SECURITIES AND EXCHANGE COMMISSION
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Washington, DC 20549
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FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
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Act of 1934
For the quarterly period ended June 30, 2002
OR
Transition report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934
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 (IRS Employer
incorporation 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
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 .
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As of July 31, 2002 there were issued and outstanding 6,463,811 shares
of the registrant's Common Stock, par value $.10 per share.
FMS FINANCIAL CORPORATION AND SUBSIDIARY
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QUARTERLY REPORT ON FORM 10-Q
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JUNE 30, 2002
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TABLE OF CONTENTS
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Page
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PART I - Financial Information
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Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2002 (unaudited) and December 31, 2001..........1
Consolidated Statements of Operations (unaudited)
for the three and six months ended
June 30, 2002 and June 30, 2001..........................2
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2002
and June 30, 2001........................................3
Consolidated Statements of Changes in Stockholders'
Equity (unaudited) for the six months ended
June 30, 2002 and June 30, 2001..........................4
Notes to Consolidated Financial Statements.....................5-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.........6-17
Item 3 - Disclosure about Market Risk.................................17
PART II Other Information
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Item 1 - Legal Proceedings............................................18
Item 2 - Changes in Securities........................................18
Item 3 - Defaults Upon Senior Securities..............................18
Item 4 - Submission of Matters to a Vote of Security Holders..........18
Item 5 - Other Information............................................18
Item 6 - Exhibits and Reports on Form 8-K.............................18
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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June 30, 2002 December 31, 2001
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ASSETS (Unaudited)
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Cash and due from banks $ 27,994,194 $ 32,336,279
Interest-bearing deposits 22,587 153,133
Short term funds 93,418,588 30,869,712
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Total cash and cash equivalents 121,435,369 63,359,124
Investment securities held to maturity 149,715,775 196,571,299
Investment securities available for sale 95,141,981 51,969,422
Loans, net 359,760,312 336,544,004
Mortgage-backed securities held to maturity 275,974,360 272,494,220
Accrued interest receivable:
Loans 1,777,736 1,591,276
Mortgage-backed securities 1,825,174 1,757,572
Investments 2,079,653 2,194,252
Federal Home Loan Bank stock 10,339,220 8,313,620
Real estate held for development, net 87,926 87,926
Real estate owned, net 201,329 214,249
Premises and equipment, net 26,373,302 26,364,980
Deferred income taxes 3,138,402 3,158,402
Prepaid expenses and other assets 1,151,804 1,767,694
Trust Capital securities issue costs, net 756,921 0
Subordinated debentures issue costs, net 120,394 149,069
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TOTAL ASSETS $ 1,049,879,658 $ 966,537,109
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities:
Deposits $ 746,901,242 $ 729,505,729
Securities sold under agreements to repurchase 195,000,000 165,000,000
Advances from the Federal Home Loan Bank 11,232,103 1,270,313
10% Subordinated debentures, due 2004 10,000,000 10,000,000
Trust Capital Securities - FMS Statutory Trust 1 25,000,000 0
Advances by borrowers for taxes and insurance 2,449,314 2,247,002
Accrued interest payable 1,767,318 1,782,508
Dividends payable 193,914 201,531
Other liabilities 3,409,584 4,326,845
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Total liabilities 995,953,475 914,333,928
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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 7,949,809 and 7,948,884 and shares outstanding 6,463,811
and 6,717,705 as of June 30, 2002 and December 31, 2001, respectively 794,981 794,888
Paid-in capital in excess of par 8,279,525 8,278,423
Accumulated other comprehensive gain (loss) -
net of deferred income taxes 687,942 147,496
Retained earnings 55,050,315 51,055,818
Less: Treasury stock (1,485,998 and 1,231,179 shares,
at cost, as of June 30, 2002 and December 31, 2001, respectively) (10,886,580) (8,073,444)
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Total stockholders' equity 53,926,183 52,203,181
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,049,879,658 $ 966,537,109
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See notes to consolidated financial statements.
1
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FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months ended Six Months ended
June 30, June 30,
2002 2001 2002 2001
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INTEREST INCOME: (Unaudited) (Unaudited)
Interest income on:
Loans $ 6,385,849 $ 5,818,673 $ 12,742,333 $ 11,519,582
Mortgage-backed securities 4,535,948 3,287,694 8,834,263 6,166,275
Investments 3,917,284 4,578,909 7,573,931 9,461,019
--------------- --------------- --------------- ---------------
Total interest income 14,839,081 13,685,276 29,150,527 27,146,876
--------------- --------------- --------------- ---------------
INTEREST EXPENSE:
Interest expense on:
Deposits 3,570,208 5,139,735 7,495,539 10,349,884
Long term debt 648,249 264,337 934,082 528,674
Borrowings 2,256,465 1,892,840 4,352,318 3,606,437
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Total interest expense 6,474,922 7,296,912 12,781,939 14,484,995
--------------- --------------- --------------- ---------------
NET INTEREST INCOME 8,364,159 6,388,364 16,368,588 12,661,881
PROVISION FOR LOAN LOSSES 26,000 60,000 29,000 120,000
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,338,159 6,328,364 16,339,588 12,541,881
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OTHER INCOME (EXPENSE):
Loan service charges and other fees 24,653 26,482 52,663 53,476
Gain on sale of loans 388 306 463 509
Gain on disposal of fixed assets 100,113 356 100,113 50,799
Real estate owned operations, net (8,013) (11,524) (15,867) (25,210)
Service charges on accounts 997,390 841,575 1,862,178 1,559,834
Other income 66,849 67,814 151,469 137,124
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Total other income 1,181,380 925,009 2,151,019 1,776,532
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OPERATING EXPENSES:
Salaries and employee benefits 3,409,715 3,089,322 6,858,401 6,087,345
Occupancy and equipment 1,113,836 1,103,112 2,220,244 2,280,116
Purchased services 649,041 525,211 1,263,939 1,011,333
Federal deposit insurance premiums 31,146 37,648 62,124 67,636
Professional fees 205,823 131,333 404,036 251,183
Advertising 121,381 60,003 204,583 117,635
Other 382,664 408,181 696,218 751,645
--------------- --------------- --------------- ---------------
Total operating expenses 5,913,606 5,354,810 11,709,545 10,566,893
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INCOME BEFORE INCOME TAXES 3,605,933 1,898,563 6,781,062 3,751,520
INCOME TAXES:
Current 1,677,070 533,005 2,674,939 1,383,894
Deferred (408,415) 139,104 (283,737) (51,711)
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Total income taxes 1,268,655 672,109 2,391,202 1,332,183
NET INCOME $ 2,337,278 $ 1,226,454 $ 4,389,860 $ 2,419,337
=============== =============== =============== ===============
BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.18 $ 0.66 $ 0.36
=============== =============== =============== ===============
DILUTED EARNINGS PER COMMON SHARE $ 0.36 $ 0.18 $ 0.66 $ 0.36
=============== =============== =============== ===============
Dividends declared per common share $ 0.03 $ 0.03 $ 0.06 $ 0.06
=============== =============== =============== ===============
Weighted average common shares outstanding 6,547,961 6,680,341 6,632,815 6,702,997
Potential dilutive effect of the exercise of
stock options 30,445 42,825 20,616 44,449
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Adjusted weighted average common shares outstanding 6,578,406 6,723,166 6,653,431 6,747,446
=============== =============== =============== ===============
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months ended
June 30,
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2002 2001
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(Unaudited)
OPERATING ACTIVITIES:
Net income $ 4,389,860 $ 2,419,337
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 29,000 120,000
Depreciation and amortization 1,952,609 1,598,023
Realized (gains) and losses on:
Sale of loans and loans held for sale (463) (509)
Disposal and sale of fixed assets (100,113) (50,799)
(Increase) Decrease in accrued interest receivable (139,463) 342,003
Decrease in prepaid expenses and other assets 615,890 84,593
Decrease in accrued interest payable (15,190) (286,885)
Decrease in other liabilities (917,261) (1,404,343)
Decrease in deferred income taxes (283,735) (51,711)
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Net cash provided by operating activities 5,531,134 2,769,709
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INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 127,226 67,417
Real estate owned 12,920 77,580
Property and equipment 213,656 84,433
Principal collected and proceeds from maturities of investment
securities held to maturity 94,078,801 172,011,796
Proceeds from maturities of investment securities available for sale 20,811,995 21,826,670
Principal collected on mortgage-backed securities held to maturity 49,711,717 38,562,762
Principal collected on loans, net 44,425,599 31,346,540
Loans originated or acquired (67,830,736) (33,371,384)
Purchase of investment securities and mortgage-backed securities
held to maturity (101,362,139) (206,151,398)
Purchase of investment securities and mortgage-backed securities
available for sale (63,239,425) (18,712,168)
Purchase of Federal Home Loan Bank stock (2,025,600) (998,310)
Purchase of office property and equipment (966,676) (1,023,791)
Net cash received from bank merger 0 1,466,726
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Net cash (used) provided by investing activities (26,042,662) 5,186,873
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FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 42,968,282 3,088,146
Net decrease in time deposits (25,572,769) (1,103,611)
Net increase (decrease) in FHLB advances 9,961,790 (5,035,331)
Proceeds from (Repayment of) securities sold under agreements
to repurchase 30,000,000 25,000,000
Net proceeds from issuance of trust capital securities 24,243,079 0
Increase in advances from borrowers for taxes and insurance 202,312 108,114
Purchase of treasury stock (2,813,136) (365,220)
Dividends paid on common stock (402,980) (403,210)
Net proceeds from issuance of common stock 1,195 18,720
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Net cash provided by financing activities 78,587,773 21,307,608
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INCREASE IN CASH AND CASH EQUIVALENTS 58,076,245 29,264,190
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 63,359,124 44,951,299
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 121,435,369 $ 74,215,489
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Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 12,797,129 $ 14,755,278
Income taxes 2,879,982 2,347,398
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 193,914 200,703
Deposits acquired in connection with merger 0 28,102,691
Assets acquired in connection with merger 0 28,260,337
See notes to consolidated financial statements.
3
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
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Accumulated Total
Common shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital (loss) gain earnings stock Equity
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Balances at December 31, 2000 6,727,702 $789,789 $8,217,654 $(358,352) $ 46,401,102 $(7,640,604) $ 47,409,589
Net Income 2,419,337 2,419,337
Other comprehensive income
Unrealized gain on securities
available for sale, net
of taxes of $119,910 212,889 212,889
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Total comprehensive income 2,632,226
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Dividends declared ($.06) (402,082) (402,082)
Exercise of options 14,493 1,449 17,271 18,720
Purchase of common stock (52,590) (365,220) (365,220)
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Balances at June 30, 2001 6,689,605 $791,238 $8,234,925 $(145,463) $ 48,418,357 $(8,005,824) $ 49,293,233
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Balances at December 31, 2001 6,717,705 $794,888 $8,278,423 $ 147,496 $ 51,055,818 $(8,073,444) $ 52,203,181
Net Income 4,389,860 4,389,860
Other comprehensive income
Unrealized loss on securities
available for sale,
net of taxes of $303,736 540,446 540,446
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Total comprehensive income 4,930,306
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Dividends declared ($.06) (395,363) (395,363)
Exercise of stock options 925 93 1,102 1,195
Purchase of common stock (254,819) (2,813,136) (2,813,136)
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Balances at June 30, 2002 6,463,811 $794,981 $8,279,525 $ 687,942 $ 55,050,315 $(10,886,580) $ 53,926,183
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See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED JUNE 30, 2002 (UNAUDITED).
1-GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial 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 and
six months ended June 30, 2002 are not necessarily indicative of the operating
results for the full fiscal year or any other interim period.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for FORM 10-Q, and therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles. These statements should be read in
conjunction with the consolidated statements and related notes which are
incorporated by reference to the Corporation's annual report on FORM 10-K for
the year ended December 31, 2001. The consolidated financial statements include
the Corporation's principle subsidiary, Farmers & Mechanics Bank ("the Bank").
2-RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2002, the FASB issued SFAS No. 145 ("FAS 145"), "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." FAS 145 rescinds FASB No. 4 "Reporting Gains and Losses from
Extinguishment of Debt" which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. As a result of FAS 145, gains and losses from
extinguishments of debt should be classified as extraordinary items only if they
meet the criteria of Accounting Principles Board Opinion No. 30 "Reporting the
Effects of Disposal of a Segment of a Business , and Extraordinary , Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"). The provisions of
FAS 145 related to the rescission of FAS 4 are required to be applied in fiscal
years beginning after May 15, 2002, with early application encouraged. FAS 145
also rescinds an amendment to FAS 4, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" ("FAS 64"), rescinds "Accounting for Intangible
Assets of Motor Carriers" ("FAS 44") and amends "Accounting for Leases ("FAS
13"). FAS 145 makes technical corrections to existing pronouncements which are
not substantive in nature. The adoption by the Corporation of SFAS No. 145
effective June 30, 2002 did not have a material effect on the Consolidated
Statement of Financial Condition or Statement of Operation.
3-LONG-TERM DEBT
Long-Term Debt at June 30, 2002 consisted of $10.0 million of 10% subordinated
debentures and $25.0 million of Trust Capital Securities. In March 2002 the
Corporation formed a wholly-owned subsidiary, FMS Statutory Trust 1 ("the
Trust"). On March 26, 2002, the Trust issued $25.0 million of floating rate
capital securities. The interest rate resets every three months to LIBOR plus
360%, with an initial rate of 5.59%, and will not exceed 11.00% through the
first five years from its issuance. The proceeds will be used for the paydown of
the $10.0 million subordinated debentures, expansion of the Bank's operations
and general corporate purposes. At December 31, 2001 long-term debt consisted of
$10.0 million of 10% subordinated debentures.
5
4-SUBSEQUENT EVENT
On August 1, 2002 the Corporation redeemed its $10.0 million 10% Subordinated
Debentures. The early redemption was at a price of 101%. The additional cost of
redemption and the remaining unamortized bond issuance costs will be recorded as
a one-time extraordinary charge to the Corporation's net income.
5-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well capitalized" by OTS regulations at June 30, 2002.
The Bank's regulatory tangible and tier 1 (core) capital ratios are $68.5
million or 6.54% of total bank assets and $72.3 million or 18.35% for risk-based
capital.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002.
FMS Financial Corporation ("the Corporation") may from time to time make written
or oral "forward-looking statements," including statements contained in the
Corporation's filings with the Securities and Exchange Commission (including
this 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.
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 following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Corporation and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Corporation's products and services;
the success of the Corporation in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services laws
and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
involved in the foregoing.
The Corporation cautions that the foregoing list of important factors is not
exclusive. The Corporation does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Corporation.
6
FINANCIAL CONDITION
Total Assets - at June 30, 2002 were $1.05 billion as compared with total assets
at December 31, 2001 of $966.5 million.
Investment Securities Held to Maturity - decreased $46.9 million to $149.7
million at June 30, 2002 from $196.6 million at December 31, 2001 primarily due
to calls in U.S. Agency Notes of $48.6 million, principal paydowns of $39.7
million in collateralized mortgage obligations (CMO's) and the maturity of $5.7
million of Municipal Bonds, partially offset by purchases of $25.0 million in
U.S. Agency Notes, $20.3 million in CMO's and $2.2 million in Municipal Bonds
during the period. Investment securities held to maturity at June 30, 2002
consisted entirely of fixed rate securities. A comparison of cost and
approximate market values of investment securities held to maturity as of June
30, 2002 and December 31, 2001 follows:
June 30, 2002 December 31, 2001
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Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
------------------------------------------------------------------ ---------------------------------
U. S. Agency Notes $ 58,472,093 $ 350,841 $ (121,047) $ 58,701,887 $ 82,190,157 $ 82,827,324
CMO's 87,038,933 756,014 (156,091) 87,638,856 106,659,768 106,350,004
Municipal bonds 4,204,749 7,615 0 4,212,364 7,721,374 7,728,414
------------------------------------------------------------------ ---------------------------------
Total $ 149,715,775 $ 1,114,470 $ (277,138) $ 150,553,107 $ 196,571,299 $ 196,905,742
================================================================== =================================
Short term funds - increased $62.5 million to $93.4 million at June 30, 2002
from $30.9 million at December 31, 2001. The increase is the result of purchases
of overnight and short-term money market investment funds from the increased
prepayment and calls of our investment and loan portfolios.
Investment Securities Available for Sale - increased $43.1 million to $95.1
million at June 30, 2002 from $52.0 million at December 31, 2001. The increase
is the result of purchases of $30.8 million in U.S. Agency Notes, $19.2 million
of MBS's and $13.0 million of CMO's, partially offset by calls of $10.6 million
in U.S. Agency Notes, principal paydowns of $10.2 million of CMO's and
mortgage-backed securities (MBS's) at June 30, 2002. Investment securities
available for sale consisted of $94.4 million in fixed rate securities and $727
thousand in adjustable rate securities at June 30, 2002. A comparison of cost
and approximate market values of investment securities available for sale as of
June 30, 2002 and December 31, 2001 follows:
June 30, 2002 December 31, 2001
------------------------------------------------------------------ ---------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
------------------------------------------------------------------ ---------------------------------
U. S. Agency Notes $ 35,188,634 $ 389,640 $ (48,986) $ 35,529,288 $ 14,990,181 $ 15,051,850
CMO's 19,279,246 210,542 (22,511) 19,467,277 12,377,010 12,565,404
MBS's 39,599,592 545,824 0 40,145,416 24,371,904 24,352,168
---------------------------------------------------------------- -------------------------------
Total $ 94,067,472 $ 1,146,006 $ (71,497) $ 95,141,981 $ 51,739,095 $ 51,969,422
================================================================ ===============================
7
Loans, net - increased $23.2 million to $359.8 million at June 30, 2002 from
$336.5 million at December 31, 2001. This increase was primarily the result of
$67.8 million of loans originated, partially offset by approximately $44.4
million of principal collected on loans during the six months ended June 30,
2002. The following table shows loans receivable by major categories at the
dates indicated.
June 30, December 31,
2002 2001
------------------------------------
Mortgage Loans $ 276,593,715 $ 259,970,571
Construction Loans 1,412,699 1,254,191
Commercial Construction 2,724,934 4,605,752
Consumer Loans 3,949,341 4,582,734
Commercial Real Estate 70,022,876 60,626,659
Commercial Business 9,999,564 10,520,704
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Subtotal 364,703,129 341,560,611
------------------------------------
Less:
Deferred loan fees 683,747 786,044
Allowance for
loan losses 4,259,070 4,230,563
------------------------------------
Total loans, net $ 359,760,312 $ 336,544,004
====================================
At June 30, 2002, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS Nos. 114 and 118 totaled $2.5 million, of
which $1.1 million related to loans that were individually measured for
impairment with a valuation allowance of $479 thousand and $1.4 million of loans
that were collectively measured for impairment with a valuation allowance of $46
thousand. The Bank had $4.3 million in total reserves for loan losses at June
30, 2002, representing approximately 167% of non-accrual loans and 1.2% of total
loans. For the six months ended June 30, 2002, the average recorded investment
in impaired loans was approximately $2.3 million. The Bank recognized $68
thousand of interest income for the six months ended June 30, 2002 on impaired
loans, all of which was recognized on the cash basis.
As of June 30, 2002 the Bank had outstanding loan commitments of $13.5 million,
of which $5.4 million represented variable rate loans and $8.1 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.
8
Non-Performing Assets - The following table sets forth information regarding
non-accrual loans, troubled debt restructured and real estate owned assets by
the Bank.
June 30, December 31,
2002 2001
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Loans accounted for on a non-accrual basis:
One-to-four family mortgage $ 892,198 $ 1,347,705
Commercial real estate 1,718,264 1,633,940
Consumer and other 0 0
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Total non-accrual loans $ 2,610,462 $ 2,981,645
----------- -----------
Troubled debt restructuring $ 1,045,940 $ 1,072,393
Real estate owned, net 201,329 214,249
Other non-performing assets 87,926 87,925
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Total non-performing assets, net $ 3,945,657 $ 4,356,212
=========== ===========
Total non-accrual loans to net loans 0.73% 0.89%
=========== ===========
Total non-accrual loans to total assets 0.25% 0.31%
=========== ===========
Total non-performing assets to total assets 0.38% 0.45%
=========== ===========
Mortgage-Backed Securities Held to Maturity - increased $3.5 million to $276.0
million at June 30, 2002 from $272.5 million at December 31, 2001. The increase
is the result of purchases of $43.7 million of FNMA, FHLMC and GNMA fixed rate
securities and $9.5 million of FNMA adjustable rate securities, partially offset
by the principal paydowns of $49.7 million. Mortgage-backed securities at June
30, 2002 consisted of $234.5 million in fixed rate securities and $41.5 million
in adjustable rate securities. Mortgage-backed securities held to maturity at
June 30, 2002 and December 31, 2001 are summarized below:
June 30, 2002 December 31, 2001
----------------------------------------------------------- -----------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
----------------------------------------------------------- -----------------------------
GNMA $ 46,242,417 $ 1,703,621 $ (120) $ 47,945,918 $ 54,266,773 $ 55,391,045
FNMA 192,636,906 3,408,241 (206,202) 195,838,945 196,556,532 197,118,792
FHLMC 37,095,037 748,086 (33,145) 37,809,978 21,670,915 22,330,681
----------------------------------------------------------- -----------------------------
Total $ 275,974,360 $ 5,859,948 $ (239,467) $ 281,594,841 $ 272,494,220 $ 274,840,518
=========================================================== =============================
9
Deposits - increased $17.4 million to $746.9 million at June 30, 2002 from
$729.5 million at December 31, 2001. Money market accounts increased $22.3
million, savings accounts increased $16.0 million and non-interest bearing
checking accounts increased $12.6 million. These increases were partially offset
by decreases in certificates of deposits of $25.6 million and checking accounts
of $7.9 million. Interest credited to depositors accounts for the six months
ended June 30, 2002 amounted to $7.6 million. The following table sets forth
certain information concerning deposits at the dates indicated.
June 30, 2002 December 31, 2001
---------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
---------------------------------------------------------------------------------
Non-interest checking $133,546,602 17.88% 0.00% $120,954,278 16.57% 0.00%
Checking accounts 126,679,979 16.96% 1.28% 134,601,630 18.45% 2.16%
Savings accounts 147,524,324 19.75% 1.43% 131,524,016 18.04% 2.23%
Money market accounts 109,152,050 14.61% 2.05% 86,854,749 11.91% 2.55%
Certificates 229,998,287 30.80% 3.91% 255,571,056 35.03% 5.12%
---------------------------------------------------------------------------------
Total Deposits $746,901,242 100.00% 2.07% $729,505,729 100.00% 2.99%
=================================================================================
Borrowings - at June 30, 2002 amounted to $206.2 million. Borrowings consisted
of $195.0 million in securities sold under the agreement to repurchase with a
weighted average interest rate of 4.49% and $11.2 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 2.18%. At December 31,
2001 borrowings consisted of $165.0 million in securities sold under agreements
to repurchase with a weighted average rate of 4.86% and $1.3 million in Federal
Home Loan Bank Advances with a weighted average interest rate of 5.00%.
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 June 30, 2002 of
$2.3 million, or $.36 diluted earnings per share as compared to $1.2 million, or
$.18 diluted earnings per share for the comparable period in 2001. Earnings for
the six months ended June 30, 2002 were $4.4 million, or $.66 diluted earnings
per share as compared to $2.4 million, or $.36 diluted earnings per share for
the comparable periods in 2001.
10
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 receivable changes principally as a result of existing mortgage loan
repayments, adjustable rate loan adjustments, sales and the interest rates and
volume of new mortgage loans. The average yields and rates are derived by
dividing income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods presented.
The following table sets forth certain information relating to the Corporation's
average balance sheet and reflects the average yield on assets and average rates
paid on liabilities for the periods indicated. Such 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:
11
Three Months Ended June 30,
---------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------- ------------- ------------ ---------------- -------------- -----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 364,113 $ 6,386 7.02% $ 304,958 $ 5,819 7.63%
Mortgage-backed securities 304,900 4,536 5.95% 200,420 3,288 6.56%
Investment securities 301,482 3,917 5.20% 293,838 4,579 6.23%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-earning assets 970,495 14,839 6.12% 799,216 13,686 6.85%
----------------- ------------- ------------ ---------------- -------------- ----------
Interest-bearing liabilities:
Deposits 738,412 3,570 1.93% 653,262 5,140 3.15%
Borrowings 203,677 2,256 4.43% 145,437 1,893 5.21%
Long-Term Debt 35,774 648 7.25% 10,000 264 10.56%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-bearing
liabilities $ 977,863 6,474 2.65% $ 808,699 7,297 3.61%
================= ------------- ------------ ================ -------------- ----------
Net interest income $ 8,365 $ 6,389
============= ==============
Interest rate spread 3.47% 3.24%
============ ==========
Net yield on average interest-earning assets 3.45% 3.20%
============ ==========
Ratio of average interest-
earning assets to average interest
-bearing liabilities 99.25% 98.83%
============ ==========
Six Months Ended June 30,
---------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------- ------------- ------------ ---------------- -------------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 358,999 $ 12,742 7.10% $ 300,047 $ 11,520 7.68%
Mortgage-backed securities 294,259 8,834 6.00% 185,244 6,166 6.66%
Investment securities 275,774 7,574 5.49% 312,750 9,461 6.05%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-earning
assets 929,032 29,150 6.28% 798,041 27,147 6.80%
----------------- ------------- ------------ ---------------- -------------- ----------
Interest-bearing liabilities:
Deposits 731,667 7,496 2.05% 641,773 10,350 3.23%
Borrowings 191,545 4,352 4.54% 136,727 3,606 5.27%
Long-Term Debt 23,580 934 7.92% 10,000 529 10.58%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-bearing
liabilities $ 946,792 12,782 2.70% $ 788,500 14,485 3.67%
================= ------------- ------------ ================ -------------- ----------
Net interest income $ 16,368 $ 12,662
============= ==============
Interest rate spread 3.58% 3.13%
============ ==========
Net yield on average interest-earning assets 3.52% 3.17%
============ ==========
Ratio of average interest-
earning assets to average interest
-bearing liabilities 98.12% 101.21%
============ ==========
12
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rate, (ii) changes in volume and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). A higher level of non-performing loans affects the
changes in both volume and rate.
Three Months Ended Six Months Ended
June 30, June 30,
2002 vs 2001 2002 vs 2001
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
--------------------------------------- ---------------------------------------
Rate Volume Total Rate Volume Total
(In Thousands) (In Thousands)
---------------------------------------- ---------------------------------------
Interest income:
Loans $ (562) $ 1,129 $ 567 $ (1,041) $ 2,263 $ 1,222
Mortgage-backed securities (466) 1,714 1,248 (961) 3,629 2,668
Investment securities (781) 119 (662) (768) (1,119) (1,887)
---------------------------------------- ---------------------------------------
Total change interest income (1,809) 2,962 1,153 (2,770) 4,773 2,003
---------------------------------------- ---------------------------------------
Interest expense:
Deposits (2,240) 670 (1,570) (4,304) 1,450 (2,854)
Borrowings (395) 758 363 (700) 1,446 746
Long-Term Debt (296) 680 384 (313) 718 405
---------------------------------------- ---------------------------------------
Total change - interest expense (2,931) 2,108 (823) (5,317) 3,614 (1,703)
---------------------------------------- ---------------------------------------
Net change in net interest income $ 1,122 $ 854 $ 1,976 $ 2,547 $ 1,159 $ 3,706
======================================== =======================================
Net Interest Income - for the three and six months ended June 30, 2002 totaled
$8.4 million and $16.4 million, respectively. Net interest income for the three
months ended June 30, 2002 increased $2.0 million compared to the same period in
2001 due primarily to an increase in interest income on mortgage-backed
securities of $1.2 million, an increase in interest income on loans of $567
thousand and a decrease in interest expense on deposits of $1.5 million,
partially offset by a decrease in interest income on investment securities of
$662 thousand, an increase in interest expense on long-term debt of $384
thousand and an increase in interest expense on borrowings of $363 thousand.
The increase in interest income was primarily the result of an increase in
mortgage-backed securities interest income of $1.2 million to $4.5 million for
the three months ended June 30, 2002 from $3.3 million for the same period in
2001. The average balance of MBS's increased $104.5 million to $304.9 million
for the three months ended June 30, 2002 from $200.4 million for the same period
in 2001, which resulted in an interest income volume increase of $1.7 million.
The increase in the average balance during this period was due to MBS purchases
of $53.2 million, partially offset by principal paydowns of $49.7 million. The
average yield of the MBS portfolio decreased 61 basis points to 5.95% for the
quarter ended June 30, 2002 from 6.56% for the same period in 2001, which
resulted in an interest income decrease of $466 thousand due to rate changes.
13
Interest income on loans increased $567 thousand to $6.4 million for the three
months ended June 30, 2002 from $5.8 million for the same period in 2001. The
average balance of the loan portfolio increased $59.2 million to $364.1 million
for the three months ended June 30, 2002 from $305.0 million for the same period
in 2001, which resulted in a volume increase in interest income of $1.1 million.
The increase in the average balance is principally due to an increase in loan
originations during this period and $25.0 million of CloverBank loans acquired
through the merger finalized on June 1, 2001. The average rate on loans
decreased 61 basis points to 7.02% for the three months ended June 30, 2002 from
7.63% for the same period in 2001, which resulted in a decrease in interest
income of $562 thousand due to rate changes.
Interest income on investment securities decreased $662 thousand to $3.9 million
for the three months ended June 30, 2002 from $4.6 million for the same period
in 2001. The average yield of the investment portfolio decreased 103 basis
points to 5.20% for the quarter ended June 30, 2002 from 6.23% for the same
period in 2001, which resulted in an interest income decrease of $781 thousand
due to rate changes. The average balance of investment securities increased $7.6
million to $301.5 million for the three months ended June 30, 2002 from $293.8
million for the same period in 2001, which resulted in a volume increase in
interest income of $119 thousand. The increase in the average volume during this
period is due to purchases of $110.4 million in U.S. Agency Notes, partially
offset by investment calls and maturities of $64.9 million and principal
paydowns of $50.0 million.
Interest expense on deposits decreased $1.5 million to $3.6 million for the
three months ended June 30, 2002 from $5.1 million for the same period in 2001.
The average rate paid on deposits decreased 122 basis points to 1.93% for the
quarter ended June 30, 2002 from 3.15% for the same period in 2001, which
resulted in a decrease in interest expense of $2.2 million due to rate changes.
The average balance of deposits increased $85.2 million to $738.4 million for
the three months ended June 30, 2002 from $653.3 million for the same period in
2001, which resulted in a volume increase in interest expense of $670 thousand.
Interest expense on long term debt increased $384 thousand to $648 thousand for
the three months ended June 30, 2002 from $264 thousand for the same period in
2001. The $25.0 million in Trust capital securities issued in March 2002 at an
initial floating rate of 5.59% increased interest expense from the same period
in 2001.
Interest expense on borrowings increased $363 thousand to $2.3 million for the
three months ended June 30, 2002 from $1.9 million for the same period in 2001.
The average balance of borrowings increased $58.2 million to $203.7 million at
June 30, 2002 from $145.4 million for the same period in 2001, which resulted in
a volume increase in interest expense of $758 thousand. The average rate paid on
borrowings decreased 78 basis points to 4.43% for the quarter ended June 30,
2002 from 5.21% for the same period in 2001 which resulted in a decrease in
interest expense of $395 thousand due to rate changes.
Net interest income for the six months ended June 30, 2002 increased $3.7
million primarily due to an increase in interest income on mortgage-backed
securities of $2.7 million, an increase in interest income on loans of $1.2
million and a decrease in interest expense on deposits of $2.9 million,
partially offset by a decrease in interest income on investment securities of
$1.9 million, an increase in interest expense on borrowings of $746 thousand and
an increase in interest expense on long-term debt of $405 thousand as compared
to the same six month period in 2001.
14
The increase in interest income on mortgage-backed securities was due to an
increase in the average balance of the portfolio of $109.0 million to $294.3
million for the six months ended June 30, 2002 from $185.2 million for the six
months ended June 30, 2001. The increase in the average balance of the portfolio
resulted in a $3.6 million increase in interest income. The average yield on the
portfolio decreased 66 basis points to 6.00% for the six months ended June 30,
2002 from 6.66% for the same period in 2001, which resulted in a decrease in
interest income of $961 thousand due to rate changes. The increase in the
average balance was due to purchases during this period of $165.2 million,
partially offset by $101.5 million of principal paydowns from June 2001 through
June 2002.
The increase in interest income on loans was due to an increase in the average
balance of $59.0 million to $359.0 million for the six months ended June 30,
2002 from $300.0 million for the six months ended June 30, 2001. The increase in
the average balance resulted in a $2.3 million volume increase in interest
income. The increase in the average balance is primarily due to an increase in
loan originations and $25.0 million of CloverBank loans acquired through the
merger finalized on June 1, 2001. The average yield on loans decreased 58 basis
points to 7.10% for the six months ended June 30, 2002 from 7.68% for the same
period in 2001, which resulted in a decrease in interest income of $1.0 million
due to rate changes.
The decrease in interest income on investment securities was due to a decrease
in the the average balance of the portfolio of $37.0 million to $275.8 million
for the six months ended June 20, 2002 from $312.8 million for the same period
in 2001, which resulted in a volume decrease in interest income of $1.1 million.
The decrease in the average balance was primarily due to $188.3 million in calls
on U.S. Agency Notes and $102.4 million of principal paydowns, partially offset
by purchases of $274.7 million in U.S. Agency Notes and CMO's. The average yield
on the investment portfolio decreased 56 basis points to 5.49% for the six
months ended June 30, 2002 from 6.05% for the same period in 2001, which
resulted in a decrease in interest income of $768 thousand due to rate changes.
The decrease in interest expense on deposits was the result of a decrease in the
average yield of 118 basis points to 2.05% for the six months ended June 30,
2002 from 3.23% for the same period in 2001, which resulted in a decrease in
interest expense of $4.3 million due to rate changes. The average balance of
deposits increased $89.9 million to $731.7 million for the six months ended June
30, 2002 from $641.8 million for the same period in 2001, which resulted in a
volume increase in interest expense of $1.5 million.
The increase in interest expense on borrowings was the result of an increase in
the average balance of $54.8 million to $191.5 million for the six months ended
June 30, 2002 from $136.7 million for the same period in 2001, which resulted in
a volume increase in interest expense of $1.4 million. The average yield on
borrowings decreased 73 basis points to 4.54% for the six months ended June 30,
2002 from 5.27% for the same period in 2001, which resulted in a decrease in
interest expense of $700 thousand due to rate changes.
Interest expense on long-term debt increased $405 thousand to $934 thousand for
the six months ended June 30, 2002 from $529 thousand for the same period in
2001. The $25.0 million in Trust capital securities issued in March 2002 at an
initial floating rate of 5.59% increased interest expense from the same period
in 2001.
15
Most Significant Accounting Estimate-Provision for Loan Losses - The Banks most
significant accounting estimate is the provision for loan losses which decreased
$34 thousand to $26 thousand for the three months ended June 30, 2002 from $60
thousand for the same period in 2001. At June 30, 2002 the allowance for loan
losses amounted to $4.3 million compared to $4.2 million at June 30, 2001. 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.
Other Income - for the three and six month periods ended June 30, 2002 was $1.2
million and $2.2 million, as compared to $925 thousand and $1.8 million for the
same periods in 2001. The increase was primarily due to a gain on the sale of
the 712 Stokes Road branch of $160 thousand, an increase in retail banking fees
for the two branches opened since the second quarter of 2001 and an increase in
the amount received on rental properties acquired since the second quarter of
2001.
Operating Expenses - for the three and six month periods ended June 30, 2002
totaled $5.9 million and $11.7 million, respectively as compared to $5.4 million
and $10.6 million for the same periods in 2001.
Salaries and Employee Benefits - for the three and six month periods ended June
30, 2002 were $3.4 million and $6.9 million, as compared to $3.1 million and
$6.1 million for the same period in 2001. The increases were primarily due to
additional staff in the two new branches opened since the second quarter of 2001
and annual compensation adjustments, effective the beginning of the year.
Average full time equivalent employees at June 30, 2002 were 477 as compared to
425 at June 30, 2001.
Purchased Services - for the three and six month periods ended June 30, 2002
totaled $649 thousand and $1.3 million, as compared to $525 thousand and $1.0
million for the same periods in 2001. ATM charges increased $163 thousand for
the first six months of 2002 compared to the same period in 2001. Check
processing costs increased $56 thousand for the six months ended June 30, 2002
compared to the same period in 2001 due to higher transaction volumes.
Professional Fees - for the three and six month periods ended June 30, 2002
totaled $206 thousand and $404 thousand as compared to $131 thousand and $251
thousand for the same periods in 2001. Costs associated with nonmaterial
litigation and data network consulting fees are the principle reasons for the
increases.
16
Advertising - for the three and six month periods ended June 30, 2002 increased
$61 thousand and $87 thousand respectively. Additional newspaper and cable TV
ads increased advertising costs.
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the six months ended June 30, 2002 from
the information presented in the annual report on Form 10-K for the year ended
December 31, 2001.
17
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Changes in Securities
------- ---------------------
None
Item 3: Defaults Upon Senior Securities
------- -------------------------------
None
Item 4: Submission of Matters to Vote of Security of Holders
------- ----------------------------------------------------
None
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibit 99.1 certification
(b) No reports on Form 8-K were filed during the period
under report
18
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: August 9, 2002 /s/ Craig W. Yates
------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2002 /s/ Channing L. Smith
---------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)