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 June 30, 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 August 6, 2004 there were issued and outstanding 6,500,960 shares
of the registrant's Common Stock, par value $.10 per
share.
FMS FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------
QUARTERLY REPORT ON FORM 10-Q
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JUNE 30, 2004
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TABLE OF CONTENTS
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Page
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PART I - Financial Information
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Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2004 (unaudited) and December 31, 2003...............1
Consolidated Statements of Operations (unaudited)
for the three and six months ended
June 30, 2004 and June 30, 2003...............................2
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2004
and June 30, 2003.............................................3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the six months ended June 30, 2004 and
June 30, 2003.................................................4
Notes to Consolidated Financial Statements........................5 - 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............6 - 17
Item 3 - Disclosure about Market Risk..........................................18
Item 4 - Controls and Procedures...............................................18
PART II - Other Information
- ---------------------------
Item 1 - Legal Proceedings.....................................................19
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.........................................19
Item 3 - Defaults Upon Senior Securities.......................................19
Item 4 - Submission of Matters to Vote Security of Holders.....................19
Item 5 - Other Information.....................................................19
Item 6 - Exhibits and Reports on Form 8-K......................................19
Signatures.....................................................................20
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
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ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 40,595,523 $ 41,022,232
Interest-bearing deposits 63,291 142,929
Short term funds 53,673,058 31,169,476
------------------ ------------------
Total cash and cash equivalents 94,331,872 72,334,637
Investment securities held to maturity 189,176,335 250,383,262
Investment securities available for sale 169,987,586 149,230,862
Loans, net 419,173,791 402,606,056
Mortgage-backed securities held to maturity 311,266,421 294,915,606
Accrued interest receivable 5,603,511 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 31,188,366 31,429,069
Deferred income taxes 2,034,218 2,043,909
Core deposit intangible 2,950,134 3,308,238
Prepaid expenses and other assets 2,103,730 1,603,294
FMS Statutory Trust 1 issue costs, net 601,233 640,154
------------------- ------------------
TOTAL ASSETS $ 1,240,167,317 $ 1,225,556,749
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 907,516,125 $ 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 2,439,394 2,142,499
Accrued interest payable 1,279,011 1,319,501
Dividends payable 195,029 194,576
Other liabilities 2,605,180 4,098,885
------------------ ------------------
Total liabilities 1,174,808,739 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 7,990,142 and 7,975,059 and shares
outstanding 6,500,960
and 6,485,877 as of June 30, 2004
and December 31, 2003, respectively 799,014 797,506
Paid-in capital in excess of par 8,544,121 8,507,333
Accumulated other comprehensive income - net of deferred income taxes (468,130) 802,239
Retained earnings 67,418,572 63,657,664
Less: Treasury stock (1,489,182 and 1,489,182 shares, at cost, as of
June 30, 2004 and December 31, 2003, respectively) (10,934,999) (10,934,999)
------------------ ------------------
Total stockholders' equity 65,358,578 62,829,743
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,240,167,317 $ 1,225,556,749
================== ==================
See notes to consolidated financial statements.
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months ended Six Months ended
June 30, June 30,
-------------------------------------- -----------------------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest income on:
Loans $ 6,059,107 $ 6,058,727 $ 12,110,883 $ 12,284,453
Mortgage-backed securities 4,072,439 3,770,334 8,013,004 8,306,479
Investments 3,453,157 2,608,387 7,102,094 5,278,711
------------------ ----------------- --------------- --------------
Total interest income 13,584,703 12,437,448 27,225,981 25,869,643
------------------ ----------------- --------------- --------------
INTEREST EXPENSE:
Interest expense on:
Deposits 1,825,981 2,236,527 3,606,190 4,837,741
Borrowings 2,345,984 2,365,150 4,700,898 4,707,350
Long term debt 335,240 327,575 639,038 659,142
------------------ ----------------- --------------- --------------
Total interest expense 4,507,205 4,929,252 8,946,126 10,204,233
------------------ ----------------- --------------- --------------
NET INTEREST INCOME 9,077,498 7,508,196 18,279,855 15,665,410
PROVISION FOR LOAN LOSSES 75,000 60,000 150,000 120,000
------------------ ----------------- --------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,002,498 7,448,196 18,129,855 15,545,410
------------------ ----------------- --------------- --------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 29,932 19,920 59,176 43,734
Gain on sale of real estate held for development, net 0 0 0 600,780
Gain on sale of loans 0 22 1 51
Gain on sale of investment securities 0 222,743 100,056 222,743
Gain on disposal of fixed assets 46,080 0 46,080 (141,151)
Real estate owned operations, net (3,284) 28,035 (4,547) 21,205
Service charges on accounts 1,322,312 1,184,345 2,526,552 2,256,242
Other income 35,180 46,112 64,315 69,465
------------------ ----------------- --------------- --------------
Total other income 1,430,220 1,501,177 2,791,633 3,073,069
------------------ ----------------- --------------- --------------
OPERATING EXPENSES:
Salaries and employee benefits 4,074,148 3,907,795 8,199,780 7,731,197
Occupancy and equipment 1,302,436 1,360,201 2,682,092 2,688,716
Purchased services 748,290 723,733 1,445,012 1,397,758
Federal deposit insurance premiums 33,282 31,386 65,547 63,582
Professional fees 167,895 163,703 333,678 341,419
Advertising 104,063 117,245 216,026 232,856
Amortization of core deposit intangible 179,052 65,757 358,104 65,757
Other 364,166 442,754 701,350 924,915
----------------- ----------------- --------------- --------------
Total operating expenses 6,973,332 6,812,574 14,001,589 13,446,200
----------------- ----------------- --------------- --------------
INCOME BEFORE INCOME TAXES 3,459,386 2,136,799 6,919,899 5,172,279
INCOME TAXES 1,386,729 836,827 2,769,355 2,032,384
----------------- ----------------- --------------- --------------
NET INCOME $ 2,072,657 $ 1,299,972 $ 4,150,544 $ 3,139,895
================= ================= =============== ==============
BASIC EARNINGS PER COMMON SHARE $ 0.32 $ 0.20 $ 0.64 $ 0.49
================== ================= =============== ==============
DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.20 $ 0.64 $ 0.48
================== ================= =============== ==============
Dividends declared per common share $ 0.03 $ 0.03 $ 0.06 $ 0.06
================= ----------------- ---------------- --------------
Weighted average common shares outstanding 6,492,516 6,473,606 6,489,421 6,468,706
Potential dilutive effect of the exercise of stock options 37,920 45,208 38,631 39,763
----------------- ----------------- ---------------- --------------
Adjusted weighted average common shares outstanding 6,530,436 6,518, 14 6,528 052 6,508,469
================= ================= =============== ==============
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Six Months ended
June 30,
-----------------------------------------------
2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 4,150,544 $ 3,139,895
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 150,000 120,000
Amortization and Depreciation 3,920,945 4,069,921
Realized (gains) and losses on:
Sale of loans (1) (51)
Disposal and sale of fixed assets (46,080) 141,151
Sale of investment securities (100,056) (222,743)
Sale of real estate owned (654) (33,432)
Gain on sale of real estate held for development, net
Increase) Decrease in accrued interest receivable (399,763) 133,471
Increase in prepaid expenses and other assets (500,438) (387,106)
Decrease in accrued interest payable (40,490) (86,052)
(Decrease) Increase in other liabilities (648,911) 193,347
Provision for deferred income taxes 9,691 1,066,866
---------------------- --------------------
Net cash provided by operating activities 6,494,787 7,534,487
---------------------- --------------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 18,626 53,203
Real estate held for development 0 688,706
Real estate owned 48,948 332,786
Property and equipment 238,872 149,281
Principal collected and proceeds from maturities of investment
securities held to maturity 61,641,762 103,407,336
Proceeds from maturities of investment securities available for sale 31,714,385 65,468,657
Principal collected on mortgage-backed securities held to maturity 60,467,501 104,979,136
Principal collected on loans, net 46,439,992 52,645,034
Loans originated or acquired, net (63,229,673) (71,889,087)
Purchase of investment securities and mortgage-backed
securities held to maturity (79,100,923) (244,796,070)
Purchase of investment securities and mortgage-backed
securities available for sale (55,127,967) (86,629,780)
Redemption of Federal Home Loan Bank stock 59,500 252,100
Purchase of office property and equipment (933,164) (3,309,486)
Net cash received from deposit purchase, net 0 16,539,246
---------------------- --------------------
Net cash used by investing activities 2,237,859 (62,108,938)
---------------------- --------------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 25,478,605 40,236,760
Net decrease in time deposits (10,968,978) (4,126,312)
Net decrease in FHLB advances (1,191,047) (41,056)
Increase in advances from borrowers for taxes and insurance 296,895 368,327
Purchase of treasury stock 0 (3,224)
Dividends paid on common stock (389,182) (387,828)
Net proceeds from issuance of common stock 38,296 205,000
---------------------- --------------------
Net cash provided by financing activities 13,264,589 36,251,667
---------------------- --------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,997,235 (18,322,784)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 72,334,637 88,410,346
---------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94,331,872 $ 70,087,562
====================== ====================
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 8,986,616 $ 10,290,285
Income taxes 3,918,000 2,255,500
Non-cash investing and financing activities:
Dividends declared and not paid at year end 195,029 194,524
Non-monetary transfers from loans to real estate owned
through foreclosure 0 209,575
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, 2003 6,463,811 $794,981 $ 8,279,525 $ 1,216,053 $ 58,233,840 $(10,886,580) $57,637,819
Net Income 3,139,895 3,139,895
Other comprehensive income
Unrealized loss on securities
available for sale, net of
taxes of $353,419 and
reclassificaton adjustment
of $222,743 (531,454) (531,454)
-----------
Total comprehensive income 2,608,441
-----------
Dividends declared ($.06) (388,438) (388,438)
Exercise of stock options 20,500 2,050 202,950 205,000
Purchase of common stock (171) (3,224) (3,224)
- --------------------------------------------------------------------------------------------------------------------- -----------
Balances at June 30, 2003 6,484,140 $797,031 $ 8,482,475 $ 684,599 $ 60,985,297 $(10,889,804) $60,059,598
- --------------------------------------------------------------------------------------------------------------------- -----------
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 4,150,544 4,150,544
Other comprehensive income
Unrealized gain on securities
available for sale,
net of taxes of ($844,794) (1,270,369) (1,270,369)
-----------
Total comprehensive income 2,880,175
-----------
Dividends declared ($.06) (389,636) (389,636)
Exercise of stock options 15,083 1,508 36,788 38,296
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2004 6,500,960 $799,014 $ 8,544,121 $(468,130) $ 67,418,572 $(10,934,999) $65,358,578
- ----------------------------------------------------------------------------------------------------------------------------------
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED).
1-GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements of FMS Financial Corporation contain all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of its financial
condition, results of operations, cash flows and changes in stockholders' equity
for the periods and dates indicated. The results of operations for the three and
six months ended June 30, 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 year ended December 31, 2003. The consolidated financial statements include
the Corporation's principle subsidiary, Farmers & Mechanics Bank (the "Bank").
2-LONG-TERM DEBT
Long-Term Debt at June 30, 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
June 30, 2004 and 2003 the interest rate was 5.19% and 4.61%, 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 June 30, 2004.
The Bank's regulatory tangible and tier 1 (core) capital ratios are $78.1
million or 6.32% of total bank assets and $82.2 million or 16.63% for risk-based
capital.
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 six months ended June 30,
2004 and 2003.
5
5-PENSION PLAN- The Corporation maintains a defined benefit Pension Plan for
active employees. The Corporation contributed $21 thousand to its Pension Plan
during the six months ended June 30, 2004 and expects to contribute a total of
approximately $826 thousand to its Pension Plan in 2004. The components of the
net pension cost are as follows:
Six Months ended June 30,
- ----------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------
Service cost $ (434,520) $ (358,307)
Interest cost (282,184) (243,193)
Return on assets 316,100 230,728
Net amortization and deferral (6,134) (29,456)
- ----------------------------------------------------------------------
Net periodic pension cost $ (406,738) $ (400,228)
- ----------------------------------------------------------------------
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 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 uncertainties 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.
7
FINANCIAL CONDITION
Total Assets - at June 30, 2004 were $1.24 billion as compared with total assets
at December 31, 2003 of $1.23 billion.
Short Term Funds - increased $22.5 million to $53.7 million at June 30, 2004
from $31.2 million at December 31, 2003 due to cash prepayment of investments.
Investment Securities Held to Maturity - decreased $61.2 million to $189.2
million at June 30, 2004 from $250.4 million at December 31, 2003 primarily due
to a reclassification of securities from pass-thru investments to
mortgage-backed securities (MBS's) held to maturity of $64.9 million, calls of
$30.2 million in U.S. Agency Notes, principal paydowns of $29.5 million in
collateralized mortgage obligations (CMO's) and the maturity of $1.9 million in
municipal bonds, partially offset by purchases of $62.6 million in U.S. Agency
Notes, $1.6 million of CMO's and $1.4 million of municipal bonds during the
period. Investment securities held to maturity at June 30, 2004 consisted of
$189.2 million in fixed rate securities. A comparison of cost and approximate
market values of investment securities held to maturity as of June 30, 2004 and
December 31, 2003 follows:
June 30, 2004 December 31, 2003
- ---------------------------------------------------------------------------------------- ----------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- ---------------------------------------------------------------------------------------- ----------------------------------
U. S. Gov't Agencies $ 104,565,647 $ 414,284 $ (1,423,919) $ 103,556,012 $ 72,256,272 $ 72,994,187
CMO's 82,742,598 116,735 (2,206,442) 80,652,891 175,727,450 175,279,820
Municipal bonds 1,868,090 3,211 0 1,871,301 2,399,540 2,404,563
- ---------------------------------------------------------------------------------------- ----------------------------------
Total $ 189,176,335 $ 534,230 $ (3,630,361) $ 186,080,204 $ 250,383,262 $ 250,678,570
======================================================================================== ==================================
Investment Securities Available for Sale - increased $20.8 million to $170.0
million at June 30, 2004 from $149.2 million at December 31, 2003. The increase
is the result of purchases of $31.0 million of U.S. Agency Notes, $19.0 million
of CMO's and $5.0 million of mortgage-backed securities (MBS's), partially
offset by principal paydowns of $23.9 million of CMO's and MBS's, $2.4 million
of calls of U.S. Agency Notes, sales of $5.3 million of CMO's and MBS's and $2.1
million in market adjustments at June 30, 2004. Investment securities available
for sale consisted of $169.6 million in fixed rate securities and $365 thousand
in adjustable rate securities at June 30, 2004. A comparison of cost and
approximate market values of investment securities available for sale as of June
30, 2004 and December 31, 2003 follows:
June 30, 2004 December 31, 2003
- ------------------------------------------------------------------------------------ ---------------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- ------------------------------------------------------------------------------------- ---------------------------------
U. S. Gov't Agencies $ 41,768,298 $ 0 $ (487,203) $ 41,281,095 $ 13,100,525 $ 13,188,525
CMO's 42,669,606 154,089 (648,997) 42,174,698 48,250,773 48,419,522
MBS's 86,344,371 810,491 (623,069) 86,531,793 86,559,090 87,622,815
- ------------------------------------------------------------------------------------- ---------------------------------
Total $ 170,782,275 $ 964,580 $ (1,759,269) $ 169,987,586 $ 147,910,388 $ 149,230,862
===================================================================================== =================================
8
Loans, net - increased $16.6 million to $419.2 million at June 30, 2004 from
$402.6 million at December 31, 2003. This increase was primarily the result of
$63.2 million of loans originated, partially offset by approximately $46.4
million of principal collected on loans during the six months ended June 30,
2004. The following table shows loans receivable by major categories at the
dates indicated.
June 30, 2004 December 31, 2003
-----------------------------------------------
Mortgage Loans $ 282,982,777 $ 280,663,785
Construction Loans 427,015 1,324,699
Commercial Construction 9,730,113 5,993,838
Consumer Loans 3,041,518 3,186,549
Commercial Real Estate 112,036,765 104,352,118
Commercial Business 16,088,333 12,180,496
-------------------- -----------------------
Subtotal 424,306,521 407,701,485
Less:
Deferred loan fees 574,577 687,877
Allowance for
loan losses 4,558,153 4,407,552
------------------- -----------------------
Total loans, net $ 419,173,791 $ 402,606,056
------------------- -----------------------
At June 30, 2004, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS Nos. 114 and 118 totaled $1.8 million of
which $985 thousand related to loans that were individually measured for
impairment with a valuation allowance of $414 thousand and $793 thousand of
loans that were collectively measured for impairment with a valuation allowance
of $18 thousand. The Bank had $4.6 million in total reserves for loan losses at
June 30, 2004, representing approximately 256% of non-accrual loans and 1.1% of
total loans. For the six months ended June 30, 2004, the average recorded
investment in impaired loans was approximately $2.0 million. The Bank recognized
$66 thousand of interest income on impaired loans for the six months ended June
30, 2004, all of which was recognized on the cash basis.
As of June 30, 2004 the Bank had outstanding loan commitments of $21.0 million,
of which $15.3 million represented variable rate loans and $5.7 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.
June 30, 2004 December 31, 2003
------------------------------------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family 419,948 $ 507,317
Commercial real estate 998,303 1,188,504
Consumer and other 0 0
----------------- ---------------
Total non-accrual loans $ 1,418,251 $ 1,695,821
----------------- ---------------
Troubled debt restructuring $ 810,708 $ 1,027,054
Real estate owned, net 0 48,294
Other non-performing assets 0 0
----------------- ---------------
Total non-performing assets, net $ 2,228,959 $ 2,771,169
----------------- ---------------
Total non-accrual loans to net loans 0.34% 0.42%
================= ===============
Total non-accrual loans to total assets 0.11% 0.14%
================= ===============
Total non-performing assets to total assets 0.18% 0.23%
================= ===============
Mortgage-Backed Securities Held to Maturity - increased $16.4 million to $311.3
million at June 30, 2004 from $294.9 million at December 31, 2003. The increase
is the result of purchases of $13.4 million of pass-thru securities and a
reclassification of $64.9 million of pass-thru securities from investments held
to maturity, partially offset by principal paydowns of $60.5 million.
Mortgage-backed securities at June 30, 2004 consisted of $269.4 million in fixed
rate securities and $41.8 million in adjustable rate securities. Mortgage-backed
securities held to maturity at June 30, 2004 and December 31, 2003 are
summarized below:
June 30, 2004 December 31, 2003
- ------------------------------------------------------------------------------------------ ----------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
- ------------------------------------------------------------------------------------------ ----------------------------------
GNMA $ 10,143,919 $ 431,462 $ (327) $ 10,575,054 $ 13,948,013 $ 14,684,540
FNMA 159,934,626 2,241,570 (1,028,920) 161,147,276 194,437,708 197,881,404
FHLMC 73,082,249 579,814 (1,026,100) 72,635,963 86,529,885 87,076,088
Pass-Thru 68,105,627 414,832 (551,772) 67,968,687 0 0
- ----------------------------------------------------------------------------------------- ----------------------------------
Total $ 311,266,421 $ 3,667,678 $ (2,607,119) $ 312,326,980 $ 294,915,606$ $ 299,642,032
========================================================================================= ==================================
10
Deposits - increased $14.5 million to $907.5 million at June 30, 2004 from
$893.0 million at December 31, 2003. Non-interest bearing checking accounts
increased $13.5 million, savings accounts increased $9.4 million,
interest-bearing checking accounts increased $1.6 million, money market accounts
increased $940 thousand and certificates of deposits decreased $11.0 million for
the six months ended June 30, 2004. Interest credited to depositors accounts for
the six months ended June 30, 2004 amounted to $3.6 million. The following table
sets forth certain information concerning deposits at the dates indicated.
June 30, 2004 December 31, 2003
- ------------------------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
- ------------------------------------------------------------------------------------------------------------
Non-interest checking $171,178,091 18.86% 0.00% $157,637,346 17.65% 0.00%
Checking accounts 188,211,669 20.74% 0.64% 186,572,464 20.89% 0.55%
Savings accounts 197,594,108 21.77% 0.55% 188,235,776 21.08% 0.69%
Money market accounts 133,668,338 14.73% 0.65% 132,728,015 14.87% 0.78%
Certificates 216,863,919 23.90% 1.85% 227,832,897 25.51% 2.40%
- -------------------------------------------------------------------------------------------------------------
Total Deposits $907,516,125 100.00% 0.80% $893,006,498 100.00% 1.01%
=============================================================================================================
Borrowings - at June 30, 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 1.57%. 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 1.78%.
Long-term debt - at June 30, 2004 and December 31, 2003 consisted of $25.0
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 June 30, 2004 and 2003 the interest rate was 5.19% and 4.61%,
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.
11
The Corporation recorded net income for the three months ended June 30, 2004 of
$2.1 million, or $.32 diluted earnings per share as compared to $1.3 million, or
$.20 diluted earnings per share for the comparable period in 2003. The
Corporation recorded net income for the six months ended June 30, 2004 of $4.2
million, or $.64 diluted earnings per share as compared to $3.1 million, or $.48
diluted earnings per share for the comparable period in 2003.
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.
12
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 June 30,
- ----------------------------------------------------------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------- -------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------------- ---------------- -------------- ------------------ --------------- --------------
Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 416,013 $ 6,059 5.83% $ 381,737 $ 6,059 6.35%
Interest-bearing deposit 60,211 151 1.00% 43,540 131 1.20%
Mortgage-backed securities 380,660 4,072 4.28% 367,474 3,770 4.10%
Investment securities 291,120 3,303 4.54% 279,957 2,477 3.54%
---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-earning
assets 1,148,004 13,585 4.73% 1,072,708 12,437 4.64%
---------------- ---------------- -------------- ------------------ --------------- --------------
Interest-bearing liabilities:
Checking deposits 367,215 359 0.39% 306,865 238 0.31%
Savings deposits 197,034 271 0.55% 180,478 300 0.66%
Money Market depsoits 132,194 215 0.65% 91,798 236 1.03%
Time deposit 217,883 981 1.80% 228,478 1,462 2.56%
Borrowings 235,000 2,346 3.99% 236,191 2,365 4.01%
Long-Term Debt 25,774 335 5.20% 25,774 328 5.09%
---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-bearing
liabilities $ 1,175,100 4,507 1.53% $ 1,069,584 4,929 1.84%
================ ---------------- -------------- ================== --------------- --------------
Net interest income $ 9,078 $ 7,508
================ ===============
Interest rate spread 3.20% 2.79%
============== ==============
Net yield on average
interest-earning assets 3.16% 2.80%
============== ==============
Ratio of average interest-
earning assets to average
interest -bearing liabilities 97.69% 100.29%
============== ==============
Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------- -------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------- ---------------- -------------- ------------------ --------------- --------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 412,504 $ 12,111 5.87% $ 378,892 $ 12,284 6.48%
Interest-bearing deposit 38,466 255 1.33% 44,833 287 1.28%
Mortgage-backed securities 372,755 8,013 4.30% 379,631 8,306 4.38%
Investment securities 309,504 6,847 4.42% 253,532 4,992 3.94%
---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-earning
assets 1,133,229 27,226 4.81% 1,056,888 25,869 4.90%
---------------- ---------------- -------------- ------------------ --------------- --------------
Interest-bearing liabilities:
Checking deposits 354,950 615 0.35% 297,788 519 0.35%
Savings deposits 193,030 531 0.55% 173,815 719 0.83%
Money Market depsoits 131,649 428 0.65% 128,593 580 0.90%
Time deposit 220,395 2,032 1.84% 225,228 3,020 2.68%
Borrowings 235,272 4,701 4.00% 236,207 4,707 3.99%
Long-Term Debt 25,774 639 4.96% 25,774 659 5.11%
---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-bearing
liabilities $ 1,161,070 8,946 1.54% $ 1,087,405 10,204 1.88%
================ ---------------- -------------- ================== --------------- --------------
Net interest income $ 18,280 $ 15,665
================ ===============
Interest rate spread 3.26% 3.02%
============== ==============
Net yield on average interest-
earning assets 3.23% 2.96%
============== ==============
Ratio of average interest-
earning assets to average
interest-bearing liabilities 97.60% 97.19%
============== ==============
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 June 30, Six Months Ended June 30,
2004 vs. 2003 2004 vs. 2003
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 $ (544) $ 544 $ - $ (1,263) $ 1,090 $ (173)
Interest-bearing deposits (30) 50 20 9 (41) (32)
Mortgage-backed securities 167 135 302 (143) (150) (293)
Investment securities 727 99 826 753 1,102 1,855
----------------------------------------- ------------------------------------------
Total change - interest income 320 828 1,148 (644) 2,001 1,357
----------------------------------------- ------------------------------------------
Interest expense:
Checking deposits 74 47 121 (4) 100 96
Savings deposit (57) 28 (29) (267) 79 (188)
Money market deposit (125) 104 (21) (166) 14 (152)
Time deposit (413) (68) (481) (923) (65) (988)
Borrowings (7) (12) (19) 13 (19) (6)
Long-Term Debt 7 - 7 (20) - (20)
----------------------------------------- ------------------------------------------
Total change - interest expense (521) 99 (422) (1,367) 109 (1,258)
----------------------------------------- ------------------------------------------
Net change in net interest income $ 841 $ 729 $ 1,570 $ 723 $ 1,892 $ 2,615
========================================= ==========================================
14
Net Interest Income - Net interest income for the three months ended June 30,
2004 increased $1.6 million to $9.1 million compared to $7.5 million for the
same period in 2003 due primarily to increases in interest income on investment
securities of $826 thousand and mortgage-backed securities of $302 thousand and
decreases in interest expense on time deposits of $481 thousand, partially
offset by an increase in interest expense on checking accounts of $121 thousand.
The increase in interest income was primarily the result of an increase in
interest income on investment securities of $826 thousand to $3.3 million for
the three months ended June 30, 2004 from $2.5 million for the same period in
2003. The average yield of the investment portfolio increased 100 basis points
to 4.54% for the quarter ended June 30, 2004 from 3.54% for the same period in
2003, which resulted in an interest income increase of $727 thousand due to rate
changes. The average balance of investment securities increased $11.1 million to
$291.1 million for the three months ended June 30, 2004 from $280.0 million for
the same period in 2003, which resulted in a volume increase in interest income
of $99 thousand.
Interest income on mortgage-backed securities increased $302 thousand to $4.1
million for the three months ended June 30, 2004 from $3.8 million for the same
period in 2003. The average yield of the MBS portfolio increased 18 basis points
to 4.28% for the quarter ended June 30, 2004 from 4.10% for the same period in
2003, which resulted in an interest income increase of $167 thousand due to rate
changes. The average balance of MBS's increased $13.2 million to $380.7 million
for the three months ended June 30, 2004 from $367.5 million for the same period
in 2003, which resulted in an interest income volume increase of $135 thousand.
Interest income on loans remained constant at $6.1 million for the three months
ended June 30, 2004 and 2003. The average rate on loans decreased 52 basis
points to 5.83% for the three months ended June 30, 2004 from 6.35% for the same
period in 2003, which resulted in a decrease in interest income of $544 thousand
due to rate changes. The average balance of the loan portfolio increased $34.3
million to $416.0 million for the three months ended June 30, 2004 from $381.7
million for the same period in 2003, which resulted in a volume increase in
interest income of $544 thousand.
Interest expense on time deposits decreased $481 thousand to $981 thousand for
the three months ended June 30, 2004 from $1.5 million for the same period in
2003. The average rate on time deposits decreased 76 basis points to 1.80% for
the quarter ended June 30, 2004 from 2.56% for the same period in 2003, which
resulted in a decrease in interest expense of $413 thousand. The average balance
of time deposits decreased $10.6 million to $217.9 million for the three months
ended June 30, 2004 from $228.5 million for the same period in 2003, which
resulted in a volume decrease in interest expense of $68 thousand.
Interest expense on checking deposits increased $121 thousand to $359 thousand
for the three months ended June 30, 2004 from $238 thousand for the same period
in 2003. The average rate on checking deposits increased 8 basis points to 0.39%
for the quarter ended June 30, 2004 from 0.31% for the same period in 2003,
which resulted in an increase in interest expense of $74 thousand. The average
balance of checking deposits increased $60.3 million to $367.2 million for the
three months ended June 30, 2004 from $306.9 for the same period in 2003, which
resulted in a volume increase in interest expense of $47 thousand.
15
Net interest income for the six months ended June 30, 2004 increased $2.6
million primarily due to an increase in interest income on investment securities
of $1.8 million and decreases in interest expense on time deposits of $988
thousand, savings deposits of $188 thousand and money market accounts of $152
thousand, partially offset by decreases in interest income on mortgage-backed
securities of $293 thousand and loans of $173 thousand as compared to the same
six month period in 2003.
The increase in interest income on investment securities was due to an increase
in the average yield on the investment portfolio of 48 basis points to 4.42% for
the six months ended June 30, 2004 from 3.94% for the same period in 2003, which
resulted in an increase in interest income of $753 thousand due to interest rate
changes. The average balance of the portfolio increased $56.0 million to $309.5
million for the six months ended June 30, 2004 from $253.5 million for the same
period in 2003, which resulted in a volume increase in interest income of $1.1
million. The increase in the average balance was primarily due to purchases of
$278.2 million, partially offset by investment calls and maturities of $77.4
million, principal paydowns of $132.7 million and a reclassification of
pass-thru investment securities to mortgage-backed securities of $64.9 million.
Interest expense on time deposits decreased $988 thousand to $2.0 million for
the six months ended June 30, 2004 from $3.0 million for the same period in
2003. The average rate on time deposits decreased 84 basis points to 1.84% for
the six months ended June 30, 2004 from 2.68% for the same period in 2003, which
resulted in a decrease in interest expense of $923 thousand. The average balance
of time deposits decreased $4.8 million to $220.4 million for the six months
ended June 30, 2004 from $225.2 million for the same period in 2003, which
resulted in a volume decrease in interest expense of $65 thousand.
Interest expense on savings deposits decreased $188 thousand to $531 thousand
for the six months ended June 30, 2004 from $719 thousand for the same period in
2003. The average rate on savings deposits decreased 28 basis points to 0.55%
for the six months ended June 30, 2004 from 0.83% for the same period in 2003,
which resulted in a decrease in interest expense of $267 thousand. The average
balance of savings deposits increased $19.2 million to $193.0 million for the
six months ended June 30, 2004 from $173.8 million for the same period in 2003,
which resulted in a volume increase in interest expense of $79 thousand.
Interest expense on money market deposits decreased $152 thousand to $428
thousand for the six months ended June 30, 2004 from $580 thousand for the same
period in 2003. The average rate on money market deposits decreased 25 basis
points to 0.65% for the six months ended June 30, 2004 from 0.90% for the same
period in 2003, which resulted in a decrease in interest expense of $166
thousand. The average balance of money market deposits increased $3.0 million to
$131.6 million for the six months ended June 30, 2004 from $128.6 million for
the same period in 2003, which resulted in a volume increase in interest expense
of $14 thousand.
Interest income on mortgage-backed securities decreased $293 thousand for the
six months ended June 30, 2004 to $8.0 million from $8.3 million for the same
period in 2003. The decrease in interest income was due to a decrease in the
average yield on the portfolio of 8 basis points to 4.30% for the six months
ended June 30, 2004 from 4.38% for the same period in 2003, which resulted in a
decrease in interest income of $143 thousand due to interest rate changes. The
average balance of the portfolio decreased $6.8 million to $372.8 million for
the six months ended June 30, 2004 from $379.6 million for the six months ended
June 30, 2004, which resulted in a $150 thousand decrease in interest income.
The decrease in the average balance was due to $126.0 million of principal
paydowns from June 2003 through June 2004, partially offset by a
reclassification of pass-thru investment securities to mortgage-backed
securities of $64.9 million and purchases during this period of $18.4 million.
16
The decrease in interest income on loans was due to a decrease in the average
yield on loans of 61 basis points to 5.87% for the six months ended June 30,
2004 from 6.48% for the same period in 2003, which resulted in a decrease in
interest income of $1.3 million due to rate changes. The average balance of
loans increased $33.6 million to $412.5 million for the six months ended June
30, 2004 from $378.9 million for the six months ended June 30, 2003, which
resulted in a $1.1 million volume increase in interest income. The increase in
the average balance is primarily due to an increase in loan originations.
Critical Accounting Estimate-Provision for Loan Losses - A critical accounting
estimate is the provision for loan losses which increased $30 thousand to $150
thousand for the six months ended June 30, 2004 from $120 thousand for the same
period in 2003. At June 30, 2004 the allowance for loan losses amounted to $4.6
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.
Other Income - for the three and six month periods ended June 30, 2004 was $1.4
million and $2.8 million, respectively, as compared to $1.5 million and $3.1
million for the same periods in 2003. The decrease was primarily due to a $601
thousand gain on the sale of real estate held for development sold in January
2003, partially offset by a $270 thousand increase in service charges on
accounts for the six months ended June 30, 2004.
Salaries and Employee Benefits - for the three and six month periods ended June
30, 2004 were $4.1 million and $8.2 million, respectively, as compared to $3.9
million and $7.7 million for the same period in 2003. The increase is due to
annual compensation increases and $118 thousand increase in health insurance
cost for the six months ended June 30, 2004. Average full time equivalent
employees at June 30, 2004 were 525 as compared to 533 at June 30, 2003.
Purchased Services - for the three and six month periods ended June 30, 2004
totaled $748 thousand and $1.4 million, as compared to $724 thousand and $1.4
million for the same periods in 2003. Check processing costs increased $23
thousand for the six months ended June 30, 2004 compared to the same period in
2003 due to higher transaction volume.
17
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the six months ended June 30, 2004 from
the information presented in the annual report on Form 10-K for the year ended
December 31, 2003.
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 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 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.
18
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
----------------------------------------------------
None
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) 31 Certifications pursuant to Section 302 of the
Sarbanes-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 July 28, 2004
reporting the Company's earnings for the six months
ended June 30, 2004.
19
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: August 9, 2004 /s/ Craig W. Yates
------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2004 /s/ Channing L. Smith
---------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
20