8.06 115,000 $8.54
Options exercised (15,100) 5.90 (4,650) 7.49 (25,250) 9.71
Options surrendered (14,000) 6.50 (5,000) 5.33 (14,500) 10.00
- -------------------------------------------------------------------------------------------------
Outstanding at the
End of the year 36,500 $10.00 65,600 $8.31 75,250 $8.06
- -------------------------------------------------------------------------------------------------
-31-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
20. RISKS AND UNCERTAINTIES
Generally accepted accounting principles 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
loan losses, pension benefit obligations, postretirement benefits, income taxes,
and carrying values of real estate owned.
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.
Consideration is given to a variety of factors in establishing the
estimate for allowance for loan losses 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 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 loan losses and the carrying values of the real
estate assets could differ materially in the near term.
The Bank sponsors pension and other retirement plans. The Bank's external
actuarial consultants use certain statistical factors to estimate the future
benefit obligations. The assumptions used could differ materially from actual
results and may impact the amount of pension expense recorded by the Bank.
The Bank is self insured for a portion of its current years' losses related
to its medical programs. In estimating the Bank's self insurance accruals, the
Bank utilize estimates of expected losses, which are based on statistical
analysis of historical data. These assumptions are closely monitored and
adjusted when warranted by changing circumstances. Should a greater amount of
claims occur compared to what was estimated or medical costs increase beyond
what was expected, accruals might not be sufficient, and additional expenses may
be recorded. Medical costs are anticipated to increase very modestly in fiscal
year 2006.
The Bank is subject to claims and lawsuits in the ordinary course of its
business. A determination of the amount accrued, if any, for these contingencies
is made after analysis of each matter. The Bank continually evaluates such
accruals and may increase or decrease accrued amounts as we deem appropriate.
-32-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
21. PARENT COMPANY FINANCIAL INFORMATION
The financial statements for FMS Financial Corporation are as follows:
December 31,
-------------------------------------
FMS Financial Corporation Statements of Financial Condition 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash $1,337,624 $1,692,495
Investment in subsidiary 91,911,725 86,626,282
Intercompany receivable, net 7,172,564 6,758,424
FMS Statutory Trust 1 issue costs, net 484,467 562,311
Other 174,423 688,127
-------------------------------
Total Assets $101,080,803 $96,327,639
===============================
Liabilities:
FMS Statutory Trust 1 debentures $25,774,000 $25,774,000
Dividends payable 195,486 195,029
Accrued interest payable 29,041 21,991
-------------------------------
Total Liabilities 25,998,527 25,991,020
-------------------------------
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 8,006,392 and 7,991,292 and shares outstanding 6,515,110 and 6,502,110 as
of December 31, 2005 and 2004, respectively 800,639 799,129
Paid-in capital in excess of par 8,767,381 8,555,506
Accumulated comprehensive income - net of deferred income taxes (1,099,630) 270,784
Retained earnings 77,583,683 71,646,199
Less:Treasury Stock (1,491,282 and 1,489,182 shares, at cost at December 31, 2005 and
2004, respectively) (10,969,797) (10,934,999)
-------------------------------
Total Stockholders' Equity 75,082,276 70,336,619
-------------------------------
Total Liabilities and Stockholders' Equity $101,080,803 $96,327,639
===============================
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------
FMS Financial Corporation Statements of Operations 2005 2004 2003
- ----------------------------------------------------------------------------------------------------
Intercompany interest income $414,140 $320,582 $329,366
Interest expense (1,834,528) (1,368,591) (1,295,928)
Dividends from subsidiary 1,200,000 2,400,000 2,400,000
Equity in undistributed income of subsidiary 6,442,469 7,056,742 4,439,345
- ----------------------------------------------------------------------------------------------------
Income before taxes 6,222,081 8,408,733 5,872,783
Income tax benefit 496,151 359,496 328,631
- ----------------------------------------------------------------------------------------------------
Net Income $6,718,232 $8,768,229 $6,201,414
- ----------------------------------------------------------------------------------------------------
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
-33-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
For Years Ended December 31,
---------------------------------------
FMS Financial Corporation Statements of Cash Flows 2005 2004 2003
- -------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 6,718,232 $ 8,768,229 $ 6,201,414
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the subsidiary (6,442,469) (7,056,742) (4,439,345)
Amortization of debt issue costs 77,844 77,843 77,845
Increase (Decrease) in interest payable 7,050 4,915 (823)
(Increase) Decrease in intercompany receivable, net (414,140) (1,320,582) 1,670,633
Other 513,708 (359,496) 226,102
----------- ----------- -----------
Net cash provided by operating activities 460,225 114,167 3,735,826
----------- ----------- -----------
Financing Activities
Purchase of treasury stock (34,798) 0 (48,419)
Investment in subsidiary (213,385) (49,796) (2,230,331)
Cash dividends paid on common stock (780,298) (779,240) (776,929)
Proceeds from issuance of stock 213,385 49,796 230,333
----------- ----------- -----------
Net cash used by financing activities (815,096) (779,240) (2,825,346)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH (354,871) (665,073) 910,480
CASH, BEGINNING OF YEAR 1,692,495 2,357,568 1,447,088
----------- ----------- -----------
CASH, END OF YEAR $ 1,337,624 $ 1,692,495 $ 2,357,568
=========== =========== ===========
- --------------------------------------------------------------------------------
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
-34-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS [LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
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 of America, 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 our opinion.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
March 24, 2006
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT REPORT
To the Federal Deposit Insurance Corporation and the Office of Thrift
Supervision:
FINANCIAL STATEMENTS
Management of FMS Financial Corporation and Subsidiary ("the Corporation") is
responsible for the preparation, integrity, and fair presentation of its
published consolidated financial statements, and Thrift Financial Report (TFR)
filed with the Office of Thrift Supervision, as of December 31, 2005, and for
the year then ended. The published consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, and the
Thrift Financial Report has been prepared in accordance with the Office of
Thrift Supervision reporting instructions, and, as such, include some amounts
that are based upon judgments and estimates of management.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to consolidated financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 2005. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring Organization
of the Treadway Commission. Based on this assessment, management believes that
the Corporation maintained an effective internal control structure over
financial reporting as of December 31, 2005.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with federal and state laws and
regulations concerning dividend restrictions and federal laws and regulations
concerning loans to insiders designated by the Office of Thrift Supervision as
safety and soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that the Corporation has complied, in all significant respects, with the
designated laws and regulations related to safety and soundness for the year
ended December 31, 2005.
/s/Craig W. Yates /s/Channing L. Smith
Craig W. Yates Channing L. Smith
President and Chief Executive Officer Vice President and Chief Financial Officer
FMS Financial Corporation
Burlington, New Jersey
March 10, 2006
-36-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
ANNUAL MEETING
The 2006 Annual Shareholders' Meeting of FMS Financial Corporation will be
held at 10:30 a.m., on the 27th day of April, 2006 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
10, 2006 was approximately 725, 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, 2005 and 2004:
2005
------------------------
QUARTER ENDED HIGH LOW
- -----------------------------------------------------
March 31, $20.50 $19.72
June 30, $19.80 $16.52
September 30, $18.00 $16.78
December 31, $18.09 $16.02
- -----------------------------------------------------
2004
------------------------
QUARTER ENDED HIGH LOW
- -----------------------------------------------------
March 31, $19.70 $16.50
June 30, $18.99 $15.66
September 30, $17.96 $15.15
December 31, $21.00 $16.31
- -----------------------------------------------------
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 trust capital securities before payment of cash dividends to
its stockholders.
As of December 31, 2005 the Bank was a Tier 1 capital compliant institution
and had available $27.9 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 on shares out of the Corporation's surplus, defined as the
excess of net assets of the Corporation over stated capital.
-37-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MARKET MAKERS
The following companies were making a market in the Corporation's common
stock at December 31, 2005:
Advest, Inc. Ryan Beck & Co.
280 Trumbull Street 80 Main Street
1 Commercial Plaza W. Orange, NJ 07052
Hartford, CT 06103 (973) 597-6000
(203) 541-5441
Robert W. Baird & Co., Inc. Trident Securities
4300 W. Cypress Street 1275 Peachtree Street, NE
Tampa, FL 33607 Suite 460
(813) 877-4000 Atlanta, GA (404) 249-7700
FORM 10-K AND OTHER FINANCIAL INQUIRIES
The Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, as filed with the Securities and Exchange Commission
will be furnished to shareholders of the Corporation upon written request
without charge. Shareholders, analysts and others seeking this and other
requests for information relating to stock, annual shareholders' meeting
and related matters on FMS Financial Corporation, should contact the
Corporate Secretary at the Executive Offices.
Transfer Agent and Registrar Independent Accountants
American Stock Transfer and PricewaterhouseCoopers LLP
Trust Company 300 Madison Avenue
40 Wall Street New York, NY 10017
New York, NY 10005
Special Counsel
Malizia Spidi & Fisch, PC
901 New York Avenue, N.W.
Suite 210 East
Washington, D.C. 20001
-38-
FMS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
FARMERS & MECHANICS BANK
EXECUTIVE AND ADMINISTRATIVE OFFICES DELANCO MOORESTOWN
3 Sunset Road and 811 Sunset Road 801 Burlington Avenue 53 East Main Street
Burlington NJ 08016 Delanco, NJ 08075 Moorestown, NJ 08057
(609) 386-2400 (856) 824-0067 (856) 235-0544
MAIN BRANCH DELRAN MOUNT HOLLY
3 Sunset Road & Route 541 3002 Route 130 North 555 High Street
Burlington, NJ 08016 Delran, NJ 08075 Mount Holly, NJ 08060
(609) 387-2728 (856) 764-3740 (609) 261-0975
AUDUBON EASTAMPTON MOUNT LAUREL
157 S. White Horse Pike 1191 Woodlane Road 4522 Church Road
Audubon, NJ 08106 Eastampton, NJ 08060 Mount Laurel, NJ 08054
(856) 672-9070 (609) 261-6400 (856) 235-4445
BEVERLY EDGEWATER PARK MT. LAUREL - FELLOWSHIP
414 Cooper Street 1149 Cooper Street 301 Fellowship Road
Beverly, NJ 08010 Edgewater Park, NJ 08010 Mount Laurel, NJ 08054
(609) 239-4066 (609) 387-0046 (856) 222-9364
BORDENTOWN FLORENCE PEMBERTON
335 Farnsworth Avenue 220 West Front Street 25 Fort Dix Road
Bordentown, NJ 08505 Florence, NJ 08518 Pemberton, NJ 08068
(609) 291-8200 (609) 499-4960 (609) 726-9111
BROWNS MILLS LARCHMONT PENNSAUKEN
101 Pemberton-Browns Mills Road 3220 Route 38 Route 130 & Merchantville Avenue
Browns Mills, NJ 08015 Mount Laurel, NJ 08054 Pennsauken, NJ 08110
(609) 893-5540 (856) 235-6666 (856) 663-9200
BURLINGTON CITY LUMBERTON
352 High Street 1636-61 Route 38 & Eayrestown Road RIVERSIDE
Burlington, NJ 08016 Lumberton, NJ 08048 2 Scott Street & Pavilion Avenue
(609) 386-4643 (609) 267-6811 Riverside, NJ 08075
(856) 461-4333
BURLINGTON TOWNSHIP MARLTON
809 Sunset Road 42 Main Street RIVERTON
Burlington, NJ 08016 Marlton, NJ 08053 604 Main Street
(609) 387-1150 (856) 596-6555 Riverton, NJ 08077
(856) 786-5333
BURLINGTON-NECK ROAD MEDFORD
1029 Neck Road 200 Tuckerton Road SOUTHAMPTON
Burlington, NJ 08016 Medford, NJ 08055 1841 Route 70
(609) 239-4500 (856) 596-4300 Southampton, NJ 08088
(609) 859-2700
CHESTERFIELD MEDFORD LAKES
305 Bordentown-Chesterfield Road 700 Stokes Road TABERNACLE
Chesterfield, NJ 08620 Medford, NJ 08055 1484 Route 206
(609) 324-1256 (609) 654-6373 Tabernacle, NJ 08088
(609) 268-5993
CINNAMINSON MEDFORD VILLAGE
1703 Highland Avenue 1 S. Main Street at Bank Street WAL* MART AUDUBON
Cinnaminson, NJ 08077 Medford, NJ 08055 130 Blackhorse Pike
(856) 303-1870 (609) 714-1115 Audubon, NJ 08106
(856) 310-0909
-39-
WAL* MART BURLINGTON
2106 Burlington-Mt. Holly Road
Burlington, NJ 08016
(609) 386-5960
WAL* MART CHERRY HILL
500 Route 38 & Cuthbert Boulevard
Cherry Hill, NJ 08002
(856) 662-1450
WAL* MART CINNAMINSON
2501 Route 130 South
Cinnaminson, NJ 08077
(856) 303-1395
WAL* MART HAMILTON
700 Market Place Boulevard
Hamilton, NJ 08691
(609) 585-2252
WAL* MART LUMBERTON
1740 Route 38
Lumberton, NJ 08048
(609) 702-9800
WAL* MART MARLTON
150 Route 70
Marlton, NJ 08053
(856) 988-1442
WILLINGBORO
399 Charleston Road
Willingboro, NJ 08046
(609) 877-2888
WILLINGBORO EAST
611 Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 871-4900
WILLINGBORO ROUTE 130
4406 Route 130 & Van Sciver Parkway
Willingboro, NJ 08046
(609) 871-6009
WILLINGBORO WEST
1 Rose Street & Beverly-Rancocas Road
Willingboro, NJ 08046
(609) 835-4700