UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2006
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-17353
FMS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
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(State or other jurisdiction of incorporation I.R.S. Employer or organization)
Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.10 par value Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
[ ] YES [X] NO
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] YES [X] NO
Based on the closing sales price of $16.12 per share of the registrant's
common stock on June 30, 2006, as reported on the Nasdaq Global Market, the
aggregate market value of voting stock held by non-affiliates of the registrant
was approximately $57.5 million. As of March 8, 2007, there were 6,541,313
shares outstanding of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
This Amendment No. 1 to FMS Financial Corporation's (the "Corporation" or
"FMS Financial") Annual Report on Form 10-K for the year ended December 31, 2006
as originally filed with the Securities and Exchange Commission on March 14,
2007 (the "Original Filing") is being filed to amend Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations," Item
8. "Financial Statements" and Item 11 "Executive Compensation." Item 7 was
amended to add a reconciliation of regulatory capital to GAAP capital. Item 8
was amended to (i) reclassify the $1.4 million adjustment resulting from the
initial application of SFAS No. 158 from total comprehensive income into a
separate adjustment of accumulated comprehensive income, (ii) add a new Note 6
regarding accrued interest receivable, (iii) add a new Note 10 regarding accrued
interest payable, (iv) add to Note 13 (previously Note 11) a reconciliation of
regulatory capital to GAAP capital, (v) add certain additional disclosures to
Note 14 (previously Note 12) regarding the Corporation's retirement plans, and
(vi) make additional wording changes and disclosures of an immaterial nature in
response to comments from the staff of the Office of Thrift Supervision and
Securities and Exchange Commission. Item 11 was amended to add additional
disclosure to the Compensation Discussion and Analysis and to add a narrative
paragraph following the Director Compensation table discussing director fee
arrangements.
Except for the matters described above, the updated certifications pursuant
to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 filed as
Exhibits 31 and 32 hereto, and updated exhibit index, this Form 10-K/A continues
to speak as of the date of the Original Filing and does not modify, amend or
update in any way any other item or disclosure in the Original Filing. This Form
10-K/A sets forth the Original Filing in its entirety and, no attempt has been
made in this Form 10-K/A to modify or update the disclosures in the Original
Filing except as described above. In particular, this Form 10-K/A continues to
describe conditions as of the date of the Original Filing, and the disclosures
contained herein have not been updated to reflect events, results or
developments that occurred after the Original Filing, or to modify or update
those disclosures affected by subsequent events. Among other things,
forward-looking statements made in the Original Filing have not been revised to
reflect events, results or developments that occurred or facts that became known
to the Corporation after the date of the Original Filing, and such
forward-looking statements should be read in conjunction with the Corporation's
filings with the SEC subsequent to the filing of the Original Filing.
2
##
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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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.
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. In recent years, FMS Financial's interest rate spread, like
that of most financial institutions, has narrowed significantly due to a
flattening of the yield curve which has made it difficult to obtain interest
earning assets at rates significantly higher than the rates it must pay on its
interest bearing liabilities. FMS Financial anticipates that this will continue
in 2007 and has tried to offset the impact of this interest rate environment by
increasing its non-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.
FINANCIAL CONDITION
Total assets of the Corporation decreased $43.2 million or 3.5% to $1.19
billion at December 31, 2006 from $1.23 billion at December 31, 2005. Short-term
funds increased $14.2 million or 36.1% to $53.4 million at December 31, 2006
from $39.3 million at December 31, 2005, primarily due to an increase in
short-term money market accounts. Investment securities held to maturity
decreased $55.1 million or 11.4% to $428.4 million at December 31, 2006 from
$483.5 million at December 31, 2005 primarily due to $43.1 million in principal
paydowns and $27.8 million in investment calls and maturities, partially offset
by purchases of $5.0 million of U.S. Government agency notes and $11.0 million
of municipal bonds. Investment securities available for sale decreased $9.6
million or 6.2% to $146.0 million during the year ended December 31, 2006 from
$155.6 million at December 31, 2005, due to principal paydowns of $14.2 million
and calls and maturities of $5.0 million, partially offset by purchases of $10.0
3
million in U.S. Government agency notes. Loans receivable increased $7.5 million
or 1.7% to $450.1 million at December 31, 2006 from $442.6 million at December
31, 2005 primarily due to $105.1 million of loans originated, partially offset
by $97.0 million of principal collected on loans. Federal Home Loan Bank stock
decreased $1.9 million or 23.5% to $6.3 million at December 31, 2006 from $8.2
million at December 31, 2005 due to mandatory redemption by the Federal Home
Loan Bank as a result of the Bank's repayment of FHLB borrowings during the
year.
Total liabilities decreased $46.4 million or 4.0% to $1.11 billion at
December 31, 2006 from $1.16 billion at December 31, 2005. Deposits decreased
$14.0 million or 1.5% to $933.1 million at December 31, 2006 from $947.1 million
at December 31, 2005. The decrease in total deposits during the year was due to
decreases in money market accounts of $18.3 million, savings accounts of $13.8
million and checking accounts of $1.8 million, partially offset by an increase
in time deposits of $19.9 million. Securities sold under agreements to
repurchase decreased $60.0 million or 34.3% to $115.0 million at December 31,
2006 from $175.0 million at December 31, 2005 due to the repayment of these
borrowings during the year. These borrowings are collateralized by U.S.
Government agency notes, MBSs and CMOs and had a weighted average rate of 5.24%
and 4.93% at December 31, 2006 and 2005, respectively. FMS Statutory Trust I and
II debentures increased $25.8 million or 100% to $51.5 million at December 31,
2006 from $25.8 million at December 31, 2005. The Corporation established FMS
Statutory Trust II in June 2006 and issued $25.0 million of floating rate
capital securities to institutional investors and $774 thousand of common
securities to the Corporation.
Stockholders' equity increased $3.3 million or 4.4% to $78.4 million at
December 31, 2006 from $75.1 million at December 31, 2005. The increase was due
to net income of $5.3 million and the exercise of stock options of $165
thousand, partially offset by $782 thousand of dividends declared on common
stock and a decrease of $1.4 million in accumulated comprehensive income ($136
thousand increase in the net unrealized loss on available for sale securities
and a $1.3 million net increase in the underfunded pension and postretirement
liabilities).
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, on a tax-equivalent
basis, 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 non-interest 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.
4
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, on a tax-equivalent
basis, by the average balance of interest-earning assets or interest-bearing
liabilities, respectively for the periods presented.
Year Ended December 31,
------------------------------------------------------------------------
2006 2005
------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable.......................... $ 456,185 $ 27,802 6.09% $436,338 $25,906 5.94%
Interest-bearing deposits................. 40,739 2,107 5.17 46,693 1,338 2.87
Mortgage-backed securities................ 250,778 12,559 5.01 308,078 14,630 4.75
Investment securities..................... 366,474 18,719 5.11 340,922 16,124 4.73
----------- -------- ------ ---------- ------- ----
Total interest-earning assets......... 1,114,176 61,187 5.49 1,132,031 57,998 5.12
----------- -------- ------ ---------- ------ ----
Interest-bearing liabilities:
Checking deposits......................... $ 399,912 6,293 1.57 $ 399,956 4,125 1.03
Savings deposits.......................... 187,601 1,138 0.61 196,030 1,149 0.59
Money market accounts..................... 127,365 1,548 1.22 142,137 1,266 0.89
Time deposits............................. 214,651 7,105 3.31 208,825 4,878 2.34
Borrowings................................ 152,725 7,753 5.08 167,402 8,293 4.95
Long-term debt............................ 39,735 3,578 9.00 25,774 1,826 7.08
----------- -------- ------ ---------- ------- ----
Total interest-bearing liabilities.... $ 1,121,989 27,415 2.44 $1,140,124 21,537 1.89
=========== -------- ------ ========== ------- ----
Net interest income........................... $33,772 $36,461
======= =======
Interest rate spread.......................... 3.05% 3.23%
===== =====
Net yield on average interest-earning
assets.................................... 3.03% 3.22%
===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................... 99.30% 99.29%
===== =====
Year Ended December 31,
----------------------------------
2004
---------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
Interest-earning assets:
Loans receivable............................ $ 418,354 $24,634 5.89%
Interest-bearing deposits................... 50,928 667 1.31
Mortgage-backed securities.................. 396,962 17,389 4.38
Investment securities....................... 281,314 13,149 4.67
---------- ------- -----
Total interest-earning assets.......... 1,147,558 55,839 4.87
---------- ------- -----
Interest-bearing liabilities:
Checking deposits........................... $ 366,338 1,717 0.47
Savings deposits............................ 194,246 1,071 0.55
Money market accounts....................... 139,038 1,001 0.72
Time deposits............................... 216,906 3,965 1.83
Borrowings.................................. 221,883 9,291 4.19
Long-term debt.............................. 25,774 1,369 5.31
---------- ------- -----
Total interest-bearing liabilities...... $1,164,185 18,414 1.58
========== ------- -----
Net interest income............................. $37,425
=======
Interest rate spread............................ 3.29%
=====
Net yield on average interest-earning
assets...................................... 3.26%
=====
Ratio of average interest-earning
assets to average interest-bearing
liabilities................................. 98.57%
=====
5
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in the
Bank's interest income and interest expense, on a tax-equivalent basis, 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 volume (changes in average volume multiplied by old rate); (ii)
changes in rates (changes in rate multiplied by old average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume).
Years Ended December 31,
----------------------------------------------------------------------------
2006 vs. 2005 2005 vs. 2004
------------------------------------ ------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------------------ ------------------------------------
Rate Volume Net Rate Volume Net
---- ------ --- ----- ------- ----
Interest income:
Loans.......................... $ 718 $ 1,178 $ 1,896 $ 213 $ 1,059 $ 1,272
Interest-bearing deposits...... 940 (171) 769 726 (55) 671
Mortgage-backed securities 650 (2,721) (2,071) 1,135 (3,894) (2,759)
Investment securities.......... 1,387 1,208 2,595 189 2,786 2,975
--------- --------- ---------- --------- --------- ----------
Total change - interest income..... 3,695 (506) 3,189 2,263 (104) 2,159
--------- ---------- ---------- --------- --------- ----------
Interest expense:
Checking deposits.............. 2,168 0 2,168 2,250 158 2,408
Savings deposits............... 38 (49) (11) 68 10 78
Money market deposits.......... 414 (132) 282 243 22 265
Time deposits.................. 2,091 136 2,227 1,061 (148) 913
Borrowings..................... 187 (727) (540) 1,283 (2,281) (998)
Long-term debt................. 763 989 1,752 457 0 457
--------- --------- ---------- --------- --------- ----------
Total change - interest expense.... 5,661 217 5,878 5,362 (2,239) 3,123
--------- --------- ---------- --------- --------- ----------
Change in net interest income...... $ (1,966) $ (723) $ (2,689) $ (3,099) $ 2,135 $ (964)
========== ========== =========== ========= ========= ==========
COMPARISONS OF YEARS ENDED DECEMBER 31, 2006 AND 2005.
NET INCOME. The Corporation and its subsidiary recorded net income of $5.3
million for the year ended December 31, 2006, or $0.81 diluted earnings per
share, as compared to net income of $6.7 million, or $1.03 diluted earnings per
share for the year ended December 31, 2005. Net interest income on a tax
equivalent basis was $33.8 million in 2006 compared to $36.5 million in 2005.
Provisions for loan losses were $330 thousand in 2006 and $360 thousand in 2005.
Non-interest income was $7.2 million in 2006 compared to $5.4 million in 2005.
Total non-interest expenses for the year ended December 31, 2006 were $31.7
million compared to $30.1 million in the previous year. During 2006, the
Corporation declared cash dividends, which totaled $782 thousand or $0.12 per
share, which resulted in a dividend payout ratio of 14.81%.
INTEREST INCOME. Total interest income on a tax-equivalent basis increased
$3.2 million to $61.2 million in 2006 from $58.0 million in 2005. The increase
in 2006 is attributable to increases in interest income on investment securities
of $2.6 million, loans of $1.9 million and interest-bearing deposits of $769
thousand, partially offset by a decrease in interest income on mortgage-backed
securities of $2.1 million.
Interest income on investment securities increased $2.6 million to $18.7
million in 2006 from $16.1 million in 2005. The average yield on the portfolio
increased 38 basis points to 5.11% in 2006 from 4.73% in 2005, which resulted in
an increase in interest income of $1.4 million. The average balance of the
portfolio increased $25.6 million to $366.5 million in 2006 from $340.9 million
in 2005, which resulted in
6
an increase in interest income of $1.2 million in 2006. The investment portfolio
increased primarily due to purchases of $15.0 million of U.S. Government agency
notes and $11.0 million of municipal bonds during the year ended December 31,
2006. These increases were partially offset by principal paydowns of CMO's of
$15.0 million and calls of $5.0 million of U.S. Government agency notes during
the year.
Interest income on loans increased $1.9 million to $27.8 million in 2006
from $25.9 million in 2005. The average balance of the loan portfolio increased
$19.9 million to $456.2 million in 2006 from $436.3 million in 2005. The
increase in the average balance in 2006 was primarily due to $105.1 million in
loans originated, partially offset by $97.0 million in principal collected. The
increase in the loan volume during 2006 resulted in a volume increase in
interest income of $1.2 million. The average yield on the loan portfolio
increased 15 basis points to 6.09% in 2006 from 5.94% in 2005, which resulted in
an increase in interest income of $718 thousand.
Interest income on interest-bearing deposits increased $769 thousand to
$2.1 million in 2006 from $1.3 million in 2005. The increase was primarily due
to an increase in the average yield on the portfolio of 230 basis points to
5.17% in 2006 from 2.87% in 2005, which resulted in an increase in interest
income of $940 thousand. The average balance decreased $6.0 million to $40.7
million in 2006 from $46.7 million in 2005, which resulted in a decrease in
interest income of $171 thousand.
Interest income on mortgage-backed securities decreased $2.0 million to
$12.6 million in 2006 from $14.6 million in 2005. The average balance of the
portfolio decreased $57.3 million to $250.8 million in 2006 from $308.1 million
in 2005, resulting in a decrease in interest income of $2.7 million. The average
balance decrease in 2006 was due to $31.6 million in principal paydowns on
mortgage-backed securities and security sales of $12.0 million. The average
yield on the portfolio increased 26 basis points to 5.01% in 2006 from 4.75% in
2005, which resulted in an increase in interest income of $650 thousand.
INTEREST EXPENSE. Total interest expense increased $5.9 million to $27.4
million in 2006 from $21.5 million in 2005. The increase in interest expense on
time deposits of $2.2 million, checking deposits of $2.2 million, long-term debt
of $1.8 million and money market deposits of $282 thousand were partially offset
by decreases in interest expense on borrowings of $540 thousand and savings
deposits of $11 thousand.
Interest expense on time deposits increased $2.2 million to $7.1 million in
2006 from $4.9 million in 2005. The average rate on time deposits increased 97
basis points to 3.31% in 2006 from 2.34% in 2005, resulting in a $2.1 million
increase in interest expense due to changes in rate. The average balance of time
deposits increased $5.9 million to $214.7 million in 2006 from $208.8 million in
2005, resulting in a $136 thousand increase in interest expense due to volume.
Interest expense on checking deposits increased $2.2 million to $6.3
million in 2006 from $4.1 million in 2005. The average rate on checking deposits
increased 54 basis points to 1.57% in 2006 from 1.03% in 2005, which resulted in
an increase in interest expense of $2.2 million from higher rates. The average
balance of checking deposits remained constant at $400.0 million in 2006 and
2005.
Interest expense on long-term debt increased $1.8 million to $3.6 million
in 2006 from $1.8 million in 2005. The average balance on debentures increased
$13.9 million to $39.7 million in 2006 from $25.8 million in 2005, which
resulted in an increase in interest expense of $989 thousand. This increase is
primarily due to the Trust II issuance in June 2006 of $25.0 million of floating
rate debentures. The average rate increased 192 basis points to 9.00% in 2006
from 7.08% in 2005, which increased interest expense on long-term debt $763
thousand.
7
Interest expense on money market deposits increased $282 thousand to $1.5
million in 2006 from $1.3 million in 2005. The average rate on money market
deposits increased 33 basis points to 1.22% in 2006 from 0.89% in 2005, which
resulted in an increase in interest expense of $414 thousand. The average
balance of money market deposits decreased $14.7 million to $127.4 million in
2006 from $142.1 million in 2005, which resulted in a volume decrease in
interest expense of $132 thousand.
Interest expense on borrowings decreased $540 thousand to $7.8 million in
2006 from $8.3 million in 2005. The average balance of borrowings decreased
$14.7 million to $152.7 million in 2006 from $167.4 million in 2005, which
resulted in a decrease in interest expense of $727 thousand. The average rate
paid on borrowings increased 13 basis points to 5.08% in 2006 from 4.95% in
2005, which resulted in an increase in interest expense of $187 thousand due to
rate changes.
Interest expense on savings deposits decreased $11 thousand to $1.1 million
in 2006 from $1.1 million in 2005. The average balance of savings deposits
decreased $8.4 million to $187.6 million in 2006 from $196.0 million in 2005,
which resulted in a decrease in interest expense of $49 thousand. The average
rate on savings deposits increased 2 basis points to 0.61% in 2006 from 0.59% in
2005, which resulted in an increase in interest expense of $38 thousand.
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 decreased $30 thousand to $330 thousand in 2006 from $360
thousand in 2005. The decrease in the provision was due to the moderate to low
actual loan loss experienced over the last several years along with allowance
for loan loss approaching 1.20% of total loans. 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 2006 and 2005 totaled $2 thousand and $16 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.
Most of the Bank's lending activity is with customers located within
southern New Jersey. Generally, the loans are secured by real estate consisting
of single family residential properties. While this represents a concentration
of credit risk, the credit losses arising from this type of lending compare
favorably with the Bank's credit loss experience on its portfolio as a whole.
The ultimate repayment of these loans is dependent to a certain degree on the
local economy and real estate market.
The Corporation recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences. Deferred tax assets are subject to
management's judgment based upon available evidence that future realization is
more likely than not. If management determines that the Corporation may be
unable to realize all or part of net deferred tax assets in the future, a direct
charge to income tax expense may be required to reduce the recorded value of the
net deferred tax asset to the expected realizable amount.
8
NON-INTEREST INCOME. Non-interest income from operations increased $1.8
million to $7.2 million in 2006 compared with $5.4 million in 2005. The increase
is primarily due to the gain on the sale of fixed assets of $837 thousand and
the gain on the sale of investment securities of $365 thousand during 2006.
Service charges on accounts increased $537 thousand to $5.8 million in 2006
from $5.3 million in 2005. This is primarily due to a new fee structure for
retail banking fees, effective April 2006, resulting in an increase of $362
thousand to $3.3 million in 2006 from $2.9 million in 2005. Check card income
increased $175 thousand to $1.8 million in 2006 from $1.6 million in 2005 due to
increased customer activity.
NON-INTEREST EXPENSE. Non-interest expense increased $1.6 million to $31.7
million in 2006 from $30.1 million in 2005.
Salaries and benefits increased $1.0 million to $19.0 million in 2006 from
$18.0 million in 2005. The increase was primarily due to a $981 thousand
increase in retirement and health insurance costs in 2006. Average full time
equivalent employees were 519 during 2006 as compared to 525 during 2005.
Occupancy and equipment expense increased $516 thousand to $6.1 million in
2006 from $5.6 million in 2005. Maintenance expense increased $259 thousand,
property taxes increased $152 thousand and light, heat and utilities expense
increased $93 thousand during 2006.
Telecommunications expense increased $100 thousand to $556 thousand in 2006
from $456 thousand in 2005. This increase was due to enhancing our network lines
to provide more efficient service to our customers.
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 on a
tax-equivalent basis was $36.4 million in 2005 compared to $37.4 million in
2004. Provisions for loan losses were $360 thousand in 2005 and $330 thousand in
2004. Non-interest income was $5.4 million in 2005 compared to $6.1 million in
2004. Total non-interest 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 of $780 thousand or $0.12 per share, which
resulted in a dividend payout ratio of 11.65%.
INTEREST INCOME. Total interest income on a tax equivalent basis increased
$2.2 million to $58.0 million in 2005 from $55.8 million in 2004. The increase
in 2005 is attributable to increases in interest income on investment securities
of $3.0 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 $3.0 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 in 2005
primarily due to purchases of $123.0 million of U. S. Government agency notes
and $9.4 million of CMOs. These increases in 2005 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 6 basis points to 4.73% in 2005 from 4.67% in
2004, which resulted in an increase in interest income of $189 thousand.
9
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 5.94% in 2005 from 5.89%
in 2004, which resulted in an increase in interest income of $213 thousand.
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 of $2.4 million, time deposits of $913 thousand, long-term
debt of $457 thousand, money market deposits of $265 thousand and savings
deposits of $78 thousand, was partially offset by a decrease in interest expense
on borrowings of $998 thousand.
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
10
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 million in 2005 from $221.9 million 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 construction and
commercial real estate loans, which have a higher risk of loss than residential
mortgages. The net charge-offs for 2005 and 2004 totaled $16 thousand and $19
thousand, respectively.
NON-INTEREST INCOME. Non-interest income from operations decreased $636
thousand to $5.4 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.
NON-INTEREST EXPENSE. Non-interest 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.
11
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, 2006 the Bank had $115.0 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 Corporation's commitment to make loans and management's assessment
of the Corporation's ability to generate funds. The Corporation is also subject
to federal regulations that impose certain minimum capital requirements.
The Bank is also subject to federal regulations that impose certain minimum
capital requirements. At December 31, 2006 and 2005, the Bank was in compliance
with all of these requirements. A reconciliation of GAAP capital to regulatory
capital is as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005
Bank GAAP Capital $ 94,220,043 $ 91,137,726
Accumulated Other Comprehensive
Loss 2,485,410 1,099,630
Less:
Subsidiary Investments not includable (745,645) (745,655)
Core deposit intangible (1,159,614) (1,675,822)
Tier 1, Tier 1 Risk-Based and
Tangible Capital $ 94,800,194 $ 89,615,889
General Valuation Allowance 4,977,001 4,649,217
Risk-Based Capital $ 99,777,195 $ 94,265,106
The amount of time deposit accounts which are scheduled to mature during
the twelve months ending December 31, 2007 is approximately $180.4 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.
12
The following table sets forth our contractual obligations and commitments
as of December 31, 2006.
Less than More than
1 Year 1-3 Years 3-5 Years 5 Years Total
------ --------- --------- ------- -----
(In thousands)
Securities sold under agreements to
Repurchase*........................... $20,000 $ -- $80,000 $15,000 $115,000
FMS Statutory Trust I and II debentures -- -- -- 51,548 51,548
Operating leases........................ 375 557 217 609 1,758
Commitments to fund loans............... 6,017 -- -- -- 6,017
Unused lines of credit.................. -- -- -- 29,531 29,531
Standby letters of credit............... 6,569 -- -- -- 6,569
Software maintenance contracts.......... 90 -- -- -- 90
- ----------
* Subject to prepayment calls, which may accelerate the payment of these obligations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
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 2006, the total
investment in MBSs and CMOs amounted to $307.2 million, or 48.4% 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 53.1% 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. MBS's, CMO's and agency
notes of $49.0 million and $54.1 million were used to secure public funds on
deposit at December 31, 2006 and 2005, respectively. At December 31, 2006, FMS
FInancial had total unrealized losses of $9.5 million on its investment
portfolio. The unrealized lossese were due to changes in market value stemming
from changes in the general level of interest rates and are considered to be
temporary and not material to FMS Financial.
13
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 Management 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 mature within a given period of time. The
difference, or the interest rate repricing GAP, provides an indication of the
extent to which an institution's interest rate spread will be affected by
changes in interest rates over a period of time. A GAP is considered positive
when the amount of interest rate sensitive assets maturing or repricing over a
specified period of time exceeds the amount of interest rate sensitive
liabilities maturing or repricing within that period and is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
over a specified period of time exceeds the amount of interest rate sensitive
assets maturing or repricing within that period. Generally, during a period of
rising interest rates, a negative GAP within a given period of time would
adversely affect net interest income, while a positive GAP within such period of
time may result in an increase in net interest income; during a period of
falling interest rates, a negative GAP within a given period of time may result
in an increase in net interest income while a positive GAP within such period of
time may have the opposite effect. At December 31, 2006, the Bank's GAP position
for net assets repricing for one year cumulative totaled a negative $151.8
million or 12.8%.
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.
14
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, 2006, the Bank would
experience a 390 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.
Change Net Portfolio Value
In Market -------------------------------------------------------
Interest Rates $ Amount $ Change % Change NPV Ratio(1)
-------------- -------- -------- -------- ------------
(basis points) (Dollars in thousands)
+300 $ 79,524 $(79,184) (50)% 6.84%
+200 104,835 (53,873) (34)% 8.81%
+100 133,522 (25,186) (16)% 10.94%
0 158,708 0 0% 12.71%
-100 166,976 8,269 5% 13.24%
-200 163,170 4,463 3% 12.92%
- -------------
(1) 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The Corporation's financial statements and supplementary data are contained
in this Annual Report on Form 10-K immediately following Item 15.
FMS FINANCIAL CORPORATION AND SUBSIDIARY
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
PAGE
----
Report of Independent Registered Public Accounting Firm....................16
Report of Independent Registered Public Accounting Firm....................17
Consolidated Statements of Financial Condition.............................18
Consolidated Statements of Operations......................................19
Consolidated Statements of Cash Flows......................................20
Consolidated Statements of Changes in Stockholders' Equity.................21
Notes to Consolidated Financial Statements.................................22
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
FMS Financial Corporation
We have audited the accompanying consolidated statement of financial
condition of FMS Financial Corporation and Subsidiary (the "Company") as of
December 31, 2006 and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FMS
Financial Corporation and Subsidiary as of December 31, 2006 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company has adopted
Financial Accounting Standards Board Statement (FASB) No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R) in 2006.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, PA
March 12, 2007
16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of FMS Financial Corporation:
In our opinion, the accompanying consolidated statement 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 its subsidiaries ("the Company") at
December 31, 2005, and the results of their operations and their cash flows for
each of the two 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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, N.Y.
March 24, 2006
17
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 55,269,961 $ 54,544,693
Interest-bearing deposits 1,052,911 27,874
Short term funds 53,438,325 39,268,382
-------------- --------------
Total cash and cash equivalents 109,761,197 93,840,949
Investment securities held to maturity 428,441,417 483,536,309
Investment securities available for sale 146,005,715 155,632,095
-------------- --------------
Total investment securities 574,447,132 639,168,404
Loans, net 450,099,184 442,571,357
Accrued interest receivable 6,372,354 6,224,371
Federal Home Loan Bank stock 6,313,520 8,248,420
Office properties and equipment, net 33,738,928 34,801,087
Deferred income taxes 4,094,838 2,607,641
Core deposit intangible 1,159,614 1,875,822
Prepaid expenses and other assets 2,125,656 1,925,324
-------------- --------------
TOTAL ASSETS $1,188,112,423 $1,231,263,375
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities:
Interest-bearing deposits $ 738,896,140 $ 759,991,442
Noninterest-bearing deposits 194,206,626 187,075,982
-------------- --------------
Total deposits 933,102,766 947,067,424
Securities sold under agreements to repurchase 115,000,000 175,000,000
FMS Statutory Trust I and II debentures 51,548,000 25,774,000
Advances by borrowers for taxes and insurance 2,086,128 2,132,320
Accrued interest payable 1,467,745 1,378,353
Dividends payable 195,849 195,486
Other liabilities 6,351,377 4,633,516
-------------- --------------
Total liabilities 1,109,751,865 1,156,181,099
============== ==============
Commitments and contingencies (Note 17)
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 8,022,892 and 8,006,392 and shares outstanding 6,529,313
and 6,515,110 as of December 31, 2006 and 2005, respectively 802,289 800,639
Additional paid-in capital 8,930,731 8,767,381
Accumulated other comprehensive loss- net of deferred income taxes (2,485,410) (1,099,630)
Retained earnings 82,120,391 77,583,683
Less: Treasury stock (1,493,579 and 1,491,282 shares, at cost, as of
December 31, 2006 and 2005 respectively) (11,007,443) (10,969,797)
-------------- --------------
Total stockholders' equity 78,360,558 75,082,276
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,188,112,423 $1,231,263,375
============== ==============
See notes to consolidated financial statements.
18
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 2005 2004
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest income on:
Loans $27,801,801 $25,906,502 $ 24,634,462
Mortgage-backed securities 12,559,180 14,629,526 17,388,728
Investments
Taxable 20,254,674 17,192,737 13,758,077
Tax exempt 377,265 177,550 38,143
----------- ----------- ------------
Total interest income 60,992,920 57,906,315 55,819,410
----------- ----------- ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 16,083,899 11,418,289 7,754,391
Borrowings 7,753,044 8,293,015 9,290,862
Long-term debt 3,577,511 1,826,092 1,368,591
----------- ----------- ------------
Total interest expense 27,414,454 21,537,396 18,413,844
----------- ----------- ------------
NET INTEREST INCOME 33,578,466 36,368,919 37,405,566
PROVISION FOR LOAN LOSSES 330,000 360,000 330,000
----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 33,248,466 36,008,919 37,075,566
----------- ----------- ------------
NON-INTEREST INCOME:
Service charges on accounts 5,811,341 5,274,330 5,197,949
Gain (Loss) on sale/disposal of fixed assets 837,335 (6,769) 46,080
Gain on sale of investment securities 364,621 - 682,880
Other income 150,118 155,667 132,779
----------- ----------- ------------
Total non-interest income 7,163,415 5,423,228 6,059,688
----------- ----------- ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 19,027,244 18,012,670 16,877,722
Occupancy and equipment 6,103,445 5,587,270 5,383,883
Purchased services 2,869,212 2,810,218 2,850,118
Professional fees 770,702 754,127 662,180
Amortization of core deposit intangible 716,208 716,208 716,208
Office supplies 618,608 669,130 573,447
Other expenses 609,707 632,481 588,887
Telecommunications 555,701 456,107 303,586
Advertising 455,268 429,263 429,093
----------- ----------- ------------
Total non-interest expense 31,726,095 30,067,474 28,385,124
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 8,685,786 11,364,673 14,750,130
INCOME TAXES 3,366,746 4,646,441 5,981,901
----------- ----------- ------------
NET INCOME $ 5,319,040 $ 6,718,232 $ 8,768,229
=========== =========== ============
BASIC EARNINGS PER COMMON SHARE $ 0.82 $ 1.03 $ 1.35
=========== =========== ============
DILUTED EARNINGS PER COMMON SHARE $ 0.81 $ 1.03 $ 1.34
=========== =========== ============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.12 $ 0.12 $ 0.12
=========== =========== ============
See notes to consolidated financial statements.
19
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2006 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 5,319,040 $ 6,718,232 $ 8,768,229
Adjustments to reconcile net income to net cash by provided
operating activities:
Provision for loan losses 330,000 360,000 330,000
Amortization and accretion of premiums and discounts on investments, net 309,693 1,751,762 4,382,268
Amortization and accretion of other fees and costs 763,006 807,312 769,567
Depreciation 2,003,485 2,007,918 1,965,197
Realized (gains) and losses on:
Sale of loans - - (229)
Sale and disposal of fixed assets (837,335) 6,769 (46,080)
Sale of investment securities (364,621) - (682,880)
Sale of real estate owned 455 - (654)
(Increase) Decrease in accrued interest receivable (147,983) 97,736 (1,118,359)
(Increase) Decrease in prepaid expenses and other assets (200,332) 510,056 (347,619)
Increase (Decrease) in accrued interest payable 89,392 131,692 (72,840)
(Decrease) Increase in other liabilities 562,791 1,833,368 (21,078)
Benefit for deferred income taxes (1,487,197) (457,199) (106,533)
------------- ------------- -------------
Net cash provided by operating activities 6,340,394 13,767,646 13,818,989
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans - - 60,279
Real estate owned 157,761 - 48,948
Office property and equipment 1,640,592 3,111 238,871
Investment securities 12,206,808 - 22,870,336
Principal collected and proceeds from maturities of investment securities
held to maturity 59,104,971 266,172,752 250,288,555
Principal collected and proceeds from maturities of investment securities
available for sale 19,248,254 112,499,244 71,614,876
Principal collected on loans, net 97,047,011 93,277,149 110,121,450
Loans originated or acquired (105,109,852) (117,423,133) (126,679,593)
Purchase of investment securities and mortgage-backed securities
held to maturity (16,014,543) (226,985,664) (232,157,961)
Purchase of investment securities and mortgage-backed securities available
for sale (10,000,000) (128,868,417) (88,703,074)
Redemption of Federal Home Loan Bank stock 1,934,900 2,001,700 1,559,500
Purchase of office property and equipment (1,744,583) (6,071,651) (1,476,146)
------------- ------------- -------------
Net cash provided (used) by investing activities 58,471,319 (5,394,909) 7,786,041
------------- ------------- -------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and savings accounts (33,865,777) 4,417,156 65,584,898
Net increase (decrease) in time deposits 19,901,119 1,143,448 (17,084,576)
Net decrease in FHLB advances - (10,000,000) (1,191,047)
Repayment of securities sold under agreement to repurchase, net (60,000,000) (20,000,000) (30,000,000)
Net proceeds from issuance of trust capital securities 25,774,000 - -
(Decrease) Increase in advances from borrowers for taxes and insurance (46,192) (68,037) 57,858
Purchase of treasury stock (37,646) (34,798) -
Dividends paid on common stock (781,969) (780,298) (779,240)
Net proceeds from issuance of common stock 165,000 213,385 49,796
------------- ------------- --------------
Net cash (used) provided by financing activities (48,891,465) (25,109,144) 16,637,689
------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
15,920,248 (16,736,407) 38,242,719
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
93,840,949 110,577,356 72,334,637
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 109,761,197 $ 93,840,949 $ 110,577,356
============= ============= ==============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings 27,325,062 21,405,704 18,486,684
Income taxes 3,538,800 4,727,200 5,450,000
Non-cash investing and financing activities:
Dividends declared and not paid at year end 195,849 195,486 195,063
Non-monetary transfers from loans to real estate owned through foreclosure 158,216 - -
See notes to consolidated financial statements.
20
- -----------------------------------------------------------------------------------------------------------------------------
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, 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
- -----------------------------------------------------------------------------------------------------------------------------
Net income 5,319,040 5,319,040
Other comprehensive loss
Unrealized loss
on securities available
for sale, net of tax
benefit of $94,246 (136,465) (136,465)
-----------
Total comprehensive income 5,182,575
Adjustment to initially
apply SFAS 158, net of
tax benefit of $862,779 (1,249,315) (1,249,315)
Dividends declared (782,332) (782,332)
Exercise of stock options 16,500 1,650 163,350 165,000
Purchase of common stock (2,297) (37,646) (37,646)
- -----------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2006 6,529,313 $802,289 $8,930,731 $(2,485,410) $82,120,391 $(11,007,443) $78,360,558
=============================================================================================================================
See notes to consolidated financial statements.
21
FMS FINANCIAL CORPORATION AND SUBIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNATURE 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, 2006 and 2005, were $24.2 million and $21.8 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.
22
ALLOWANCE FOR LOAN LOSSES
In accordance with SFAS No. 5 "Accounting for Contingencies", 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.
In accordance with SFAS No. 114 "Accounting by Creditors for Impairment of
a Loan-an amendment of FASB No. 5 and 15", 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
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 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 contractual 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 of $3.6 million are amortized over their
useful life of five years using the straight-line method. Accumulated
amortization was $2.4 million and $1.7 million as of December 31, 2006 and 2005,
respectively. Amortization expenses for each of the years ended December 31,
2006, 2005 and 2004 was $716 thousand. Amortization expense is expected to be
$716 thousand and $443 thousand for the years ended December 31, 2007 and 2008,
respectively. 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.
23
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.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
SEGMENT REPORTING
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way business enterprises report
information about operating segments in annual financial statements. The Bank
has one operating segment, "Community Banking." All of the Bank's activities are
interrelated, and each activity is dependent and assessed based on how each of
the activities of the Bank supports the others. For example, commercial lending
is dependent upon the ability of the Bank to fund itself with retail deposits
and other borrowings and to manage interest rate and credit risk. This situation
is also similar for consumer, residential and multi-family/non-residential
mortgage lending. Accordingly, all significant operating decisions are based
upon analysis of the Bank as one operating segment.
RECLASSIFICATIONS
Certain items in the 2005 and 2004 consolidated financial statements have
been reclassified to conform with the presentation in the 2006 consolidated
financial statements. There was no impact on net income or stockholders' equity
for the reclassifications.
RECLASSIFICATION OF CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The Corporation reclassified the $1.4 million adjustment to initially apply
SFAS No. 158 from the 2006 total comprehensive income as reported in FMS
Financial Corporation 2006 Form 10-K into a separate adjustment of accumulated
comprehensive loss as reported in FMS Financial Corporation Form 2006 10-K/A.
There was no impact on net income or total stockholders' equity for the
reclassification.
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 in the consolidated
statements of operations. The reconciliation of the outstanding shares is
presented in the earnings per share footnote.
REPURCHASE PLAN
The Corporation announced a Stock Repurchase Plan 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share-Based
Payment" (SFAS 123R). This statement is a revision of SFAS 123, "Accounting for
Stock-Based Compensation," and supersedes APR Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The adoption of this standard
had no effect on the Company's consolidated financial statements as no stock
options have been issued since 1998 and all outstanding stock options are fully
vested.
In May 2005, the FASB issued Statement No. 154 (SFAS 154), "Accounting
Changes and Error Corrections". SFAS 154 applies to all voluntary changes in
accounting principle and to changes required by an accounting pronouncement when
the pronouncement does not include specific transition provisions. SFAS 154
requires retrospective application of changes in accounting principle to prior
periods' financial statements unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15,
24
2005, with early adoption permitted. The Corporation's adoption of SFAS 154 did
not have a material impact on the Company's consolidated financial statements.
In November 2005, the FASB issued FASB Staff Position ("FSP") SFAS 115-1
and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments." This FSP nullifies certain requirements of EITF-03-01
on this topic and provides additional guidance on when an investment in a debt
or equity security should be considered impaired and when that impairment should
be considered other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. The FSP also
required certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP SFAS 115-1 and 124-1 was
effective for reporting periods beginning after December 15, 2005. Adoption of
the FSP did not have a material impact on the Company's consolidated financial
statements.
In March 2006, the FASB issued Statement No. 156 (SFAS 156), "Accounting
for Servicing of Financial Assets". SFAS 156 amends SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 156 permits, but does not require, an entity to choose either
the amortization method or the fair value measurement method for measuring each
class of separately recognized servicing assets and servicing liabilities. SFAS
156 is effective for fiscal years beginning after September 15, 2006 and will
not have a material impact on the Company's consolidated financial statements.
In July 2006, FASB issued FASB Interpretation (FIN 48), "Accounting for
Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes". FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an entity's financial statements in accordance
with Statement of SFAS No. 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006 and is currently under
evaluation by the Company and is not expected to have a material impact on the
Company's consolidated financial statements.
In September 2006, FASB issued Statement No. 157 (SFAS 157), "Fair Value
Measurements". SFAS 157 defines fair value and establishes a framework for
measuring fair value in generally accepted accounting principles. This Statement
does not require any new fair value measurements; however, it may change current
practices related to the definition of fair value, the methods used to measure
fair value and expanded disclosures about fair value measurements. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years
and is not expected to have a material impact on the Company's consolidated
financial statements.
In September 2006, FASB Issued Statement No. 158 (SFAS 158), "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans--an
amendment of FASB Statements No. 87, 88, 106, and 132(R)". SFAS 158 requires an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income. This
Statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. The Company
adopted this Statement effective December 31, 2006. The impact on the Company's
consolidated financial statement was to recognize and record a liability of $2.1
million for the underfunded pension and postretirement costs at December 31,
2006.
In September 2006, the SEC staff issued Staff Accounting Bulletin No.108
(SAB 108) "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements". SAB 108 was issued to
provide consistency among registrants in the quantification of financial
statement misstatements. SAB 108 established an approach that requires
quantification of financial statement misstatements based on the effects of the
misstatement on each of the Company's financial statements and the related
disclosures. SAB 108 allows registrants to initially apply the approach either
by (1) retroactively adjusting prior financial statements as if the approach had
always been used or (2) recording the cumulative effect of initially applying
the approach as adjustments to the carrying values of assets and liabilities as
of January 1, 2006 with the related offset recorded to the opening balance of
retained earnings. Use of the "cumulative effect" transition requires full
disclosure as to the nature and amount of each individual error being corrected.
SAB 108 was adopted by the Company during 2006 and did not have a material
impact on the Company's consolidated financial statements.
25
In February 2007, FASB Issued Statement No. 159 (SFAS 159), "The Fair Value
Option for Financial Assets and Financial Liabilities-Including an amendment of
FASB No. 115". SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement is effective
for the beginning of the first fiscal year that begins after November 15, 2007.
Management is currently evaluating the impact on the Company's consolidated
financial statements.
MERGER ANNOUNCED
FMS Financial Corporation announced on October 13, 2006 that it has agreed
to merge with Philadelphia based Beneficial Mutual Savings Bank ("Beneficial").
Under the terms of the merger agreement, Beneficial will conduct a minority
stock offering to its depositors, our shareholders and the public and
immediately thereafter will acquire FMS Financial Corporation. Upon completion
of the merger, Farmers & Mechanics Bank will be merged with and into Beneficial
Mutual Savings Bank. The merger, which is expected to close mid-year 2007, will
significantly expand the network of neighborhood branches and ATM locations
available to our customers across the greater Delaware Valley area.
The completion of the merger is subject to the approval of the Office of
Thrift Supervision, Federal Deposit Insurance Corporation and the Pennsylvania
Department of Banking. Beneficial Mutual Bancorp, Inc. will file a registration
statement, which will include a prospectus for the minority stock offering and a
proxy statement/prospectus to be mailed to shareholders of FMS in connection
with the solicitation of their approval of the merger agreement and their
merger, and other relevant documents with the Securities and Exchange Commission
and the Office of Thrift Supervision with respect to the minority stock offering
and the merger.
2. EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted
earnings per share for the years ended December 31, 2006, 2005 and 2004.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2006 2005 2004
- --------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $5,319,040 $6,718,232 $8,768,229
Average common shares outstanding 6,517,747 6,504,143 6,495,218
Net income per common share $0.82 $1.03 $1.35
DILUTED EARNINGS PER SHARE:
- ---------------------------
Net income available to common shareholders
on a diluted basis $5,319,040 $6,718,232 $8,768,229
Average common shares outstanding 6,517,747 6,504,143 6,495,218
Additional shares considered in diluted
computation assuming exercise of stock options 9,185 16,495 34,251
---------- ---------- ----------
Adjusted weighted average common shares outstanding 6,526,932 6,520,638 6,529,469
Net income per common share $0.81 $1.03 $1.34
26
3. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and estimated market value of investment
securities held to maturity at December 31, 2006 and 2005 are as follows:
DECEMBER 31, 2006
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------
U.S. Gov't agencies $ 197,325,677 $ - $ (2,778,005) $ 194,547,672
Agency MBS's 118,913,950 538,065 (1,472,350) 117,979,665
CMO'S 60,057,762 - (1,903,220) 58,154,542
Pass through
certificates 45,553,222 4,323 (1,204,033) 44,353,512
Municipal bonds 6,590,806 1,136 - 6,591,942
- --------------------------------------------------------------------------------------------
Total $ 428,441,417 $ 543,524 $ (7,357,608) $ 421,627,333
============================================================================================
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
Agency MBS's 157,095,589 1,310,736 (1,790,650) 156,615,675
CMO'S 71,621,287 - (1,973,989) 69,647,298
Pass through
certificates 51,100,285 9,879 (1,250,682) 49,859,482
Municipal bonds 11,390,725 2,302 - 11,393,027
- --------------------------------------------------------------------------------------------
Total $ 483,536,309 $ 1,343,616 $ (7,179,989) $ 477,699,936
============================================================================================
Investments in CMO's are issued by Fannie Mae (FNMA), Freddie Mac (FHLMC)
and private label non-agencies, issued by major financial institutions, which
are rated AAA or AA. During 2006, the Bank sold $11.8 million of MBS's held to
maturity, which resulted in a realized gain of $365 thousand. The sale of these
securities qualified as maturities in accordance with FASB No. 115 "Accounting
for Certain Investments in Debt and Equity Securities", as the Bank had already
collected a substantial portion (in excess of 85%) of the principal due of the
scheduled payments and prepayments. 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, 2006, by contractual maturity, are
shown in the following table. Expected maturities may differ as borrowers have
the right to call or prepay certain obligations.
DECEMBER 31, 2006
--------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
- ------------------------------------------------------
Due one year or less $ 16,490,167 $ 16,400,156
Due one to five years 40,176,616 39,526,711
Due five to ten years 87,122,082 85,674,523
Due after ten years 284,652,552 280,025,943
- ------------------------------------------------------
$428,441,417 $421,627,333
- ------------------------------------------------------
27
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of investment securities
available for sale at December 31, 2006 and 2005 are as follows:
DECEMBER 31, 2006
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------
U.S. Gov't agencies $ 65,398,776 $ - $ (917,439) $ 64,481,337
Agency MBS's 44,251,261 54,318 (499,770) 43,805,809
Pass through
certificates 19,586,361 - (288,237) 19,298,124
CMO'S 18,859,081 - (438,636) 18,420,445
- --------------------------------------------------------------------------------------------
Total $ 148,095,479 $ 54,318 $ (2,144,082) $ 146,005,715
============================================================================================
DECEMBER 31, 2005
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------
U.S. Gov't agencies $ 60,411,063 $ - $ (829,667) $ 59,581,396
Agency MBS's 52,082,272 79,909 (519,495) 51,642,686
Pass through
certificates 22,647,193 2,042 (231,589) 22,417,646
CMO'S 22,350,620 - (360,253) 21,990,367
- --------------------------------------------------------------------------------------------
Total $ 157,491,148 $ 81,951 $ (1,941,004) $ 155,632,095
============================================================================================
Investments in CMO's are issued by Fannie Mae (FNMA), Freddie Mac (FHLMC)
and private label non-agencies, issued by major financial institutions, which
are rated AAA or AA. The amortized cost and estimated market value of
investments available for sale at December 31, 2006, by contractual maturity,
are shown in the following table. Expected maturities may differ as borrowers
have the right to call or prepay certain obligations.
DECEMBER 31, 2006
--------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
- ------------------------------------------------------
Due one year or less $ - $ -
Due one to five years 37,924,492 37,528,226
Due five to ten years 19,087,756 18,703,043
Due after ten years 91,083,231 89,774,446
- ------------------------------------------------------
$148,095,479 $146,005,715
======================================================
There were no sales of investment securities available for sale during 2006
or 2005. During 2004, the Bank sold $17.0 million of MBSs, CMOs and equity
securities available for sale, which resulted in a realized gain of $683
thousand.
28
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 position
at December 31, 2006. The unrealized losses are due to changes in market value
stemming from changes in the general level of interest rates and are considered
to be temporary.
DECEMBER 31, 2006
--------------------------------------------------------------------------------------------
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 $ 4,950,000 $ (50,000) $ 59,531,337 $ (867,439) $ 64,481,337 $ (917,439)
Agency MBS's 7,976,824 (27,402) 29,261,754 (472,368) 37,238,578 (499,770)
Pass through certificates 3,708,209 (63,448) 15,589,915 (224,789) 19,298,124 (288,237)
CMO's - - 18,420,445 (438,636) 18,420,445 (438,636)
--------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES
AVAILABLE FOR SALE $16,635,033 $ (140,850) $122,803,451 $(2,003,232) $139,438,484 $(2,144,082)
--------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
HELD TO MATURITY:
- ---------------------------------
U.S. Gov't agencies $ 14,832,850 $ (110,666) $179,714,822 $ (2,667,339) $ 194,547,672 $ (2,778,005)
Agency MBS's 4,948,808 (16,494) 74,259,528 (1,455,856) 79,208,336 (1,472,350)
Pass through certificates 249,692 (1,101) 43,498,235 (1,202,932) 43,747,927 (1,204,033)
CMO's 1,188,885 (1,443) 56,965,657 (1,901,777) 58,154,542 (1,903,220)
--------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES
HELD TO MATURITY $ 21,220,235 $ (129,704) $354,438,242 $ (7,227,904) $ 375,658,477 $ (7,357,608)
--------------------------------------------------------------------------------------------
TOTAL $ 37,855,268 $ (270,554) $477,241,693 $ (9,231,136) $ 515,096,961 $ (9,501,690)
============================================================================================
29
5. LOANS, NET
Loans, net at December 31, 2006 and 2005 consist of the following:
DECEMBER 31,
------------------------------------
2006 2005
- -------------------------------------------------------------
Mortgage Loans $ 288,052,449 $ 286,476,251
Construction Loans 3,759,783 1,774,630
Commercial Construction 2,955,926 6,942,091
Consumer Loans 2,250,836 2,355,697
Commercial Real Estate 132,217,307 127,704,281
Commercial Business 26,276,040 22,550,190
- -------------------------------------------------------------
Subtotal 455,512,341 447,803,140
Less:
Deferred loan fees 22,587 168,998
Allowance for
possible loan
losses 5,390,570 5,062,785
- -------------------------------------------------------------
Total loans, net $ 450,099,184 $ 442,571,357
=============================================================
At December 31, 2006 and 2005 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 $2.9 million and $1.8 million, respectively. At December 31, 2006,
impaired loans of $985 thousand related to loans that were individually measured
for impairment with a valuation allowance of $414 thousand and $1.9 million of
loans that were collectively measured for impairment with a valuation allowance
of $210 thousand. 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. For the
years ended December 31, 2006 and 2005, the average recorded investment in
impaired loans was approximately $2.1 million and $2.2 million, respectively.
During the years ended December 31, 2006 and 2005, the Corporation recognized
$186 thousand and $231 thousand, respectively, of interest on impaired loans.
The principal amount of non-accrual loans at December 31, 2006 and 2005 was
$2.9 million and $1.8 million, respectively. Interest income on non-accrual
loans that would have been recorded in 2006 under the original terms of such
loans was $184 thousand, and the interest income actually recognized in 2006 for
such loans was $142 thousand. 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 actual interest income recognized in 2005 for such loans was
$101 thousand.
Loans pledged as collateral for advances and lines of credit from the
Federal Home Loan Bank totaled $82.6 million and $41.4 million, at December 31,
2006 and 2005, respectively.
30
The Bank originates and purchases both adjustable and fixed interest rate
loans. At December 31, 2006, the composition of these loans is as follows:
MATURING MATURING
DURING FROM 2008 MATURING
(IN THOUSANDS) 2007 THROUGH 2011 AFTER 2011 TOTAL
- -----------------------------------------------------------------------------------------
Mortgage Loans $ 2,603 $ 12,551 $ 272,898 $288,052
Construction Loans 3,760 0 0 3,760
Commercial Construction 2,493 463 0 2,956
Consumer Loans 876 785 590 2,251
Commercial Real Estate 5,095 7,759 119,363 132,217
Commercial Business 13,635 6,692 5,949 26,276
- -----------------------------------------------------------------------------------------
Total $ 28,462 $ 28,250 $ 398,800 $455,512
- -----------------------------------------------------------------------------------------
Interest sensitivity on the above loans:
Loans with predetermined rates $ 14,678 $ 25,689 $ 282,424 $322,791
Loans with adjustable or
floating rates 13,784 2,561 116,376 132,721
- -----------------------------------------------------------------------------------------
Total $ 28,462 $ 28,250 $ 398,800 $455,512
=========================================================================================
Changes in the allowance for loan losses are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
2006 2005 2004
- ------------------------------------------------------------------
Balance at beginning
of year $ 5,062,785 $ 4,719,192 $ 4,407,552
Provision charged to
operations 330,000 360,000 330,000
Charge-offs (9,311) (58,587) (22,860)
Recoveries 7,096 42,180 4,500
- ------------------------------------------------------------------
Balance at end of year $ 5,390,570 $ 5,062,785 $ 4,719,192
==================================================================
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 2006 and 2005 are summarized by
major classification, as follows:
DECEMBER 31,
----------------------------------
2006 2005
- ----------------------------------------------------------------------------------------
Accrued interest on loans $ 2,016,923 $ 1,833,297
Accrued interest on investment securities held to
maturity 3,231,833 3,361,066
Accrued interest on investment securities available
for sale 1,123,598 1,030,008
- ----------------------------------------------------------------------------------------
Total accrued interest receivable $ 6,372,354 $ 6,224,371
- ----------------------------------------------------------------------------------------
31
7. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at December 31, 2006 and 2005 are
summarized by major classification, as follows:
DECEMBER 31,
-------------------------------
2006 2005
- -------------------------------------------------------------------
Land, buildings and improvements $ 39,892,255 $ 39,687,711
Furniture and equipment 8,319,452 7,945,004
Computers 6,438,325 6,318,293
- -------------------------------------------------------------------
Total 54,650,032 53,951,008
Less accumulated depreciation (20,911,104) (19,149,921)
- -------------------------------------------------------------------
Office properties and equipment, net $ 33,738,928 $ 34,801,087
===================================================================
Depreciation expense totaled $2.0 million for the years ended December 31,
2006, 2005 and 2004.
8. DEPOSITS
Deposits at December 31, 2006 and 2005 consisted of the following major
classifications and weighted average interest rates:
DECEMBER 31, 2006
----------------------------------------------
WEIGHTED PERCENT
AVERAGE RATE AMOUNT OF TOTAL
- ------------------------------------------------------------------------
Non-interest checking 0.00% $ 194,206,626 20.81%
Checking accounts 2.93% 217,387,796 23.30%
Savings accounts 0.61% 175,056,992 18.76%
Money market accounts 1.22% 114,658,464 12.29%
Time deposits 3.31% 231,792,888 24.84%
- ------------------------------------------------------------------------
Total 1.73% $ 933,102,766 100.00%
========================================================================
DECEMBER 31, 2005
----------------------------------------------
WEIGHTED PERCENT
AVERAGE RATE AMOUNT OF TOTAL
- ------------------------------------------------------------------------
Non-interest 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%
========================================================================
The aggregate amount of time deposits in excess of $100 thousand totaled
$43.9 million at December 31, 2006. Generally, deposits greater than $100
thousand are not federally insured. Deposits from related parties, including
directors and named executive officers, totaled $1.7 million and $1.2 million at
December 31, 2006 and 2005, respectively. A summary of time deposits by maturity
at December 31, 2006 is as follows:
YEARS ENDED DECEMBER 31, AMOUNT
- -------------------------------------------------
2007 $180,369,639
2008 27,257,113
2009 10,771,793
2010 5,661,231
2011 7,719,241
Thereafter 13,871
- -------------------------------------------------
Total $231,792,888
=================================================
32
A summary of interest expense on deposits is as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------
2006 2005 2004
- -----------------------------------------------------------------------
Checking accounts $ 6,293,415 $ 4,124,244 $ 1,717,164
Savings accounts 1,137,763 1,149,484 1,070,861
Money market accounts 1,547,516 1,266,737 1,001,238
Time deposits 7,105,205 4,877,824 3,965,128
- -----------------------------------------------------------------------
Total interest expense $16,083,899 $11,418,289 $ 7,754,391
=======================================================================
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 2006, the Bank had securities sold under the agreements to
repurchase (repurchase agreements) in the aggregate amount of $115.0 million.
The repurchase agreements are collateralized by U.S. Government agency notes,
MBSs, CMOs and loans with a market value of $119.4 million. Accrued interest
payable totaled $600 thousand and $1.0 million, at December 31, 2006 and 2005,
respectively.
YEAR ENDED DECEMBER 31, 2006
- -----------------------------------------------------------------------------
WEIGHTED MATURITY CALL
COUNTER PARTY AMOUNT AVERAGE RATE DATE FEATURE
- -----------------------------------------------------------------------------
FHLB $ 20,000,000 5.72% 12/19/07 03/19/07
FHLB 20,000,000 5.95% 08/30/10 03/01/07
FHLB 20,000,000 5.54% 10/18/10 01/17/07
FHLB 20,000,000 4.85% 12/20/10 03/20/07
FHLB 20,000,000 5.22% 12/20/10 03/20/07
FHLB 5,000,000 3.73% 01/05/16 01/05/07
Merrill Lynch 10,000,000 3.90% 01/06/16 01/06/08
- -----------------------------------------------------------------------------
TOTAL $ 115,000,000 5.24%
=============================================================================
YEAR ENDED DECEMBER 31, 2005
- -----------------------------------------------------------------------------
WEIGHTED MATURITY CALL
COUNTER PARTY 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%
=============================================================================
10. ACCRUED INTEREST PAYABLE
Accrued interest payable at December 31, 2006 and 2005 are summarized by
major classification, as follows:
DECEMBER 31,
----------------------------------
2006 2005
- ------------------------------------------------------------------------------
Accrued interest on deposits $ 758,371 $ 324,676
Accrued interest on repurchase agreements 600,025 1,024,636
Accrued interest on FMS Statutory Trust I
and II 109,349 29,041
- ------------------------------------------------------------------------------
Total accrued interest payable $ 1,467,745 $ 1,378,353
- ------------------------------------------------------------------------------
33
11. INCOME TAXES
The Corporation's provision for income taxes differs from that computed by
applying the statutory federal income tax rate to income taxes as follows:
DECEMBER 31,
-------------------------------------------------------------------------------------
2006 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------
Tax at Federal tax rate: $ 2,953,167 34.00% $ 3,863,989 34.00% $ 5,162,546 35.00%
Increase (decrease) from:
State income taxes,
net of federal income tax benefit 624,702 7.19 813,465 7.16 925,297 6.27
Tax exempt interest income (96,203) (1.11) (45,275) (.40) (10,680) (.07)
Other (114,920) (1.32) 14,262 .13 (95,262) (.65)
- ----------------------------------------------------------------------------------------------------------------------
Total $ 3,366,746 38.76% $ 4,646,441 40.89% $ 5,981,901 40.55%
======================================================================================================================
The temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31
----------------------------------
2006 2005
- ---------------------------------------------------------------------------
Deferred income tax assets:
Allowance for possible loan losses $ 2,202,048 $ 2,068,148
Compensation and pension asset 167,931 82,876
Amortization of deposit premiums 789,262 635,674
Pension and postretirement benefits 1,067,049 204,250
Accrued expenses 168,888 137,566
Other 32,412 24,461
- ---------------------------------------------------------------------------
Gross deferred tax assets $ 4,427,590 $ 3,152,975
===========================================================================
Deferred income tax liabilities:
Prepaid deposit insurance premiums $ 13,129 $ 13,129
Depreciation (102,697) 168,544
Deferred loan fees - net 422,320 363,661
- ---------------------------------------------------------------------------
Gross deferred tax liabilities $ 332,752 $ 545,334
- ---------------------------------------------------------------------------
Deferred income tax asset, net $ 4,094,838 $ 2,607,641
===========================================================================
There was no change in the valuation allowance for the year ended December
31, 2006, 2005 and 2004.
34
The following represents the components of income tax expense for the years
ended December 31, 2006, 2005 and 2004, respectively.
DECEMBER 31,
--------------------------------------------
2006 2005 2004
- ----------------------------------------------------------------------------------
Current Federal tax provision $ 2,975,624 $ 3,831,359 $ 4,645,184
Current State tax provision 1,015,520 1,272,280 1,443,252
- ----------------------------------------------------------------------------------
Total Current provision $ 3,991,144 $ 5,103,639 $ 6,088,436
- ----------------------------------------------------------------------------------
Deferred Federal tax provision (benefit) ($555,395) ($417,440) ($86,817)
Deferred State tax provision (benefit) (69,003) (39,758) (19,718)
- ----------------------------------------------------------------------------------
Total deferred provision (benefit) (624,398) (457,198) (106,535)
- ----------------------------------------------------------------------------------
Total $ 3,366,746 $ 4,646,441 $ 5,981,901
==================================================================================
12. LEASES
The Bank leases eleven branch locations, which expire over the next 13
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, 2006 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- -----------------------------------------------
2007 $ 375,505
2008 305,974
2009 250,850
2010 216,325
2011 and beyond 609,317
- -----------------------------------------------
TOTAL $ 1,757,971
===============================================
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 $442 thousand, $363 thousand and $329 thousand for
fiscal years 2006, 2005 and 2004, respectively.
35
13. 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. Retained earnings have been
restricted and a special reserve was established for these deposits. This
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,
2006 and 2005. The following table presents the capital ratios of the Bank at
December 31, 2006 and 2005.
MINIMUM
TO BE WELL
CAPITALIZED
MINIMUM UNDER PROMPT
CAPITAL CORRECTIVE ACTION
ACTUAL REQUIREMENT PROVISIONS
------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------
DECEMBER 31, 2006 (THOUSANDS)
- -------------------------------------------------------------------------------------------------------
Tier 1 (Core) Capital: $ 94,800 7.98% $ 47,511 4.0% $ 59,389 5.0%
.
Risk-Based Capital: $ 99,777 19.27% $ 41,416 8.0% $ 51,770 10.0%
Tier 1 Risked-Based Capital: $ 94,800 18.31% $ 20,708 4.0% $ 31,062 6.0%
Tangible Capital: $ 94,800 7.98% $ 17,817 1.5% $ 24,377 2.0%
- -------------------------------------------------------------------------------------------------------
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 Risked-Based Capital: $ 89,616 17.24% $ 20,794 4.0% $ 31,191 6.0%
Tangible Capital: $ 89,616 7.29% $ 18,442 1.5% $ 24,589 2.0%
=======================================================================================================
A reconciliation of the Bank's GAAP capital to the regulatory capital
amounts is provided in the following table:
DECEMBER 31, 2006 DECEMBER 31, 2005
- -------------------------------------------------------------------------------------------------
BANK GAAP CAPITAL $ 94,220,043 $ 91,137,726
Accumulated other comprehensive loss 2,485,410 1,099,630
Less:
Subsidiary investments not includable (745,645) (745,645)
Core deposit intangible (1,159,614) (1,875,822)
- -------------------------------------------------------------------------------------------------
TIER 1, TIER 1 RISK-BASED AND TANGIBLE CAPITAL $ 94,800,194 $ 89,615,889
- -------------------------------------------------------------------------------------------------
General valuation allowance 4,977,001 4,649,217
- -------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL $ 99,777,195 $ 94,265,106
===============================================================================================
36
14. RETIREMENT PLANS
The Bank has a defined benefit pension plan for active employees. The Bank
also provides certain health care and life insurance benefits to certain retired
employees.
As of December 31, 2006, the Corporation adopted SFAS 158, "Employers'
Accounting for Defined Benefit and Other Postretirement Plans," which requires
recognition of the funded status of these plans in the consolidated statement of
financial condition. At December 31, 2006, the incremental effect of applying
SFAS 158 on individual line items in the Consolidated Statement of Financial
Condition are as follows:
BEFORE AFTER
APPLICATION OF APPLICATION OF
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION- LINE ITEMS SFAS 158 ADJUSTMENTS SFAS 158
- ---------------------------------------------------------------------------------------------------------------------
Deferred income taxes $ 3,232,039 $ 862,799 $ 4,094,838
Total assets $1,187,249,624 $ 862,799 $1,188,112,423
Pension benefit liability $ 319,092 $ 1,968,131 $ 2,287,223
Postretirement liability $ 500,000 $ 143,983 $ 643,983
Other liabilities (including benefit & postretirement
liability shown above) $ 4,239,263 $ 2,112,114 $ 6,351,377
Total liabilities $1,107,639,751 $ 2,112,114 $1,109,751,865
Accumulated other comprehensive loss-net of deferred
income taxes $ (1,236,095) $(1,249,315) $ (2,485,410)
Total stockholders' equity $ 79,609,873 $(1,249,315) $ 78,360,558
Total liabilities and stockholders' equity $1,187,249,624 $ 862,799 $1,188,112,423
Amounts recognized is accumulated other comprehensive income at December
31, 2006 are as follows:
PENSION POST-RETIREMENT
PLAN PLAN
---------------------------------------
Net loss $ 515,113 $143,983
Prior service cost 1,453,018 -
The estimated net loss, net prior service cost, and net transition
obligation for the pension benefits that will be amortized from accumulated
other comprehensive income into net periodic pension costs over the next fiscal
year are $0, $98 thousand and $0, respectively. It is estimated that there will
not be any net loss, net prior service cost or net transition obligation for the
post-retirement benefits that will be amortized from accumulated other
comprehensive income into periodic post-retirement benefit costs over the next
fiscal year.
Net pension expense was $1.0 million, $1.0 million and $822 thousand for
years ended December 31, 2006, 2005 and 2004, respectively. The components of
net pension cost are as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
2006 2005 2004
- -----------------------------------------------------------------
Service cost $ 1,025,847 $ 947,524 $ 871,039
Interest cost 744,708 742,271 563,963
Return on assets (1,537,656) (487,280) (659,381)
Net amortization
and deferral 786,636 (191,135) 46,634
- -----------------------------------------------------------------
Net periodic
pension cost $ 1,019,535 $ 1,011,380 $ 822,255
=================================================================
37
The following table presents a reconciliation of the funded status of the
defined benefit pension plan at December 31, 2006 and 2005:
DECEMBER 31,
-----------------------------------
2006 2005
- ------------------------------------------------------------------
Accumulated benefit obligation
Projected benefit obligation $16,100,982 $ 13,952,999
Fair value of plan assets 13,813,759 12,146,662
- ------------------------------------------------------------------
Unfunded of plan assets over
projected benefit
obligation 2,287,223 1,806,337
Unrecognized net loss - (21,883)
Unrecognized prior service cost - (1,551,445)
- ------------------------------------------------------------------
Accrued pension cost
included in the
consolidated
balance sheet $ 2,287,223 233,009
==================================================================
The following table presents a reconciliation of beginning and ending
balances of benefit obligations and plan assets:
DECEMBER 31,
-------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION 2006 2005
- ------------------------------------------------------------------------
Projected benefit obligation
at beginning of year $ 13,952,889 $ 10,844,831
Service cost 1,025,847 947,524
Interest cost 744,708 742,271
Actuarial loss 1,211,309 1,570,235
Benefits paid (833,771) (151,972)
- ------------------------------------------------------------------------
Projected benefit obligation
at end of year 16,100,982 13,952,889
- ------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
- ------------------------------------------------------------------------
Fair value of plan assets
at beginning of year 12,146,662 10,712,030
Actual return of plan assets 1,537,656 487,280
Employer contribution 963,212 1,099,324
Benefits paid (833,771) (151,972)
- ------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 13,813,759 $ 12,146,662
========================================================================
Actuarial assumptions used in determining pension amounts are as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
2006 2005 2004
- ------------------------------------------------------------
Discount rate for periodic
pension cost 5.50% 6.00% 6.00%
Discount rate for
benefit obligation 5.50% 5.50% 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%
- ------------------------------------------------------------
38
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 2006, 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, 2006
are as follows:
% OF
MARKET VALUE ASSETS
- --------------------------------------------------------
Cash $ 831,635 6.0%
Equity securities 12,931,179 93.6%
Preferred stock securities 30,438 0.2%
Closed-end funds 20,507 0.2%
- --------------------------------------------------------
Total Plan Assets $13,813,759 100.00%
========================================================
The Bank regularly monitors our pension asset allocation. Senior management
review performance results at least quarterly. As of December 31, 2006, our
target asset allocation was 94% U.S. common stock equities, 0.2% preferred stock
equities, 0.2% mutual funds 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 2006 and 2005, $955
thousand and $1.0 million, respectively were contributed by the Corporation to
meet the pension funding requirements. The contribution to the pension plan for
2007 is expected to be approximately $779 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 2007
through 2011 are $287 thousand, $349 thousand, $408 thousand, $439 thousand, and
$477 thousand, respectively. The aggregate expected benefits to be paid in the
five years from 2012 through 2016 are $3.0 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 employee's 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 $285 thousand, $302 thousand and $281
thousand for the years ended December 31, 2006, 2005 and 2004.
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 in
other liabilities.
The net periodic postretirement benefit costs includes the following
components:
DECEMBER 31,
--------------------------------------
2006 2005 2004
- ---------------------------------------------------------------------
Interest cost $24,520 $ 25,163 $ 51,547
Amortization of prior service (7,064) (11,339) (11,339)
Amortization of loss (3,860) 19,517 15,776
- ---------------------------------------------------------------------
Net periodic post-retirement
benefit cost $13,596 $ 33,341 $ 55,984
=====================================================================
39
The assumed discount rate used in the calculation for net periodic
postretirement benefit costs was 5.50% for 2006 and 2005. The assumed health
care cost trend rate for 2006 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, 2006
------------------------------------
1.0% INCREASE 1.0% DECREASE
- ------------------------------------------------------------------------
Accumulated postretirement obligation $47,674 $42,860
Service and interest Cost $ 2,485 $ 2,234
=======================================================================
The following table summarizes the amounts recognized in the Bank's balance
sheet:
DECEMBER 31,
----------------------------
2006 2005
- -----------------------------------------------------------------
Accumulated post-retirement
benefit obligation $(643,983) $(480,053)
Unrecognized prior service cost - (7,063)
Unrecognized net gain - (70,969)
- -----------------------------------------------------------------
Accrued post-retirement benefit
cost $(643,983) $(558,085)
=================================================================
The assumed discount rate used in the calculation for the accumulated
postretirement benefit obligations was 5.50% as of December 31, 2006 and 2005.
The following table presents a reconciliation of beginning and ending
balance of benefit obligations and plan assets:
DECEMBER 31,
-----------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION 2006 2005
- ---------------------------------------------------------------------
Projected benefit obligation
at beginning of year $480,053 $ 744,827
Service cost $ - $ -
Interest cost $ 24,520 $ 25,163
Actuarial loss (gain) $207,892 $(246,625)
Benefits paid $(68,482) $ (43,312)
- ---------------------------------------------------------------------
Projected benefit obligation
at end of year $643,983 $ 480,053
- ---------------------------------------------------------------------
CHANGE IN PLAN ASSETS
- ---------------------------------------------------------------------
Fair value of plan assets
at beginning of year $ - $ -
Actual return of plan assets $ - $ -
Employer contribution $ 68,482 $ 43,312
Benefits paid $(68,482) $ (43,312)
- ---------------------------------------------------------------------
Fair value of plan assets
at end of year - -
=====================================================================
The expected cost of postretirement benefits in each year from 2007 through
2011 are $71 thousand, $72 thousand, $71 thousand, $70 thousand and $68
thousand, respectively. The aggregate expected benefits to be paid in the five
years from 2012 through 2016 are $293 thousand.
40
15. LONG-TERM DEBT
The Corporation established FMS Statutory Trust 1 ("Trust I") 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,
2006 and 2005, the interest rate was 8.97% and 8.12%, 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.
The Corporation established FMS Statutory Trust II ("Trust II") in June
2006. 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 for 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 158 basis points. As of December 31, 2006 the interest rate was 6.94%. The
debentures are redeemable at the Corporation's option any time after June 2011.
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 I and II, 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.
41
16. 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 AND SECURITIES AVAILABLE FOR SALE: 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.
DEPOSITS: 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.
FMS STATUTORY TRUST I AND II 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, 2006 and December 31, 2005, the carrying amount and the
estimated market value of Corporation's financial instruments are as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005
--------------------------------------- ----------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT MARKET VALUE AMOUNT MARKET VALUE
--------------------------------------- ----------------------------------
Financial assets:
Cash and cash equivalents $ 109,761,197 $ 109,761,197 $ 93,840,949 $ 93,840,949
Investment securities held to maturity and
investment
securities available for sale $ 574,447,132 $ 567,633,048 $ 639,168,404 $ 633,332,032
FHLB Stock $ 6,313,520 $ 6,313,520 $ 8,248,420 $ 8,248,420
Loans, net of unearned income $ 455,489,754 $ 449,681,000 $ 447,634,142 $ 445,616,000
Less: Allowance for loan losses $ (5,390,570) $ (5,390,570) $ (5,062,785) $ (5,062,785)
Loans, net $ 450,099,184 $ 444,290,430 $ 442,571,357 $ 440,553,215
Financial liabilities:
Deposits
Checking, passbook, and money market accounts $ 701,309,878 $ 701,309,878 $ 735,175,654 $ 735,175,655
Certificates $ 231,792,888 $ 230,923,000 $ 211,891,770 $ 210,789,000
Securities sold under agreements to repurchase $ 115,000,000 $ 116,690,444 $ 175,000,000 $ 178,419,000
Trust capital securities-FMS Statutory
Trust I and II $ 51,548,000 $ 51,403,666 $ 25,774,000 $ 26,670,935
Off-balance sheet financial instruments:
Commitments to extend credit $ 35,547,494 $ 35,547,494 $ 54,113,170 $ 54,113,170
Standby letters of credit $ 6,568,883 $ 6,568,883 $ 6,905,486 $ 6,905,486
42
17. COMMITMENTS AND CONTINGENCIES
The Bank has outstanding loan commitments of $35.5 million as of December
31, 2006. Of these commitments outstanding, the breakdown between fixed and
variable rate loans is as follows:
DECEMBER 31, 2006
-----------------------------------------------------------------
INTEREST RATE
FIXED VARIABLE RANGE-FIXED RATE
RATE RATE TOTAL COMMITMENTS
- ---------------------------------------------------------------------------------------
Commitments to:
fund loans $2,445,572 $ 3,571,000 $ 6,016,572 6.125%-7.50%
Unused lines:
Construction 1,722,940 3,901,232 5,624,172 5.75%-8.75%
Equity line of
credit loans - 23,906,750 23,906,750 -
- ---------------------------------------------------------------------------------------
Total $4,168,512 $31,378,982 $ 35,547,494 5.75%-8.75%
=======================================================================================
In addition to outstanding loan commitments, the Bank as of December 31,
2006, issued $6.6 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.
18. 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, 2006, which are expected to have a material impact on the
Corporation's financial position or results of operations.
19. 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, 2006 and 2005, loans made to directors and executive officers whose
indebtedness exceeded $60 thousand amounted to $3.3 million and $5.2 million,
respectively. During 2006, new loans to these individuals totaled $722 thousand
and repayments totaled $2.6 million.
43
20. 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, 2006, 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 2006, 2005 and 2004.
The following table summarizes information about stock options outstanding
at December 31, 2006.
EXERCISE OUTSTANDING AVERAGE EXERCISABLE
PRICE OPTIONS LIFE * OPTIONS
- -----------------------------------------------------
$10.00 17,500 1.8 17,500
=====================================================
* Average contractual life in years
A summary of the status of the Corporation's Stock Option Plan as of
December 31, 2006, 2005 and 2004 and changes during the years ending on those
dates is presented below.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
2006 2005 2004
- --------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- --------------------------------------------------------------------------------
Outstanding at the
beginning of the
year 36,500 $10.00 65,600 $ 8.31 75,250 $8.06
Options exercised (16,500) 10.00 (15,100) 5.90 (4,650) 7.49
Options surrendered (2,500) 10.00 (14,000) 6.50 (5,000) 5.33
- --------------------------------------------------------------------------------
Outstanding at the
end of the year 17,500 $10.00 36,500 $10.00 65,600 $8.31
================================================================================
44
21. 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 utilizes 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 2007.
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.
45
22. PARENT COMPANY FINANCIAL INFORMATION
The financial statements for FMS Financial Corporation are as follows:
DECEMBER 31,
--------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF FINANCIAL CONDITION 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 1,502,610 $ 1,337,624
Investment in subsidiary 95,768,042 91,911,725
Intercompany receivable, net 32,151,523 7,172,564
FMS Statutory Trust 1 issue costs, net 78,582 484,467
Other 712,999 174,423
--------------- --------------
TOTAL ASSETS $ 130,213,756 $ 101,080,803
=============== ==============
LIABILITIES:
FMS Statutory Trust I and II debentures $ 51,548,000 $ 25,774,000
Dividends payable 195,849 195,486
Accrued interest payable 109,349 29,041
--------------- --------------
TOTAL LIABILITIES 51,853,198 25,998,527
--------------- --------------
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 8,022,892 and 8,006,392 and shares outstanding 6,529,313 and 6,515,110
as of December 31, 2006 and 2005, respectively 802,289 800,639
Paid-in capital in excess of par 8,930,731 8,767,381
Accumulated comprehensive loss - net of deferred income taxes (2,485,410) (1,099,630)
Retained earning 82,120,391 77,583,683
Less:Treasury Stock (1,493,579 and 1,491,282 shares, at cost at December 31,
2006 and 2005, respectively) (11,007,443) (10,969,797)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY 78,360,558 75,082,276
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 130,213,756 $ 101,080,803
=============== ==============
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
46
DECEMBER 31,
---------------------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS 2006 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Interest income $ 2,559 $ - $ -
Intercompany interest income 1,478,959 414,140 320,582
Interest expense (3,566,290) (1,834,528) (1,368,591)
Other expense (12,284) - -
Dividends from subsidiary 2,400,000 1,200,000 2,400,000
Equity in undistributed income of subsidiary 4,303,097 6,442,469 7,056,742
-----------------------------------------------------------
Income before taxes 4,606,041 6,222,081 8,408,733
Income tax benefit 712,999 496,151 359,496
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,319,040 $ 6,718,232 $ 8,768,229
==================================================================================================================
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
DECEMBER 31,
----------------------------------------------------------
FMS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS 2006 2005 2004
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,319,040 $ 6,718,232 $ 8,768,229
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the subsidiary (4,303,097) (6,442,469) (7,056,742)
Amortization of issue costs 405,885 77,844 77,843
Increase in interest payable 80,308 7,050 4,915
Increase in intercompany receivable, net (24,978,959) (414,140) (1,320,582)
Other (538,576) 513,708 (359,496)
------------ ----------- -----------
Net cash provided by operating activities (24,015,399) 460,225 114,167
------------ ----------- -----------
FINANCING ACTIVITIES
Purchase of treasury stock (37,646) (34,798) -
Proceeds from issuance of trust capital securities 25,000,000 - -
Investment in subsidiary (165,000) (213,385) (49,796)
Cash dividends paid on common stock (781,969) (780,298) (779,240)
Proceeds from issuance of stock 165,000 213,385 49,796
------------ ----------- -----------
Net cash provided (used) by financing activities 24,180,385 (815,096) (779,240)
------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 164,986 (354,871) (665,073)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,337,624 1,692,495 2,357,568
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,502,610 $ 1,337,624 $ 1,692,495
============ =========== ===========
These statements should be read in conjunction with the other notes related to
the consolidated financial statements.
47
23. CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)
The following table presents summarized quarterly data for 2006 and 2005:
- -----------------------------------------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
2006 QUARTER QUARTER QUARTER QUARTER YEAR
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER AMOUNTS)
Total interest income $ 15,177 $ 15,294 $ 15,436 $ 15,086 $ 60,993
Total interest expense 6,345 6,710 7,129 7,231 27,415
-------- -------- -------- -------- --------
Net interest income 8,832 8,584 8,307 7,855 33,578
Provision for loan losses 90 90 90 60 330
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 8,742 8,494 8,217 7,795 33,248
Total non-interest income 1,398 1,922 1,793 2,051 7,164
Total non-interest expense 7,944 7,945 8,027 7,810 31,726
-------- -------- -------- -------- --------
Income before income taxes 2,196 2,471 1,983 2,036 8,686
Federal and state income taxes 862 961 736 808 3,367
-------- -------- -------- -------- --------
Net income $ 1,334 $ 1,510 $ 1,247 $ 1,228 $ 5,319
-------- -------- -------- -------- --------
Basic earnings per common share $ 0.20 $ 0.23 $ 0.19 $ 0.20 $ 0.82
======== ======== ======== ======== ========
Diluted earnings per common share $ 0.20 $ 0.23 $ 0.19 $ 0.19 $ 0.81
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
2005 QUARTER QUARTER QUARTER QUARTER YEAR
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income $ 14,017 $ 14,327 $ 14,598 $ 14,964 $ 57,906
Total interest expense 4,967 5,134 5,420 6,016 21,537
-------- -------- -------- -------- ---------
Net interest income 9,050 9,193 9,178 8,948 36,369
Provision for loan losses 90 90 90 90 360
-------- -------- -------- -------- ---------
Net interest income after provision
for loan losses 8,960 9,103 9,088 8,858 36,009
Total non-interest income 1,308 1,416 1,373 1,326 5,423
Total non-interest expense 7,382 7,395 7,585 7,705 30,067
-------- -------- -------- -------- ---------
Income before income taxes 2,886 3,124 2,876 2,479 11,365
Federal and state 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
======== ======== ======== ======== =========
48
24. SUBSEQUENT EVENT (UNAUDITED)
On March 7, 2007, the Company announced that it intends to close eleven New
Jersey branch locations of its wholly-owned bank subsidiary, Farmers & Mechanics
Bank, including all seven Wal-Mart branch locations, at an estimated net cost of
approximately $1.5 million or $.23 per share, substantially all of which is
expected to be incurred and recorded during the quarter ending June 30, 2007.
The costs associated with the branch closings consist primarily of employee
costs, fixed assets and early lease cancellation fees as all of the Wal-Mart
branches are operated under long-term leases. The Company also announced that it
had entered into an agreement with Beneficial Mutual Saving Bank "Beneficial" to
indemnify the Company for any and all costs associated with the branch closures
in the event that the proposed merger with Beneficial in not consummated for any
reason.
49
PART III
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
non-cash compensation for the year ended December 31, 2006 awarded to the chief
executive officer, the principal financial officer and other named executive
officers (collectively, the "Named Executive Officers") who served in such
capacity during such period and received total compensation in excess of
$100,000 during the year ended December 31, 2006.
Change in Pension
Value and
Nonqualified
Deferred
Compensation All Other
Name and Principal Position Year Salary Bonus Earnings Compensation Total
- --------------------------- ---- ------ ----- -------- ------------ -----
Craig W. Yates 2006 $205,000 $10,000 $124,703 $10,000 (1) $349,703
President and CEO
Channing L. Smith 2006 $100,452 $ 7,000 $ 46,461 $ 5,128 (1) $159,041
Vice President and Chief
Financial Officer
James E. Igo 2006 $123,505 $10,000 $ 27,657 $ 7,377 (1)(2) $168,539
Senior Vice President and
Senior Lending Officer
Thomas M. Topley 2006 $117,084 $10,000 $ 19,292 $ 7,927 (1) $154,303
Senior Vice President of
Operations and Corporate
Secretary
(1) Includes the value of the Corporations matching contribution to 401(k)
retirement plan
(2) Includes payment for unused vacation
50
All Other Compensation consists of the value of the Corporation's matching
contribution to the 401(k) retirement plan and amounts paid for unused vacation:
UNUSED
NAME YEAR 401(K) VACATION
- ---- ---- ------ --------
Craig W. Yates 2006 $10,000 $0
Channing L. Smith 2006 $ 5,128 $0
James E. Igo 2006 $ 6,625 $752
Thomas M. Topley 2006 $ 7,927 $0
GRANTS OF PLAN BASED AWARDS DURING 2006. There were no grants of stock
options to any Named Executive Officer during 2006.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006. The following table sets
forth information concerning the exercise of options by the Chief Executive
Officer and the other Named Executive Officers during the last fiscal year, as
well as the value of such options held by such persons at the end of the fiscal
year. None of the Named Executive Officers had any outstanding unvested stock
awards.
Option Awards
------------------------------------------------------------------
Equity
Incentive
Number of Number of Plan Awards:
Securities Securities Number of
Underlying Underlying Securities
Unexercised Unexercised Underlying
Options Options Unexercised Option Option
Unearned Exercise Expiration
Name Exercisable Unexercisable Options Price Date
- ---- ----------- ------------- -------- ----- ----
Craig W. Yates 0 0 0 $0
Channing L. Smith 5,000 0 0 10.00 10/27/2007
James E. Igo 3,000 0 0 10.00 10/27/2007
Thomas M. Topley 0 0 0 0
51
EXERCISES OF OPTIONS AND VESTING OF SHARES DURING 2006
Option Awards Stock Awards
----------------------------------- --------------------------------------
Number of Number of
Shares Acquired Value Realized Shares Acquired Value Realized
Name on Exercise on Exercise on Vesting on Vesting
- ---- ---------- ----------- ---------- ----------
Craig W. Yates 0 $0 0 $0
Channing L. Smith 0 0 0 0
James E. Igo 0 0 0 0
Thomas M. Topley SAR 22,810 0 0
PENSION BENEFITS. The following table sets forth information regarding the
present value of each Named Executive Officer's accumulated benefit under the
Bank's pension plan. None of the Named Executive Officers participate in any
nonqualified defined contribution or other nonqualified deferred compensation
plan.
Number of Present
Years Value of Payments
Credited Accumulated During Last
Name Plan Name Service Benefit Fiscal Year
- ---- --------- ------- ------- -----------
Craig W. Yates Farmers & Mechanics Bank 16 $864,852 $0
Pension Plan
Channing L. Smith Farmers & Mechanics Bank 13 280,423 0
Pension Plan
James E. Igo Farmers & Mechanics Bank 15 188,953 0
Pension Plan
Thomas M. Topley Farmers & Mechanics Bank 15 126,085 0
Pension Plan
COMPENSATION COMMITTEE, INTERLOCKS AND INSIDER PARTICIPATION
The Corporation's Compensation Committee serves as the Compensation
Committee for executive officers of the Corporation and the Bank. George J.
Barber, a director and member of the Compensation Committee, served as President
of the Bank from 1973 until his retirement in 1986.
No member of the Committee is, or was during 2006, an executive officer of
another Corporation whose board of directors has a comparable committee on which
one of the Corporation's executive officers serves. None of the executive
officers of the Corporation is, or was during 2006, a member of a comparable
compensation committee of a Corporation of which any of the directors of the
Corporation is an executive officer.
COMPENSATION DISCUSSION AND ANALYSIS
The responsibility of the Compensation Committee of the Corporation is to
determine the compensation levels of the executive officers. The overall policy
of the executive compensation program is to closely align the compensation paid
to executive officers with the short-term and long-term performance goals of the
Corporation and to allow the Bank to attract and retain key executives who will
drive long-term success and create shareholder value.
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The executive compensation program has in the past included three elements
that taken together constitute a flexible and balanced method of establishing a
total compensation opportunity for executive officers. These elements are (1)
base salary, (2) annual bonus plan award, and (3) long-term incentive award,
which in the past have been stock option grants. The Committee determines the
level of compensation for each executive annually after reviewing various
surveys of compensation paid to executives performing similar duties for
depository institutions and their holding companies, with particular focus on
the level of compensation paid by comparable institutions in and around the
Corporations market area.
BASE SALARY - Base Salaries of executive officers are established based on
the scope of responsibility and competitive market compensation. Based on 2006
performance, all executives received salary increases for 2007 except for Mr.
Craig W. Yates. The salary increases for executive officers were increased using
the same merit increase percentages applicable to other Bank employees ranging
from 3% to 5%.
ANNUAL BONUS PLAN - The purpose of the annual bonus plan is to provide
motivation, and to reward and retain individuals by providing a competitive
compensation package. The actual bonus awards for 2006 are shown in the "Bonus"
column of the Summary Compensation Table.
LONG-TERM INCENTIVE PLAN - In past years prior to the expiration of the
FMS Financial stock option plan in 1998, stock options had been granted to
officers, including executive officers and certain other employees to motivate
and to reward them for increases in stockholder value and to align their
personal financial interests with those of the stockholders of the Corporation.
All stock options were granted with an exercise price equal to the closing price
of FMS Financial Corporation Common Stock on the date of grant. Accordingly,
those stock options had value only if the market price of the common stock
increases after that date. No options have been granted since 1998.
The Compensation Committee anticipates that all compensation paid by the
Company is deductible for federal income tax purposes in accordance with the
limitations included under the Internal Revenue Code of 1986, as amended
("Code"), including Sections 162(m) (limitations on compensation in excess of $1
and $280 thousand (limitations on payments made in conjunction with a change in
control).
The Company does not maintain employment contracts, severance agreements or
change in control agreements for its executive officers. Annually, the President
makes his recommendations to the Compensation Committee with respect to salary
increases, bonus awards and stock option awards for the Company's executive
officers. The Compensation Committee makes a final determination on such matters
as well as any compensation actions regarding the President. The President does
not participate in the Compensation Committee's deliberations with respect to
his compensation arrangements.
COMPENSATION COMMITTEE REPORT
The Corporation's executive officers consist of Craig W. Yates (President
and Chief Executive Officer), Channing L. Smith (Vice President and Chief
Financial Officer), James E. Igo (Senior Vice President and Senior Lending
Officer) and Thomas M. Topley (Senior Vice President of Operations and Corporate
Secretary). The Compensation Committee of the Corporation determines the
compensation of the executive officers. This committee meets at the end of each
year to determine the level of any salary increase to take effect as of the
beginning of the following year. The committee also approves any perquisites
payable to these executive officers. All of the directors, except Craig W.
Yates, serve on the Compensation Committee.
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The Compensation Committee has reviewed and discussed the "Compensation
Discussion and Analysis" set forth above with management. Based on this review
and discussion, the compensation committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in the Annual Report
on Form 10-K.
Compensation Committee:
Dominic W. Flamini
George J. Barber
Edward Staats
Vincent R. Farias
Mary Wells
Roy D. Yates
Joseph W. Clarke, Jr.
BOARD OF DIRECTORS COMPENSATION TABLE
CHANGE IN
PENSION VALUE
& NONQUALIFIED
NON-EQUITY DEFERRED
FEE EARNED STOCK OPTION INCENTIVE PLAN COMPENSATION ALL OTHER
NAME OR PAID IN CASH AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION (1) TOTAL
---- --------------- ------ ------- --------------- -------- ---------------- -----
Roy D. Yates $18,000 $ - $ - $ - $ - $ - $18,000
George J. Barber $12,000 $ - $ - $ - $ - $ 12,417 $24,417
Joseph W. Clarke Jr. $12,000 $ - $ - $ - $ - $ - $12,000
Vincent R. Farias $12,000 $ - $ - $ - $ - $ - $12,000
Dominic W. Flamini $12,000 $ - $ - $ - $ - $ 12,413 $24,413
Edward J. Staats Jr. $12,000 $ - $ - $ - $ - $ - $12,000
Mary Wells $12,000 $ - $ - $ - $ - $ - $12,000
Wayne H. Page $ 8,000 $ - $ - $ - $ - $ 12,413 $20,413
(1) Amounts paid for Health insurance Premiums
DIRECTORS' COMPENSATION
For 2006, Directors received $12,000 as directors of FMS Financial and
Farmers & Mechanics Bank. The President does not receive director fees for
attendance at Board or committee meetings. The Chairman of the Board received
$6,000 in addition to directors' fees for serving as Chairman for the fiscal
year ended December 31, 2006. Total fees paid to directors for the fiscal year
ended December 31, 2006 were $98,000. In addition to cash fees received, FMS
Financial provides certain health care benefits to certain Directors. Total
health insurance premiums paid for directors for the fiscal year ended December
31, 2006 were $37,243.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ---------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated statements of financial condition of FMS
Financial Corporation and subsidiary as of December 31, 2006 and
2005, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the years in
the three year period ended December 31, 2006, together with the
related notes and the Independent Registered Public Accounting
Firms' auditors' report of PricewaterhouseCoopers LLP with
respect to 2005 and Grant Thornton LLP with respect to 2006.
2. Schedules omitted, as they are not applicable.
3. Exhibits
The following Exhibits are filed as part of this report:
2 Agreement and Plan of Merger ***
3.1 Certificate of Incorporation*
3.2 Bylaws*
10.1 Stock Option and Incentive Plan**
21 Subsidiaries of the Registrant ****
23.1 Consent of Grant Thornton LLP
23.2 Consent of PricewaterhouseCoopers LLP
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-------
* Incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-24340.
** Incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-24340.
*** Incorporated by references to the Registrant's Form 8-K filed with the SEC on October 13, 2006.
**** Incorporated by reference to the Original Filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of May 14, 2007.
FMS FINANCIAL CORPORATION
By: /s/ Craig W. Yates
-------------------------------------------
Craig W. Yates, President and
Chief Executive Officer
(Duly Authorized Representative)
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