UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, DC 20549
--------------------
----------------------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the
- ------ Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
OR
Transition report pursuant to section 13 or 15(d) of the
- ------- Securities Exchange Act of 1934
Commission file number 0-17353
FMS FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
- ---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
- -------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES NO X .
--- ---
As of May 3, 2004 there were issued and outstanding 6,489,377 shares of
the registrant's Common Stock, par value $.10 per share.
FMS FINANCIAL CORPORATION AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2004
TABLE OF CONTENTS
Page
----
PART I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2004 (unaudited) and December 31, 2003....................................1
Consolidated Statements of Operations (unaudited)
for the three months ended
March 31, 2004 and March 31, 2003...................................................2
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 2004 and March 31, 2003 3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the three months ended March 31, 2004 and
March 31, 2003 ...............................................................4
Notes to Consolidated Financial Statements..................................................5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................6 - 15
Item 3 - Disclosure about Market Risk............................................................15
Item 4 - Disclosure Controls and Procedures .....................................................15
PART II - Other Information
- ---------------------------
Item 1 - Legal Proceedings.......................................................................16
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.........................................................................16
Item 3 - Defaults Upon Senior Securities.........................................................16
Item 4 - Submission of Matters to a Vote of Security Holders.....................................16
Item 5 - Other Information.......................................................................16
Item 6 - Exhibits and Reports on Form 8-K........................................................16
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 37,520,003 $ 41,022,232
Interest-bearing deposits 40,139 142,929
Short term funds 40,480,644 31,169,476
--------------- ---------------
Total cash and cash equivalents 78,040,786 72,334,637
Investment securities held to maturity 272,799,180 250,383,262
Investment securities available for sale 164,143,355 149,230,862
Loans, net 405,318,056 402,606,056
Mortgage-backed securities held to maturity 273,498,495 294,915,606
Accrued interest receivable 5,657,938 5,203,748
Federal Home Loan Bank stock 11,750,120 11,809,620
Real estate owned, net 0 48,294
Office properties and equipment, net 31,319,000 31,429,069
Deferred income taxes 2,122,072 2,043,909
Core deposit intangible 3,129,186 3,308,238
Prepaid expenses and other assets 2,371,538 1,603,294
FMS Statutory Trust 1 issue costs, net 620,694 640,154
--------------- ---------------
TOTAL ASSETS $ 1,250,770,420 $ 1,225,556,749
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 905,918,262 $ 893,006,498
Securities sold under agreements to repurchase 225,000,000 225,000,000
Advances from the Federal Home Loan Bank 10,000,000 11,191,047
FMS Statutory Trust 1 debentures 25,774,000 25,774,000
Advances by borrowers for taxes and insurance 2,296,911 2,142,499
Accrued interest payable 1,251,566 1,319,501
Dividends payable 194,606 194,576
Other liabilities 15,258,683 4,098,885
--------------- ---------------
Total liabilities 1,185,694,028 1,162,727,006
--------------- ---------------
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 7,976,059 and 7,975,059 and shares outstanding 6,486,877
and 6,485,877 as of March 31, 2004 and December 31, 2003, respectively 797,606 797,506
Paid-in capital in excess of par 8,517,233 8,507,333
Accumulated other comprehensive income - net of deferred income taxes 1,155,607 802,239
Retained earnings 65,540,945 63,657,664
Less: Treasury stock (1,489,182 and 1,489,182 shares, at cost, as of
March 31, 2004 and December 31, 2003, respectively) (10,934,999) (10,934,999)
--------------- ---------------
Total stockholders' equity 65,076,392 62,829,743
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,250,770,420 $ 1,225,556,749
=============== ===============
See notes to consolidated financial statements
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------
Three Months ended
March 31,
-----------------------------
2004 2003
- ------------------------------------------------------------------------------------------
(Unaudited)
INTEREST INCOME:
Interest income on:
Loans $ 6,051,776 $ 6,225,726
Mortgage-backed securities 3,940,565 4,536,145
Investments 3,648,937 2,670,324
------------ ------------
Total interest income 13,641,278 13,432,195
------------ ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 1,780,209 2,601,214
Borrowings 2,354,914 2,342,200
Long-term debt 303,798 331,567
------------ ------------
Total interest expense 4,438,921 5,274,981
------------ ------------
NET INTEREST INCOME 9,202,357 8,157,214
PROVISION FOR LOAN LOSSES 75,000 60,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,127,357 8,097,214
------------ ------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 29,244 23,814
Gain on sale of investment securities 100,056 0
Gain on sale of real estate held for development, net 0 600,780
Loss on disposal of fixed assets 0 (141,151)
Real estate owned operations, net (1,263) (6,830)
Service charges on accounts 1,204,240 1,071,897
Other income 29,136 23,382
------------ ------------
Total other income 1,361,413 1,571,892
------------ ------------
OPERATING EXPENSES:
Salaries and employee benefits 4,125,632 3,823,402
Occupancy and equipment 1,379,656 1,328,515
Purchased services 696,722 674,025
Federal deposit insurance premiums 32,265 32,196
Professional fees 165,783 177,716
Advertising 111,963 115,611
Amortization of core deposit intangible 179,052 0
Other 337,184 482,161
------------ ------------
Total operating expenses 7,028,257 6,633,626
------------ ------------
INCOME BEFORE INCOME TAXES 3,460,513 3,035,480
INCOME TAXES 1,382,626 1,195,557
------------ ------------
NET INCOME $ 2,077,887 $ 1,839,923
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.32 $ 0.28
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.28
============ ============
Dividends declared per common share $ 0.03 $ 0.03
============ ============
Weighted average common shares outstanding 6,486,325 6,463,811
Potential dilutive effect of the exercise of stock options 41,033 40,116
------------ ------------
Adjusted weighted average common shares outstanding 6,527,358 6,503,927
============ ============
See notes to consoldiated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ------------------------------------------------------------------------------------------------------
Three Months ended
March 31,
-------------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 2,077,887 $ 1,839,923
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 75,000 60,000
Amortization and Depreciation 1,981,879 985,554
Realized (gains) and losses on:
Sale of loans (1) (29)
Disposal and sale of fixed assets 0 141,151
Sale of investment securities (100,056) 0
Sale of real estate owned (654) 0
Sale of real estate held for development, net 0 (600,780)
Decrease in accrued interest receivable (454,190) (316,366)
Increase in prepaid expenses and other assets (768,244) (648,221)
Decrease in accrued interest payable (67,935) (47,333)
Increase in other liabilities 924,806 797,843
Provision for deferred income taxes (78,163) 850,606
------------- -------------
Net cash provided by operating activities 3,590,329 3,062,348
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 15,301 42,641
Real estate held for development 0 688,706
Real estate owned 48,948 0
Property and equipment 0 176,555
Principal collected and proceeds from maturities of investment
securities held to maturity 32,485,161 35,533,268
Proceeds from maturities of investment securities available for sale 16,577,021 16,372,159
Principal collected on mortgage-backed securities held to maturity 20,763,373 48,033,512
Principal collected on loans, net 25,135,645 23,504,023
Loans originated or acquired, net (27,955,402) (36,263,074)
Purchase of investment securities and mortgage-backed securities
held to maturity (50,184,757) (111,591,237)
Purchase of investment securities and mortgage-backed securities
available for sale (26,138,938) (38,645,883)
Redemption of Federal Home Loan Bank stock 59,500 252,100
Purchase of office property and equipment (380,585) (2,515,827)
Net cash received from deposit purchase, net 0 16,539,246
------------- -------------
Net cash used by investing activities (9,574,733) (47,873,811)
------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 21,486,365 24,065,072
Net decrease in time deposits (8,574,601) (2,334,248)
Net decrease in FHLB advances (1,191,047) (41,056)
Increase in advances from borrowers for taxes and insurance 154,412 237,570
Dividends paid on common stock (194,576) (193,914)
Net proceeds from issuance of common stock 10,000 0
------------- -------------
Net cash provided by financing activities 11,690,553 21,733,424
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,706,149 (23,078,039)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 72,334,637 88,410,346
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 78,040,786 $ 65,332,307
============= =============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 4,506,856 $ 5,322,314
Income taxes 1,050,000 867,500
Non-cash investing and financing activities:
Dividends declared and not paid at year end 194,606 193,914
Non-monetary transfers from loans to real estate owned
through foreclosure 0 209,575
Investments purchased and not yet settled 10,000,000 0
See notes to consolidated financial statements.
3
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital income (loss) earnings stock Equity
- ----------------------------------------------------------------------------------------------------------------------
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 1,839,923 1,839,923
Other comprehensive
income
Unrealized loss
on securities
available for
sale, net of
taxes of $100,116 (154,843) (154,843)
-------------
Total comprehensive
income 1,685,080
-------------
Dividends declared
($.03) (193,915) (193,915)
Exercise of stock
options
- ----------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2003 6,463,811 $794,981 $ 8,279,525 $ 1,061,210 $ 59,879,848 $(10,886,580) $59,128,984
- ----------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2003 6,485,877 $797,506 $ 8,507,333 $ 802,239 $ 63,657,664 $(10,934,999) $62,829,743
Net Income 2,077,887 2,077,887
Other comprehensive
income
Unrealized gain
on securities
available for
sale, net of
taxes of $234,994 353,368 353,368
-----------
Total comprehensive
income 2,431,255
-----------
Dividends declared
($.03) (194,606) (194,606)
Exercise of stock
options 1,000 100 9,900 10,000
- ----------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2004 6,486,877 $797,606 $ 8,517,233 $ 1,155,607 $ 65,540,945 $(10,934,999) $65,076,392
- ----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 (UNAUDITED).
1-GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation (the "Corporation") contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of its financial condition, results of operations, cash flows and
changes in stockholders' equity for the periods and dates indicated. The results
of operations for the three months ended March 31, 2004 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 fiscal year ended December 31, 2003. The 2003 comparative Statement of
Financial Condition was derived from the audited financial statements. The
consolidated financial statements include the Corporation's principle
subsidiary, Farmers & Mechanics Bank (the "Bank").
2-LONG-TERM DEBT
Long-Term Debt at March 31, 2004 and December 31, 2003 consisted of $25.8
million of FMS Statutory Trust 1 debentures. The interest rate resets every
three months to LIBOR plus 360 basis points and will not exceed 11.00% through
March 2007. As of March 31, 2004 and 2003 the interest rate was 4.71% and 4.89%,
respectively. 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.
3-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well capitalized" by OTS regulations at March 31, 2004.
The Bank's regulatory tangible and tier 1 (core) capital ratios are $75.6
million or 6.08% of total bank assets and $79.7 million or 16.37% for risk-based
capital. FMS's consolidated capital ratio at March 31, 2004 totaled 5.20%.
4-STOCK OPTIONS
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 three months ended March
31, 2004 and 2003.
5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004. The following
discussion and analysis should be read with our financial statements and related
notes included elsewhere in this report on Form 10-Q. 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. The discussion and analysis in this report may
contain "forward-looking statements" within the meaning of Section 21A of the
Securities and Exchange Act of 1934.
These forward-looking statements involve risk and uncertainties, such as
statements of the Corporation's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Corporation's control). The cautionary statements made
in this report should be read as applying to all related forward-looking
statements wherever they appear in this report. The following factors, among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives, expectations, estimates and intentions expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Corporation and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Corporation's products and services;
the success of the Corporation in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services laws
and regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
involved in the foregoing. Such risks and uncertainities could cause actual
results to differ materially from any future performance suggested in this
report. The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation undertakes no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date of this report. This caution is made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.
6
FINANCIAL CONDITION
Total Assets - at March 31, 2004 were $1.3 billion as compared with total assets
at December 31, 2003 of $1.2 billion.
Investment Securities Held to Maturity - increased $22.4 million to $272.8
million at March 31, 2004 from $250.4 million at December 31, 2003 primarily due
to purchases of $39.0 million in U.S. Agency Notes, $15.0 million in
collateralized mortgage obligations (CMO's) and $1.1 million in Municipal Bonds,
partially offset by principal paydowns of $13.4 million in CMO's, the maturity
of $1.9 million in Municipal Bonds and calls of $17.2 million in U.S. Agency
Notes during the period. Investment securities held to maturity at March 31,
2004 consisted of $250.0 million in fixed rate securities and $22.8 million in
adjustable rate securities. A comparison of cost and approximate market values
of investment securities held to maturity as of March 31, 2004 and December 31,
2003 follows:
March 31, 2004 December 31, 2003
- ------------------------------------------------------------------------------------ ------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- ------------------------------------------------------------------------------------ ------------------------------
U. S. Agency Notes $ 93,922,398 $ 357,664 $ (9) $ 94,280,053 $ 72,256,272 $ 72,994,187
CMO's 177,212,992 2,349,781 (334,905) 179,227,868 175,727,450 175,279,820
Municipal bonds 1,663,790 6,292 1,670,082 2,399,540 2,404,563
- ------------------------------------------------------------------------------------ ------------------------------
Total $272,799,180 $2,713,737 $ (334,914) $275,178,003 $250,383,262 $250,678,570
==================================================================================== ==============================
Investment Securities Available for Sale - increased $14.9 million to $164.1
million at March 31, 2004 from $149.2 million at December 31, 2003. The increase
is the result of purchases of $21.0 million of U.S. Agency Notes, $5.0 million
of mortgage-backed securities (MBS's) and $5.0 million of CMO's, partially
offset by principal paydowns of $8.8 million of CMO's and MBS's, sales of $5.3
million, calls of U.S. Agency Notes of $2.5 million and $588 thousand in market
adjustments at March 31, 2004. Investment securities available for sale
consisted of $163.7 million in fixed rate securities and $400 thousand in
adjustable rate securities at March 31, 2004. A comparison of cost and
approximate market values of investment securities available for sale as of
March 31, 2004 and December 31, 2003 follows:
March 31, 2004 December 31, 2003
- ------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- ------------------------------------------------------------------------------------------------------------
U. S. Agency Notes $ 31,798,920 $ 27,487 $ (37,727) $ 31,788,680 $ 13,100,525 $ 13,188,525
CMO's 49,174,688 425,570 (74,937) 49,525,321 48,250,773 48,419,522
MBS's 81,260,914 1,637,756 (69,316) 82,829,354 86,559,090 87,622,815
---------------------------------------------------------- -------------------------
Total $162,234,522 $2,090,813 $ (181,980) $164,143,355 $147,910,388 $149,230,862
=============================================================================== ============================
7
Loans, net - increased $2.7 million to $405.3 million at March 31, 2004 from
$402.6 million at December 31, 2003. This increase was primarily the result of
$28.0 million of loans originated, partially offset by approximately $25.1
million of principal collected on loans during the three months ended March 31,
2004. The following table shows loans receivable by major categories at the
dates indicated.
March 31, December 31,
2004 2003
- -----------------------------------------------------------------------
Mortgage Loans $ 280,151,111 $ 280,663,785
Construction Loans 469,232 1,324,699
Commercial Construction 7,119,337 5,993,838
Consumer Loans 3,114,966 3,186,549
Commercial Real Estate 105,910,580 104,352,118
Commercial Business 13,687,151 12,180,496
- -----------------------------------------------------------------------
Subtotal 410,452,377 407,701,485
Less:
Deferred loan fees 650,124 687,877
Allowance for
loan losses 4,484,197 4,407,552
- -----------------------------------------------------------------------
Total loans, net $ 405,318,056 $ 402,606,056
- -----------------------------------------------------------------------
At March 31, 2004, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $2.2 million of
which $985 thousand related to loans that were individually measured for
impairment with a valuation allowance of $414 thousand and $1.2 million of loans
that were collectively measured for impairment with a valuation allowance of $28
thousand. The Bank had $4.5 million in total reserves for loan losses at March
31, 2004, representing approximately 202% of non-performing loans and 1.1% of
total loans. For the three months ended March 31, 2004, the average recorded
investment in impaired loans was approximately $2.2 million. The Bank recognized
$28 thousand of interest income on impaired loans for the three months ended
March 31, 2004, all of which was recognized on the cash basis.
As of March 31, 2004 the Bank had outstanding loan commitments of $21.5 million,
of which $11.4 million represented variable rate loans and $10.1 million
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled amortization of loans and mortgage-backed securities, additional
borrowings, and if necessary, the sale of investment securities available for
sale.
8
Non-Performing Assets - The following table sets forth information regarding
non-accrual loans, troubled debt restructured and real estate owned assets by
the Bank.
March 31, December 31,
2004 2003
---------- ----------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 983,064 $ 507,317
Commercial real estate 1,032,349 1,188,504
Consumer and other 812 -
---------- ----------
Total non-accrual loans $2,016,225 $1,695,821
---------- ----------
Troubled debt restructuring $1,014,980 $1,027,054
Real estate owned, net - 48,294
Other non-performing assets - -
---------- ----------
Total non-performing assets, net $3,031,205 $2,771,169
---------- ----------
Total non-accrual loans to net loans 0.50% 0.42%
========== ==========
Total non-accrual loans to total assets 0.16% 0.14%
========== ==========
Total non-performing assets to total assets 0.24% 0.23%
========== ==========
Mortgage-Backed Securities Held to Maturity - decreased $21.4 million to $273.5
million at March 31, 2004 from $294.9 million at December 31, 2003. The decrease
is the result of principal paydowns of $20.8 million. Mortgage-backed securities
at March 31, 2004 consisted of $250.6 million in fixed rate securities and $22.9
million in adjustable rate securities. Mortgage-backed securities held to
maturity at March 31, 2004 and December 31, 2003 are summarized below:
March 31, 2004 December 31, 2003
- ------------------------------------------------------------------------ ---------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
- -------- --------------------------------------------------------------- ---------------------------------
GNMA $ 11,995,088 $ 624,772 $ (397) $ 12,619,463 $ 13,948,013 $ 14,684,540
FNMA 180,106,374 4,418,290 (30,231) 184,494,433 194,437,708 197,881,404
FHLMC 81,397,033 1,424,999 (103,347) 82,718,685 86,529,885 87,076,088
- -------- --------------------------------------------------------------- ---------------------------------
Total $ 273,498,495 $ 6,468,061 $ (133,975) $ 279,832,581 $ 294,915,606 $ 299,642,032
======== =============================================================== =================================
9
Deposits - increased $12.9 million to $905.9 million at March 31, 2004 from
$893.0 million at December 31, 2003. Checking accounts increased $8.6 million,
non-interest bearing checking accounts increased $7.4 million, and savings
accounts increased $5.3 million for the three months ended March 31, 2004. These
increases were partially offset by a decrease in certificate of deposit accounts
of $8.6 million during this period. Interest credited to depositors accounts for
the three months ended March 31, 2004 amounted to $1.3 million. The following
table sets forth certain information concerning deposits at the dates indicated.
March 31, 2004 December 31, 2003
- ---------------------------------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
- ---------------------------------------------------------------------------------------------------------------------
Non-interest checking $165,010,048 18.21% 0.00% $157,637,346 17.65% 0.00%
Checking accounts 195,138,158 21.54% 0.55% 186,572,464 20.89% 0.55%
Savings accounts 193,569,457 21.37% 0.56% 188,235,776 21.08% 0.69%
Money market accounts 132,942,303 14.68% 0.65% 132,728,015 14.87% 0.78%
Certificates 219,258,296 24.20% 1.89% 227,832,897 25.51% 2.40%
- ---------------------------------------------------------------------------------------------------------------------
Total Deposits $905,918,262 100.00% 0.81% $893,006,498 100.00% 1.01%
=====================================================================================================================
Borrowings - at March 31, 2004 amounted to $235.0 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 $10.0 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 1.12%. At December 31,
2003, 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 1.56%.
Long-term debt - at March 31, 2004 and December 31, 2003 consisted of $25.8
million of FMS Statutory Trust 1 debentures. The interest rate resets every
three months to LIBOR plus 360 basis points and will not exceed 11.00% through
March 2007. At March 31, 2004 and 2003 the interest rate was 4.71% and 4.89%,
respectively.
RESULTS OF OPERATIONS
General
The earnings of the Corporation depend primarily upon the level of net interest
income, which is the difference between interest earned on its interest-earning
assets such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits including non-interest checking accounts,
long-term debts and borrowings. Net interest income is a function of the
interest rate spread, which is the difference between the weighted average yield
earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing liabilities. Net income is also affected
by non-interest income, such as gains (losses) on the sale of loans and
investments, provision for loan losses and real estate owned, service charges
and other fees, and operating expenses, such as: salaries, employee benefits,
deposit insurance premiums, depreciation, occupancy and equipment expense and
purchased services expense.
The Corporation recorded net income for the three months ended March 31, 2004 of
$2.1 million, or $.32 diluted earnings per share as compared to $1.8 million, or
$.28 diluted earnings per share for the comparable period in 2003.
10
Interest Rate Spread
The Bank's interest income is affected by the difference or "interest rate
spread" between yields received by the Bank on its interest-earning assets and
the interest rates paid by the Bank on its interest-bearing liabilities
including non-interest checking accounts. Net interest income is affected by (i)
the spread between the yield earned on interest-earning assets and the interest
rates paid on interest-bearing savings deposits including non-interest checking
accounts and borrowings (liabilities) and (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities. The Bank's interest
rate spread varies over time because money fund accounts and other flexible rate
accounts have become significant sources of savings deposits. Income from
investment securities and mortgage-backed securities depends upon the amount
invested during the period and the yields earned on such securities. The yield
on loans receivable changes principally as a result of existing mortgage loan
repayments, adjustable rate loan adjustments, sales and the interest rates and
volume of new mortgage loans. The average yields and rates are derived by
dividing income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods presented.
The following table sets forth certain information relating to the Corporation's
average balance sheet and reflects the average yield on assets and average rates
paid on liabilities for the periods indicated. Such yields and rates are derived
by dividing income or expense by the average balance of interest-earning assets
or interest-bearing liabilities, respectively, for the periods presented:
Three Months Ended March 31,
- -----------------------------------------------------------------------------------------------------------------
2004 2003
- -----------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 408,995 $ 6,052 5.92% $ 376,046 $ 6,226 6.62%
Interest-bearing deposits 41,206 105 1.02% 46,127 156 1.35%
Mortgage-backed securities 361,008 3,941 4.37% 391,788 4,536 4.63%
Investment securities 318,363 3,543 4.45% 227,107 2,514 4.43%
-----------------------------------------------------------------------------
Total interest-earning
assets 1,129,572 13,641 4.83% 1,041,068 13,432 5.16%
-----------------------------------------------------------------------------
Interest-bearing liabilities:
Checking deposits 342,684 256 0.30% 288,712 282 0.39%
Savings deposits 189,026 260 0.55% 167,152 419 1.00%
Money market deposits 131,104 213 0.65% 126,227 343 1.09%
Certificates of deposits 222,907 1,051 1.89% 221,978 1,557 2.81%
Borrowings 235,545 2,355 4.00% 236,223 2,342 3.97%
Long-Term Debt 25,774 304 4.72% 25,774 332 5.15%
-----------------------------------------------------------------------------
Total interest-bearing
liabilities $ 1,147,040 4,439 1.55% $ 1,066,066 5,275 1.98%
===========----------------------------===========---------------------------
Net interest income $ 9,202 $ 8,157
======== ========
Interest rate spread 3.28% 3.18%
===== ======
Net yield on average
interest-earning assets 3.26% 3.13%
===== ======
Ratio of average
interest-earning assets
to average interest-bearing
liabilities 98.48% 97.66%
====== ======
11
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 March 31,
2004 vs. 2003
Increase (Decrease) due to Change in:
-------------------------------------
Rate Volume Total
(In Thousands)
-----------------------------
Interest income:
Loans receivable $ (720) $ 546 $ (174)
Interest-bearing deposits (34) (17) (51)
Mortgage-backed securities (239) (356) (595)
Investment securities 19 1,010 1,029
-----------------------------
Total change - interest income (974) 1,183 209
-----------------------------
Interest expense:
Checking deposits (79) 53 (26)
Savings deposits (214) 55 (159)
Money market deposits (143) 13 (130)
Certificates of deposits (513) 7 (506)
Borrowings 20 (7) 13
Long-Term Debt (28) - (28)
-----------------------------
Total change - interest expense (957) 121 (836)
-----------------------------
Net change in net interest income $ (17) $ 1,062 $ 1,045
=============================
12
Net Interest Income - for the three months ended March 31, 2004 totaled $9.2
million. Net interest income for the three months ended March 31, 2004 increased
$1.0 million compared to the same period in 2003 due primarily to an increase in
interest income on investment securities of $1.0 million coupled with decreases
in interest expense on all deposit products of $821 thousand and long term debt
of $28 thousand, partially offset by decreases in interest income on
mortgage-backed securities of $595 thousand and interest income on loans of $174
thousand.
Interest income on investment securities increased $1.0 million to $3.5 million
for the three months ended March 31, 2004 from $2.5 million for the same period
in 2003. The average balance of investment securities increased $91.3 million to
$318.4 million for the three months ended March 31, 2004 from $227.1 million for
the same period in 2003, which resulted in a volume increase in interest income
of $1.0 million. The increase in the average volume during this period is due to
purchases of $411.4 million, partially offset by investment calls and maturities
of $104.8 million and principal paydowns of $222.5 million since March 31, 2003.
The average yield of the investment portfolio increased 2 basis points to 4.45%
for the quarter ended March 31, 2004 from 4.43% for the same period in 2003,
which resulted in an interest income increase of $19 thousand due to rate
changes.
Interest expense on time deposits decreased $506 thousand to $1.1 million for
the three months ended March 31, 2004 from $1.6 million for the same period in
2003. The average rate on time deposits decreased 92 basis points to 1.89% for
the quarter ended March 31, 2004 from 2.81% for the same period in 2003, which
resulted in a decrease in interest expense of $513 thousand. The average balance
of time deposits increased $929 thousand to $222.9 million for the three months
ended March 31, 2004 from $222.0 million for the same period in 2003, which
resulted in a volume increase in interest expense of $7 thousand.
Interest expense on checking deposits decreased $26 thousand to $256 thousand
for the three months ended March 31, 2004 from $282 thousand for the same period
in 2003. The average rate on checking deposits decreased 9 basis points to 0.30%
for the quarter ended March 31, 2004 from 0.39% for the same period in 2003,
which resulted in a decrease in interest expense of $79 thousand. The average
balance of checking deposits increased $54 million to $342.7 million for the
three months ended March 31, 2004 from $288.7 million for the same period in
2003, which resulted in a volume increase in interest expense of $53 thousand.
Interest expense on savings deposits decreased $159 thousand to $260 thousand
for the three months ended March 31, 2004 from $419 thousand for the same period
in 2003. The average rate on savings deposits decreased 45 basis points to 0.55%
for the quarter ended March 31, 2004 from 1.00% for the same period in 2003,
which resulted in a rate decrease in interest expense of $214 thousand. The
average balance of savings deposits increased $21.9 million to $189.0 million
for the quarter ended March 31, 2004 from $167.2 million for the same period in
2003, which resulted in an increase in interest expense of $55 thousand.
Interest expense on money market deposits decreased $130 thousand to $213
thousand for the three months ended March 31, 2004 from $343 thousand for the
same period in 2003. The average rate on money market deposits decreased 44
basis points to 0.65% for the quarter ended March 31, 2004 from 1.09% for the
same period in 2003, which resulted in a decrease in interest expense of $143
thousand. The average balance of money market deposits increased $4.9 million to
$131.1 million for the three months ended March 31, 2004 from $126.2 million for
the same period in 2003, which resulted in a volume increase in interest expense
of $13 thousand.
Interest expense on long term debt decreased $28 thousand to $304 thousand for
the three months ended March 31, 2004 from $332 thousand for the same period in
2003. The average rate decreased 43 basis points to 4.72% for the three months
ended March 31, 2004 from 5.15% for the same period in 2003, which lowered
interest expense on long-term debt $28 thousand due to rate changes.
13
Interest income on mortgage-backed securities ("MBS") decreased by $595 thousand
to $3.9 million for the three months ended March 31, 2004 from $4.5 million for
the same period in 2003. The average balance of MBS's decreased $30.8 million to
$361.0 million for the three months ended March 31, 2004 from $391.8 million for
the same period in 2003, which resulted in an interest income volume decrease of
$356 thosand. The decrease in the average balance during this period was due to
principal paydowns of $175.7 million, partially offset by purchases of MBS's of
$132.0 million from the first quarter of 2003. The average yield of the MBS
portfolio decreased 26 basis points to 4.37% for the quarter ended March 31,
2004 from 4.63% for the same period in 2003, which resulted in an interest
income decrease of $239 thousand due to changes in rates.
Interest income on loans decreased $174 thousand to $6.1 million for the three
months ended March 31, 2004 from $6.2 million for the same period in 2003. The
average rate on loans decreased 70 basis points to 5.92% for the three months
ended March 31, 2004 from 6.62% for the same period in 2003, which resulted in a
decrease in interest income of $720 thousand due to rate changes. The average
balance of the loan portfolio increased $33.0 million to $409.0 million for the
three months ended March 31, 2004 from $376.0 million for the same period in
2003, which resulted in a volume increase in interest income of $546 thousand.
The increase in the average balance is principally due to loan originations of
$171.0 million since the first quarter of 2003, partially offset by principal
collected on loans of $139.3 million during this period.
Interest expense on borrowings increased $13 thousand to $2.4 million for the
three months ended March 31, 2004 from $2.3 million for the same period in 2003.
The average rate paid on borrowings increased 3 basis points to 4.00% for the
quarter ended March 31, 2004 from 3.97% for the same period in 2003, which
resulted in an increase in interest expense of $20 thousand due to rate changes.
The average balance of borrowings decreased $678 thousand to $235.5 million at
March 31, 2004 from $236.2 million for the same period in 2003, which resulted
in a volume decrease in interest expense of $7 thousand.
Critical Accounting Estimate-Provision for Loan Losses - A critical accounting
estimate is the provision for loan losses. The provision increased $15 thousand
to $75 thousand for the three months ended March 31, 2004 from $60 thousand for
the same period in 2003. At March 31, 2004 the allowance for loan losses
amounted to $4.5 million compared to $4.4 million at December 31, 2003. 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.
14
Other Income - for the three month period ended March 31, 2004 was $1.4 million
compared to $1.6 million for the same period in 2003. The decrease from 2003 is
due to the $601 thousand gain on sale of real estate held for development sold
in January 2003, partially offset by a $100 thousand gain on the sale of
investment securities during the quarter ended March 31, 2004.
Operating Expenses - for the three month period ended March 31, 2004 totaled
$7.0 million compared to $6.6 million for the same period in 2003. The increase
in operating expenses was due to an increase in salaries and benefits, occupancy
and equipment and amortization of core deposit intangible.
Salaries and Employee Benefits - for the three month period ended March 31, 2004
were $4.1 million compared to $3.8 million for the same period in 2003. The
increase was primarily due to annual compensation increases and additional staff
in one new branch opened since the first quarter of 2003. Average full time
equivalent employees at March 31, 2004 were 512 as compared to 503 at March 31,
2003.
Occupancy and Equipment- for the three month period ended March 31, 2004 were
$1.4 million compared to $1.3 million for the same period in 2003. This increase
is due to additional depreciation and occupancy expense on the new branch office
opened since the first quarter of 2003.
Amortization of core deposit intangible - for the three month period ended March
31, 2004 totaled $179 thousand. The increase is due to the five year write-off
of the premiums paid to acquire two existing bank branches in Florence and
Tabernacle, NJ in 2003.
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the three months ended March 31, 2004 from
the information presented in the annual report on Form 10-K for the year ended
December 31, 2003.
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
------------------------------------------------
Based on their evaluation of the Corporation's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")), the Corporation's principal executive officer and
principal financial officer have concluded that as of the end of the period
covered by this Quarterly Report on Form 10-Q such disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Corporation in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls over financial reporting.
--------------------------------------------------------
During the quarter under report, there was no change in the Corporation's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
15
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Changes in Securities, Use of Proceeds and Issuer Purchases of
------- ------------------------------------------------------------------
Equity Securities
-----------------
None
Item 3: Defaults Upon Senior Securities
------- -------------------------------
None
Item 4: Submission of Matters to Vote of Security of Holders
------- ----------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
April 29, 2004 and the following matters were presented:
The Election of Directors: Roy D. Yates, George J. Barber and and
Dominic W. Flamini were re-elected as directors for terms of
three years ending 2007 and until their successors are elected
and qualified. Mr. Yates received 5,829,209 votes in favor and
129,738 votes were withheld; Mr. Barber received 5,822,723 votes
in favor and 136,224 votes were withheld; Mr Flamini received
5,904,595 votes in favor and 54,352 were withheld.
Ratification of the appointment of PricewaterhouseCoopers LLP the
Company's auditors for the 2004 fiscal year: Price
WaterhouseCoopers LLP was ratified as the Company's auditors with
5,916,696 votes for, 27,595 votes against and 14,656 abstentions.
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
(a) 31 Certifications pursuant to Section 302 of the
Sarbances-Oxley Act of 2002.
(b) 32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(c) The Company filed a Form 8-K on April 29, 2004 reporting the
Company's earnings for the three months ended March 31,
2004.
16
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: May 12, 2004 /s/Craig W. Yates
-------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2004 /s/Channing L. Smith
-------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)