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 September 30, 2002
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 . As of
November 1, 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
----------------------------------------
QUARTERLY REPORT ON FORM 10-Q
-----------------------------
SEPTEMBER 30, 2002
------------------
TABLE OF CONTENTS
-----------------
PART I - Financial Information Page
- ------------------------------ ----
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2002 (unaudited) and December 31, 2001................................1
Consolidated Statements of Operations (unaudited)
for the three and nine months ended
September 30, 2002 and September 30, 2001...........................................2
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2002
and September 30, 2001..............................................................3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the nine months ended September 30, 2002
and September 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
Item 4 - Disclosure Controls and Procedures......................................................17
PART II - Other Information
- ---------------------------
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 Forms 8-K .....................................................18
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001
- --------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 30,230,050 $ 32,336,279
Interest-bearing deposits 44,878 153,133
Short term funds 36,280,803 30,869,712
---------------- ----------------
Total cash and cash equivalents 66,555,731 63,359,124
Investment securities held to maturity 151,026,006 196,571,299
Investment securities available for sale 145,668,759 51,969,422
Loans, net 360,795,487 336,544,004
Mortgage-backed securities held to maturity 330,606,407 272,494,220
Accrued interest receivable:
Loans 1,707,518 1,591,276
Mortgage-backed securities 2,079,810 1,757,572
Investments 2,251,564 2,194,252
Federal Home Loan Bank stock 10,811,720 8,313,620
Real estate held for development, net 87,926 87,926
Real estate owned, net 278,126 214,249
Premises and equipment, net 27,599,917 26,364,980
Deferred income taxes 3,458,136 3,158,402
Prepaid expenses and other assets 1,210,177 1,767,694
Trust Capital securities issue costs, net 737,460 0
Subordinated debentures issue costs, net 0 149,069
---------------- ----------------
TOTAL ASSETS $ 1,104,874,744 $ 966,537,109
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 766,107,078 $ 729,505,729
Securities sold under agreements to repurchase 205,000,000 165,000,000
Advances from the Federal Home Loan Bank 11,232,103 1,270,313
10% Subordinated debentures, due 2004 0 10,000,000
Trust Capital securities - FMS Statutory Trust 1 25,000,000 0
Advances by borrowers for taxes and insurance 2,166,998 2,247,002
Accrued interest payable 1,350,784 1,782,508
Dividends payable 193,914 201,531
Other liabilities 37,603,551 4,326,845
----------------- -----------------
Total liabilities 1,048,654,428 914,333,928
----------------- -----------------
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 September 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 income - net of deferred income taxes 1,229,145 147,496
Retained earnings 56,803,245 51,055,818
Less: Treasury stock (1,485,998 and 1,231,179 shares, at cost, as of
September 30, 2002 and December 31, 2001, respectively) (10,886,580) (8,073,444)
----------------- -----------------
Total stockholders' equity 56,220,316 52,203,181
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,104,874,744 $ 966,537,109
================= =================
See notes to consolidated financial statements.
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME: (Unaudited) (Unaudited)
Interest income on:
Loans $ 6,425,228 $ 6,256,589 $ 19,167,561 $ 17,776,171
Mortgage-backed securities 4,782,173 3,451,146 13,616,436 9,617,421
Investments 3,302,760 4,457,085 10,876,691 13,918,104
-------------- -------------- -------------- -------------
Total interest income 14,510,161 14,164,820 43,660,688 41,311,696
-------------- -------------- -------------- -------------
INTEREST EXPENSE:
Interest expense on:
Deposits 3,354,425 5,154,265 10,849,964 15,504,149
Long term debt 445,773 264,337 1,379,855 793,011
Borrowings 2,314,864 1,974,566 6,667,182 5,581,003
-------------- -------------- -------------- -------------
Total interest expense 6,115,062 7,393,168 18,897,001 21,878,163
-------------- -------------- -------------- -------------
NET INTEREST INCOME 8,395,099 6,771,652 24,763,687 19,433,533
PROVISION FOR LOAN LOSSES 60,000 60,000 89,000 180,000
-------------- -------------- -------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,335,099 6,711,652 24,674,687 19,253,533
-------------- -------------- -------------- -------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 31,389 36,700 84,052 90,176
Gain on sale of loans 330 765 793 1,274
Loss on sale of investment securities 0 (17,153) 0 (17,153)
Gain on disposal of fixed assets 654 0 100,767 50,799
Real estate owned operations, net (11,515) 58,712 (27,383) 33,502
Service charges on accounts 1,034,639 852,763 2,896,817 2,412,597
Other income 75,066 71,864 226,535 208,988
-------------- -------------- -------------- -------------
Total other income 1,130,563 1,003,651 3,281,581 2,780,183
-------------- -------------- -------------- -------------
OPERATING EXPENSES:
Salaries and employee benefits 3,473,344 3,143,500 10,331,745 9,230,845
Occupancy and equipment 1,145,015 1,130,813 3,365,259 3,410,929
Purchased services 650,496 556,075 1,914,435 1,567,408
Federal deposit insurance premiums 30,655 48,151 92,779 115,787
Professional fees 224,439 300,386 628,475 551,569
Advertising 115,737 88,614 320,320 206,249
Other 467,868 366,369 1,164,085 1,118,014
-------------- -------------- -------------- -------------
Total operating expenses 6,107,554 5,633,908 17,817,098 16,200,801
-------------- -------------- -------------- -------------
INCOME BEFORE INCOME TAXES 3,358,108 2,081,395 10,139,170 5,832,915
INCOME TAXES: 1,274,405 724,832 3,665,607 2,057,015
-------------- -------------- -------------- -------------
NET INCOME before extraodinary loss $ 2,083,703 $ 1,356,563 $ 6,473,563 $ 3,775,900
============== ============== ============== =============
EXTRAORDINARY LOSS (Net of $ 81,394 tax benefit) (133,682) 0 (133,682) 0
-------------- -------------- -------------- -------------
NET INCOME $ 1,950,021 $ 1,356,563 $ 6,339,881 $ 3,775,900
============== ============== ============== =============
BASIC EARNINGS PER COMMON SHARE before extraodinary loss $ 0.32 $ 0.20 $ 0.98 $ 0.56
============== ============== ============== =============
DILUTED EARNINGS PER COMMON SHARE before extraodinary loss $ 0.32 $ 0.20 $ 0.98 $ 0.56
============== ============== ============== =============
Extraodinary Loss per Common share Basic $ (0.02) $ 0.00 $ (0.02) $ 0.00
============== ============== ============== =============
Extraodinary Loss per Common share Diluted $ (0.02) $ 0.00 $ (0.02) $ 0.00
============== ============== ============== =============
BASIC EARNINGS PER COMMON SHARE $ 0.30 $ 0.20 $ 0.96 $ 0.56
============== ============== ============== =============
DILUTED EARNINGS PER COMMON SHARE $ 0.30 $ 0.20 $ 0.96 $ 0.56
============== ============== ============== =============
Dividends declared per common share $ 0.03 $ 0.03 $ 0.09 $ 0.09
============== ============== ============== =============
Weighted average common shares outstanding 6,463,811 6,686,917 6,576,481 6,697,658
Potential dilutive effect of the exercise of stock options 29,450 29,505 23,792 29,364
-------------- -------------- -------------- -------------
Adjusted weighted average common shares outstanding 6,493,261 6,716,422 6,600,273 6,727,022
============== ============== ============== =============
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Nine Months ended
September 30,
------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES:
Net income $ 6,339,881 $ 3,775,900
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 89,000 180,000
Depreciation and amortization 3,599,560 2,335,181
Realized (gains) and losses on:
Sale of loans and loans held for sale (793) (1,274)
Disposal and sale of fixed assets (100,767) (50,799)
Investment securities available for sale 0 17,153
Sale of real estate owned 0 (70,658)
Extraordinary loss on retirement of debt 133,682 0
(Decrease) Increase in accrued interest receivable (495,792) 1,175,314
Decrease in prepaid expenses and other assets 557,517 195,889
Decrease in accrued interest payable (431,724) (443,034)
Increase in other liabilities 81,706 453,126
Decrease in deferred income taxes (937,639) (354,427)
---------------- ---------------
Net cash provided by operating activities 8,834,631 7,212,371
---------------- ---------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 190,697 215,194
Real estate owned 12,920 413,854
Property and equipment 214,310 84,432
Principal collected and proceeds from maturities of investment
securities held to maturity 157,051,095 274,872,465
Proceeds from maturities of investment securities available
for sale 34,566,341 38,149,514
Principal collected on mortgage-backed securities held to maturity 76,948,183 60,154,539
Principal collected on loans, net 62,462,942 48,520,794
Loans originated or acquired (87,081,309) (59,483,824)
Purchase of investment securities and mortgage-backed securities
held to maturity (225,240,989) (334,244,331)
Purchase of investment securities and mortgage-backed securities
available for sale (116,843,528) (36,920,030)
Purchase of Federal Home Loan Bank stock (2,498,100) (1,248,310)
Purchase of office property and equipment (2,616,888) (1,412,804)
Net cash received from bank merger 0 1,466,726
---------------- ---------------
Net cash used by investing activities (102,834,326) (9,431,781)
---------------- ---------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 62,548,477 23,048,231
Net (decrease) increase in time deposits (25,947,128) 676,756
Net increase (decrease) in FHLB advances 9,961,790 (5,035,331)
Proceeds from securities sold under agreements to repurchase 40,000,000 35,000,000
Net proceeds from issuance of trust capital securities 24,221,532 0
Repayment of subordinated debentures (10,100,000) 0
(Decrease) Increase in advances from borrowers for taxes
and insurance (80,004) 33,933
Purchase of treasury stock (2,813,136) (432,840)
Dividends paid on common stock (596,424) (603,913)
Net proceeds from issuance of common stock 1,195 41,325
---------------- ---------------
Net cash provided by financing activities 97,196,302 52,728,161
---------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,196,607 50,508,751
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 63,359,124 44,951,299
---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66,555,731 $ 95,460,050
================ ===============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 19,328,725 $ 22,304,595
Income taxes 4,729,982 2,697,733
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 193,914 200,961
Deposits acquired in connection with merger 0 28,102,691
Assets acquired in connection with merger 0 28,260,337
Non-monetary transfers from loans to real estate acquired
through foreclosure 76,797 0
Investments purchased and not yet settled 33,195,000 0
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) gain earnings stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
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 3,775,900 3,775,900
Other comprehensive income
Unrealized loss on securities
available for sale, net
of taxes of $439,998 782,426 782,426
-----------
Total comprehensive income 4,558,326
------------
Dividends declared ($.09) (603,042) (603,042)
Exercise of stock options 31,993 3,199 38,126 41,325
Purchase of common stock (60,990) (432,840) (432,840)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2001 6,698,705 $792,988 $8,255,780 $ 424,074 $49,573,960 $ (8,073,444) $50,973,358
- ------------------------------------------------------------------------------------------------------------------------------------
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 6,339,881 6,339,881
Other comprehensive income
Unrealized gain on securities
available for sale net
of taxes of $719,299 1,081,649 1,081,649
-----------
Total comprehensive income 7,421,530
-----------
Dividends declared ($.09) (592,454) (592,454)
Exercise of stock options 925 93 1,102 1,195
Purchase of common stock (254,819) (2,813,136) (2,813,136)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2002 6,463,811 $794,981 $8,279,525 $1,229,145 $56,803,245 $(10,886,580) $56,220,316
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 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
nine months ended September 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 June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards SFAS No. 146 (FAS 146) "Accounting for Costs
Associated with Exit or Disposal Activities" which superseded Emerging Issues
Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including certain
costs incurred in restructuring)". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities. This
Statement is effective for exit or disposal activities initiated after December
31, 2002, with early application encouraged. The adoption by the Corporation of
FAS 146, effective September 30, 2002, had no effect on the Consolidated
Statements of Financial Condition or the Consolidated Statements of Operations.
In October 2002, the FASB issued SFAS 147 (FAS 147)"Acquisitions of Certain
Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretations No. 9". This Statement requires the application of the purchase
method of accounting to all acquisitions of financial institutions (except two
or more mutual enterprises) and provides accounting for the recognition of
certain long-term customer relationship intangible assets recognized in an
acquisition of a financial institution. This Statement is effective on October
1, 2002, with earlier application permitted. The adoption of FAS 147, effective
September 30, 2002, had no effect on the Consolidated Statements of Financial
Condition or the Consolidated Statements of Operation.
5
3-LONG-TERM DEBT
Long-Term Debt at September 30, 2002 consisted of $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 basis points, with an initial rate of 5.59%, and
will not exceed 11.00% through the first five years from its issuance. The
proceeds were used for the paydown of the $10.0 million subordinated debentures,
expansion of the Bank's operations and general corporate purposes. On August 1,
2002 the Corporation redeemed its $10.0 million 10 % subordinated debentures.
The early redemption was at a price of 101%. The cost of redemption and the
remaining unamortized bond issuance costs were recorded as a one-time
extraordinary charge to net income of $134 thousand net of taxes. At December
31, 2001 long-term debt consisted of $10.0 million of 10% subordinated
debentures.
4-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well capitalized" by OTS regulations at September 30,
2002. The Bank's regulatory tangible and tier 1 (core) capital ratios are $69.5
million or 6.31% of total bank assets and $73.4 million or 17.87% for risk-based
capital.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 2002 were $1.1 billion as compared with total
assets at December 31, 2001 of $966.5 million.
Investment Securities Held to Maturity - decreased $45.6 million to $151.0
million at September 30, 2002 from $196.6 million at December 31, 2001 primarily
due to calls in U.S. Agency Notes of $87.5 million, principal paydowns of $62.4
million in collateralized mortgage obligations (CMO's) and the maturity of $7.1
million of Municipal Bonds, partially offset by purchases of $56.0 million in
CMO's, $45.5 million in U.S. Agency Notes and $9.4 million in Municipal Bonds
during the period. Investment securities held to maturity at September 30, 2002
consisted entirely of fixed rate securities. A comparison of cost and
approximate market values of investment securities held to maturity as of
September 30, 2002 and December 31, 2001 follows:
September 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 $ 40,555,793 $ 525,084 $ 0 $ 41,080,877 $ 82,190,157 $ 82,827,324
CMO's 100,497,344 672,548 (102,073) 101,067,819 106,659,768 106,350,004
Municipal bonds 9,972,869 8,142 0 9,981,011 7,721,374 7,728,414
- -------------------------------------------------------------------------------------- -----------------------------
Total $151,026,006 $1,205,774 $(102,073) $152,129,707 $196,571,299 $196,905,742
====================================================================================== =============================
Short Term Funds - increased $5.4 million to $36.3 million at September 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 $93.7 million to $145.7
million at September 30, 2002 from $52.0 million at December 31, 2001. The
increase is the result of purchases of $44.3 million in U.S. Agency Notes, $57.8
million of MBS's and $23.1 million of CMO's, partially offset by calls of $15.8
million in U.S. Agency Notes, principal paydowns of $18.8 million of CMO's and
mortgage-backed securities (MBS's) at September 30, 2002. Investment securities
available for sale consisted of $145.0 million in fixed rate securities and $704
thousand in adjustable rate securities at September 30, 2002. A comparison of
cost and approximate market values of investment securities available for sale
as of September 30, 2002 and December 31, 2001 follows:
September 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 $ 43,522,715 $ 537,265 $ 0 $ 44,059,980 $14,990,181 $15,051,850
CMO's 25,110,545 252,879 (57,714) 25,305,710 12,377,010 12,565,404
MBS's 75,004,225 1,302,308 (3,464) 76,303,069 24,371,904 24,352,168
- ------------------------------------------------------------------------------------- ---------------------------------
Total $143,637,485 $2,092,452 $(61,178) $145,668,759 $51,739,095 $51,969,422
===================================================================================== =================================
7
Loans, net - increased $24.3 million to $360.8 million at September 30, 2002
from $336.5 million at December 31, 2001. This increase was primarily the result
of $87.1 million of loans originated, partially offset by approximately $62.5
million of principal collected on loans during the nine months ended September
30, 2002. The following table shows loans receivable by major categories at the
dates indicated.
September 30, December 31,
2002 2001
----------------------------------
Mortgage Loans $ 273,637,344 $ 259,970,571
Construction Loans 1,480,564 1,254,191
Commercial Construction 3,159,727 4,605,752
Consumer Loans 3,615,047 4,582,734
Commercial Real Estate 72,789,983 60,626,659
Commercial Business 11,060,190 10,520,704
----------------------------------
Subtotal 365,742,855 341,560,611
----------------------------------
Less:
Deferred loan fees 681,155 786,044
Allowance for
loan losses 4,266,213 4,230,563
----------------------------------
Total loans, net $ 360,795,487 $ 336,544,004
==================================
At September 30, 2002, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $2.3 million,
of which $1.1 million related to loans that were individually measured for
impairment with a valuation allowance of $437 thousand and $1.2 million of loans
that were collectively measured for impairment with a valuation allowance of $45
thousand. The Bank had $4.3 million in total reserves for loan losses at
September 30, 2002, representing approximately 182% of non-accrual loans and
1.2% of total loans. For the nine months ended September 30, 2002, the average
recorded investment in impaired loans was approximately $2.3 million. The Bank
recognized $117 thousand of interest income for the nine months ended September
30, 2002 on impaired loans, all of which was recognized on the cash basis.
As of September 30, 2002 the Bank had outstanding loan commitments of $17.9
million, of which $7.0 million represented variable rate loans and $10.9 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.
September 30, December 31,
2002 2001
----------- -----------
Loans accounted for on a non-accrual basis:
One-to-four family mortgage $ 667,693 $ 1,347,705
Commercial real estate 1,668,776 1,633,940
Consumer and other 3,007 0
----------- -----------
Total non-accrual loans $ 2,339,476 $ 2,981,645
----------- -----------
Troubled debt restructuring $ 1,041,144 $ 1,072,392
Real estate owned, net 278,126 214,249
Other non-performing assets 87,926 87,926
----------- -----------
Total non-performing assets, net $ 3,746,672 $ 4,356,212
=========== ===========
Total non-accrual loans to net loans 0.65% 0.89%
=========== ===========
Total non-accrual loans to total assets 0.21% 0.31%
=========== ===========
Total non-performing assets to total assets 0.34% 0.45%
=========== ===========
Mortgage-Backed Securities Held to Maturity - increased $58.1 million to $330.6
million at September 30, 2002 from $272.5 million at December 31, 2001. The
increase is the result of purchases of $109.3 million of FNMA, FHLMC and GNMA
fixed rate securities and $24.5 million of FNMA adjustable rate securities
partially offset by the principal paydowns of $76.9 million. Mortgage-backed
securities at September 30, 2002 consisted of $282.5 million in fixed rate
securities and $48.1 million in adjustable rate securities. Mortgage-backed
securities held to maturity at September 30, 2002 and December 31, 2001 are
summarized below:
September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------ ------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
- ------------------------------------------------------------------------ ------------------------------
GNMA $ 40,238,229 $1,877,643 $(112) $ 42,115,760 $ 54,266,773 $ 55,391,045
FNMA 226,814,339 6,110,915 (19) 232,925,235 196,556,532 197,118,792
FHLMC 63,553,839 1,270,047 (23) 64,823,863 21,670,915 22,330,681
- ----------------------------------------------------------------------- ------------------------------
Total $330,606,407 $9,258,605 $(154) $339,864,858 $272,494,220 $274,840,518
======================================================================= ==============================
9
Deposits - increased $36.6 million to $766.1 million at September 30, 2002 from
$729.5 million at December 31, 2001. Money market accounts increased $33.0
million, savings accounts increased $15.4 million and non-interest bearing
checking accounts increased $15.1 million. These increases were partially offset
by decreases in certificates of deposits of $25.9 million and checking accounts
of $964 thousand. Interest credited to depositors accounts for the nine months
ended September 30, 2002 amounted to $11.0 million. The following table sets
forth certain information concerning deposits at the dates indicated.
September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
- ------------------------------------------------------------------------------------------------------
Non-interest checking $136,091,199 17.76% 0.00% $120,954,278 16.57% 0.00%
Checking accounts 133,637,316 17.44% 1.26% 134,601,630 18.45% 2.16%
Savings accounts 146,905,069 19.18% 1.39% 131,524,016 18.04% 2.23%
Money market accounts 119,849,565 15.64% 1.97% 86,854,749 11.91% 2.55%
Certificates 229,623,929 29.98% 3.72% 255,571,056 35.03% 5.12%
- ------------------------------------------------------------------------------------------------------
Total Deposits $766,107,078 100.00% 1.96% $729,505,729 100.00% 2.99%
======================================================================================================
Borrowings - at September 30, 2002 amounted to $216.2 million. Borrowings
consisted of $205.0 million in securities sold under the agreement to repurchase
with a weighted average interest rate of 4.35% 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%.
Long-term debt- at September 30, 2002 consisted of $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 basis points, with an initial rate
of 5.59%, and will not exceed 11.00% through the first five years from its
issuance. The proceeds were used for the paydown of the $10.0 million
subordinated debentures, expansion of the Bank's operations and general
corporate purposes. On August 1, 2002 the Corporation redeemed its $10.0 million
10 % subordinated debentures. The early redemption was at a price of 101%. The
cost of redemption and the remaining unamortized bond issuance costs were
recorded as a one-time extraordinary charge to net income of $134 thousand net
of taxes. At December 31, 2001 long-term debt consisted of $10.0 million of 10%
subordinated debentures.
Other Liabilities- increased $33.3 million to $37.6 million at September 30,
2002 from $4.3 million at December 31, 2001 as a result of $33.2 million in
payables for investments purchased and recorded on their trade date in September
2002 with settlement dates in October 2002.
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 September 30,
2002 of $2.0 million or $.30 diluted earnings per share which includes an
extraordinary loss on the early retirement of debt of $134 thousand or $.02
diluted loss per share, net of taxes as compared to $1.4 million or $.20 diluted
earnings per share for the comparable period in 2001. Earnings for the nine
months ended September 30, 2002 were $6.3 million or $.96 diluted earnings per
share after extraordinary loss as compared to $3.8 million or $.56 diluted
earnings per share for the comparable periods in 2001.
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 September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------------- -------------- ----------- ------------- ---------------- ------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 362,946 $ 6,425 7.08% $ 326,566 $ 6,257 7.66%
Mortgage-backed securities 339,519 4,782 5.63% 213,921 3,451 6.45%
Investment securities 276,478 3,303 4.78% 299,293 4,457 5.96%
------------- ------------- ----------- ------------- ------------- ----------
Total interest-earning assets 978,943 14,510 5.93% 839,780 14,165 6.75%
------------- ------------- ----------- ------------- ------------- ----------
Interest-bearing liabilities:
Deposits 751,995 3,354 1.78% 687,331 5,154 3.00%
Borrowings 210,641 2,315 4.40% 152,046 1,975 5.20%
Long-Term Debt 29,107 446 6.13% 10,000 264 10.56%
------------- ------------- ----------- ------------- ------------- ----------
Total interest-bearing
liabilities $ 991,743 6,115 2.47% $ 849,377 7,393 3.48%
============= ------------- ----------- ============= ------------- ----------
Net interest income $ 8,395 $ 6,772
============= =============
Interest rate spread 3.46% 3.27%
=========== ==========
Net yield on average interest-earning assets 3.43% 3.23%
=========== ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 98.71% 98.87%
=========== ==========
Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------- ----------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------- ------------- ----------- ------------- -------------- -----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 360,315 $ 19,168 7.09% $ 308,887 $ 17,776 7.67%
Mortgage-backed securities 309,346 13,616 5.87% 194,803 9,618 6.58%
Investment securities 278,017 10,877 5.22% 297,492 13,918 6.24%
------------- ------------- ----------- ------------- ------------- ----------
Total interest-earning assets 947,678 43,661 6.14% 801,182 41,312 6.87%
------------- ------------- ----------- ------------- ------------- ----------
Interest-bearing liabilities:
Deposits 738,443 10,850 1.96% 656,959 15,504 3.15%
Borrowings 197,910 6,667 4.49% 141,833 5,581 5.25%
Long-Term Debt 25,422 1,380 7.24% 10,000 793 10.57%
------------- ------------- ----------- ------------- ------------- ----------
Total interest-bearing
liabilities $ 961,775 18,897 2.62% $ 808,792 21,878 3.61%
============= ------------- ----------- ============= ------------- ----------
Net interest income $ 24,764 $ 19,434
============= =============
Interest rate spread 3.52% 3.26%
=========== ==========
Net yield on average interest-earning assets 3.48% 3.23%
=========== ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 98.53% 99.06%
=========== ==========
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 September 30, Nine Months Ended September 30,
2002 vs. 2001 2002 vs. 2001
Increase (Decrease) due to Change in: Increase (Decrease) due to Change in:
------------------------------------------ ------------------------------------------
Rate Volume Total Rate Volume Total
(In Thousands) (In Thousands)
------------------------------------------ ------------------------------------------
Interest income:
Loans $ (529) $ 697 $ 168 $ (1,568) $ 2,960 $ 1,392
Mortgage-backed securities (695) 2,026 1,331 (1,657) 5,655 3,998
Investment securities (814) (340) (1,154) (2,130) (911) (3,041)
----------------------------------------- ----------------------------------------
Total change
- interest income (2,038) 2,383 345 (5,355) 7,704 2,349
----------------------------------------- ----------------------------------------
Interest expense:
Deposits (2,285) 485 (1,800) (6,577) 1,923 (4,654)
Borrowings (421) 761 340 (1,121) 2,207 1,086
Long-Term Debt (322) 504 182 (636) 1,223 587
----------------------------------------- ----------------------------------------
Total change
- interest expense (3,028) 1,750 (1,278) (8,334) 5,353 (2,981)
---------------------------------------- ----------------------------------------
Net change in net interest
income $ 990 $ 633 $ 1,623 $ 2,979 $ 2,351 $ 5,330
======================================== ========================================
Net Interest Income - for the three and nine months ended September 30, 2002
totaled $8.4 million and $24.8 million, respectively. Net interest income for
the three months ended September 30, 2002 increased $1.6 million compared to the
same period in 2001 due primarily to an increase in interest income on
mortgage-backed securities of $1.3 million, an increase in interest income on
loans of $168 thousand and a decrease in interest expense on deposits of $1.8
million, partially offset by a decrease in interest income on investment
securities of $1.2 million, an increase in interest expense on borrowings of
$340 thousand and an increase in interest expense on long-term debt of $182
thousand.
The increase in interest income was primarily the result of an increase in
mortgage-backed securities interest income of $1.3 million to $4.8 million for
the three months ended September 30, 2002 from $3.5 million for the same period
in 2001. The average balance of MBS's increased $125.6 million to $339.5 million
for the three months ended September 30, 2002 from $213.9 million for the same
period in 2001, which resulted in an interest income volume increase of $2.0
million. The increase in the average balance during this period was due to MBS
purchases of $119.3 million, partially offset by principal paydowns of $31.2
million. The average yield of the MBS portfolio decreased 82 basis points to
5.63% for the quarter ended September 30, 2002 from 6.45% for the same period in
2001, which resulted in an interest income decrease of $695 thousand due to rate
changes.
13
Interest income on loans increased $168 thousand to $6.4 million for the three
months ended September 30, 2002 from $6.3 million for the same period in 2001.
The average balance of the loan portfolio increased $36.3 million to $362.9
million for the three months ended September 30, 2002 from $326.6 million for
the same period in 2001, which resulted in a volume increase in interest income
of $697 thousand. The increase in the average balance is principally due to an
increase in loan originations during this period. The average rate on loans
decreased 58 basis points to 7.08% for the three months ended September 30, 2002
from 7.66% for the same period in 2001, which resulted in a decrease in interest
income of $529 thousand due to rate changes.
Interest income on investment securities decreased $1.2 million to $3.3 million
for the three months ended September 30, 2002 from $4.5 million for the same
period in 2001. The average yield of the investment portfolio decreased 118
basis points to 4.78% for the quarter ended September 30, 2002 from 5.96% for
the same period in 2001, which resulted in an interest income decrease of $814
thousand due to rate changes. The average balance of investment securities
decreased $22.8 million to $276.5 million for the three months ended September
30, 2002 from $299.3 million for the same period in 2001, which resulted in a
volume decrease in interest income of $340 thousand.
Interest expense on deposits decreased $1.8 million to $3.4 million for the
three months ended September 30, 2002 from $5.2 million for the same period in
2001. The average rate paid on deposits decreased 122 basis points to 1.78% for
the quarter ended September 30, 2002 from 3.00% for the same period in 2001,
which resulted in a decrease in interest expense of $2.3 million due to rate
changes. The average balance of deposits increased $64.7 million to $752.0
million for the three months ended September 30, 2002 from $687.3 million for
the same period in 2001, which resulted in a volume increase in interest expense
of $485 thousand.
Interest expense on long term debt increased $182 thousand to $446 thousand for
the three months ended September 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. Partially offsetting this increase was the redemption of $10.0
million 10% subordinated debentures on August 1, 2002.
Interest expense on borrowings increased $340 thousand to $2.3 million for the
three months ended September 30, 2002 from $2.0 million for the same period in
2001. The average balance of borrowings increased $58.6 million to $210.6
million at September 30, 2002 from $152.0 million for the same period in 2001,
which resulted in a volume increase in interest expense of $761 thousand. The
average rate paid on borrowings decreased 80 basis points to 4.40% for the
quarter ended September 30, 2002 from 5.20% for the same period in 2001 which
resulted in a decrease in interest expense of $421 thousand due to rate changes.
Net interest income for the nine months ended September 30, 2002 increased $5.3
million primarily due to an increase in interest income on mortgage-backed
securities of $4.0 million, an increase in interest income on loans of $1.4
million and a decrease in interest expense on deposits of $4.7 million,
partially offset by a decrease in interest income on investment securities of
$3.0 million, an increase in interest expense on borrowings of $1.1 million and
an increase in interest expense on long-term debt of $587 thousand as compared
to the same nine 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 $114.5 million to $309.3
million for the nine months ended September 30, 2002 from $194.8 million for the
nine months ended September 30, 2001. The increase in the average balance of the
portfolio resulted in a $5.7 million increase in interest income. The average
yield on the portfolio decreased 71 basis points to 5.87% for the nine months
ended September 30, 2002 from 6.58% for the same period in 2001, which resulted
in a decrease in interest income of $1.7 million due to rate changes. The
increase in the average balance was due to purchases during this period of
$207.9 million, partially offset by $107.1 million of principal paydowns from
September 2001 through September 2002.
The increase in interest income on loans was due to an increase in the average
balance of $51.4 million to $360.3 million for the nine months ended September
30, 2002 from $308.9 million for the nine months ended September 30, 2001. The
increase in the average balance resulted in a $3.0 million volume increase in
interest income. The average yield on loans decreased 58 basis points to 7.09%
for the nine months ended September 30, 2002 from 7.67% for the same period in
2001, which resulted in a decrease in interest income of $1.6 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 $19.5 million to $278.0 million
for the nine months ended September 20, 2002 from $297.5 million for the same
period in 2001, which resulted in a volume decrease in interest income of $911
thousand. The decrease in the average balance was primarily due to $146.7
million in calls on U.S. Agency Notes and $111.5 million of principal paydowns,
partially offset by purchases of $320.6 million in U.S. Agency Notes and CMO's.
The average yield on the investment portfolio decreased 102 basis points to
5.22% for the nine months ended September 30, 2002 from 6.24% for the same
period in 2001, which resulted in a decrease in interest income of $2.1 million
due to rate changes.
The decrease in interest expense on deposits was the result of a decrease in the
average yield of 119 basis points to 1.96% for the nine months ended September
30, 2002 from 3.15% for the same period in 2001, which resulted in a decrease in
interest expense of $6.6 million due to rate changes. The average balance of
deposits increased $81.4 million to $738.4 million for the nine months ended
September 30, 2002 from $657.0 million for the same period in 2001, which
resulted in a volume increase in interest expense of $1.9 million.
The increase in interest expense on borrowings was the result of an increase in
the average balance of $56.1 million to $197.9 million for the nine months ended
September 30, 2002 from $141.8 million for the same period in 2001, which
resulted in a volume increase in interest expense of $2.2 million. The average
yield on borrowings decreased 76 basis points to 4.49% for the nine months ended
September 30, 2002 from 5.25% for the same period in 2001, which resulted in a
decrease in interest expense of $1.1 million due to rate changes.
Interest expense on long-term debt increased $587 thousand to $1.4 million for
the nine months ended September 30, 2002 from $793 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 remained
constant for the three months ended September 30, 2002 at $60 thousand compared
to the same period in 2001. At September 30, 2002 the allowance for loan losses
amounted to $4.3 million compared to $4.2 million at September 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. Based on the analysis of the loan portfolio, as
well as the growth in the loan portfolio during the current period, it was
determined that an additional provision to the loan loss reserve was necessary.
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 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 nine month periods ended September 30, 2002 was
$1.1 million and $3.3 million, as compared to $1.0 million and $2.8 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, and an increase in the amount received on rental properties acquired since
the third quarter of 2001.
Operating Expenses - for the three and nine month periods ended September 30,
2002 totaled $6.1 million and $17.8 million, respectively as compared to $5.6
million and $16.2 million for the same periods in 2001.
Salaries and Employee Benefits - for the three and nine month periods ended
September 30, 2002 were $3.5 million and $10.3 million, as compared to $3.1
million and $9.2 million for the same period in 2001. The increases were
primarily due to additional staff in the one new branch opened since the third
quarter of 2001 and annual compensation adjustments, effective the beginning of
the year. Average full time equivalent employees at September 30, 2002 were 480
as compared to 437 at September 30, 2001.
Purchased Services - for the three and nine month periods ended September 30,
2002 totaled $650 thousand and $1.9 million, as compared to $556 thousand and
$1.6 million for the same periods in 2001. ATM charges increased $253 thousand
for the first nine months of 2002 compared to the same period in 2001. Check
processing costs increased $71 thousand due to higher transaction volumes and
internet on-line banking service costs which added $55 thousand of costs for the
nine months ended September 30, 2002 as compared to the same period in 2001.
Professional Fees - for the three and nine month periods ended September 30,
2002 totaled $224 thousand and $628 thousand as compared to $300 thousand and
$552 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 nine month periods ended September 30, 2002
increased $27 thousand and $114 thousand respectively. Additional newspaper and
cable TV ads increased advertising costs.
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the nine months ended September 30, 2002
from the information presented in the annual report on Form 10-K for the year
ended December 31, 2001.
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Registrant's principal executive officer and principal financial
officer have concluded that the Registrant's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the "Exchange Act")) are effective to ensure that information required
to be disclosed by the Company in reports that it files or submits under
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. There were no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective action with regard to significant deficiencies and material
weaknesses.
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
------- ----------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
April 25, 2002 and the following items were presented:
The Election of Directors: Edward J. Staats, Jr., Mary Wells,
Craig W. Yates and Joseph W. Clarke, Jr. were reelected as
directors for terms of three years ending 2005 and until their
successors are elected and qualified. Mr Staats received
5,475,650 votes in favor and 66,810 votes were withheld; Ms.
Wells received 5,525,172 votes in favor and 17,288 votes were
withheld; Mr. Yates received 5,520,990 votes in favor and 21,470
votes were withheld; and Mr. Clarke, Jr. received 5,520,493 votes
in favor and 21,967 votes were withheld.
Ratification of the appointment of PricewaterhouseCoopers LLP the
Company's auditors for the 2002 fiscal year:
PricewaterhouseCoopers LLP was ratified as the Company's auditors
with 5,523,839 votes for, 7,064 votes against and 11,557
abstentions.
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
(a) 99.0 certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed
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: November 13, 2002 /s/ Craig W. Yates
------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2002 /s/ Channing L. Smith
---------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
19
SECTION 302 CERTIFICATION
I, Craig W. Yates, President of FMS Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FMS Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report, (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ Craig W. Yates
- ----------------- ------------------
Date Craig W. Yates, President
20
SECTION 302 CERTIFICATION
I, Channing L. Smith, Chief Financial Officer of FMS Financial Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of FMS Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(e) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report, (the "Evaluation Date"); and
(f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing equivalent functions):
(c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ Channing L. Smith
- ----------------- ---------------------
Date Channing L. Smith,
Chief Financial Officer
21