UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2007
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes NO X
--- ---
Indicate the number of shares outstanding to each of the issuer's classes
of common stock as of the latest practicable date : May 4, 2007.
Class 6,543,813
----- ---------
$.10 par value common stock Outstanding Shares
FMS FINANCIAL CORPORATION AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2007
TABLE OF CONTENTS
Page
----
PART I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2007 (unaudited) and December 31, 2006 1
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2007
and March 31, 2006 2
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2007 and
March 31, 2006 3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the three months ended March 31, 2007
and March 31, 2006 4
Notes to Consolidated Financial Statements 5 - 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 21
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 - Controls and Procedures 22
PART II - Other Information
- ---------------------------
Item 1 - Legal Proceedings 23
Item 1A- Risk Factors 23
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3 - Defaults Upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits 23
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------
MARCH 31, 2007 DECEMBER 31, 2006
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 48,569,822 $ 55,269,961
Interest-bearing deposits 35,555 1,052,911
Short term funds 62,608,361 53,438,325
-------------- --------------
Total cash and cash equivalents 111,213,738 109,761,197
Investment securities held to maturity 414,983,094 428,441,417
Investment securities available for sale 141,084,588 146,005,715
-------------- --------------
Total investment securities 556,067,682 574,447,132
Loans, net 447,465,984 450,099,184
Accrued interest receivable 6,974,194 6,372,354
Federal Home Loan Bank stock 6,088,520 6,313,520
Office properties and equipment, net 33,455,509 33,738,928
Deferred income taxes 4,169,868 4,094,838
Core deposit intangible 980,561 1,159,614
Prepaid expenses and other assets 2,898,022 2,125,656
-------------- --------------
TOTAL ASSETS $1,169,314,078 $1,188,112,423
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
Liabilities:
Interest-bearing deposits $ 751,629,412 $ 738,896,140
Non-interest-bearing deposits 191,168,110 194,206,626
-------------- --------------
Total deposits 942,797,522 933,102,766
Securities sold under agreements to repurchase 110,000,000 115,000,000
FMS Statutory Trust I and II debentures 25,774,000 51,548,000
Advances by borrowers for taxes and insurance 2,253,407 2,086,128
Accrued interest payable 1,614,014 1,467,745
Dividends payable 196,269 195,849
Other liabilities 7,221,301 6,351,377
-------------- --------------
Total liabilities 1,089,856,513 1,109,751,865
-------------- --------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.10 par value 5,000,000 shares authorized;
none issued Common stock - $.10 par value 10,000,000 shares
authorized; shares issued 8,035,892 and 8,022,892 and shares
outstanding 6,542,313 and 6,529,313 as of March 31, 2007 and
December 31, 2006, respectively 803,589 802,289
Additional paid-in capital 9,059,431 8,930,731
Accumulated other comprehensive loss- net of deferred income taxes (2,208,198) (2,485,410)
Retained earnings 82,810,186 82,120,391
Less: Treasury stock (1,493,579 shares, at cost, as of
March 31, 2007 and December 31, 2006) (11,007,443) (11,007,443)
-------------- --------------
Total stockholders' equity 79,457,565 78,360,558
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,169,314,078 $1,188,112,423
============== ==============
See notes to consolidated financial statements.
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- -----------------------------------------------------------------------------------------------
2007 2006
- -----------------------------------------------------------------------------------------------
(UNAUDITED)
INTEREST INCOME:
Interest income on:
Loans $ 6,914,683 $ 6,804,861
Mortgage-backed securities 2,846,611 3,472,078
Investments
Taxable 5,126,297 4,814,620
Tax exempt 24,134 85,016
----------- ------------
Total interest income 14,911,725 15,176,575
----------- ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 4,737,159 3,654,097
Borrowings 1,462,923 2,123,725
Long-term debt 1,048,606 566,910
----------- ------------
Total interest expense 7,248,688 6,344,732
----------- ------------
NET INTEREST INCOME 7,663,037 8,831,843
PROVISION FOR LOAN LOSSES 15,000 90,000
----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,648,037 8,741,843
----------- ------------
NON-INTEREST INCOME:
Service charges on accounts 1,367,441 1,358,662
Other income 23,093 39,453
----------- ------------
Total non-interest income 1,390,534 1,398,115
----------- ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,465,869 4,821,585
Occupancy and equipment 1,582,528 1,466,688
Purchased services 715,411 717,024
Professional fees 117,871 196,847
Amortization of core deposit intangible 179,052 179,052
Office supplies 98,554 164,404
Other expenses 126,212 150,560
Telecommunications 137,372 138,969
Advertising 117,477 108,918
----------- ------------
Total non-interest expense 7,540,346 7,944,047
----------- ------------
INCOME BEFORE INCOME TAXES 1,498,225 2,195,911
INCOME TAXES 612,161 861,825
----------- ------------
NET INCOME $ 886,064 $ 1,334,086
=========== ============
BASIC EARNINGS PER COMMON SHARE $0.14 $0.20
=========== ============
DILUTED EARNINGS PER COMMON SHARE $0.14 $0.20
=========== ============
DIVIDENDS DECLARED PER COMMON SHARE $0.03 $0.03
=========== ============
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------------------------------------------------
2007 2006
- ---------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 886,064 $ 1,334,086
Adjustments to reconcile net income to net cash by provided
operating activities:
Provision for loan losses 15,000 90,000
Amortization and accretion of premiums and discounts on investments, net 62,920 156,331
Amortization and accretion of other fees and costs 180,424 234,169
Depreciation 491,868 496,495
Realized losses on disposal of fixed assets 6,856 3,084
Changes in assets and liabilities:
Increase in accrued interest receivable (601,840) (1,074,183)
Increase in prepaid expenses and other assets (772,366) (1,592,820)
Increase in accrued interest payable 146,269 34,656
Increase in other liabilities 678,475 53,319
Benefit for deferred income taxes (75,030) (56,002)
------------ ------------
Net cash provided (used) by operating activities 1,018,640 (320,865)
------------ ------------
INVESTING ACTIVITIES:
Principal collected and proceeds from maturities of investment
securities held to maturity 13,420,665 17,763,385
Principal collected and proceeds from maturities of investment
securities available for sale 5,364,526 3,703,113
Principal collected on loans, net 17,751,800 25,749,636
Loans originated or acquired (15,134,971) (33,930,926)
Purchase of investment securities and mortgage-backed securities
held to maturity - (9,843,737)
Purchase of investment securities and mortgage-backed securities
available for sale - (5,000,000)
Redemption of Federal Home Loan Bank stock 225,000 900,000
Purchase of office property and equipment (215,305) (535,781)
------------ ------------
Net cash provided (used) by investing activities 21,411,715 (1,194,310)
------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and savings accounts (15,252,020) 4,512,894
Net increase in time deposits 24,946,776 994,178
Repayment of securities sold under agreement to repurchase, net (5,000,000) (10,000,000)
Redemption of trust capital securities (25,774,000) -
Increase in advances from borrowers for taxes and insurance 167,279 154,313
Dividends paid on common stock (195,849) (195,466)
Net proceeds from issuance of common stock 130,000 -
------------ ------------
Net cash used by financing activities (20,977,814) (4,534,081)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,452,541 (6,049,256)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 109,761,197 93,840,949
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $111,213,738 $ 87,791,693
============ ============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings 7,102,419 6,310,076
Income taxes - 275,000
Non-cash investing and financing activities:
Dividends declared and not paid at period end 196,269 195,486
See notes to consolidated financial statements.
3
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED TOTAL
COMMON SHARES COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL (LOSS) INCOME EARNINGS STOCK EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2005 6,515,110 $800,639 $8,767,381 $ (1,099,630) $77,583,683 $(10,969,797) $75,082,276
Net Income 1,334,086 1,334,086
Other comprehensive income:
Unrealized loss on securities
available for sale, net of
taxes of $776,568 (1,124,457) (1,124,457)
------------
Total comprehensive income 209,629
------------
Dividends declared ($.03) (195,466) (195,466)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 2006 6,515,110 $800,639 $8,767,381 $ (2,224,087) $78,722,303 $(10,969,797) $75,096,439
- -------------------------------------------------------------------------------------------------------------------------------
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
Net Income 886,064 886,064
Other comprehensive income:
Unrealized gain on securities
available for sale, net of
taxes of $191,451 277,212 277,212
------------
Total comprehensive income 1,163,276
------------
Dividends declared ($.03) (196,269) (196,269)
Exercise of stock options 13,000 1,300 128,700 130,000
- -------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 2007 6,542,313 $803,589 $9,059,431 $ (2,208,198) $82,810,186 $(11,007,443) $79,457,565
- -------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 (UNAUDITED).
1-BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation (the "Corporation") contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of its financial condition, results of operations, cash flows and
changes in stockholders' equity for the periods and dates indicated. The results
of operations for the three months ended March 31, 2007 are not necessarily
indicative of the operating results for the full fiscal year or any other
interim period.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q, and therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles. These statements should be read in
conjunction with the consolidated statements and related notes, which are
incorporated by reference to the Corporation's Form 10-K for the fiscal year
ended December 31, 2006. The consolidated financial statements include the
Corporation's principal subsidiary, Farmers & Mechanics Bank (the "Bank").
2-STATUTORY TRUST DEBENTURES
In March 2007, the Corporation redeemed $25.8 million of subordinated debentures
held by FMS Statutory Trust I. FMS Statutory Trust I subsequently redeemed $25.0
million of floating rate capital securities and $774 thousand of common
securities. These debentures were redeemed at par and required the mandatory
redemption of the Trust's capital and common securities. Long-Term Debt at March
31, 2007 consisted of $25.8 million of FMS Statutory Trust II debentures. The
interest rate resets every three months to LIBOR plus 158 basis points. As of
March 31, 2007 the interest rate was 6.93%. These debentures are redeemable at
the Corporation's option anytime after June 2011.
3-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well capitalized" by OTS regulations at March 31, 2007.
The Bank's regulatory tangible and tier 1 (core) capital ratios are $95.2
million, or 8.14% of total bank assets, and $100.2 million or 19.47% for
risk-based capital. FMS's consolidated capital ratio at March 31, 2007 totaled
6.80%.
4-STOCK OPTIONS
The Corporation maintains an incentive stock option plan. The Financial
Accounting Standards Board ("FASB") issued Statement of Financial Standards No.
123R in December 2004, (SFAS No. 123R), which establishes standards for
share-based payments. This statement has no effect on the Corporation's
Consolidated Statements of Financial Condition or Consolidated Statements of
Operations as no options have been granted during the three months ended March
31, 2007 or March 31, 2006, or for the year ended December 31, 2006.
5
5-EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted earnings per
share for the three months March 31, 2007 and 2006.
THREE MONTHS ENDED
MARCH 31,
---------------------------
2007 2006
- --------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
- ------------------------
Net income available to common shareholders $886,064 $1,334,086
Average common shares outstanding 6,536,480 6,515,110
Net income per common share $0.14 $0.20
DILUTED EARNINGS PER SHARE:
- --------------------------
Net income available to common shareholders
on a diluted basis $886,064 $1,334,086
Average common shares outstanding 6,536,480 6,515,110
Additional shares considered in diluted
computation assuming exercise of stock options 3,087 15,249
---------------------------
Adjusted weighted average common shares outstanding 6,539,567 6,530,359
NET INCOME PER COMMON SHARE $0.14 $0.20
6-RETIREMENT PLANS
The Bank maintains a defined benefit pension plan for active employees. The
Corporation expects to contribute approximately $950 thousand to our pension
plan in 2007. The components of the net pension cost are as follows:
THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------
2007 2006
- --------------------------------------------------------------------------------
Service cost $ 272,666 $ 256,462
Interest cost 215,310 205,876
Return on assets (240,987) (219,864)
Net amortization and deferral 24,607 5,008
- --------------------------------------------------------------------------------
Net periodic pension cost $ 271,596 $ 247,482
- --------------------------------------------------------------------------------
In addition to providing retirement plan benefits the Bank provides certain
health care and life insurance benefits to certain retired employees. The
expected cost of post-retirement benefits for 2007 is estimated to be
approximately $34 thousand. The components of net periodic postretirement
benefit cost are as follows:
THREE MONTHS ENDED MARCH 31,
- ----------------------------------------------------------------------
2007 2006
- ----------------------------------------------------------------------
Interest cost $ 8,384 $ 6,463
Amortization of prior service cost - (1,766)
Amortization of (gain) loss - (965)
- ----------------------------------------------------------------------
Net periodic postretirement benefit
costs $ 8,384 $ 3,732
- ----------------------------------------------------------------------
6
7-RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115." SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. SFAS 159 provides entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. The statement also
establishes presentation and disclosure requirements. The entity shall report
the effect of the first re-measurement to fair value as a cumulative-effective
adjustment to the opening balance of retained earnings. At each subsequent
reporting date, unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings. The fair value option may
be applied instrument by instrument, with a few exceptions, is irrevocable and
is applied only to entire instruments. Most of the provisions of SFAS 159 apply
only to entities that elect the fair value option. However, the amendment to
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
applies to all entities with available-for-sale and trading securities. If the
fair value option is elected for any available-for-sale or held-to-maturity
securities at the effective date, the cumulative unrealized gains and losses at
that date shall be included in the cumulative-effect adjustment. SFAS 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided that the entity also
elects to apply the provisions of SFAS 157, "Fair Value Measurements." The
Corporation is in the process of assessing the impact of the adoption of this
statement on the Corporation'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 Corporation
adopted this Statement effective December 31, 2006. The impact on the
Corporation'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 Corporation'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 Corporation during 2006 and did not have a material
impact on the Corporation's consolidated financial statements.
7
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 Corporation'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. The adoption of FIN 48
did not have a material impact on the Corporation'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. The
adoption of SFAS 156 did not have a material impact on the Corporation's
consolidated financial statements.
8-PENDING MERGER
The Corporation announced on October 13, 2006 that it has agreed to merge with
Philadelphia- based Beneficial Mutual Bancorp, Inc. (Beneficial), the holding
company for Beneficial Mutual Savings Bank. 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 the
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 that will be mailed to shareholders of the
Corporation 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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007.
The following discussion and analysis should be read with our financial
statements and related notes included elsewhere in this report on Form 10-Q. The
Corporation may from time to time make written or oral "forward-looking
statements," including statements contained in the
8
Corporation's filings with the Securities and Exchange Commission (including
this quarterly report on Form 10-Q and the exhibits thereto), in its reports to
stockholders and in other communications by the Corporation, which are made in
good faith by the Corporation pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The discussion and analysis in
this report may contain "forward-looking statements" within the meaning of
Section 21A of the Securities and Exchange Act of 1934.
These forward-looking statements involve risk and uncertainties, such as
statements of the Corporation's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Corporation's control). The cautionary statements made
in this report should be read as applying to all related forward-looking
statements wherever they appear in this report. The following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Corporation and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Corporation's products and services;
the success of the Corporation in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services laws
and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
involved in the foregoing. Such risks and uncertainties could cause actual
results to differ materially from any future performance suggested in this
report. The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation undertakes no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date of this report. This caution is made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.
FINANCIAL CONDITION
TOTAL ASSETS - at March 31, 2007 were $1.17 billion as compared with total
assets at December 31, 2006 of $1.19 billion.
9
INVESTMENT SECURITIES HELD TO MATURITY - decreased $13.4 million to $415.0
million at March 31, 2007 from $428.4 million at December 31, 2006 primarily due
to $8.8 million of principal paydowns and $4.6 million in investment maturities
during this period. Investment securities held to maturity at March 31, 2007
consisted of $395.4 million in fixed rate securities and $19.6 million in
adjustable rate securities. A comparison of cost and approximate market values
of investment securities held to maturity as of March 31, 2007 and December 31,
2006 follows:
MARCH 31, 2007 December 31, 2006
- -------------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Market
COST GAINS LOSSES VALUE Cost Value
- ------------------------------------------------------------------------------------------------------------------------
U. S. Gov't agencies $ 197,330,038 $ 18 $ (1,739,060) $ 195,590,996 $ 197,325,677 $ 194,547,672
Agency MBS's 113,825,751 624,703 (1,326,251) 113,124,203 118,913,950 117,979,665
CMO's 54,611,737 - (1,407,670) 53,204,067 60,057,762 58,154,542
Pass through certificates 47,223,012 12,344 (866,923) 46,368,433 45,553,222 44,353,512
Municipal bonds 1,992,556 957 - 1,993,513 6,590,806 6,591,942
- ------------------------------------------------------------------------------------------------------------------------
Total $ 414,983,094 $638,022 $ (5,339,904) $ 410,281,212 $ 428,441,417 $ 421,627,333
========================================================================================================================
INVESTMENT SECURITIES AVAILABLE FOR SALE - decreased $4.9 million to $141.1
million at March 31, 2007 from $146.0 million at December 31, 2006. The decrease
is primarily the result of principal paydowns of $2.7 million and investment
calls of $2.6 million. Investment securities available for sale consisted of
$137.8 million in fixed rate securities and $3.3 million in adjustable rate
securities at March 31, 2007. A comparison of cost and approximate market values
of investment securities available for sale as of March 31, 2007 and December
31, 2006 follows:
MARCH 31, 2007 December 31, 2006
- -------------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Market
COST GAINS LOSSES VALUE Cost Value
- ------------------------------------------------------------------------------------------------------------------------
U. S. Gov't agencies $ 62,785,903 $ - $ (615,031) $ 62,170,872 $ 65,398,776 $ 64,481,337
Agency MBS's 42,386,071 62,568 (446,101) 42,002,538 44,251,261 43,805,809
Pass through certificates 18,931,068 - (293,668) 18,637,400 19,586,361 19,298,124
CMO's 18,602,647 - (328,869) 18,273,778 18,859,081 18,420,445
- ------------------------------------------------------------------------------------------------------------------------
Total $ 142,705,689 $ 62,568 $(1,683,669) $ 141,084,588 $ 148,095,479 $ 146,005,715
========================================================================================================================
The following table shows the gross unrealized losses and fair value of the
Bank's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in continuous unrealized loss position
at March 31, 2007. 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 and do not have a material impact on the Corporation.
10
LESS THAN 12 MONTHS 12 MONTHS OR GREATER TOTAL
------------------------------------------------------------------------------------------------
UNREALIZED UNREALIZED UNREALIZED
DESCRIPTION OF SECURITY FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
- ------------------------------------------------------------------------------------------------------------------------------
Available for Sale:
- -------------------
U.S. Gov't agencies $0 $0 $62,785,903 ($615,031) $62,785,903 ($615,031)
Agency MBS's - - 36,082,640 (446,101) 36,082,640 (446,101)
Pass through certificates - - 18,931,068 (293,668) 18,931,068 (293,668)
CMO's - - 18,602,648 (328,869) 18,602,648 (328,869)
-------------------------------- ------------------------------- -------------------------------
TOTAL INVESTMENT SECURITIES
AVAILABLE FOR SALE $0 $0 $136,402,259 ($1,683,669) $136,402,259 ($1,683,669)
-------------------------------- ------------------------------- -------------------------------
Held to Maturity:
- -----------------
U.S. Gov't agencies $0 $0 $192,345,656 ($1,739,060) $192,345,656 ($1,739,060)
Agency MBS's - - 77,202,602 (1,326,251) 77,202,602 (1,326,251)
Pass through certificates - - 45,565,851 (866,923) 45,565,851 (866,923)
CMO's 1,161,783 (17) 53,449,954 (1,407,653) 54,611,737 (1,407,670)
-------------------------------- ------------------------------- -------------------------------
TOTAL INVESTMENT SECURITIES
HELD TO MATURITY $1,161,783 ($17) $368,564,063 ($5,339,887) $369,725,846 ($5,339,904)
-------------------------------- ------------------------------- -------------------------------
TOTAL $1,161,783 ($17) $504,966,322 ($7,023,556) $506,128,105 ($7,023,573)
================================ =============================== ===============================
LOANS, NET - decreased $2.6 million to $447.5 million at March 31, 2007 from
$450.1 million at December 31, 2006. This decrease was primarily the result of
$17.7 million of principal collected on loans, partially offset by $15.1 million
of loans originated during the three months ended March 31, 2007. The following
table shows loans receivable by major categories at the dates indicated.
MARCH 31, 2007 DECEMBER 31, 2006
- --------------------------------------------------------------------------
Mortgage Loans $286,162,565 $288,052,449
Construction Loans 3,024,604 3,759,783
Commercial Construction 2,515,310 2,955,926
Consumer Loans 2,156,430 2,250,836
Commercial Real Estate 134,483,519 132,217,307
Commercial Business 24,543,222 26,276,040
- --------------------------------------------------------------------------
Subtotal 452,885,650 455,512,341
Less:
Deferred loan fees 13,595 22,587
Allowance for
loan losses 5,406,071 5,390,570
- --------------------------------------------------------------------------
Total loans, net $447,465,984 $450,099,184
- --------------------------------------------------------------------------
11
At March 31, 2007, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $3.9 million of
which $985 thousand related to loans that were individually measured for
impairment with a valuation allowance of $414 thousand, and $2.9 million of
loans that were collectively measured for impairment with a valuation allowance
of $227 thousand. The Bank had $5.4 million in total reserves for loan losses at
March 31, 2007, representing approximately 138% of non-performing assets and
1.2% of total loans. For the three months ended March 31, 2007, the average
recorded investment in impaired loans was approximately $3.9 million. Interest
income on impaired loans that would have been recognized during the three months
ended March 31, 2007 under the original terms totaled $207 thousand. The Bank
recognized $150 thousand of interest income on impaired loans for the three
months ended March 31, 2007, all of which was recognized on the cash basis.
As of March 31, 2007 the Bank had outstanding loan commitments of $7.0 million,
of which $3.3 million represented variable rate loans and $3.7 million
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled amortization of loans and mortgage-backed securities, additional
borrowings, and if necessary, the sale of investment securities available for
sale.
NON-PERFORMING ASSETS - The following table sets forth information regarding
non-accrual loans, troubled debt restructured and real estate owned assets by
the Bank.
MARCH 31, 2007 DECEMBER 31, 2006
-------------- -----------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 677,556 $1,055,828
Commercial real estate 3,212,620 1,799,770
Consumer and other 0 0
-------------- ----------------
Total non-accrual loans $3,890,176 $2,855,598
-------------- ----------------
Troubled debt restructuring 32,524 32,987
Real estate owned, net 0 0
-------------- ----------------
Total non-performing assets, net $3,922,700 $2,888,585
-------------- ----------------
Total non-accrual loans to net loans 0.87% 0.63%
============== ================
Total non-accrual loans to total assets 0.33% 0.24%
============== ================
Total non-performing assets to total
assets 0.34% 0.24%
============== ================
12
DEPOSITS - increased $9.7 million to $942.8 million at March 31, 2007 from
$933.1 million at December 31, 2006. Increases in time deposits of $24.9 million
and savings accounts of $1.2 million, were partially offset by decreases in
checking accounts of $10.3 million, money market accounts of $3.1 million and
non-interest checking accounts of $3.0 million for the three months ended March
31, 2007. Interest credited to depositors accounts for the three months ended
March 31, 2007 amounted to $2.5 million. The following table sets forth certain
information concerning deposits at the dates indicated.
MARCH 31, 2007 December 31, 2006
- -------------------------------------------------------------------------------------------------------------------
PERCENT WEIGHTED Percent Weighted
OF TOTAL AVERAGE of Total Average
AMOUNT DEPOSITS RATE Amount Deposits Rate
- -------------------------------------------------------------------------------------------------------------------
Non-interest checking $191,168,111 20.27% 0.00% $194,206,626 20.81% 0.00%
Checking accounts 207,088,975 21.97% 0.47% 217,387,796 23.30% 2.93%
Savings accounts 176,284,057 18.70% 0.69% 175,056,992 18.76% 0.61%
Money market accounts 111,516,715 11.83% 1.34% 114,658,464 12.29% 1.22%
Time deposits 256,739,664 27.23% 4.06% 231,792,888 24.84% 3.31%
- -------------------------------------------------------------------------------------------------------------------
Total Deposits $942,797,522 100.00% 2.09% $933,102,766 100.00% 1.73%
===================================================================================================================
BORROWINGS - at March 31, 2007 amounted to $110.0 million in securities sold
under the agreement to repurchase with a weighted average interest rate of
5.31%. At December 31, 2006, borrowings consisted of $115.0 million in
securities sold under agreements to repurchase with a weighted average rate of
5.24%.
LONG-TERM DEBT - In March 2007, the Corporation redeemed $25.8 million of
subordinated debentures held by FMS Statutory Trust I. FMS Statutory Trust I
subsequently redeemed $25.0 million of floating rate capital securities and $774
thousand of common securities. These debentures were redeemable at the
Corporation's option any time on or after March 2007. Long-Term Debt at March
31, 2007 consisted of $25.8 million of FMS Statutory Trust II debentures. The
interest rate resets every three months to LIBOR plus 158 basis points. As of
March 31, 2007 the interest rate was 6.93%. These debentures are redeemable at
the Corporation's option anytime after June 2011.
RESULTS OF OPERATIONS
GENERAL
The earnings of the Corporation depend primarily upon the level of net interest
income, which is the difference between interest earned on its interest-earning
assets such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits including non-interest checking accounts,
long-term debts and borrowings. Net interest income is a function of the
interest rate spread, which is the difference between the weighted average yield
earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing liabilities. Net income is also affected
by non-interest income, such as gains (losses) on the sale of loans and
investments, provision for loan losses and real estate owned, service charges
and other fees, and operating expenses, such as: salaries, employee benefits,
deposit insurance premiums, depreciation, occupancy and equipment expense and
purchased services expense.
The Corporation recorded net income for the three months ended March 31, 2007 of
$886 thousand, or $0.14 diluted earnings per share as compared to $1.3 million,
or $0.20 diluted earnings per share for the comparable period in 2006.
13
INTEREST RATE SPREAD
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities
including non-interest checking accounts. Net interest income is affected by (i)
the spread between the yield earned on interest-earning assets and the interest
rates paid on interest-bearing savings deposits including non-interest checking
accounts and borrowings (liabilities) and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's interest
rate spread varies over time because money fund accounts and other flexible rate
accounts have become significant sources of savings deposits. Income from
investment securities and mortgage-backed securities depends upon the amount
invested during the period and the yields earned on such securities. The yield
on loans changes principally as a result of existing mortgage loan repayments,
adjustable rate loan adjustments, sales and the interest rates and volume of new
mortgage loans. The average yields and rates are derived by dividing income or
expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented.
14
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 liabilities, respectively for the
periods presented.
THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------------------------------------------
2007 2006
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
--------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable $453,991 $6,915 6.09% $454,145 $6,805 5.99%
Interest-bearing deposits 54,750 704 5.14% 24,108 260 4.31%
Mortgage-backed securities 225,270 2,847 5.06% 274,898 3,472 5.05%
Investment securities 349,203 4,459 5.11% 375,518 4,684 4.99%
--------------------------------------------------------------------------------------------
Total interest-earning
assets 1,083,214 14,925 5.51% 1,128,669 15,221 5.39%
--------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Checking deposits 392,654 1,634 1.66% 401,228 1,469 1.46%
Savings deposits 172,968 302 0.70% 189,662 279 0.59%
Money market deposits 111,630 369 1.32% 130,297 344 1.06%
Time deposits 243,209 2,433 4.00% 212,554 1,562 2.94%
Borrowings 110,376 1,463 5.30% 171,614 2,124 4.95%
Long-Term Debt 49,890 1,048 8.40% 25,774 567 8.80%
--------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $1,080,727 7,249 2.68% $1,131,129 6,345 2.24%
=================-----------------------------=================-----------------------------
Net interest income $7,676 $8,876
======= =======
Interest rate spread 2.83% 3.15%
===== =====
Net yield on average interest-earning assets 2.83% 3.15%
===== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 100.23% 99.78%
====== ======
15
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense, on a tax
equivalent basis, during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in rate, (ii) changes in volume
and (iii) total changes in rate and volume (the combined effect of changes in
both volume and rate, not separately identified, has been allocated to rate). A
higher level of non-performing loans affects the changes in both volume and
rate.
THREE MONTHS ENDED MARCH 31,
2007 VS. 2006
INCREASE (DECREASE) DUE TO CHANGE IN:
------------------------------------------------
RATE VOLUME TOTAL
(IN THOUSANDS)
------------------------------------------------
Interest income:
Loans receivable $112 ($2) $110
Interest-bearing deposits 114 330 444
Mortgage-backed securities 2 (627) (625)
Investment securities 103 (328) (225)
------------------------------------------------
Total change - interest income 331 (627) (296)
------------------------------------------------
Interest expense:
Checking deposits 196 (31) 165
Savings deposits 48 (25) 23
Money market deposits 74 (49) 25
Time deposits 646 225 871
Borrowings 97 (758) (661)
Long-Term Debt (50) 531 481
------------------------------------------------
Total change - interest expense 1,011 (107) 904
------------------------------------------------
Net change in net interest income ($680) ($520) ($1,200)
================================================
NET INCOME
The Corporation and its subsidiary recorded net income of $886 thousand for the
quarter ended March 31, 2007, or $0.14 diluted earnings per share, as compared
to net income of $1.3 million, or $0.20 diluted earnings per share for the
quarter ended March 31, 2006. Net interest income on a tax equivalent basis was
$7.7 million for the three months ended March 31, 2006 compared to $8.9 million
for the same period in 2006. Provisions for loan losses were $15 thousand and
$90 thousand for the quarters ended March 31, 2007 and 2006, respectively.
Non-interest income was $1.4 million for the three months ended March 31, 2007
and 2006. Total noninterest expense for the quarter ended March 31, 2007 was
$7.5 million compared to $7.9 million for the same quarter in 2006.
INTEREST INCOME
Total interest income on a tax equivalent basis decreased $296 thousand to $14.9
million for the quarter ended March 31, 2007 from $15.2 million for the same
period in 2006. The decrease is attributable to decreases in interest income on
mortgage-backed securities (MBS's) of $625 thousand and investment securities of
$225 thousand, partially offset by increases in interest income on
interest-bearing deposits of $444 thousand and loans receivable of $110
thousand.
16
Interest income on mortgage-backed securities decreased by $625 thousand to $2.8
million for the three months ended March 31, 2007 from $3.5 million for the same
period in 2006. The average balance of MBS's decreased $49.6 million to $225.3
million for the three months ended March 31, 2007 from $274.9 million for the
same period in 2006, which resulted in an interest income volume decrease of
$627 thousand. The decrease in the average balance during this period was due to
principal paydowns of $29.2 million and calls and maturities of $12.0 million,
partially offset by purchases of MBS's of $3.1 million from the first quarter of
2006. The average yield of the MBS portfolio increased 1 basis point to 5.06%
for the quarter ended March 31, 2007 from 5.05% for the same period in 2006,
which resulted in an interest income increase of $2 thousand due to changes in
rates.
Interest income on investment securities decreased $225 thousand to $4.5 million
for the three months ended March 31, 2007 from $4.7 million for the same period
in 2006. The average balance of investment securities decreased $26.3 million to
$349.2 million for the three months ended March 31, 2007 from $375.5 million for
the same period in 2006, which resulted in a volume decrease in interest income
of $328 thousand. The decrease in the average volume during this period is due
to investment principal paydowns of $23.8 million and calls and maturities of
$22.5 million, partially offset by investment purchases of $8.1 million since
the first quarter 2006. The average yield of the investment portfolio increased
12 basis points to 5.11% for the quarter ended March 31, 2007 from 4.99% for the
same period in 2006, which resulted in an interest income increase of $103
thousand due to rate changes.
Interest income on interest-bearing deposit investments increased $444 thousand
to $704 thousand for the three months ended March 31, 2007 from $260 thousand
for the same period in 2006. The average balance of interest-bearing deposit
investments increased $30.7 million to $54.8 million for the quarter ended March
31, 2007 from $24.1 million for the same period in 2006, which resulted in a
volume increase in interest income of $330 thousand. The average yield of
interest-bearing deposit investments increased 83 basis points to 5.14% for the
three months ended March 31, 2007 from 4.31% for the same period in 2006, which
resulted in an increase in interest income of $114 thousand due to rate changes.
Interest income on loans increased $110 thousand to $6.9 million for the three
months ended March 31, 2007 from $6.8 million for the same period in 2006. The
average rate on loans increased 10 basis points to 6.09% for the three months
ended March 31, 2007 from 5.99% for the same period in 2006, which resulted in
an increase in interest income of $112 thousand due to rate changes. The average
balance of the loan portfolio decreased $154 thousand to $454.0 million for the
three months ended March 31, 2007 from $454.1 million for the same period in
2006, which resulted in a volume decrease in interest income of $2 thousand. The
decrease in the average balance is primarily due to principal collected on loans
of $89.0 million, partially offset by $86.3 of loan originated since the first
quarter of 2006.
INTEREST EXPENSE
Total interest expense increased $904 thousand to $7.2 million for the three
months ended March 31, 2007 from $6.3 million for the same period in 2006. The
increases in interest expense on time deposits, long-term debt, checking
deposits, money market deposits and savings deposits were partially offset by a
decrease in interest expense on borrowings.
Interest expense on time deposits increased $871 thousand to $2.4 million for
the three months ended March 31, 2007 from $1.6 million for the same period in
2006. The average rate on time
17
deposits increased 106 basis points to 4.00% for the quarter ended March 31,
2007 from 2.94% for the same period in 2006, which resulted in a rate increase
in interest expense of $646 thousand. The average balance of time deposits
increased $30.6 million to $243.2 million for the quarter ended March 31, 2007
from $212.6 million for the same period in 2006, which resulted in an increase
in interest expense of $225 thousand. The increase in the average balance of
time deposits is the result of a promotional 5 month and 13 month certificate of
deposit program that began in September 2006.
Interest expense on long-term debt increased $481 thousand to $1.0 million for
the three months ended March 31, 2007 from $567 thousand for the same period in
2006. The average balance of debentures increased $24.1 million to $49.9 million
for the quarter ended March 31, 2007 from $25.8 million for the same period in
2006, which resulted in an increase in interest expense of $531 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 decreased 40 basis points to 8.40%
for the three months ended March 31, 2007 from 8.80% for the same period in
2006, which decreased interest expense on long-term debt $50 thousand.
Interest expense on checking deposits increased $165 thousand to $1.6 million
for the three months ended March 31, 2007 from $1.5 thousand for the same period
in 2006. The average rate on checking deposits increased 20 basis points to
1.66% for the quarter ended March 31, 2007 from 1.46% for the same period in
2006, which resulted in an increase in interest expense of $196 thousand. This
increase was primarily due to an increase in the average rate paid on municipal
government checking accounts to 5.25% for the three months ended March 31, 2007
from 4.67% for the same period in 2006. The average balance of checking deposits
decreased $8.5 million to $392.7 million for the three months ended March 31,
2007 from $401.2 million for the same period in 2006, which resulted in a volume
decrease in interest expense of $31 thousand.
Interest expense on money market deposits increased $25 thousand to $369
thousand for the three months ended March 31, 2007 from $344 thousand for the
same period in 2006. The average rate on money market deposits increased 26
basis points to 1.32% for the quarter ended March 31, 2007 from 1.06% for the
same period in 2006, which resulted in an increase in interest expense of $74
thousand. The average balance of money market deposits decreased $18.7 million
to $111.6 million for the three months ended March 31, 2007 from $130.3 million
for the same period in 2006, which resulted in a volume decrease in interest
expense of $49 thousand.
Interest expense on savings deposits increased $23 thousand to $302 thousand for
the three months ended March 31, 2007 from $279 thousand for the same period in
2006. The average rate on savings deposits increased 11 basis point to 0.70% for
the quarter ended March 31, 2007 from 0.59% for the same period in 2006, which
resulted in an increase in interest expense of $48 thousand. The average balance
of savings deposits decreased $16.7 million to $173.0 million for the three
months ended March 31, 2007 from $189.7 million for the same period in 2006,
which resulted in a volume decrease in interest expense of $25 thousand.
Interest expense on borrowings decreased $661 thousand to $1.5 million for the
three months ended March 31, 2007 from $2.1 million for the same period in 2006.
The average balance of borrowings decreased $61.2 million to $110.4 million at
March 31, 2007 from $171.6 million for the same period in 2006, which resulted
in a volume decrease in interest expense of $758 thousand. The average rate paid
on borrowings increased 35 basis points to 5.30% for the quarter ended March 31,
2007 from 4.95% for the same period in 2006, which resulted in an increase in
interest expense of $97 thousand due to rate changes.
18
CRITICAL ACCOUNTING ESTIMATES
PROVISION FOR LOAN LOSSES - A critical accounting estimate is the provision for
loan losses. The provision decreased to $15 thousand for the three months ended
March 31, 2007 compared to $90 thousand for the same period in 2006. The
allowance for loan losses amounted to $5.4 million at March 31, 2007 and
December 31, 2006. The determination of the allowance level for loan losses is
based on management's analysis of the risk characteristics of various types of
loans, levels of classified loans, previous loan loss experience, the estimated
fair market value of the underlying collateral and current economic conditions.
Additionally, the mix within the Bank's portfolio continues to change as the
Bank offers a wider variety of products. Within the loan portfolio, a change is
also occurring as a shift is made from lower yielding loans (i.e., one-to-four
family loans) to higher yielding loans (i.e., commercial real estate mortgages,
commercial construction, consumer and commercial business loans). These types of
loans contain a higher degree of risk. The Bank will continue to monitor its
allowance for loan losses and make future adjustments to the allowance through
the provision for loan losses as changing conditions dictate. Although the Bank
maintains its allowance for loan losses at a level that it considers to be
adequate to provide for the inherent risk of loss in its loan portfolio, there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods due
to the higher degree of credit risk which might result from the change in the
mix of the loan portfolio or changes in economic conditions. Most of the Bank's
lending activity is with customers located within southern New Jersey.
Generally, the loans are secured by real estate consisting of single-family
residential properties. While this represents a concentration of credit risk,
the credit losses arising from this type of lending compare favorably with the
Bank's credit loss experience on its portfolio as a whole. The ultimate
repayment of these loans is dependent to a certain degree on the local economy
and real estate market.
DEFERRED TAX ASSETS AND LIABILITIES-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.
NON-INTEREST INCOME - remained constant at $1.4 million for the three-month
period ended March 31, 2007 and 2006.
NON-INTEREST EXPENSE - decreased $400 thousand to $7.5 million for the three
month period ended March 31, 2007 from $7.9 million for the same period in 2006
primarily due to a decrease in salaries and employee benefits expense, partially
offset by an increase in occupancy and equipment expense.
SALARIES AND EMPLOYEE BENEFITS - decreased $356 thousand to $4.5 million for the
three month period ended March 31, 2007 compared to $4.8 million for the same
period in 2006. The decrease was due to a reduction in overtime pay of $69
thousand as well as a current moratorium on hiring is in effect. Average full
time equivalent employees were 477 at March 31, 2007 as compared to 547 at March
31, 2006.
OCCUPANCY AND EQUIPMENT- increased $116 thousand to $1.6 million for the three
month period ended March 31, 2007 compared to $1.5 million for the same period
in 2006 due primarily to increases in maintenance expense of $77 thousand,
equipment expense of $18 thousand and property taxes of $12 thousand.
19
BRANCH CLOSINGS- On March 7, 2007, the Corporation 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
Corporation also announced that it had entered into an agreement with Beneficial
Mutual Saving Bank "Beneficial" to indemnify the Corporation 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.
ITEM 3: QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET
RISK
There were no significant changes for the three months ended March 31, 2007
from the information presented in the annual report on Form 10-K for the
year ended December 31, 2006.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Corporation's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")), the Corporation's principal executive officer and
principal financial officer have concluded that as of the end of the period
covered by this Quarterly Report on Form 10-Q such disclosure controls and
procedures are effective to ensure that information required to be
disclosed by the Corporation in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and
forms.
(b) Changes in internal controls over financial reporting. During the
quarter under report, there was no change in the Corporation's internal
control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not Applicable
ITEM 1A: RISK FACTORS
Information regarding risk factors appears in Part 1, Item 1A of
Form 10-K for the year ended December 31, 2006. There have been
no material changes from the risk factors as disclosed in that
report.
20
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Issuer Purchase of Equity Securities - None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY OF HOLDERS
None
ITEM 5: OTHER INFORMATION
Not Applicable
ITEM 6: EXHIBITS
(a) 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(b) 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: May 15, 2007 /s/ Craig W. Yates
--------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal and Executive Officer)
Date: May 15, 2007 /s/ Channing L. Smith
--------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
22