UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 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
- ------------------------------ -------------------
(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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES NO X .
--- ---
As of November 3, 2003 there were issued and outstanding 6,485,877
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, 2003
TABLE OF CONTENTS
Page
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PART I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2003 (unaudited) and December 31, 2002..........1
Consolidated Statements of Operations (unaudited) for the
three and nine months ended September 30, 2003 and
September 30, 2002............................................2
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 2003 and September 30,
2002..........................................................3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the nine months ended September 30, 2003
and September 30, 2002........................................4
Notes to Consolidated Financial Statements...........................5-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..............7-19
Item 3 - Quantitative and Qualitative Disclosure about Market Risk.............19
Item 4 - Controls and Procedures...............................................19
PART II - Other Information
Item 1 - Legal Proceedings.....................................................20
Item 2 - Changes in Securities and Use of Proceeds.............................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
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
- ------
Cash and due from depository institutions $ 35,970,683 $ 41,497,691
Interest-bearing deposits 25,928 12,252
Short term funds 31,445,401 46,900,403
--------------- ---------------
Total cash and cash equivalents 67,442,012 88,410,346
Investment securities held to maturity 216,468,687 164,227,126
Investment securities available for sale 139,346,990 118,612,961
Loans, net 395,076,833 361,674,400
Mortgage-backed securities held to maturity 323,629,918 342,122,678
Accrued interest receivable:
Loans 1,581,269 1,560,272
Mortgage-backed securities 1,921,216 2,175,776
Investments 1,483,586 1,543,610
Federal Home Loan Bank stock 11,834,620 12,061,720
Real estate held for development, net 0 87,926
Real estate owned, net 397,353 291,200
Premises and equipment, net 30,895,325 29,092,970
Deferred income taxes 2,245,813 2,972,572
Prepaid expenses and other assets 1,291,762 1,005,822
Trust Capital securities issue costs, net 659,616 717,999
Excess of cost over fair value of assets acquired 1,183,642 0
--------------- ---------------
TOTAL ASSETS $ 1,195,458,642 $ 1,126,557,378
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 866,651,239 $ 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 2,192,382 2,049,813
Accrued interest payable 1,303,628 1,383,054
Dividends payable 194,576 193,914
Other liabilities 3,162,613 3,720,453
--------------- ---------------
Total liabilities 1,134,695,485 1,068,919,559
--------------- ---------------
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 7,975,059 and 7,949,809 and shares outstanding 6,485,877
and 6,463,811 as of September 30, 2003 and December 31, 2002, respectively 797,506 794,981
Paid-in capital in excess of par 8,507,333 8,279,525
Accumulated comprehensive income - net of deferred income taxes 702,163 1,216,053
Retained earnings 61,691,154 58,233,840
Less: Treasury stock (1,489,182 and 1,485,998 shares, at cost, as of
September 30, 2003 and December 31, 2002, respectively) (10,934,999) (10,886,580)
--------------- ---------------
Total stockholders' equity 60,763,157 57,637,819
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,195,458,642 $ 1,126,557,378
=============== ===============
See notes to consolidated financial statements.
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INTEREST INCOME:
Interest income on:
Loans $ 6,023,654 $ 6,425,228 $ 18,308,107 $ 19,167,561
Mortgage-backed securities 3,508,199 4,782,173 11,814,678 13,616,436
Investments 2,135,917 3,302,760 7,414,628 10,876,691
------------ ------------ ------------ ------------
Total interest income 11,667,770 14,510,161 37,537,413 43,660,688
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 1,917,653 3,354,425 6,755,394 10,849,964
Long term debt 314,282 445,773 973,424 1,379,855
Borrowings 2,386,311 2,314,864 7,093,661 6,667,182
------------ ------------ ------------ ------------
Total interest expense 4,618,246 6,115,062 14,822,479 18,897,001
------------ ------------ ------------ ------------
NET INTEREST INCOME 7,049,524 8,395,099 22,714,934 24,763,687
PROVISION FOR LOAN LOSSES 75,000 60,000 195,000 89,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,974,524 8,335,099 22,519,934 24,674,687
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 19,566 31,389 63,300 84,052
Gain on sale of real estate held for development, net 0 0 600,780 0
Gain on sale of loans 232 330 283 793
Gain on sale of investment securities, net 63,103 0 285,846 0
Gain (Loss) on disposal of fixed assets 0 654 (141,151) 100,767
Real estate owned operations, net (4,265) (11,515) 16,940 (27,383)
Service charges on accounts 1,159,714 1,034,639 3,415,956 2,896,817
Other income 33,566 75,066 103,031 226,535
------------ ------------ ------------ ------------
Total other income 1,271,916 1,130,563 4,344,985 3,281,581
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries and employee benefits 3,876,483 3,473,344 11,607,680 10,331,745
Occupancy and equipment 1,384,007 1,145,015 4,072,723 3,365,259
Purchased services 744,658 650,496 2,142,416 1,914,435
Federal deposit insurance premiums 32,466 30,655 96,048 92,779
Professional fees 157,366 224,439 498,785 628,475
Advertising 112,879 115,737 345,735 320,320
Other 450,273 467,868 1,440,945 1,164,085
------------ ------------ ------------ ------------
Total operating expenses 6,758,132 6,107,554 20,204,332 17,817,098
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,488,308 3,358,108 6,660,587 10,139,170
INCOME TAXES 587,873 1,274,405 2,620,257 3,665,607
------------ ------------ ------------ ------------
NET INCOME before extraodinary loss $ 900,435 $ 2,083,703 $ 4,040,330 $ 6,473,563
============ ============ ============ ============
EXTRAORDINARY LOSS (Net of $ 81,394 tax benefit) 0 (133,682) 0 (133,682)
------------ ------------ ------------ ------------
NET INCOME $ 900,435 $ 1,950,021 $ 4,040,330 $ 6,339,881
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE before extraordinary loss $ 0.14 $ 0.32 $ 0.62 $ 0.98
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE before extraordinary loss $ 0.14 $ 0.32 $ 0.62 $ 0.98
============ ============ ============ ============
Extraodinary Loss per Common share Basic $ 0.00 $ (0.02) $ 0.00 $ (0.02)
============ ============ ============ ============
Extraodinary Loss per Common share Diluted $ 0.00 $ (0.02) $ 0.00 $ (0.02)
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.14 $ 0.30 $ 0.62 $ 0.96
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.14 $ 0.30 $ 0.62 $ 0.96
============ ============ ============ ============
Dividends declared per common share $ 0.03 $ 0.03 $ 0.09 $ 0.09
============ ============ ============ ============
Weighted average common shares outstanding 6,484,466 6,463,811 6,473,959 6,576,481
Potential dilutive effect of the exercise of stock options 36,009 29,450 36,420 23,792
------------ ------------ ------------ ------------
Adjusted weighted average common shares outstanding 6,520,475 6,493,261 6,510,379 6,600,273
============ ============ ============ ============
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
Nine Months ended
September 30,
------------------------------
2003 2002
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OPERATING ACTIVITIES:
Net income $ 4,040,330 $ 6,339,881
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 195,000 89,000
Amortization and depreciation 7,548,803 3,599,560
Realized (gains) and losses on:
Sale of loans (283) (793)
Disposal and sale of fixed assets 141,151 (100,767)
Loss on retirement of debt 0 133,682
Sale of investment securities (285,846) 0
Sale of real estate owned (33,432) 0
Sale of real estate held for development, net (600,780) 0
Decrease (Increase) in accrued interest receivable 293,587 (495,792)
(Increase) Decrease in prepaid expenses and other assets (285,940) 557,517
Decrease in accrued interest payable (79,426) (431,724)
(Decrease) Increase in other liabilities (557,840) 81,706
Provision (Benefit) for deferred income taxes 1,068,497 (937,639)
------------- -------------
Net cash provided by operating activities 11,443,821 8,834,631
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 98,685 190,697
Real estate held for development 688,706 0
Real estate owned 332,877 12,920
Property and equipment 148,619 214,310
Principal collected and proceeds from maturities of investment securities held to
maturity 178,121,234 157,051,095
Proceeds from maturities of investment securities available for sale 108,485,625 34,566,341
Principal collected on mortgage-backed securities held to maturity 168,304,986 76,948,183
Principal collected on loans, net 107,109,449 62,462,942
Loans originated or acquired, net (141,250,672) (87,081,309)
Purchase of investment securities and mortgage-backed securities held to
maturity (385,731,684) (225,240,989)
Purchase of investment securities and mortgage-backed securities available
for sale (131,343,250) (116,843,528)
Redemption (Purchase) of Federal Home Loan Bank stock 227,100 (2,498,100)
Purchase of office property and equipment (3,615,921) (2,616,888)
Cash received from deposit purchase, net 16,539,246 0
------------- -------------
Net cash used by investing activities (81,885,000) (102,834,326)
------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 57,996,689 62,548,477
Net decrease in time deposits (8,224,918) (25,947,128)
Net (decrease) increase in FHLB advances (41,056) 9,961,790
Proceeds from securities sold under agreement to repurchase 0 40,000,000
Net proceeds from issuance of trust capital securities 0 24,221,532
Repayment of subordinated debentures 0 (10,100,000)
Increase (Decrease) in advances from borrowers for taxes and insurance 142,569 (80,004)
Purchase of treasury stock (48,419) (2,813,136)
Dividends paid on common stock (582,353) (596,424)
Net proceeds from issuance of common stock 230,333 1,195
------------- -------------
Net cash provided by financing activities 49,472,845 97,196,302
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20,968,334) 3,196,607
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 88,410,346 63,359,124
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 67,442,012 $ 66,555,731
============= =============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 14,901,905 $ 19,328,725
Income taxes 2,255,500 4,729,982
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 194,578 193,914
Non-monetary transfers from loans to real estate owned
through foreclosure 405,598 76,797
Investments purchased and not yet settled 0 33,195,000
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 income (loss) earnings stock Equity
- -----------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------
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 4,040,330 4,040,330
Other comprehensive income
Unrealized loss on
securities available
for sale, net of taxes
of $341,738 and
reclassification
adjustment of $285,846 (513,890) (513,890)
-----------
Total comprehensive income 3,526,440
-----------
Dividends declared ($.09) (583,016) (583,016)
Exercise of stock options 25,250 2,525 227,808 230,333
Purchase of common stock (3,184) (48,419) (48,419)
- ------------------------------------------------------------------------------------------------------------------------
Balances at
September 30, 2003 6,485,877 $797,506 $ 8,507,333 $ 702,163 $61,691,154 $(10,934,999) $60,763,157
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 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
nine months ended September 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 nine months ended
September 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 September 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 September 30,
2003. The Bank's regulatory tangible and tier 1 (core) capital ratios are $74.0
million or 6.21% of total bank assets and $77.9 million or 16.73% for risk-based
capital. FMS's consolidated capital ratio at September 30, 2003 totaled 5.08%.
5-SUBSEQUENT EVENTS
On October 24, 2003, the Bank purchased $22.3 million of deposits, $2.3 million
of consumer loans and the banking facility, including certain equipment, from
Sovereign Bank's Tabernacle branch. Farmers & Mechanics Bank moved its existing
Tabernacle Branch operations to this new location.
5
5-RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN 46, "Consolidated of Variable Interest
Entities". This interpretation provides guidance on how to identify a variable
interest entity and determine when such an entity needs to be included in a
company's consolidated financial statement. The Corporation does not have
interest in any variable interest entities. The provisions of this
interpretation became effective in January 2003. The adoption of FIN 46 did not
have a material effect on the Consolidated Statements of Financial Condition or
the Consolidated Statements of Operations.
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 149 "Amendment of Statement 133 on
Derivative 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 did not have a material effect on the Consolidated
Statements of Financial Condition or Consolidated Statements of Operations
because the Corporation generally does not engage in derivative activities.
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. In October 2003, the FASB deferred the provision related to mandatory
redeemable non-controlling interests until further notice. The adoption of this
standard did not 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 NINE MONTHS ENDED SEPTEMBER 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 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.
7
FINANCIAL CONDITION
Total Assets - at September 30, 2003 were $1.2 billion as compared with total
assets at December 31, 2002 of $1.1 billion.
Short Term Funds - decreased $15.5 million to $31.4 million at September 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 $52.3 million to $216.5
million at September 30, 2003 from $164.2 million at December 31, 2002 primarily
due to purchases of $192.2 million in collateralized mortgage obligations
(CMO's), $35.0 million in U.S. Agency Notes and $3.4 million in Municipal Bonds,
partially offset by principal paydowns of $141.0 million in CMO's, the maturity
of $15.9 million in Municipal Bonds and calls of $21.1 million in U.S. Agency
Notes during the period. Investment securities held to maturity at September 30,
2003 consisted of $14.7 million in adjustable rate securities and $201.8 million
in fixed rate securities. A comparison of cost and approximate market values of
investment securities held to maturity as of September 30, 2003 and December 31,
2002 follows:
September 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 $ 39,628,472 $ 706,573 $ 0 $ 40,335,045 $ 25,914,918 $ 26,547,362
CMO's 174,809,675 858,509 (849,887) 174,818,297 123,809,139 124,545,227
Municipal bonds 2,030,540 6,284 2,036,824 14,503,069 14,509,921
------------------------------------------------- ---------------------------
Total $216,468,687 $1,571,366 $ (849,887) $217,190,166 $164,227,126 $165,602,510
======================================================================= ===========================
Investment Securities Available for Sale - increased $20.7 million to $139.3
million at September 30, 2003 from $118.6 million at December 31, 2002. The
increase is the result of purchases of $64.4 million of mortgage-backed
securities (MBS's), $56.0 million of CMO's and $9.4 million of U.S. Agency
Notes, partially offset by principal paydowns of $76.0 million of CMO's and
MBS's, $25.0 million of calls of U.S. Agency Notes and sales of $7.2 million of
CMO's and MBS's at September 30, 2003. Investment securities available for sale
consisted of $131.7 million in fixed rate securities and $7.6 million in
adjustable rate securities at September 30, 2003. A comparison of cost and
approximate market values of investment securities available for sale as of
September 30, 2003 and December 31, 2002 follows:
September 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 $ 9,352,814 $ 66,861 $ 0 $ 9,419,675 $ 24,993,110 $ 25,358,000
CMO's 38,499,322 264,353 (151,287) 38,612,388 21,978,385 22,107,521
MBS's 90,341,007 1,062,992 (89,072) 91,314,927 69,631,991 71,147,440
------------------------------------------------- ----- -------------------
Total $138,193,143 $1,394,206 $ (240,359) $139,346,990 $116,603,486 $118,612,961
================================================= =========================
8
Loans, net - increased $33.4 million to $395.1 million at September 30, 2003
from $361.7 million at December 31, 2002. This increase was primarily the result
of $141.3 million of loans originated, partially offset by approximately $107.1
million of principal collected on loans during the nine months ended September
30, 2003. The following table shows loans receivable by major categories at the
dates indicated.
September 30, December 31,
2003 2002
- ------------------------------------------------------------
Mortgage Loans $275,506,865 $272,777,144
Construction Loans 815,688 305,607
Commercial Construction 5,315,508 1,157,268
Consumer Loans 2,915,645 3,521,889
Commercial Real Estate 104,069,967 76,354,155
Commercial Business 11,543,357 12,621,048
- ------------------------------------------------------------
Subtotal 400,167,030 366,737,111
Less:
Deferred loan fees 758,269 745,236
Allowance for
loan losses 4,331,928 4,317,475
- ------------------------------------------------------------
Total loans, net $395,076,833 $361,674,400
============================================================
At September 30, 2003, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $1.7 million of
which $985 thousand related to loans that were individually measured for
impairment with a valuation allowance of $435 thousand and $762 thousand of
loans that were collectively measured for impairment with a valuation allowance
of $21 thousand. The Bank had $4.3 million in total reserves for loan losses at
September 30, 2003, representing approximately 248% of non-accrual loans and
1.08% of total loans. For the nine months ended September 30, 2003, the average
recorded investment in impaired loans was approximately $1.9 million. The Bank
recognized $59 thousand of interest income on impaired loans for the nine months
ended September 30, 2003, all of which was recognized on the cash basis.
As of September 30, 2003 the Bank had outstanding loan commitments of $20.8
million, of which $10.1 million represented variable rate loans and $10.7
million represented fixed rate loans. The Bank intends to fund these commitments
through scheduled amortization of loans and mortgage-backed securities,
additional borrowings, and if necessary, the sale of investment securities
available for sale.
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.
September 30, December 31,
2003 2002
------------- -------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 558,670 $ 960,558
Commercial real estate 1,188,504 1,785,864
Consumer and other 3,983 11,789
----------- -----------
Total non-accrual loans $ 1,751,157 $ 2,758,211
----------- -----------
Troubled debt restructuring $ 1,073,579 $ 986,581
Real estate owned, net 397,353 291,200
Other non-performing assets - 87,926
----------- -----------
Total non-performing assets, net $ 3,222,089 $ 4,123,918
----------- -----------
Total non-accrual loans to net loans 0.44% 0.76%
=========== ===========
Total non-accrual loans to total assets 0.15% 0.24%
=========== ===========
Total non-performing assets to total assets 0.27% 0.37%
=========== ===========
Mortgage-Backed Securities Held to Maturity - decreased $18.5 million to $323.6
million at September 30, 2003 from $342.1 million at December 31, 2002. The
decrease is the result of principal paydowns of $168.3 million partially offset
by the purchases of $150.3 million of FNMA and FHLMC fixed rate securities.
Mortgage-backed securities at September 30, 2003 consisted of $295.0 million in
fixed rate securities and $28.6 million in adjustable rate securities.
Mortgage-backed securities held to maturity at September 30, 2003 and December
31, 2002 are summarized below:
September 30, 2003 December 31, 2002
- ------------------------------------------------------------------ ---------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- ------------------------------------------------------------------ ---------------------------
GNMA $ 18,394,691 $ 969,692 $ (148) $ 19,364,235 $ 33,862,839 $ 35,556,313
FNMA 212,391,460 4,368,966 (288,594) 216,471,832 233,608,680 239,975,322
FHLMC 92,843,767 971,994 (452,042) 93,363,719 74,651,159 76,090,093
---------------------------------------------------------- ---------------------------
Total $323,629,918 $ 6,310,652 $ (740,784) $329,199,786 $342,122,678 $351,621,728
========================================================== ===========================
10
Deposits - increased $66.4 million to $866.7 million at September 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 $27.5 million, savings accounts
increased $23.1 million, interest bearing checking deposits increased $9.9
million, money market accounts increased $6.4 million and certificates of
deposits decreased $485 thousand for the nine months ended September 30, 2003.
Interest credited to depositors accounts for the nine months ended September 30,
2003 amounted to $6.8 million. The following table sets forth certain
information concerning deposits at the dates indicated.
September 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
- ------------------------------------------------------------------------------------------------------------
Non-interest checking $162,426,159 18.74% 0.00% $134,969,939 16.85% 0.00%
Checking accounts 165,591,094 19.11% 0.59% 155,730,226 19.46% 1.18%
Savings accounts 184,558,798 21.29% 0.74% 161,458,450 20.18% 1.34%
Money market accounts 131,174,100 15.14% 0.82% 124,795,059 15.59% 1.86%
Certificates 222,901,088 25.72% 2.53% 223,386,548 27.92% 3.58%
- ------------------------------------------------------------------------------------------------------------
Total Deposits $866,651,239 100.00% 1.08% $800,340,222 100.00% 1.86%
============================================================================================================
Borrowings - at September 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 1.53%. 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 September 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 equipment expense and
purchased services expense.
11
The Corporation recorded net income for the three months ended September 30,
2003 of $900 thousand, or $.14 diluted earnings per share as compared to $2.0
million, or $.30 diluted earnings per share for the comparable period in 2002.
The Corporation recorded net income for the nine months ended September 30, 2003
of $4.0 million, or $.62 diluted earnings per share as compared to $6.3 million,
or $.96 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 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:
12
Three Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 391,661 $ 6,024 6.15% $362,946 $ 6,425 7.08%
Interest-bearing deposit 44,450 115 1.03% 56,552 256 1.81%
Mortgage-backed securities 391,044 3,508 3.59% 339,519 4,782 5.63%
Investment securities 261,423 2,021 3.09% 219,926 3,047 5.54%
---------- ------- ------ -------- ------- ------
Total interest-earning
assets 1,088,578 11,668 4.29% 978,943 14,510 5.93%
---------- ------- ------ -------- ------- ------
Interest-bearing liabilities:
Checking deposits 321,628 190 0.24% 261,114 407 0.62%
Savings deposits 183,699 268 0.58% 146,364 480 1.31%
Money Market depsoits 131,979 219 0.66% 114,702 532 1.86%
Time deposit 224,232 1,241 2.21% 229,815 1,936 3.37%
Borrowings 236,191 2,386 4.04% 210,641 2,314 4.39%
Long-Term Debt 25,774 314 4.87% 29,107 446 6.13%
---------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities $1,123,503 4,618 1.64% $991,743 6,115 2.47%
========== ------- ------ ======== ------- ------
Net interest income $ 7,050 $ 8,395
======= =======
Interest rate spread 2.65% 3.46%
====== ======
Net yield on average
interest-earning assets 2.59% 3.43%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 96.89% 98.71%
====== ======
Nine Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 383,148 $18,308 6.37% $360,315 $19,168 7.09%
Interest-bearing deposit 44,706 402 1.20% 50,718 768 2.02%
Mortgage-backed securities 383,435 11,815 4.11% 309,346 13,616 5.87%
Investment securities 256,162 7,012 3.65% 227,299 10,109 5.93%
---------- ------- ------ -------- ------- ------
Total interest-earning
assets 1,067,451 37,537 4.69% 947,678 43,661 6.14%
---------- ------- ------ -------- ------- ------
Interest-bearing liabilities:
Checking deposits 305,735 709 0.31% 255,957 1,258 0.66%
Savings deposits 177,110 987 0.74% 141,858 1,475 1.39%
Money Market depsoits 129,721 799 0.82% 104,418 1,540 1.97%
Time deposit 224,896 4,260 2.52% 236,211 6,577 3.71%
Borrowings 236,202 7,094 4.00% 197,910 6,667 4.49%
Long-Term Debt 25,774 973 5.03% 25,422 1,380 7.24%
---------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities $1,099,438 14,822 1.80% $961,776 18,897 2.62%
========== ------- ------ ======== ------- ------
Net interest income $22,715 $24,764
======= =======
Interest rate spread 2.89% 3.52%
====== ======
Net yield on average
interest-earning assets 2.84% 3.48%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 97.09% 98.53%
====== ======
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 September 30, Nine Months Ended September 30,
2003 vs. 2002 2003 vs. 2002
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 $ (909) $ 508 $ (401) $ (2,075) $ 1,215 $ (860)
Interest-bearing deposits (86) (55) (141) (275) (91) (366)
Mortgage-backed securities (2,000) 726 (1,274) (5,062) 3,261 (1,801)
Investment securities (1,601) 575 (1,026) (4,381) 1,284 (3,097)
-------------------------------- --------------------------------
Total change - interest income (4,596) 1,754 (2,842) (11,793) 5,669 (6,124)
-------------------------------- --------------------------------
Interest expense:
Checking deposits (311) 94 (217) (794) 245 (549)
Savings deposit (334) 122 (212) (855) 367 (488)
Money market deposit (393) 80 (313) (1,114) 373 (741)
Time deposit (648) (47) (695) (2,002) (315) (2,317)
Borrowings (209) 281 72 (863) 1,290 427
Long-Term Debt (81) (51) (132) (426) 19 (407)
-------------------------------- --------------------------------
Total change - interest expense (1,976) 479 (1,497) (6,054) 1,979 (4,075)
-------------------------------- --------------------------------
Net change in net interest income $ (2,620) $ 1,275 $ (1,345) $ (5,739) $ 3,690 $ (2,049)
================================ ================================
14
Net Interest Income - for the three and nine months ended September 30, 2003
totaled $7.1 million and $22.7 million, respectively. Net interest income for
the three months ended September 30, 2003 decreased $1.3 million compared to the
same period in 2002 due primarily to lower market interest rates causing
decreases in interest income on mortgage-backed securities of $1.3 million,
investment securities of $1.0 million, loans of $401 thousand and
interest-bearing deposits of $141 thousand, partially offset by decreases in
interest expense on deposits of $1.4 million and long term debt of $132
thousand.
The decrease in interest income was primarily the result of a decrease in
interest income on mortgage-backed securities of $1.3 million to $3.5 million
for the three months ended September 30, 2003 from $4.8 million for the same
period in 2002. The average yield of the MBS portfolio decreased 204 basis
points to 3.59% for the quarter ended September 30, 2003 from 5.63% for the same
period in 2002, which resulted in an interest income decrease of $2.0 million
due to rate changes. The average balance of MBS's increased $51.5 million to
$391.0 million for the three months ended September 30, 2003 from $339.5 million
for the same period in 2002, which resulted in an interest income volume
increase of $726 thousand.
Interest income on investment securities decreased $1.0 million to $2.0 million
for the three months ended September 30, 2003 from $3.0 million for the same
period in 2002. The investment portfolio interest income was significantly
reduced by increased prepayments, which require faster than normal amortization
of premiums previously paid on investments and reflected in reduced yields. The
average yield of the investment portfolio decreased 245 basis points to 3.09%
for the quarter ended September 30, 2003 from 5.54% for the same period in 2002,
which resulted in an interest income decrease of $1.6 million due to rate
changes. The average balance of investment securities increased $41.5 million to
$261.4 million for the three months ended September 30, 2003 from $219.9 million
for the same period in 2002, which resulted in a volume increase in interest
income of $575 thousand.
Interest income on loans decreased $401 thousand to $6.0 million for the three
months ended September 30, 2003 from $6.4 million for the same period in 2002.
The average rate on loans decreased 93 basis points to 6.15% for the three
months ended September 30, 2003 from 7.08% for the same period in 2002, which
resulted in a decrease in interest income of $909 thousand due to rate changes.
The average balance of the loan portfolio increased $28.8 million to $391.7
million for the three months ended September 30, 2003 from $362.9 million for
the same period in 2002, which resulted in a volume increase in interest income
of $508 thousand.
Interest expense on time deposits decreased $695 thousand to $1.2 million for
the three months ended September 30, 2003 from $1.9 million for the same period
in 2002. The average rate on time deposits decreased 116 basis points to 2.21%
for the quarter ended September 30, 2003 from 3.37% for the same period in 2002,
which resulted in a decrease in interest expense of $648 thousand. The average
balance of time deposits decreased $5.6 million to $224.2 million for the three
months ended September 30, 2003 from $229.8 million for the same period in 2002,
which resulted in a volume decrease in interest expense of $47 thousand.
Interest expense on checking deposits decreased $217 thousand to $190 thousand
for the three months ended September 30, 2003 from $407 thousand for the same
period in 2002. The average rate on checking deposits decreased 38 basis points
to 0.24% for the quarter ended September 30, 2003 from 0.62% for the same period
in 2002, which resulted in a decrease in interest expense of $311 thousand. The
average balance of checking deposits increased $60.5 million to $321.6 million
for the three months ended September 30, 2003 from $261.1 for the same period in
2002, which resulted in a volume increase in interest expense of $94 thousand.
15
Interest expense on money market deposits decreased $313 thousand to $219
thousand for the three months ended September 30, 2003 from $532 thousand for
the same period in 2002. The average rate on money market deposits decreased 120
basis points to 0.66% for the quarter ended September 30, 2003 from 1.86% for
the same period in 2002, which resulted in a rate decrease in interest expense
of $393 thousand. The average balance of money market deposits increased $17.3
million to $132.0 million for the three months ended September 30, 2003 from
$114.7 million for the same period in 2002, which resulted in a volume increase
in interest expense of $80 thousand.
Interest expense on borrowings increased $72 thousand to $2.4 million for the
three months ended September 30, 2003 from $2.3 million for the same period in
2002. The average balance of borrowings increased $25.6 million to $236.2
million at September 30, 2003 from $210.6 million for the same period in 2002,
which resulted in a volume increase in interest expense of $281 thousand. The
average rate paid on borrowings decreased 35 basis points to 4.04% for the
quarter ended September 30, 2003 from 4.39% for the same period in 2002, which
resulted in a decrease in interest expense of $209 thousand due to rate changes.
Net interest income for the nine months ended September 30, 2003 decreased $2.0
million primarily due to decreases in interest income on investment securities
of $3.1 million, mortgage-backed securities of $1.8 million, loans of $860
thousand, interest-bearing deposits of $366 thousand and an increase in interest
expense on borrowings of $427 thousand, partially offset by a decrease in
interest expense on deposits of $4.1 million and a decrease in interest expense
on long-term debt of $407 thousand as compared to the same nine 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 228 basis points to 3.65%
for the nine months ended September 30, 2003 from 5.93% for the same period in
2002, which resulted in a decrease in interest income of $4.4 million due to
rate changes. The average balance of the portfolio increased $28.9 million to
$256.2 million for the nine months ended September 30, 2003 from $227.3 million
for the same period in 2002, which resulted in a volume increase in interest
income of $1.3 million. The increase in the average balance was primarily due to
purchases of $442.7 million, partially offset by investment calls and maturities
of $103.8 million and principal paydowns of $279.5 million.
The decrease in interest income on mortgage-backed securities was due to a
decrease in the average yield on the portfolio of 176 basis points to 4.11% for
the nine months ended September 30, 2003 from 5.87% for the same period in 2002,
which resulted in a decrease in interest income of $5.1 million due to rate
changes. The average balance of the portfolio increased $74.1 million to $383.4
million for the nine months ended September 30, 2003 from $309.3 million for the
nine months ended September 30, 2002, which resulted in a $3.3 million increase
in interest income. The increase in the average balance was due to purchases
during this period of $209.0 million, partially offset by $216.8 million of
principal paydowns from September 2002 through September 2003.
The decrease in interest income on loans was due to a decrease in the average
yield on loans of 72 basis points to 6.37% for the nine months ended September
30, 2003 from 7.09% for the same period in 2002, which resulted in a decrease in
interest income of $2.1 million due to rate changes. The average balance of
loans increased $22.8 million to $383.1 million for the nine months ended
September 30, 2003 from $360.3 million for the nine months ended September 30,
2002, which resulted in a $1.2 million 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 $2.3 million to $4.3 million for the
nine months ended September 30, 2003 from $6.6 million for the same period in
2002. The average rate on time deposits decreased 119 basis points to 2.52% for
the nine months ended September 30, 2003 from 3.71% for the same period in 2002,
which resulted in a rate decrease in interest expense of $2.0 million. The
average balance of time deposits decreased $11.3 million to $224.9 million for
the nine months ended September 30, 2003 from $236.2 million for the same period
in 2002, which resulted in a volume decrease in interest expense of $315
thousand.
Interest expense on checking deposits decreased $549 thousand to $709 thousand
for the nine months ended September 30, 2003 from $1.3 million for the same
period in 2002. The average rate on checking deposits decreased 35 basis points
to 0.31% for the nine months ended September 30, 2003 from 0.66% for the same
period in 2002, which resulted in a decrease in interest expense of $794
thousand. The average balance of checking deposits increased $49.7 million to
$305.7 million for the nine months ended September 30, 2003 from $256.0 for the
same period in 2002, which resulted in a volume increase in interest expense of
$245 thousand.
Interest expense on money market deposits decreased $741 thousand to $799
thousand for the nine months ended September 30, 2003 from $1.5 million for the
same period in 2002. The average rate on money market deposits decreased 115
basis points to 0.82% for the nine months ended September 30, 2003 from 1.97%
for the same period in 2002, which resulted in a decrease in interest expense of
$1.1 million. The average balance of money market deposits increased $25.3
million to $129.7 million for the nine months ended September 30, 2003 from
$104.4 million for the same period in 2002, which resulted in a volume increase
in interest expense of $373 thousand.
The increase in interest expense on borrowings was the result of an increase in
the average balance of $38.3 million to $236.2 million for the nine months ended
September 30, 2003 from $197.9 million for the same period in 2002, which
resulted in a volume increase in interest expense of $1.3 million. The average
yield on borrowings decreased 49 basis points to 4.00% for the nine months ended
September 30, 2003 from 4.49% for the same period in 2002, which resulted in a
decrease in interest expense of $863 thousand due to rate changes.
Interest expense on long-term debt decreased $407 thousand to $973 thousand for
the nine months ended September 30, 2003 from $1.4 million 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 $15 thousand to $75
thousand for the three months ended September 30, 2003 from $60 thousand for the
same period in 2002. The allowance for loan losses totaled $4.3 million at
September 30, 2003 and 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, commercial construction,
consumer and commercial business loans). These types of loans contain a higher
degree of risk. The Bank will continue to monitor its allowance for loan losses
and make future adjustments to the allowance through the provision for loan
losses as changing conditions dictate. Although the Bank maintains its allowance
for loan losses at a level that it considers to be adequate to provide for the
inherent risk of loss in its loan portfolio, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods due to the higher degree
of credit risk which might result from the change in the mix of the loan
portfolio or changes in economic conditions. Most of the Bank's lending activity
is with customers located within southern New Jersey. Generally, the loans are
secured by real estate consisting of single-family residential properties. While
this represents a concentration of credit risk, the credit losses arising from
this type of lending compare favorably with the Bank's credit loss experience on
its portfolio as a whole. The ultimate repayment of these loans is dependent to
a certain degree on the local economy and real estate market.
Other Income - for the three and nine month periods ended September 30, 2003 was
$1.3 million and $4.3 million, as compared to $1.1 million and $3.3 million for
the same periods in 2002. The increase for the nine months ended September 30,
2003 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 $7.2 million of investment securities
available for sale during the nine months ended September 30, 2003, which
resulted in a $286 thousand gain. Additionally, retail banking fees increased as
a result of the five branches opened since the third quarter of 2002.
Operating Expenses - for the three and nine month periods ended September 30,
2003 totaled $6.8 million and $20.2 million, respectively, as compared to $6.1
million and $17.8 million for the same periods in 2002.
Salaries and Employee Benefits - for the three and nine month periods ended
September 30, 2003 were $3.9 million and $11.6 million, respectively, as
compared to $3.5 million and $10.3 million for the same period in 2002. The
increase was primarily due to additional staff in the five new branches opened
since the third quarter of 2002. Average full time equivalent employees at
September 30, 2003 were 507 as compared to 468 at September 30, 2002.
Occupancy and Equipment- for the three and nine month period ended September 30,
2003 were $1.4 million and $4.1 million, respectively, as compared to $1.1
million and $3.4 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 third quarter of 2002, as well as other facility improvements and new
computer equipment additions during this period.
18
Purchased Services - for the three and nine month periods ended September 30,
2003 totaled $745 thousand and $2.1 million, as compared to $650 thousand and
$1.9 million for the same periods in 2002. ATM charges increased $196 thousand
for the first nine months of 2003 compared to the same period in 2002. Check
processing costs decreased $6 thousand for the nine months ended September 30,
2003 compared to the same period in 2002 due to an increased use of on-line
banking services.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the nine months ended September 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 and Use of Proceeds
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) Exhibits:
(i) 31 certifications pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as amended.
(ii)32 certification pursuant to Section 1350 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(i) The Registrant filed a Report on Form 8-K
pursuant to Items 7 and 12 on July 31, 2003 to report
earnings for the quarter ended June 30, 2003.
20
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, 2003 /s/Craig W. Yates
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Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2003 /s/Channing L. Smith
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Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)