UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2006
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate the number of shares outstanding to each of the issuer's
classes of common stock as of the latest practicable date : May 5, 2006.
Class 6,515,110
----- ---------
$.10 par value common stock Outstanding Shares
FMS FINANCIAL CORPORATION AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2006
TABLE OF CONTENTS
Page
----
PART I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2006 (unaudited) and December 31, 2005 1
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2006 and
March 31, 2005 2
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2006 and
March 31, 2005 3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the three months ended March 31, 2006 and
March 31, 2005 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 - Controls and Procedures 18
PART II - Other Information
- ---------------------------
Item 1 - Legal Proceedings 19
Item 1A- Risk Factors 19
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3 - Defaults Upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits 19
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 2006 December 31, 2005
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 48,076,703 $ 54,479,491
Interest-bearing deposits 182,254 93,076
Short term funds 39,532,736 39,268,382
------------------ ------------------
Total cash and cash equivalents 87,791,693 93,840,949
Investment securities held to maturity 276,265,037 275,340,435
Investment securities available for sale 154,981,618 155,632,095
Loans, net 450,659,763 442,571,357
Mortgage-backed securities held to maturity 199,241,631 208,195,874
Accrued interest receivable 7,298,554 6,224,371
Federal Home Loan Bank stock 7,348,420 8,248,420
Office properties and equipment, net 34,837,290 34,801,087
Deferred income taxes 2,663,643 2,607,641
Core deposit intangible 1,696,770 1,875,822
Prepaid expenses and other assets 3,033,677 1,440,857
FMS Statutory Trust 1 issue costs, net 432,201 484,467
------------------ ------------------
TOTAL ASSETS $ 1,226,250,297 $ 1,231,263,375
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Interest-bearing deposits $ 755,149,781 $ 759,991,442
Noninterest-bearing deposits 197,424,715 187,075,982
------------------ ------------------
Total deposits 952,574,496 947,067,424
Securities sold under agreements to repurchase 165,000,000 175,000,000
FMS Statutory Trust 1 debentures 25,774,000 25,774,000
Advances by borrowers for taxes and insurance 2,286,633 2,132,320
Accrued interest payable 1,413,009 1,378,353
Dividends payable 195,453 195,486
Other liabilities 3,910,267 4,633,516
------------------ ------------------
Total liabilities 1,151,153,858 1,156,181,099
-------------------- ------------------
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 shares outstanding
6,515,110 as of March 31, 2006 and December 31, 2005. 800,639 800,639
Paid-in capital in excess of par 8,767,381 8,767,381
Accumulated other comprehensive income - net of deferred income taxes (2,224,087) (1,099,630)
Retained earnings 78,722,303 77,583,683
Less: Treasury stock (1,491,282 shares, at cost, as of March 31, 2006
and December 31, 2005, respectively) (10,969,797) (10,969,797)
------------------ ------------------
Total stockholders' equity 75,096,439 75,082,276
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,226,250,297 $ 1,231,263,375
================== ==================
See notes to consolidated financial statements.
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
Three Months ended
March 31,
--------------------------------------------
2006 2005
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME: (Unaudited)
Interest income on:
Loans $ 6,792,143 $ 6,188,264
Mortgage-backed securities 3,472,078 3,726,015
Investments 4,899,636 4,088,509
--------------------- ---------------------
Total interest income 15,163,857 14,002,788
--------------------- ---------------------
INTEREST EXPENSE:
Interest expense on:
Deposits 3,654,097 2,403,790
Borrowings 2,123,725 2,154,778
Long-term debt 566,910 408,499
--------------------- ---------------------
Total interest expense 6,344,732 4,967,067
--------------------- ---------------------
NET INTEREST INCOME 8,819,125 9,035,721
PROVISION FOR LOAN LOSSES 90,000 90,000
--------------------- ---------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,729,125 8,945,721
--------------------- ---------------------
NONINTEREST INCOME:
Service charges on accounts 1,358,662 1,268,002
Other income 37,581 36,882
Loan service charges and other fees 14,590 17,180
--------------------- ---------------------
Total noninterest income 1,410,833 1,322,064
--------------------- ---------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 4,821,585 4,376,028
Occupancy and equipment 1,466,688 1,436,536
Purchased services 717,024 697,183
Professional fees 196,847 187,250
Amortization of core deposit intangible 179,052 179,052
Office supplies 164,404 166,270
Other expenses 150,560 152,467
Telecommunications 138,969 78,536
Advertising 108,918 108,818
--------------------- ---------------------
Total noninterest expense 7,944,047 7,382,140
--------------------- ---------------------
INCOME BEFORE INCOME TAXES 2,195,911 2,885,645
INCOME TAXES 861,825 1,184,411
--------------------- ---------------------
NET INCOME $ 1,334,086 $ 1,701,234
===================== =====================
BASIC EARNINGS PER COMMON SHARE $ 0.20 $ 0.26
===================== =====================
DILUTED EARNINGS PER COMMON SHARE $ 0.20 $ 0.26
===================== =====================
Dividends declared per common share $ 0.03 $ 0.03
--------------------- ---------------------
Weighted average common shares outstanding 6,515,110 6,502,223
Potential dilutive effect of the exercise of stock options 15,249 38,666
--------------------- ---------------------
Adjusted weighted average common shares outstanding 6,530,359 6,540,889
===================== =====================
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------
Three Months ended March 31,
2006 2005
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $1,334,086 $1,701,234
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 90,000 90,000
Amortization and accretion of premiums and discounts on
investments, net 156,331 601,182
Amortization and accretion of other fees and costs 234,169 209,436
Depreciation 496,495 496,416
Realized losses on:
Sale Disposal of fixed assets 3,084 115
(Increase) Decrease in accrued interest receivable (1,074,183) 747,705
Increase in prepaid expenses and other assets (1,592,820) (149,128)
Increase (Decrease) in accrued interest payable 34,656 (119,445)
Increase in other liabilities 53,319 1,557,358
Benefit for deferred income taxes (56,002) (73,819)
--------------------------------------
Net cash (used) provided by operating activities (320,865) 5,061,054
--------------------------------------
INVESTING ACTIVITIES:
Principal collected and proceeds from maturities of
investment securities held to maturity 8,890,313 182,464,599
Principal collected and proceeds from maturities of
investment securities available for sale 3,703,113 12,252,427
Principal collected and proceeds on mortgage-backed
securities held to maturity 8,873,072 15,700,055
Principal collected on loans, net 25,749,636 19,817,106
Loans originated or acquired (33,930,926) (23,088,936)
Purchase of investment securities and mortgage-backed
securities held to maturity (9,843,737) (155,443,243)
Purchase of investment securities and mortgage-backed
securities available for sale (5,000,000) (40,254,142)
Redemption of Federal Home Loan Bank stock 900,000 1,500,100
Purchase of office property and equipment (535,781) (482,274)
--------------------------------------
Net cash (used) provided by investing activities (1,194,310) 12,465,692
--------------------------------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 4,512,894 26,545,130
Net increase (decrease) in time deposits 994,178 (2,772,746)
Repayment of securities sold under agreement to repurchase (10,000,000) (30,000,000)
Increase in advances from borrowers for taxes and insurance 154,313 116,488
Dividends paid on common stock (195,466) (195,063)
Net proceeds from issuance of common stock 0 126,115
--------------------------------------
Net cash used by financing activities (4,534,081) (6,180,076)
--------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,049,256) 11,346,670
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 93,840,949 110,577,356
--------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $87,791,693 $121,924,026
======================================
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $6,310,076 $5,086,512
Income taxes 275,000 75,000
Non-cash investing and financing activities:
Dividends declared and not paid at year end 195,453 195,103
See notes to consolidated financial statements.
3
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Accumulated Total
Common shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital income (loss) earnings stock Equity
- -----------------------------------------------------------------------------------------------------------------
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 1,701,234 1,701,234
Other comprehensive
income
Unrealized loss on
securities
available
for sale,
net of taxes
of $700,674 (1,014,563) (1,014,563)
-----------
Total comprehensive income 686,671
-----------
Dividends declared ($.03) (195,103) (195,103)
Exercise of stock options 190 19 126,096 126,115
- -----------------------------------------------------------------------------------------------------------------
Balances at
March 31, 2005 6,502,300 $799,148 $8,681,602 ($743,779) $73,152,330 ($10,934,999) $70,954,302
- -----------------------------------------------------------------------------------------------------------------
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
Net Income 1,334,086 1,334,086
Other comprehensive income
Unrealized loss on
securities
available
for sale,
net of taxes
of $776,568 (1,124,457) (1,124,457)
-----------
Total comprehensive income 209,629
-----------
Dividends declared ($.03) (195,466) (195,466)
- -----------------------------------------------------------------------------------------------------------------
Balances at
March 31, 2006 6,515,110 $800,639 $8,767,381 ($2,224,087) $78,722,303 ($10,969,797) $75,096,439
- -----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED).
1-GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation (the "Corporation") contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of its financial condition, results of operations, cash flows and
changes in stockholders' equity for the periods and dates indicated. The results
of operations for the three months ended March 31, 2006 are not necessarily
indicative of the operating results for the full fiscal year or any other
interim period.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q, and therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles. These statements should be read in
conjunction with the consolidated statements and related notes, which are
incorporated by reference to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005. The 2005 comparative Statement of
Financial Condition was derived from the audited financial statements. The
consolidated financial statements include the Corporation's principle
subsidiary, Farmers & Mechanics Bank (the "Bank").
2-LONG-TERM DEBT
Long-Term Debt at March 31, 2006 and December 31, 2005 consisted of $25.8
million of FMS Statutory Trust 1 debentures. The interest rate resets every
three months to LIBOR plus 360 basis points and will not exceed 11.00% through
March 2007. As of March 31, 2006 and 2005 the interest rate was 8.56% and 6.69%,
respectively.
3-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well capitalized" by OTS regulations at March 31, 2006.
The Bank's regulatory tangible and tier 1 (core) capital ratios are $91.4
million, or 7.46% of total bank assets, and $96.2 million or 18.48% for
risk-based capital. FMS's consolidated capital ratio at March 31, 2006 totaled
6.12%.
4-STOCK OPTIONS The Corporation maintains an incentive stock option plan. The
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Standards No. 123R in December 2004, (SFAS No. 123R), which establishes
standards for share-based payments. This statement has no effect on the
Corporation's Consolidated Statements of Financial Condition or Consolidated
Statements of Operations as no options have been granted during the three months
ended March 31, 2006 or the year ending December 31, 2005.
5
5-RETIREMENT PLANS
The Bank maintains a defined benefit pension plan for active employees. The
Corporation expects to contribute approximately $955 thousand to our pension
plan in 2006. The components of the net pension cost are as follows:
Three Months ended March 31,
- --------------------------------------------------------------------------------
2006 2005
- --------------------------------------------------------------------------------
Service cost $256,462 $230,355
Interest cost 205,876 170,627
Return on assets (219,864) (203,406)
Net amortization and deferral 5,008 1,027
- --------------------------------------------------------------------------------
Net periodic pension cost $247,482 $198,603
- --------------------------------------------------------------------------------
In addition to providing retirement plan benefits the Bank provides certain
health care and life insurance benefits to certain retired employees. The
expected cost of postretirement benefits for 2006 is estimated to be
approximately $43 thousand. The components of net periodic postretirement
benefit cost are as follows:
Three Months ended March 31,
- -------------------------------------------------------------------------------
2006 2005
- -------------------------------------------------------------------------------
Interest cost $6,463 $6,291
Amortization of prior service cost (1,766) (2,835)
Amortization of (gain) loss (965) 4,879
- -------------------------------------------------------------------------------
Net periodic postretirement
benefit costs $3,732 $8,335
- -------------------------------------------------------------------------------
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006.
The following discussion and analysis should be read with our financial
statements and related notes included elsewhere in this report on Form 10-Q. The
Corporation may from time to time make written or oral "forward-looking
statements," including statements contained in the Corporation's filings with
the Securities and Exchange Commission (including this quarterly report on Form
10-Q and the exhibits thereto), in its reports to stockholders and in other
communications by the Corporation, which are made in good faith by the
Corporation pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The discussion and analysis in this report may
contain "forward-looking statements" within the meaning of Section 21A of the
Securities and Exchange Act of 1934.
These forward-looking statements involve risk and uncertainties, such as
statements of the Corporation's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Corporation's control). The cautionary statements made
in this report should be read as applying to all related forward-looking
statements wherever they appear in this report. The following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Corporation and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Corporation's products and services;
the success of the Corporation in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services laws
and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
involved in the foregoing. Such risks and uncertainties could cause actual
results to differ materially from any future performance suggested in this
report. The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation undertakes no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date of this report. This caution is made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.
7
FINANCIAL CONDITION
Total Assets - at March 31, 2006 were $1.2 billion as compared with total assets
at December 31, 2005 of $1.2 billion.
Investment Securities Held to Maturity - increased $925 thousand to $276.3
million at March 31, 2006 from $275.3 million at December 31, 2005 primarily due
to purchases of $5.0 million in U.S. Agency Notes and $4.8 million of Municipal
Bonds, partially offset by principal paydowns of $3.4 million in CMO's and the
maturity of $5.5 million of Municipal Bonds during the three months ended March
31, 2006. Investment securities held to maturity at March 31, 2006 consisted of
$276.3 million in fixed rate securities. A comparison of cost and approximate
market values of investment securities held to maturity as of March 31, 2006 and
December 31, 2005 follows:
March 31, 2006 December 31, 2005
------------------------------------------------------------------ ---------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- --------------------------------------------------------------------------------------- ---------------------------------
U. S. Agency Notes $197,309,978 $0 ($4,482,878) $192,827,100 $192,328,423 $190,184,454
CMO's 68,244,334 0 (2,773,681) 65,470,653 71,621,287 69,647,298
Municipal bonds 10,710,725 1,584 0 10,712,309 11,390,725 11,393,027
------------------------------------------------------------------ ---------------------------------
Total $276,265,037 $1,584 ($7,256,559) $269,010,062 $275,340,435 $271,224,779
================================================================== =================================
Investment Securities Available for Sale - decreased $650 thousand to $155.0
million at March 31, 2006 from $155.6 million at December 31, 2005. The decrease
is the result of principal paydowns of $3.7 million of CMO's and MBS's and $1.9
million in market adjustments, partially offset by purchases of $5.0 million of
U.S. Agency Notes during the three months ended March 31, 2006. Investment
securities available for sale consisted of $151.1 million in fixed rate
securities and $3.9 million in adjustable rate securities at March 31, 2006. A
comparison of cost and approximate market values of investment securities
available for sale as of March 31, 2006 and December 31, 2005 follows:
March 31, 2006 December 31, 2005
- --------------------------------------------------------------------------------------- --------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- --------------------------------------------------------------------------------------- --------------------------------
U. S. Agency Notes $65,400,056 $0 ($1,447,206) $63,952,850 $60,411,063 $59,581,396
CMO's 21,262,922 0 (660,470) 20,602,452 22,350,620 21,990,367
MBS's 50,078,569 28,891 (1,155,054) 48,952,406 52,082,272 51,642,686
Pass thru 22,000,151 0 (526,241) 21,473,910 22,647,193 22,417,646
- --------------------------------------------------------------------------------------- --------------------------------
Total $158,741,698 $28,891 ($3,788,971) $154,981,618 $157,491,148 $155,632,095
======================================================================================= ================================
8
Mortgage-Backed Securities Held to Maturity - decreased $9.0 million to $199.2
million at March 31, 2006 from $208.2 million at December 31, 2005. The decrease
is primarily the result of principal paydowns of $8.9 million. Mortgage-backed
securities at March 31, 2006 consisted of $173.5 million in fixed rate
securities and $25.7 million in adjustable rate securities. Mortgage-backed
securities held to maturity at March 31, 2006 and December 31, 2005 are
summarized below:
March 31, 2006 December 31, 2005
- ------------------------------------------------------------------------------------------ ------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Estimated Amortized Market
Cost Gains Losses Market Value Cost Value
- ------------------------------------------------------------------------------------------ ------------------------------------
GNMA $4,401,876 $177,642 $0 $4,579,518 $4,837,341 $5,038,378
FNMA 95,729,181 542,965 (1,798,962) 94,473,184 100,492,309 100,386,565
FHLMC 49,392,590 127,386 (1,239,447) 48,280,529 51,765,939 51,190,732
Pass Thru 49,717,984 5,689 (2,045,365) 47,678,308 51,100,285 49,859,482
- ------------------------------------------------------------------------------------------ ------------------------------------
Total $199,241,631 $853,682 ($5,083,774) $195,011,539 $208,195,874 $206,475,157
========================================================================================== ====================================
The following table shows 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 individual securities have been in continuous unrealized loss position
at March 31, 2006. The Bank has the intent and ability to hold temporarily
impaired securities either until maturity or until interest rates reach a level
that would eliminate a loss on sale.
Less Than 12 Months 12 Months or Greater Total
------------------------------------------------------------------------------------------
Unrealized Unrealized Unrealized
Description of Security Fair Value Losses Fair Value Losses Fair Value Losses
- ----------------------------------------------------------------------------------------------------------------------
Available for Sale:
- ------------------
U.S. Gov't agencies $ 35,859,371 ($649,629) $ 28,093,479 ($797,577) $ 63,952,850 ($1,447,206)
MBSs including pass thrus 57,666,130 (1,157,453) 11,119,154 (523,842) 68,785,284 (1,681,295)
CMOs 13,171,481 (325,625) 7,430,971 (334,845) 20,602,452 (660,470)
--------------------------- --------------------------- ---------------------------
Total Available for Sale $106,696,982 ($2,132,707) $ 46,643,604 ($1,656,264) $153,340,586 ($3,788,971)
--------------------------- --------------------------- ---------------------------
Held to Maturity:
- ----------------
U.S. Gov't agencies $147,839,484 ($3,036,765) $ 44,987,616 ($1,446,113) $192,827,100 ($4,482,878)
MBSs 100,954,609 (2,712,107) 51,592,197 (2,371,667) 152,546,806 (5,083,774)
CMOs 16,551,985 (619,747) 48,988,054 (2,153,934) 65,540,039 (2,773,681)
--------------------------- --------------------------- ---------------------------
Total Held to Maturity $265,346,078 ($6,368,619) $145,567,867 ($5,971,714) $410,913,945 ($12,340,333)
--------------------------- --------------------------- ---------------------------
Total $372,043,060 ($8,501,326) $192,211,471 ($7,627,978) $564,254,531 ($16,129,304)
============ =========== ============ =========== ============ ============
9
Loans, net - increased $8.1 million to $450.7 million at March 31, 2006 from
$442.6 million at December 31, 2005. This increase was primarily the result of
$33.9 million of loans originated, partially offset by approximately $25.7
million of principal collected on loans during the three months ended March 31,
2006. The following table shows loans receivable by major categories at the
dates indicated.
March 31, December 31,
2006 2005
- ------------------------------------------------------------------------------
Mortgage Loans $288,661,637 $286,476,251
Construction Loans 3,147,606 1,774,630
Commercial Construction 7,151,026 6,942,091
Consumer Loans 2,686,851 2,355,697
Commercial Real Estate 131,561,846 127,704,281
Commercial Business 22,722,237 22,550,190
- ------------------------------------------------------------------------------
Subtotal 455,931,203 447,803,140
Less:
Deferred loan fees 117,781 168,998
Allowance for
loan losses 5,153,659 5,062,785
- ------------------------------------------------------------------------------
Total loans, net $450,659,763 $442,571,357
- ------------------------------------------------------------------------------
At March 31, 2006, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $1.7 million of
which $985 thousand related to loans that were individually measured for
impairment with a valuation allowance of $414 thousand and $755 thousand of
loans that were collectively measured for impairment with a valuation allowance
of $15 thousand. The Bank had $5.2 million in total reserves for loan losses at
March 31, 2006, representing approximately 269% of non-performing assets and
1.1% of total loans. For the three months ended March 31, 2006, the average
recorded investment in impaired loans was approximately $1.7 million. The Bank
recognized $30 thousand of interest income on impaired loans for the three
months ended March 31, 2006, all of which was recognized on the cash basis.
As of March 31, 2006 the Bank had outstanding loan commitments of $14.2 million,
of which $10.0 million represented variable rate loans and $4.2 million
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled amortization of loans and mortgage-backed securities, additional
borrowings, and if necessary, the sale of investment securities available for
sale.
10
Non-Performing Assets - The following table sets forth information regarding
non-accrual loans, troubled debt restructured and real estate owned assets by
the Bank.
March 31, December 31,
2006 2005
---------- ------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 754,450 $ 794,154
Commercial real estate 984,924 984,924
Consumer and other 178 0
---------- ----------
Total non-accrual loans $1,739,552 $1,779,078
---------- ----------
Troubled debt restructuring 175,408 175,802
Real estate owned, net 0 0
---------- ----------
Total non-performing assets, net $1,914,960 $1,954,880
---------- ----------
Total non-accrual loans to net loans 0.39% 0.40%
========== ==========
Total non-accrual loans to total assets 0.14% 0.14%
========== ==========
Total non-performing assets to total assets 0.16% 0.16%
========== ==========
Deposits - increased $5.5 million to $952.6 million at March 31, 2006 from
$947.1 million at December 31, 2005. Non-interest checking accounts increased
$10.3 million, savings accounts increased $6.8 million and time deposit accounts
increased $994 thousand for the three months ended March 31, 2006. These
increases were partially offset by decreases in checking accounts of $11.9
million and money market accounts of $673 thousand during this period. Interest
credited to depositors accounts for the three months ended March 31, 2006
amounted to $2.0 million. The following table sets forth certain information
concerning deposits at the dates indicated.
March 31, 2006 December 31, 2005
- -------------------------------------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
- -------------------------------------------------------------------------------------------------------------------------
Non-interest checking $197,424,715 20.72% 0.00% $187,075,982 19.75% 0.00%
Checking accounts 214,329,256 22.50% 2.69% 226,271,954 23.89% 1.88%
Savings accounts 195,646,943 20.54% 0.59% 188,866,936 19.94% 0.59%
Money market accounts 132,287,635 13.89% 1.07% 132,960,782 14.04% 0.89%
Time deposits 212,885,947 22.35% 2.98% 211,891,770 22.38% 2.34%
- -------------------------------------------------------------------------------------------------------------------------
Total Deposits $952,574,496 100.00% 1.59% $947,067,424 100.00% 1.21%
=========================================================================================================================
11
Borrowings - at March 31, 2006 amounted to $165.0 million in securities sold
under the agreement to repurchase with a weighted average interest rate of
4.98%. At December 31, 2005, borrowings consisted of $175.0 million in
securities sold under agreements to repurchase with a weighted average rate of
4.93%.
Long-term debt - at March 31, 2006 and December 31, 2005 consisted of $25.8
million of FMS Statutory Trust 1 debentures. The interest rate resets every
three months to LIBOR plus 360 basis points and will not exceed 11.00% through
March 2007. At March 31, 2006 and 2005, the interest rate was 8.56% and 6.69%,
respectively.
RESULTS OF OPERATIONS
General
The earnings of the Corporation depend primarily upon the level of net interest
income, which is the difference between interest earned on its interest-earning
assets such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits including non-interest checking accounts,
long-term debts and borrowings. Net interest income is a function of the
interest rate spread, which is the difference between the weighted average yield
earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing liabilities. Net income is also affected
by non-interest income, such as gains (losses) on the sale of loans and
investments, provision for loan losses and real estate owned, service charges
and other fees, and operating expenses, such as: salaries, employee benefits,
deposit insurance premiums, depreciation, occupancy and equipment expense and
purchased services expense.
The Corporation recorded net income for the three months ended March 31, 2006 of
$1.3 million, or $.20 diluted earnings per share as compared to $1.7 million, or
$.26 diluted earnings per share for the comparable period in 2005.
12
Interest Rate Spread
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities
including non-interest checking accounts. Net interest income is affected by (i)
the spread between the yield earned on interest-earning assets and the interest
rates paid on interest-bearing savings deposits including non-interest checking
accounts and borrowings (liabilities) and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's interest
rate spread varies over time because money fund accounts and other flexible rate
accounts have become significant sources of savings deposits. Income from
investment securities and mortgage-backed securities depends upon the amount
invested during the period and the yields earned on such securities. The yield
on loans changes principally as a result of existing mortgage loan repayments,
adjustable rate loan adjustments, sales and the interest rates and volume of new
mortgage loans. The average yields and rates are derived by dividing income or
expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented.
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.
Three Months Ended March 31,
- --------------------------------------------------------------------------------------------------------------------
2006 2005
- -------------------------------------------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 454,145 $ 6,792 5.98% $ 426,983 $ 6,188 5.80%
Interest-bearing deposits 24,108 260 4.31% 54,859 315 2.30%
Mortgage-backed securities 274,898 3,472 5.05% 328,965 3,726 4.53%
Investment securities 375,518 4,640 4.94% 332,657 3,774 4.54%
---------- ---------- ---- ---------- ---------- ----
Total interest-earning
assets 1,128,669 15,164 5.37% 1,143,464 14,003 4.90%
---------- ---------- ---- ---------- ---------- ----
Interest-bearing liabilities:
Checking deposits 401,228 1,469 1.46% 386,170 797 0.83%
Savings deposits 189,662 279 0.59% 196,190 286 0.58%
Money market deposits 130,297 344 1.06% 144,194 284 0.79%
Time deposits 212,554 1,562 2.94% 210,504 1,036 1.97%
Borrowings 171,614 2,124 4.95% 187,273 2,155 4.60%
Long-Term Debt 25,774 567 8.80% 25,774 409 6.35%
---------- ---------- ---- ---------- ---------- ----
Total interest-bearing
liabilities $1,131,129 6,345 2.24% $1,150,105 4,967 1.73%
========== ---------- ---- ========== ---------- ----
Net interest income $ 8,819 $ 9,036
========== ==========
Interest rate spread 3.13% 3.17%
===== ====
Net yield on average interest-earning assets 3.13% 3.16%
==== ====
Ratio of average interest-earning assets
to average interest -bearing liabilities 99.78% 99.42%
===== =====
13
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rate, (ii) changes in volume and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). A higher level of non-performing loans affects the
changes in both volume and rate.
Three Months Ended March 31,
2006 vs. 2005
Increase (Decrease) due to Change in:
-------------------------------
Rate Volume Total
(In Thousands)
-------------------------------
Interest income:
Loans receivable $210 $394 $604
Interest-bearing deposits 122 (177) (55)
Mortgage-backed securities 358 (612) (254)
Investment securities 380 486 866
-------------------------------
Total change - interest income 1,070 91 1,161
-------------------------------
Interest expense:
Checking deposits 641 31 672
Savings deposits 3 (10) (7)
Money market deposits 87 (27) 60
Time deposits 516 10 526
Borrowings 149 (180) (31)
Long-Term Debt 158 0 158
-------------------------------
Total change - interest expense 1,554 (176) 1,378
-------------------------------
Net change in net interest income ($484) $267 ($217)
===============================
14
Net Income
The Corporation and its subsidiary recorded net income of $1.3 million for the
quarter ended March 31, 2006, or $0.20 diluted earnings per share, as compared
to net income of $1.7 million, or $0.26 diluted earnings per share for the
quarter ended March 31, 2005. Net interest income was $8.8 million for the three
months ended March 31, 2006 compared to $9.0 million for the same period in
2005. Provisions for loan losses were $90 thousand for the quarter ended March
31, 2006 and for the same period in 2005. Noninterest income was $1.4 million
for the three months ended March 31, 2006 compared to $1.3 million for the same
period in 2005. Total noninterest expense for the quarter ended March 31, 2006
was $7.9 million compared to $7.4 million for the same quarter in 2005.
Interest Income
Total interest income increased $1.2 million to $15.2 million for the quarter
ended March 31, 2006 from $14.0 million for the same period in 2005. The
increase is attributable to increases in interest income on investment
securities of $866 thousand and loans of $604 thousand, partially offset by
decreases in interest income on mortgage-backed securities of $254 thousand and
interest-bearing deposits of $55 thousand.
Interest income on investment securities increased $866 thousand to $4.6 million
for the three months ended March 31, 2006 from $3.8 million for the same period
in 2005. The average balance of investment securities increased $42.8 million to
$375.5 million for the three months ended March 31, 2006 from $332.7 million for
the same period in 2005, which resulted in a volume increase in interest income
of $486 thousand. The increase in the average volume during this period is due
to investment purchases of $221.8 million, partially offset by investment calls
and maturities of $107.7 million and principal paydowns of $55.8 million since
the first quarter 2005. The average yield of the investment portfolio increased
40 basis points to 4.94% for the quarter ended March 31, 2006 from 4.54% for the
same period in 2005, which resulted in an interest income increase of $380
thousand due to rate changes.
Interest income on loans increased $604 thousand to $6.8 million for the three
months ended March 31, 2006 from $6.2 million for the same period in 2005. The
average balance of the loan portfolio increased $27.1 million to $454.1 million
for the three months ended March 31, 2006 from $427.0 million for the same
period in 2005, which resulted in a volume increase in interest income of $394
thousand. The increase in the average balance is principally due to loan
originations of $128.3 million since the first quarter of 2005, partially offset
by principal collected on loans of $99.2 million during this period. The average
rate on loans increased 18 basis points to 5.98% for the three months ended
March 31, 2006 from 5.80% for the same period in 2005, which resulted in an
increase in interest income of $210 thousand due to rate changes.
Interest income on mortgage-backed securities decreased by $254 thousand to $3.5
million for the three months ended March 31, 2006 from $3.7 million for the same
period in 2005. The average balance of MBS's decreased $54.1 million to $274.9
million for the three months ended March 31, 2006 from $329.0 million for the
same period in 2005, which resulted in an interest income volume decrease of
$612 thousand. The decrease in the average balance during this period was due to
principal paydowns of $47.7 million, partially offset by purchases of MBS's of
$3.0 million from the first quarter of 2005. The average yield of the MBS
portfolio increased 52 basis points to 5.05% for the quarter ended March 31,
2006 from 4.53% for the same period in 2005, which resulted in an interest
income increase of $358 thousand due to changes in rates.
Interest income on interest-bearing deposit investments decreased $55 thousand
to $260 thousand for the three months ended March 31, 2006 from $315 thousand
for the same period in 2005. The average balance of interest-bearing deposit
investments decreased $30.8 million to $24.1 million for the quarter ended March
31, 2006 from $54.9 million for the same period in 2005, which resulted in a
volume decrease in interest income of $177 thousand. The average yield of
interest-bearing deposit investments increased 201 basis points to 4.31% for the
three months ended March 31, 2006 from 2.30% for the same period in 2005, which
resulted in an increase in interest income of $122 thousand due to rate changes.
15
Interest Expense
Total interest expense increased $1.3 million to $6.3 million for the three
months ended March 31, 2006 from $5.0 million for the same period in 2005. The
increases in interest expense on checking deposits, time deposits, long-term
debt and money market deposits, were partially offset by decreases in interest
expense on borrowings and savings deposits.
Interest expense on checking deposits increased $672 thousand to $1.5 million
for the three months ended March 31, 2006 from $797 thousand for the same period
in 2005. The average rate on checking deposits increased 63 basis points to
1.46% for the quarter ended March 31, 2006 from 0.83% for the same period in
2005, which resulted in an increase in interest expense of $641 thousand. This
increase was due to an increase in the average rate paid on municipal government
checking accounts to 4.67% for the three months ended March 31, 2006 from 3.03%
for the same period in 2005. The average balance of checking deposits increased
$15.1 million to $401.2 million for the three months ended March 31, 2006 from
$386.2 million for the same period in 2005, which resulted in a volume increase
in interest expense of $31 thousand.
Interest expense on time deposits increased $526 thousand to $1.6 million for
the three months ended March 31, 2006 from $1.0 million for the same period in
2005. The average rate on time deposits increased 97 basis points to 2.94% for
the quarter ended March 31, 2006 from 1.97% for the same period in 2005, which
resulted in a rate increase in interest expense of $516 thousand. The average
balance of time deposits increased $2.1 million to $212.6 million for the
quarter ended March 31, 2006 from $210.5 million for the same period in 2005,
which resulted in an increase in interest expense of $10 thousand.
Interest expense on long-term debt increased $158 thousand to $567 thousand for
the three months ended March 31, 2006 from $409 thousand for the same period in
2005. The average rate increased 245 basis points to 8.80% for the three months
ended March 31, 2006 from 6.35% for the same period in 2005, which increased
interest expense on long-term debt $158 thousand.
Interest expense on money market deposits increased $60 thousand to $344
thousand for the three months ended March 31, 2006 from $284 thousand for the
same period in 2005. The average rate on money market deposits increased 27
basis points to 1.06% for the quarter ended March 31, 2006 from 0.79% for the
same period in 2005, which resulted in an increase in interest expense of $87
thousand. The average balance of money market deposits decreased $13.9 million
to $130.3 million for the three months ended March 31, 2006 from $144.2 million
for the same period in 2005, which resulted in a volume decrease in interest
expense of $27 thousand.
Interest expense on borrowings decreased $31 thousand to $2.1 million for the
three months ended March 31, 2006 from $2.2 million for the same period in 2005.
The average balance of borrowings decreased $15.7 million to $171.6 million at
March 31, 2006 from $187.3 million for the same period in 2005, which resulted
in a volume decrease in interest expense of $180 thousand. The average rate paid
on borrowings increased 35 basis points to 4.95% for the quarter ended March 31,
2006 from 4.60% for the same period in 2005, which resulted in an increase in
interest expense of $149 thousand due to rate changes.
Interest expense on savings deposits decreased $7 thousand to $279 thousand for
the three months ended March 31, 2006 from $286 thousand for the same period in
2005. The average balance of savings deposits decreased $6.5 million to $189.7
million for the three months ended March 31, 2006 from $196.2 million for the
same period in 2005, which resulted in a volume decrease in interest expense of
$10 thousand. The average rate on savings deposits increased 1 basis point to
0.59% for the quarter ended March 31, 2006 from 0.58% for the same period in
2005, which resulted in an increase in interest expense of $3 thousand.
16
Critical Accounting Estimate-Provision for Loan Losses - A critical accounting
estimate is the provision for loan losses. The provision remained constant at
$90 thousand for the three months ended March 31, 2006 compared to the same
period in 2005. At March 31, 2006 the allowance for loan losses amounted to $5.2
million compared to $5.1 million at December 31, 2005. The determination of the
allowance level for loan losses is based on management's analysis of the risk
characteristics of various types of loans, levels of classified loans, previous
loan loss experience, the estimated fair market value of the underlying
collateral and current economic conditions. Additionally, the mix within the
Bank's portfolio continues to change as the Bank offers a wider variety of
products. Within the loan portfolio, a change is also occurring as a shift is
made from lower yielding loans (i.e., one-to-four family loans) to higher
yielding loans (i.e., commercial real estate mortgages, commercial construction,
consumer and commercial business loans). These types of loans contain a higher
degree of risk. The Bank will continue to monitor its allowance for loan losses
and make future adjustments to the allowance through the provision for loan
losses as changing conditions dictate. Although the Bank maintains its allowance
for loan losses at a level that it considers to be adequate to provide for the
inherent risk of loss in its loan portfolio, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods due to the higher degree
of credit risk which might result from the change in the mix of the loan
portfolio or changes in economic conditions. 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 - for the three month period ended March 31, 2006 was $1.4
million compared to $1.3 million for the same period in 2005. The increase from
2005 is primarily due to a new fee structure for retail banking fees, which took
effect March 1, 2006.
Noninterest Expenses - for the three month period ended March 31, 2006 totaled
$7.9 million compared to $7.4 million for the same period in 2005. The increase
in operating expenses was primarily due to an increase in salaries and employee
benefits, telecommunications and occupancy and equipment expense.
Salaries and Employee Benefits - increased $446 thousand to $4.8 million for the
three month period ended March 31, 2006 compared to $4.4 million for the same
period in 2005. The increase was primarily due to annual compensation increases
and additional staff in back office departments and one new branch opened since
the first quarter of 2005. Average full time equivalent employees were 547 at
March 31, 2006 as compared to 518 at March 31, 2005.
Telecommunications - increased $60 thousand to $139 thousand for the three
months ending March 31, 2006 compared to $79 thousand for the same period in
2005. Enhanced computer network communications services and a faster
reconfigured ATM network were the principal reasons for the higher
telecommunication expenses.
Occupancy and Equipment- increased $30 thousand to $1.5 million for the three
month period ended March 31, 2006 compared to $1.4 million for the same period
in 2005 due primarily to increases in rent expense of $22 thousand and property
taxes of $19 thousand.
17
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the three months ended March 31, 2006 from
the information presented in the annual report on Form 10-K for the year ended
December 31, 2005.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Corporation's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the
Corporation's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Corporation in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in internal controls over financial reporting. During the quarter
under report, there was no change in the Corporation's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
18
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable
Item 1A: Risk Factors
Not Applicable
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3: Defaults Upon Senior Securities
Not Applicable
Item 4: Submission of Matters to Vote of Security of Holders
The Annual Meeting of Stockholders of the Company was held on April 27,
2006 and the following matters were presented:
The Election of Directors: Vincent R. Farias and Wayne H. Page were
re-elected as directors for terms of three years ending 2009 and until their
successors are elected and qualified. Mr. Farias received 5,893,776 votes in
favor and 17,136 votes were withheld; Mr. Page received 5,884,351 votes in favor
and 26,561 were witheld.
Ratification of the appointment of PricewaterhouseCoopers LLP the Company's
independent accountants, for the 2006 fiscal year. PricewaterhouseCoopers LLP
was ratified as the Company's auditors with 5,869,857 votes for, 24,591 votes
against and 16,464 abstentions.
Item 5: Other Information
Not Applicable
Item 6: Exhibits
(a) 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
(b) 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
19
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: May 12, 2006 /s/ Craig W. Yates
-------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2006 /s/ Channing L. Smith
-------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
20