UNITED STATES
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 Act of 1934
For the quarterly period ended June 30, 2003
OR
Transition report pursuant to section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
Commission file number 0-17353
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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
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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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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X .
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As of August 1, 2003 there were issued and outstanding 6,481,324 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, 2003
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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, 2003 (unaudited) and December 31, 2002..........1
Consolidated Statements of Operations (unaudited)
for the three and six months ended
June 30, 2003 and June 30, 2002..........................2
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2003
and June 30, 2002........................................3
Consolidated Statements of Changes in Stockholders'
Equity (unaudited) for the six months ended
June 30, 2003 and June 30, 2002..........................4
Notes to Consolidated Financial Statements.....................5-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.........7-18
Item 3 - Disclosure about Market Risk.................................18
Item 4 - Disclosure Controls and Procedures...........................19
PART II Other Information
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Item 1 - Legal Proceedings............................................20
Item 2 - Changes in Securities........................................20
Item 3 - Defaults Upon Senior Securities..............................20
Item 4 - Submission of Matters to a Vote of Security Holders..........20
Item 5 - Other Information............................................20
Item 6 - Exhibits and Reports on Form 8-K.............................20
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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June 30, 2003 December 31, 2002
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ASSETS (Unaudited)
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Cash and amounts due from depository institutes $ 37,049,955 $ 41,497,691
Interest-bearing deposits 421,154 12,252
Short term funds 32,616,453 46,900,403
------------------- ----------------
Total cash and cash equivalents 70,087,562 88,410,346
Investment securities held to maturity 217,119,432 164,227,126
Investment securities available for sale 138,375,397 118,612,961
Loans, net 380,495,936 361,674,400
Mortgage-backed securities held to maturity 322,125,518 342,122,678
Accrued interest receivable:
Loans 1,554,456 1,560,272
Mortgage-backed securities 1,882,128 2,175,776
Investments 1,709,603 1,543,610
Federal Home Loan Bank stock 11,809,620 12,061,720
Real estate held for development, net 0 87,926
Real estate owned, net 201,421 291,200
Premises and equipment, net 31,122,424 29,092,970
Deferred income taxes 2,259,125 2,972,572
Prepaid expenses and other assets 1,392,928 1,005,822
Trust Capital securities issue costs, net 679,077 717,999
Excess of cost over fair value of assets acquired 1,249,400 0
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TOTAL ASSETS $ 1,182,064,027 $ 1,126,557,378
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 852,989,916 $ 800,340,222
Securities sold under agreements to repurchase 225,000,000 225,000,000
Advances from the Federal Home Loan Bank 11,191,047 11,232,103
Trust Capital Securities - FMS Statutory Trust 1 25,000,000 25,000,000
Advances by borrowers for taxes and insurance 2,418,140 2,049,813
Accrued interest payable 1,297,002 1,383,054
Dividends payable 194,524 193,914
Other liabilities 3,913,800 3,720,453
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Total liabilities 1,122,004,429 1,068,919,559
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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 7,970,309 and 7,949,809 and shares outstanding 6,484,140
and 6,463,811 as of June 30, 2003 and December 31, 2002, respectively 797,031 794,981
Paid-in capital in excess of par 8,482,475 8,279,525
Accumulated other comprehensive income -
net of deferred income taxes 684,599 1,216,053
Retained earnings 60,985,297 58,233,840
Less: Treasury stock (1,486,169 and 1,485,998 shares,
at cost, as of June 30, 2003 and December 31, 2002, respectively) (10,889,804) (10,886,580)
------------------- ----------------
Total stockholders' equity 60,059,598 57,637,819
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,182,064,027 $ 1,126,557,378
=================== ================
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,
2003 2002 2003 2002
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INTEREST INCOME: (Unaudited) (Unaudited)
Interest income on:
Loans $ 6,058,727 $ 6,385,849 $ 12,284,453 $ 12,742,333
Mortgage-backed securities 3,770,334 4,535,948 8,306,479 8,834,263
Investments 2,608,387 3,917,284 5,278,711 7,573,931
--------------- --------------- --------------- ---------------
Total interest income 12,437,448 14,839,081 25,869,643 29,150,527
--------------- --------------- --------------- ---------------
INTEREST EXPENSE:
Interest expense on:
Deposits 2,236,527 3,570,208 4,837,741 7,495,539
Long term debt 327,575 648,249 659,142 934,082
Borrowings 2,365,150 2,256,465 4,707,350 4,352,318
--------------- --------------- --------------- ---------------
Total interest expense 4,929,252 6,474,922 10,204,233 12,781,939
--------------- --------------- --------------- ---------------
NET INTEREST INCOME 7,508,196 8,364,159 15,665,410 16,368,588
PROVISION FOR LOAN LOSSES 60,000 26,000 120,000 29,000
--------------- --------------- --------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,448,196 8,338,159 15,545,410 16,339,588
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 19,920 24,653 43,734 52,663
Gain on sale of real estate held for
development, net 0 0 600,780 0
Gain on sale of loans 22 388 51 463
Gain on sale of investment securities 222,743 0 222,743 0
Gain on disposal of fixed assets 0 100,113 (141,151) 100,113
Real estate owned operations, net 28,035 (8,013) 21,205 (15,867)
Service charges on accounts 1,184,345 997,390 2,256,242 1,862,178
Other income 46,112 66,849 69,465 151,469
--------------- --------------- --------------- ---------------
Total other income 1,501,177 1,181,380 3,073,069 2,151,019
--------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Salaries and employee benefits 3,907,795 3,409,715 7,731,197 6,858,401
Occupancy and equipment 1,360,201 1,113,836 2,688,716 2,220,244
Purchased services 723,733 649,041 1,397,758 1,263,939
Federal deposit insurance premiums 31,386 31,146 63,582 62,124
Professional fees 163,703 205,823 341,419 404,036
Advertising 117,245 121,381 232,856 204,583
Other 508,511 382,664 990,672 696,218
--------------- --------------- --------------- ---------------
Total operating expenses 6,812,574 5,913,606 13,446,200 11,709,545
--------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 2,136,799 3,605,933 5,172,279 6,781,062
INCOME TAXES $ 836,827 1,268,655 2,032,384 2,391,202
--------------- --------------- --------------- ---------------
NET INCOME $ 1,299,972 $ 2,337,278 $ 3,139,895 $ 4,389,860
=============== =============== =============== ===============
BASIC EARNINGS PER COMMON SHARE $ 0.20 $ 0.36 $ 0.49 $ 0.66
=============== =============== =============== ===============
DILUTED EARNINGS PER COMMON SHARE $ 0.20 $ 0.36 $ 0.48 $ 0.66
=============== =============== =============== ===============
Dividends declared per common share $ 0.03 $ 0.03 $ 0.06 $ 0.06
=============== =============== =============== ===============
Weighted average common shares outstanding 6,473,606 6,547,961 6,468,706 6,632,815
Potential dilutive effect of the exercise of
stock options 45,208 30,445 39,763 20,616
--------------- --------------- --------------- ---------------
Adjusted weighted average common shares outstanding 6,518,814 6,578,406 6,508,469 6,653,431
=============== =============== =============== ===============
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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2003 2002
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(Unaudited)
OPERATING ACTIVITIES:
Net income $ 3,139,895 $ 4,389,860
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 120,000 29,000
Depreciation and amortization 4,069,921 1,952,609
Realized (gains) and losses on:
Sale of loans (51) (463)
Disposal and sale of fixed assets 141,151 (100,113)
Sale of investment securities (222,743) 0
Sale of real estate owned (33,432) 0
Gain on sale of real estate held for development, net (600,780) 0
Increase in accrued interest receivable 133,471 (139,463)
Increase in prepaid expenses and other assets (387,106) 615,890
Decrease in accrued interest payable (86,052) (15,190)
Increase (decrease) in other liabilities 193,347 (917,261)
Provisions for deferred income taxes 1,066,866 (283,735)
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Net cash provided by operating activities 7,534,487 5,531,134
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INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 53,203 127,226
Real estate held for development 688,706 0
Real estate owned 332,786 12,920
Property and equipment 149,281 213,656
Principal collected and proceeds from maturities of investment
securities held to maturity 103,407,336 94,078,801
Proceeds from maturities of investment securities available for sale 65,468,657 20,811,995
Principal collected on mortgage-backed securities held to maturity 104,979,136 49,711,717
Principal collected on loans, net 52,645,034 44,425,599
Loans originated or acquired (71,889,087) (67,830,736)
Purchase of investment securities and mortgage-backed securities
held to maturity (244,796,070) (101,362,139)
Purchase of investment securities and mortgage-backed securities
available for sale (86,629,780) (63,239,425)
Redemption (Purchase) of Federal Home Loan Bank stock 252,100 (2,025,600)
Purchase of office property and equipment (3,309,486) (966,676)
Net cash received from deposit purchase, net 16,539,246 0
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Net cash (used) provided by investing activities (62,108,938) (26,042,662)
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FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 40,236,760 42,968,282
Net decrease in time deposits (4,126,312) (25,572,769)
Net (decrease) increase in FHLB advances (41,056) 9,961,790
Proceeds from securities sold under agreements to repurchase 0 30,000,000
Net proceeds from issuance of trust capital securities 0 24,243,079
Increase in advances from borrowers for taxes and insurance 368,327 202,312
Purchase of treasury stock (3,224) (2,813,136)
Dividends paid on common stock (387,828) (402,980)
Net proceeds from issuance of common stock 205,000 1,195
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Net cash provided by financing activities 36,251,667 78,587,773
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (18,322,784) 58,076,245
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 88,410,346 63,359,124
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 70,087,562 $ 121,435,369
================= =================
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 10,290,285 $ 12,797,129
Income taxes 2,255,500 2,879,982
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 194,524 193,914
Non-monetary transfers from loans to real estate
owned through foreclosure 209,575 0
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 income (loss) earnings stock Equity
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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 gain on securities
available for sale,
net of taxes of $303,726 540,446 540,446
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Total comprehensive income 4,930,306
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Dividends declared ($.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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Balances at December 31, 2002 6,463,811 $794,981 $8,279,525 $1,216,053 $ 58,233,840 $(10,886,580) $ 57,637,819
Net Income 3,139,895 3,139,895
Other comprehensive income
Unrealized loss on securities
available for sale, net
of taxes of $353,419 and
reclassification
adjustment of $222,743 (531,454) (531,454)
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Total comprehensive income 2,608,441
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Dividends declared ($.06) (388,438) (388,438)
Exercise of options 20,500 2,050 202,950 205,000
Purchase of common stock (171) (3,224) (3,224)
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Balances at June 30, 2003 6,484,140 $797,031 $8,482,475 $ 684,599 $ 60,985,297 $(10,889,804) $ 60,059,598
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See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED JUNE 30, 2003 (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, 2003 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, 2002. The consolidated financial statements include
the Corporation's principle subsidiary, Farmers & Mechanics Bank ("the Bank").
The Corporation maintains an incentive stock option plan. As permitted by SFAS
No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" the
Corporation will continue to use the intrinsic value method of accounting for
stock options. No options have been granted during the six months ended June 30,
2003.
2-DEPOSITS
On March 28, 2003, the Bank purchased the deposits of the Florence branch of Sun
National Bank totaling $17.9 million.
3-LONG-TERM DEBT
Long-Term Debt at June 30, 2003 and December 31, 2002 consisted of $25.0 million
of Trust Capital Securities. The interest rate resets every three months to
LIBOR plus 360 basis points and will not exceed 11.00% through the first five
years from its issuance. The proceeds were used for the paydown in August 2002
of the $10.0 million subordinated debentures, expansion of the Bank's operations
and general corporate purposes.
4-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well capitalized" by OTS regulations at June 30, 2003.
The Bank's regulatory tangible and tier 1 (core) capital ratios are $72.1
million or 6.11% of total bank assets and $76.1 million or 16.84% for risk-based
capital.
5
5-RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 149 "Amendment of Statement 133 on
Deriative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments including
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
standard is not expected to have a material effect on the Consolidated
Statements of Financial Condition or Consolidated Statements of Operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity", which establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances.) This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory redeemable financial instruments of nonpublic
companies. The adoption of this standard is not expected to have a material
effect on the Consolidated Statements of Financial Condition or Consolidated
Statements of Operations.
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003.
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 val! ue 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.
7
FINANCIAL CONDITION
Total Assets - at June 30, 2003 were $1.2 billion as compared with total assets
at December 31, 2002 of $1.1 billion.
Short Term Funds - decreased $14.3 million to $32.6 million at June 30, 2003
from $46.9 million at December 31, 2002. The decrease is the result of purchases
of investment securities.
Investment Securities Held To Maturity - increased $52.9 million to $217.1
million at June 30, 2003 from $164.2 million at December 31, 2002 primarily due
to purchases of $142.7 million in collateralized mortgage obligations (CMO's),
$10.0 million in U.S. Agency Notes, $3.2 million in Municipal Bonds, partially
offset by principal paydowns of $86.6 million in CMO's and the maturity of $3.2
million in Municipal Bonds and calls of $13.6 million in U.S. Agency Notes
during the period. Investment securities held to maturity at June 30, 2003
consisted of $7.4 million in adjustable rate securities and $209.7 million in
fixed rate securities. A comparison of cost and approximate market values of
investment securities held to maturity as of June 30, 2003 and December 31, 2002
follows:
June 30, 2003 December 31, 2002
------------------------------------------------------------------ ---------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
------------------------------------------------------------------ ---------------------------------
U. S. Agency Notes $ 22,205,778 $ 385,897 $ 0 $ 22,591,675 $ 25,914,918 $ 26,547,362
CMO's 180,476,925 1,304,122 (277,046) 181,504,001 123,809,139 124,545,227
Municipal bonds 14,436,729 13,958 0 14,450,687 14,503,069 14,509,921
------------------------------------------------------------------ ---------------------------------
Total $ 217,119,432 $ 1,703,977 $ (277,046) $ 218,546,363 $ 164,227,126 $ 165,602,510
================================================================== =================================
Investment Securities Available For Sale - increased $19.8 million to $138.4
million at June 30, 2003 from $118.6 million at December 31, 2002. The increase
is the result of purchases of $24.7 million of mortgage-backed securities
(MBS's), $56.0 million of CMO's and $5.0 million of U.S. Agency Notes, partially
offset by principal paydowns of $44.7 million of CMO's and MBS's, $15.0 million
of calls of U.S. Agency Notes, sales of $5.5 million and $885 thousand in market
adjustments at June 30, 2003. The Bank sold $4.8 million of MBS's and $728
thousand of CMO's in June 2003, which resulted in $223 thousand gain. Investment
securities available for sale consisted of $128.4 million in fixed rate
securities and $10.0 million in adjustable rate securities at June 30, 2003. A
comparison of cost and approximate market values of investment securities
available for sale as of June 30, 2003 and December 31, 2002 follows:
June 30, 2003 December 31, 2002
------------------------------------------------------------------ ---------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
------------------------------------------------------------------ ---------------------------------
U. S. Agency Notes $ 14,997,462 $ 112,238 $ 0 $ 15,109,700 $ 24,993,110 $ 25,358,000
CMO's 55,252,945 105,319 (144,968) 55,213,296 21,978,385 22,107,521
MBS's 67,000,388 1,052,013 0 68,052,401 69,631,991 71,147,440
---------------------------------------------------------------- -------------------------------
Total $ 137,250,795 $ 1,269,570 $ (144,968) $ 138,375,397 $ 116,603,486 $ 118,612,961
================================================================ ===============================
8
Loans, Net - increased $18.8 million to $380.5 million at June 30, 2003 from
$361.7 million at December 31, 2002. This increase was primarily the result of
$71.9 million of loans originated, partially offset by approximately $52.6
million of principal collected on loans during the six months ended June 30,
2003. The following table shows loans receivable by major categories at the
dates indicated.
June 30, December 31,
2003 2002
------------------------------------
Mortgage Loans $ 275,283,416 $ 272,777,144
Construction Loans 882,032 305,607
Commercial Construction 2,671,528 1,157,268
Consumer Loans 3,136,608 3,521,889
Commercial Real Estate 90,307,055 76,354,155
Commercial Business 13,411,296 12,621,048
------------------------------------
Subtotal 385,691,935 366,737,111
------------------------------------
Less:
Deferred loan fees 762,479 745,236
Allowance for
loan losses 4,433,520 4,317,475
------------------------------------
Total loans, net $ 380,495,936 $ 361,674,400
====================================
At June 30, 2003, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS Nos. 114 and 118 totaled $2.0 million of
which $985 thousand related to loans that were individually measured for
impairment with a valuation allowance of $414 thousand and $968 thousand of
loans that were collectively measured for impairment with a valuation allowance
of $27 thousand. The Bank had $4.4 million in total reserves for loan losses at
June 30, 2003, representing approximately 227% of non-accrual loans and 1.1% of
total loans. For the six months ended June 30, 2003, the average recorded
investment in impaired loans was approximately $1.9 million. The Bank recognized
$35 thousand of interest income on impaired loans for the six months ended June
30, 2003, all of which was recognized on the cash basis.
As of June 30, 2003 the Bank had outstanding loan commitments of $30.4 million,
of which $13.8 million represented variable rate loans and $16.6 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.
9
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,
2003 2002
----------- ------------
Loans accounted for on a non-accrual basis:
One-to-four family mortgage $ 699,451 $ 960,558
Commercial real estate 1,253,151 1,785,864
Consumer and other 568 11,789
----------- -----------
Total non-accrual loans $ 1,953,170 $ 2,758,211
----------- -----------
Troubled debt restructuring $ 1,026,886 $ 986,581
Real estate owned, net 201,421 291,200
Other non-performing assets 0 87,926
----------- -----------
Total non-performing assets, net $ 3,181,477 $ 4,123,918
=========== ===========
Total non-accrual loans to net loans 0.51% 0.76%
=========== ===========
Total non-accrual loans to total assets 0.17% 0.24%
=========== ===========
Total non-performing assets to total assets 0.27% 0.37%
=========== ===========
Mortgage-backed Securities Held To Maturity - decreased $20.0 million to $322.1
million at June 30, 2003 from $342.1 million at December 31, 2002. The decrease
is the result of principal paydowns of $104.9 million, partially offset by the
purchases of $85.0 million of FNMA, FHLMC and GNMA fixed rate securities.
Mortgage-backed securities at June 30, 2003 consisted of $289.1 million in fixed
rate securities and $33.0 million in adjustable rate securities. Mortgage-
backed securities held to maturity at June 30, 2003 and December 31, 2002 are
summarized below:
June 30, 2003 December 31, 2002
----------------------------------------------------------- -----------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
----------------------------------------------------------- -----------------------------
GNMA $ 22,639,172 $ 1,092,006 $ (182) $ 23,730,996 $ 33,862,839 $ 35,556,313
FNMA 207,342,889 5,414,846 (564) 212,757,171 233,608,680 239,975,322
FHLMC $ 92,143,457 1,161,690 (85,101) 93,220,046 74,651,159 76,090,093
----------------------------------------------------------- -----------------------------
Total $ 322,125,518 $ 7,668,542 $ (85,847) $ 329,708,213 $ 342,122,678 $ 351,621,728
=========================================================== =============================
10
Deposits - increased $52.7 million to $853.0 million at June 30, 2003 from
$800.3 million at December 31, 2002. On March 28, 2003, the Bank purchased the
deposits of the Florence branch of Sun National Bank totaling $17.9 million.
Non-interest bearing checking accounts increased $24.4 million, savings accounts
increased $21.1 million, money market accounts increased $6.6 million and
certificates of deposits increased $3.6 million for the six months ended June
30, 2003. Interest credited to depositors accounts for the six months ended June
30, 2003 amounted to $4.9 million. The following table sets forth certain
information concerning deposits at the dates indicated.
June 30, 2003 December 31, 2002
---------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
---------------------------------------------------------------------------------
Non-interest checking $159,414,510 18.69% 0.00% $134,969,939 16.85% 0.00%
Checking accounts 152,650,178 17.90% 0.73% 155,730,226 19.46% 1.18%
Savings accounts 182,579,318 21.40% 1.00% 161,458,450 20.18% 1.34%
Money market accounts 131,346,217 15.40% 1.10% 124,795,059 15.59% 1.86%
Certificates 226,999,693 26.61% 2.85% 223,386,548 27.92% 3.58%
---------------------------------------------------------------------------------
Total Deposits $852,989,916 100.00% 1.31% $800,340,222 100.00% 1.86%
=================================================================================
Borrowings - at June 30, 2003 amounted to $236.2 million. Borrowings consisted
of $225.0 million in securities sold under the agreement to repurchase with a
weighted average interest rate of 4.08% and $11.2 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 1.77%. At December 31,
2002 borrowings consisted of $225.0 million in securities sold under agreements
to repurchase with a weighted average rate of 4.08% and $11.2 million in Federal
Home Loan Bank Advances with a weighted average interest rate of 1.78%.
Long-Term Debt - at June 30, 2003 and December 31, 2002 consisted of $25.0
million of Trust Capital Securities. The interest rate resets every three months
to LIBOR plus 360 basis points and will not exceed 11.00% through the first five
years from its issuance.
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 equipm! ent expense and
purchased services expense.
11
The Corporation recorded net income for the three months ended June 30, 2003 of
$1.3 million, or $.20 diluted earnings per share as compared to $2.3 million, or
$.36 diluted earnings per share for the comparable period in 2002. The
Corporation recorded net income for the six months ended June 30, 2003 of $3.1
million, or $.48 diluted earnings per share as compared to $4.4 million, or $.66
diluted earnings per share for the comparable period in 2002.
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 e! xisting 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:
12
Three Months Ended June 30,
---------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------- ------------- ------------ ---------------- -------------- -----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 381,737 $ 6,059 6.35% $ 364,113 $ 6,386 7.02%
Interest-bearing deposits 43,540 131 1.20% 62,268 292 1.88%
Mortgage-backed securities 367,474 3,770 4.10% 304,899 4,536 5.95%
Investment securities 279,957 2,477 3.54% 239,214 3,625 6.06%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-earning assets 1,072,708 12,437 4.64% 970,494 14,839 6.12%
----------------- ------------- ------------ ---------------- -------------- ----------
Interest-bearing liabilities:
Checking deposits 306,865 238 0.31% 255,844 421 0.66%
Savings deposits 180,478 300 0.66% 144,563 519 1.44%
Money market deposits 91,798 236 1.03% 104,935 537 2.05%
Time deposits 228,478 1,462 2.56% 233,071 2,094 3.59%
Borrowings 236,191 2,365 4.01% 203,677 2,256 4.43%
Long-Term Debt 25,774 328 5.09% 35,774 648 7.25%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-bearing
liabilities $ 1,069,584 4,929 1.84% $ 977,864 6,475 2.65%
================= ------------- ------------ ================ -------------- ----------
Net interest income $ 7,508 $ 8,364
============= ==============
Interest rate spread 2.80% 3.47%
============ ==========
Net yield on average interest-earning assets 2.80% 3.45%
============ ==========
Ratio of average interest-
earning assets to average interest
-bearing liabilities 100.29% 99.25%
============ ==========
Six Months Ended June 30,
---------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------- ------------- ------------ ---------------- -------------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 378,892 $ 12,284 6.48% $ 358,999 $ 12,742 7.10%
Interest-bearing deposits 44,833 287 1.28% 44,789 512 2.29%
Mortgage-backed securities 379,631 8,306 4.38% 294,259 8,834 6.00%
Investment securities 253,532 4,992 3.94% 230,985 7,063 6.11%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-earning assets 1,056,888 25,869 4.90% 929,032 29,151 6.28%
----------------- ------------- ------------ ---------------- -------------- ----------
Interest-bearing liabilities:
Checking deposits 297,788 519 0.35% 253,378 851 0.67%
Savings deposits 173,815 719 0.83% 139,605 996 1.43%
Money market deposits 128,593 580 0.90% 99,275 1,008 2.03%
Time deposits 225,228 3,020 2.68% 239,409 4,641 3.88%
Borrowings 236,207 4,707 3.99% 191,545 4,352 4.54%
Long-Term Debt 25,774 659 5.11% 23,580 934 7.92%
----------------- ------------- ------------ ---------------- -------------- ----------
Total interest-bearing
liabilities $ 1,087,405 10,204 1.88% $ 946,792 12,782 2.70%
================= ------------- ------------ ================ -------------- ----------
Net interest income $ 15,665 $ 16,369
============= ==============
Interest rate spread 3.02% 3.58%
============ ==========
Net yield on average interest-earning assets 2.96% 3.52%
============ ==========
Ratio of average interest-
earning assets to average interest
-bearing liabilities 97.19% 98.12%
============ ==========
13
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rate, (ii) changes in volume and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). A higher level of non-performing loans affects the
changes in both volume and rate.
Three Months Ended Six Months Ended
June 30, June 30,
2003 vs 2002 2003 vs 2002
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 receivable $ (636) $ 309 $ (327) $ (1,164) $ 706 $ (458)
Interest-bearing deposits (73) (88) (161) (226) 1 (225)
Mortgage-backed securities (1,697) 931 (766) (3,091) 2,563 (528)
Investment securities (1,765) 617 (1,148) (2,760) 689 (2,071)
---------------------------------------- ---------------------------------------
Total change interest income (4,171) 1,769 (2,402) (7,241) 3,959 (3,282)
---------------------------------------- ---------------------------------------
Interest expense:
Checking deposits (267) 84 (183) (481) 149 (332)
Savings deposits (348) 129 (219) (521) 244 (277)
Money market accounts (234) (67) (301) (726) 298 (428)
Time deposits (591) (41) (632) (1,346) (275) (1,621)
Borrowings (251) 360 109 (660) 1,015 355
Long-Term Debt (139) (181) (320) (362) 87 (275)
---------------------------------------- ---------------------------------------
Total change - interest expense (1,830) 284 (1,546) (4,096) 1,518 (2,578)
---------------------------------------- ---------------------------------------
Net change in net interest income $ (2,341) $ 1,485 $ (856) $ (3,145) $ 2,441 $ (704)
======================================== =======================================
14
Net Interest Income - for the three and six months ended June 30, 2003 totaled
$7.5 million and $15.7 million, respectively. Net interest income for the three
months ended June 30, 2003 decreased $856 thousand compared to the same period
in 2002 due primarily to decreases in interest income on investment securities
of $1.1 million, mortgage-backed securities of $766 thousand, loans of $327
thousand and an increase in interest expense on borrowings of $109 thousand,
partially offset by decreases in interest expense on deposits of $1.3 million
and long term debt of $320 thousand.
The decrease in interest income was primarily the result of a decrease in
interest income on investment securities of $1.1 million to $2.5 million for the
three months ended June 30, 2003 from $3.5 million for the same period in 2002.
The average yield of the investment portfolio decreased 252 basis points to
3.54% for the quarter ended June 30, 2003 from 6.06% for the same period in
2002, which resulted in an interest income decrease of $1.8 million due to rate
changes. The average balance of investment securities increased $40.8 million to
$280.0 million for the three months ended June 30, 2003 from $239.2 million for
the same period in 2002, which resulted in a volume increase in interest income
of $617 thousand.
Interest income on mortgage-backed securities decreased $766 thousand to $3.8
million for the three months ended June 30, 2003 from $4.5 million for the same
period in 2002. The average yield of the MBS portfolio decreased 185 basis
points to 4.10% for the quarter ended June 30, 2003 from 5.95% for the same
period in 2002, which resulted in an interest income decrease of $1.7 million
due to rate changes. The average balance of MBS's increased $62.6 million to
$367.5 million for the three months ended June 30, 2003 from $304.9 million for
the same period in 2002, which resulted in an interest income volume increase of
$931 thousand.
Interest income on loans decreased $327 thousand to $6.1 million for the three
months ended June 30, 2003 from $6.4 million for the same period in 2002. The
average rate on loans decreased 67 basis points to 6.35% for the three months
ended June 30, 2003 from 7.02% for the same period in 2002, which resulted in a
decrease in interest income of $636 thousand due to rate changes. The average
balance of the loan portfolio increased $17.6 million to $381.7 million for the
three months ended June 30, 2003 from $364.1 million for the same period in
2002, which resulted in a volume increase in interest income of $309 thousand.
Interest expense on time deposits decreased $632 thousand to $1.5 million for
the three months ended June 30, 2003 from $2.1 million for the same period in
2002. The average rate on time deposits decreased 103 basis points to 2.56% for
the quarter ended June 30, 2003 from 3.59% for the same period in 2002, which
resulted in a decrease in interest expense of $591 thousand. The average balance
of time deposits decreased $4.6 million to $228.5 million for the three months
ended June 30, 2003 from $233.1 million for the same period in 2002, which
resulted in a volume decrease in interest expense of $41 thousand.
Interest expense on checking deposits decreased $183 thousand to $238 thousand
for the three months ended June 30, 2003 from $421 thousand for the same period
in 2002. The average rate on checking deposits decreased 35 basis points to
0.31% for the quarter ended June 30, 2003 from 0.66% for the same period in
2002, which resulted in a decrease in interest expense of $267 thousand. The
average balance of checking deposits increased $51.1 million to $306.9 million
for the three months ended June 30, 2003 from $255.8 for the same period in
2002, which resulted in a volume increase in interest expense of $84 thousand.
15
Interest expense on money market deposits decreased $301 thousand to $236
thousand for the three months ended June 30, 2003 from $537 thousand for the
same period in 2002. The average rate on money market deposits decreased 102
basis points to 1.03% for the quarter ended June 30, 2003 from 2.05% for the
same period in 2002, which resulted in a decrease in interest expense of $234
thousand. The average balance of money market deposits decreased $13.1 million
to $91.8 million for the three months ended June 30, 2003 from $104.9 million
for the same period in 2002, which resulted in a volume decrease in interest
expense of $67 thousand.
Interest expense on borrowings increased $109 thousand to $2.4 million for the
three months ended June 30, 2003 from $2.3 million for the same period in 2002.
The average balance of borrowings increased $32.5 million to $236.2 million at
June 30, 2003 from $203.7 million for the same period in 2002, which resulted in
a volume increase in interest expense of $360 thousand. The average rate paid on
borrowings decreased 42 basis points to 4.01% for the quarter ended June 30,
2003 from 4.43% for the same period in 2002 which resulted in a decrease in
interest expense of $251 thousand due to rate changes.
Interest expense on long term debt decreased $320 thousand to $328 thousand for
the three months ended June 30, 2003 from $648 thousand for the same period in
2002. The $25.0 million in Trust capital securities were issued in March 2002 at
an initial floating rate of 5.59%.
Net interest income for the six months ended June 30, 2003 decreased $704
thousand primarily due to decreases in interest income on investment securities
of $2.1 million, mortgage-backed securities of $528 thousand, loans of $458
thousand and an increase in interest expense on borrowings of $355 thousand,
partially offset by a decrease in interest expense on deposits of $2.7 million
and a decrease in interest expense on long-term debt of $275 thousand as
compared to the same six month period in 2002.
The decrease in interest income on investment securities was due to a decrease
in the average yield on the investment portfolio of 217 basis points to 3.94%
for the six months ended June 30, 2003 from 6.11% for the same period in 2002,
which resulted in a decrease in interest income of $2.8 million due to rate
changes. The average balance of the portfolio increased $22.5 million to $253.5
million for the six months ended June 30, 2003 from $231.0 million for the same
period in 2002, which resulted in a volume increase in interest income of $689
thousand. The increase in the average balance was primarily due to purchases of
$449.5 million, partially offset by investment calls and maturities of $117.5
million and principal paydowns of $224.8 million.
The decrease in interest income on mortgage-backed securities was due to a
decrease in the average yield on the portfolio of 162 basis points to 4.38% for
the six months ended June 30, 2003 from 6.00% for the same period in 2002, which
resulted in a decrease in interest income of $3.1 million due to rate changes.
The average balance of the portfolio increased $85.3 million to $379.6 million
for the six months ended June 30, 2003 from $294.3 million for the six months
ended June 30, 2002, which resulted in a $2.6 million increase in interest
income. The increase in the average balance was due to purchases during this
period of $224.5 million, partially offset by $180.7 million of principal
paydowns from June 2002 through June 2003.
The decrease in interest income on loans was due to a decrease in the average
yield on loans of 62 basis points to 6.48% for the six months ended June 30,
2003 from 7.10% for the same period in 2002, which resulted in a decrease in
interest income of $1.2 million due to rate changes. The average balance of
loans increased $19.9 million to $378.9 million for the six months ended June
30, 2003 from $359.0 million for the six months ended June 30, 2002, which
resulted in a $706 thousand volume increase in interest income. The increase in
the average balance is primarily due to an increase in loan originations.
16
Interest expense on time deposits decreased $1.6 million to $3.0 million for the
six months ended June 30, 2003 from $4.6 million for the same period in 2002.
The average rate on time deposits decreased 120 basis points to 2.68% for the
quarter ended June 30, 2003 from 3.88% for the same period in 2002, which
resulted in a decrease in interest expense of $1.3 million. The average balance
of time deposits decreased $14.2 million to $225.2 million for the six months
ended June 30, 2003 from $239.4 million for the same period in 2002, which
resulted in a volume decrease in interest expense of $275 thousand.
Interest expense on checking deposits decreased $332 thousand to $519 thousand
for the six months ended June 30, 2003 from $851 thousand for the same period in
2002. The average rate on checking deposits decreased 32 basis points to 0.35%
for the quarter ended June 30, 2003 from 0.67% for the same period in 2002,
which resulted in a decrease in interest expense of $481 thousand. The average
balance of checking deposits increased $44.4 million to $297.8 million for the
six months ended June 30, 2003 from $253.4 for the same period in 2002, which
resulted in a volume increase in interest expense of $149 thousand.
Interest expense on money market deposits decreased $428 thousand to $580
thousand for the six months ended June 30, 2003 from $1.0 million for the same
period in 2002. The average rate on money market deposits decreased 113 basis
points to 0.90% for the quarter ended June 30, 2003 from 2.03% for the same
period in 2002, which resulted in a decrease in interest expense of $726
thousand. The average balance of money market deposits increased $29.3 million
to $128.6 million for the six months ended June 30, 2003 from $99.3 million for
the same period in 2002, which resulted in a volume increase in interest expense
of $298 thousand.
The increase in interest expense on borrowings was the result of an increase in
the average balance of $44.7 million to $236.2 million for the six months ended
June 30, 2003 from $191.5 million for the same period in 2002, which resulted in
a volume increase in interest expense of $1.0 million. The average yield on
borrowings decreased 55 basis points to 3.99% for the six months ended June 30,
2003 from 4.54% for the same period in 2002, which resulted in a decrease in
interest expense of $660 thousand due to rate changes.
Interest expense on long-term debt decreased $275 thousand to $659 thousand for
the six months ended June 30, 2003 from $934 thousand for the same period in
2002. The $25.0 million in Trust capital securities were issued in March 2002 at
an initial floating rate of 5.59%.
17
Critical Accounting Estimate-Provision For Loan Losses - A critical accounting
estimate is the provision for loan losses which increased $34 thousand to $60
thousand for the six months ended June 30, 2003 from $26 thousand for the same
period in 2002. At June 30, 2003 the allowance for loan losses amounted to $4.4
million compared to $4.3 million at December 31, 2002. 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, c! ommercial
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 con! centration 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, 2003 was $1.5
million and $3.1 million, as compared to $1.2 million and $2.2 million for the
same periods in 2002. The increase was primarily due to a $601 thousand gain on
the sale of real estate held for development. The final parcel of land, located
in Burlington Township, was sold in January 2003. The Bank sold $5.5 million of
investment securities available for sale during the six months ended June 30,
2003, which resulted in a $223 thousand gain. Additionally, retail banking fees
increased as a result of the five branches opened since the second quarter of
2002.
Operating Expenses - for the three and six month periods ended June 30, 2003
totaled $6.8 million and $13.4 million, respectively, as compared to $5.9
million and $11.7 million for the same periods in 2003.
Salaries and Employee Benefits - for the three and six month periods ended June
30, 2003 were $3.9 million and $7.7 million, respectively, as compared to $3.4
million and $6.9 million for the same period in 2002. The increase was primarily
due to additional staff in the five new branches opened since the second quarter
of 2002. Average full time equivalent employees at June 30, 2003 were 533 as
compared to 477 at June 30, 2002.
Occupancy and Equipment- for the three and six month period ended June 30, 2003
were $1.4 million and $2.7 million, respectively, as compared to $1.1 million
and $2.2 million for the same period in 2002. This increase is due to additional
depreciation and occupancy expense on the new branch offices opened since the
second quarter of 2002, as well as other facility improvements and new computer
equipment additions during this period.
Purchased Services - for the three and six month periods ended June 30, 2003
totaled $724 thousand and $1.4 million, as compared to $649 thousand and $1.3
million for the same periods in 2002. ATM charges increased $117 thousand for
the first six months of 2003 compared to the same period in 2002. Check
processing costs increased $586 thousand for the six months ended June 30, 2003
compared to the same period in 2002 due to higher transaction volume.
18
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the six months ended June 30, 2003 from
the information presented in the annual report on Form 10-K for the year ended
December 31, 2002.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the
Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report of
Form 10-Q such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the quarter
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
19
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
------ -----------------
On March 28, 2003, the Bank purchased the deposits of the
Florence branch of Sun National Bank totaling $17.9 million.
Item 6: Exhibits and Reports on Form 8-K
------ --------------------------------
(a) 31 certifications pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as amended.
(b) 32 certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(c) The Company filed a Form 8-K on July 31, 2003 reporting
the Company's earnings for the three months ended June 30,
2003.
20
S I G N A T U R E S
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 12, 2003 /s/ Craig W. Yates
-------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2003 /s/ Channing L. Smith
------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)