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, 2005
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 6, 2005 there were issued and outstanding 6,502,505 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, 2005
TABLE OF CONTENTS
Page
----
PART I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2005 (unaudited) and December 31, 2004 1
Consolidated Statements of Operations (unaudited)
for the three months ended
March 31, 2005 and March 31, 2004 2
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2005
and March 31, 2004 3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the three months ended March 31, 2005 and
March 31, 2004 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 16
Item 3 - Disclosure about Market Risk 16
Item 4 - Controls and Procedures 16
PART II - Other Information
Item 1 - Legal Proceedings 17
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits 17
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 55,946,208 $ 46,410,744
Interest-bearing deposits 141,792 30,950
Short term funds 65,836,026 64,135,662
--------------- ---------------
Total cash and cash equivalents 121,924,026 110,577,356
Investment securities held to maturity 227,753,915 254,833,749
Investment securities available for sale 168,113,061 141,999,280
Mortgage-backed securities held to maturity 253,151,834 269,221,897
Loans, net 421,969,540 418,798,633
Accrued interest receivable 5,574,402 6,322,107
Federal Home Loan Bank stock 8,750,020 10,250,120
Office properties and equipment, net 30,732,971 30,747,227
Deferred income taxes 2,224,261 2,150,442
Core deposit intangible 2,412,978 2,592,030
Prepaid expenses and other assets 2,642,891 2,513,224
--------------- ---------------
TOTAL ASSETS $ 1,245,249,899 $ 1,250,006,065
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 965,279,204 $ 941,506,820
Securities sold under agreements to repurchase 165,000,000 195,000,000
Advances from the Federal Home Loan Bank 10,000,000 10,000,000
FMS Statutory Trust 1 debentures 25,774,000 25,774,000
Advances by borrowers for taxes and insurance 2,316,845 2,200,357
Accrued interest payable 1,127,216 1,246,661
Dividends payable 195,069 195,029
Other liabilities 4,603,263 3,746,579
--------------- ---------------
Total liabilities 1,174,295,597 1,179,669,446
--------------- ---------------
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 7,991,482 and 7,991,292 and shares outstanding 6,502,300
and 6,502,110 as of March 31, 2005 and December 31, 2004, respectively 799,148 799,129
Paid-in capital in excess of par 8,681,602 8,555,506
Accumulated comprehensive income - net of taxes (743,779) 270,784
Retained earnings 73,152,330 71,646,199
Less: Treasury stock (1,489,182 shares, at cost, as of March 31, 2005
and December 31, 2004) (10,934,999) (10,934,999)
--------------- ---------------
Total stockholders' equity 70,954,302 70,336,619
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,245,249,899 $ 1,250,006,065
=============== ===============
See notes to consolidated financial statements.
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------
Three Months ended
March 31,
---------------------------
2005 2004
- -------------------------------------------------------------------------------------------------
(Unaudited)
INTEREST INCOME:
Interest income on:
Loans $ 6,188,264 $ 6,051,776
Mortgage-backed securities 3,726,015 3,940,565
Investments 4,088,509 3,648,937
------------ ------------
Total interest income 14,002,788 13,641,278
------------ ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 2,403,790 1,780,209
Borrowings 2,154,778 2,354,914
Long-term debt 408,499 303,798
------------ ------------
Total interest expense 4,967,067 4,438,921
------------ ------------
NET INTEREST INCOME 9,035,721 9,202,357
PROVISION FOR LOAN LOSSES 90,000 75,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,945,721 9,127,357
------------ ------------
NON-INTEREST INCOME:
Loan service charges and other fees 17,180 29,244
Gain on sale of investment securities 0 100,056
Real estate owned operations, net 0 (1,263)
Service charges on accounts 1,268,002 1,204,240
Other income 36,882 29,136
------------ ------------
Total non-interest income 1,322,064 1,361,413
------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,376,028 4,125,632
Occupancy and equipment 1,436,536 1,379,656
Purchased services 697,183 696,722
Federal deposit insurance premiums 32,139 32,265
Professional fees 187,250 165,783
Advertising 108,818 111,963
Amortization of core deposit intangible 179,052 179,052
Other 365,134 337,184
------------ ------------
Total non-interest expenses 7,382,140 7,028,257
------------ ------------
INCOME BEFORE INCOME TAXES 2,885,645 3,460,513
INCOME TAXES 1,184,411 1,382,626
------------ ------------
NET INCOME $ 1,701,234 $ 2,077,887
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.26 $ 0.32
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.26 $ 0.32
============ ============
Dividends per common share $ 0.03 $ 0.03
============ ============
Weighted average common shares outstanding 6,502,223 6,486,325
Potential dilutive effect of the exercise of stock options 38,668 41,033
------------ ------------
Adjusted weighted average common shares outstanding 6,540,891 6,527,358
============ ============
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months ended
March 31,
2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES:
Net income $ 1,701,234 $ 2,077,887
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 90,000 75,000
Amortization and accretion of premiums and discounts on investments, net 601,182 1,275,256
Amortization and other fees and costs 209,436 215,969
Depreciation 496,416 490,654
Realized (gains) and losses on:
Sale of loans and loans held for sale of fixed assets 0 (1)
Disposal and sale of fixed assets 115 0
Sale of investment securities 0 (100,056)
Sale of real estate owned 0 (654)
Decrease (increase) in accrued interest receivable 747,705 (454,190)
Increase in prepaid expenses and other assets (149,128) (768,244)
Decrease in accrued interest payable (119,445) (67,935)
Increase in other liabilities 1,557,358 924,806
(Benefit) Provision for deferred income taxes (73,819) (78,163)
------------- -------------
Net cash provided by operating activities 5,061,054 3,590,329
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 0 15,301
Real estate owned 0 48,948
Principal collected and proceeds from maturities of investment securities held to maturity 182,464,599 32,485,161
Proceeds from maturities of investment securities available for sale 12,252,427 16,577,021
Principal collected on mortgage-backed securities held to maturity 15,700,055 20,763,373
Principal collected on loans, net 19,817,106 25,135,645
Loans originated or acquired, net (23,088,936) (27,955,402)
Purchase of investment securities and mortgage-backed securities held to maturity (155,443,243) (50,184,757)
Purchase of investment securities and mortgage-backed securities available for sale (40,254,142) (26,138,938)
Redemption of Federal Home Loan Bank stock 1,500,100 59,500
Purchase of office property and equipment (482,274) (380,585)
------------- -------------
Net cash provided (used) by investing activities 12,465,692 (9,574,733)
------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 26,545,130 21,486,365
Net decrease in time deposits (2,772,746) (8,574,601)
Net decrease in FHLB advances 0 (1,191,047)
(Repayment) Proceeds from securities sold under agreement to repurchase (30,000,000) 0
Increase in advances from borrowers for taxes and insurance 116,488 154,412
Dividends paid on common stock (195,063) (194,576)
Net proceeds from issuance of common stock 126,115 10,000
------------- -------------
Net cash (used) provided by financing activities (6,180,076) 11,690,553
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 11,346,670 5,706,149
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 110,577,356 72,334,637
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 121,924,026 $ 78,040,786
============= =============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 5,086,512 $ 4,506,856
Income taxes 75,000 1,050,000
Non-cash investing and financing activities:
Dividends declared and not paid at quarter end 195,103 194,606
Investments purchased and not yet settled 0 10,000,000
See notes to consolidated financial statements.
3
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital income (loss) earnings stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 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
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 6,502,110 $799,129 $ 8,555,506 $ 270,784 $71,646,199 $(10,934,999) $70,336,619
Net Income 1,701,234 1,701,234
Other comprehensive income
Unrealized loss on
securities available
for sale, net of taxes
of $700,674 (1,014,563) (1,014,563)
-----------
Total comprehensive income 686,671
-----------
Dividends declared ($.03) (195,103) (195,103)
Exercise of stock options 190 19 126,096 126,115
--------------------------------------------------------------------------------------------------
Balances at March 31, 2005 6,502,300 $799,148 $ 8,681,602 $ (743,779) $73,152,330 $(10,934,999) $70,954,302
- ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 (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, 2005 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, 2004. The 2004 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, 2005 and December 31, 2004 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, 2005 and 2004 the interest rate was 6.69% and 4.71%,
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, 2005.
The Bank's regulatory tangible and tier 1 (core) capital ratios are $83.3
million, or 6.70% of total bank assets, and $87.0 million or 16.70% for
risk-based capital. FMS's consolidated capital ratio at March 31, 2005 totaled
5.70%.
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, 2005 and 2004.
5-PENSION PLAN
The Corporation maintains a defined benefit Pension Plan for active employees.
The Corporation expects to contribute approximately $986 thousand to our pension
plan in 2005 and has contributed $205 thousand during the three months ended
March 31, 2005. The components of the net pension cost are as follows:
Three Months ended March 31,
----------------------------
2005 2004
---- ----
Service cost $ 230,355 $ 217,760
Interest cost 170,627 141,092
Return on assets (203,406) (158,050)
Net amortization and deferral 1,027 3,067
--------- ---------
Net periodic pension cost $ 198,603 $ 203,869
========= =========
5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005.
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, 2005 were $1.2 billion as compared with total assets
at December 31, 2004 of $1.3 billion.
Investment Securities Held to Maturity - decreased $27.0 million to $227.8
million at March 31, 2005 from $254.8 million at December 31, 2004 primarily due
to calls of $65.4 million in U.S. Agency Notes, principal paydowns of $6.1
million in CMO's and the maturity of $1.0 million of Municipal Bonds, partially
offset by purchases of $20.0 million of U.S. Agency Notes, $5.5 million of
Municipal Bonds and a net increase of $20.0 million of Repurchase Agreements in
the first quarter of 2005. Investment securities held to maturity at March 31,
2005 consisted of $227.8 million in fixed rate securities. A comparison of cost
and approximate market values of investment securities held to maturity as of
March 31, 2005 and December 31, 2004 follows:
March 31, 2005 December 31, 2004
- ---------------------------------------------------------------------------------- ----------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- ---------------------------------------------------------------------------------- ----------------------------
Repurchase Agreements $ 20,000,000 $ 0 $ 0 $ 20,000,000 $ 0 $ 0
U. S. Agency Notes 118,883,481 43,840 (1,284,217) 117,643,104 164,381,425 164,033,241
CMO's 81,302,796 45,070 (1,578,969) 79,768,897 87,413,111 86,773,600
Municipal bonds 7,567,638 3,270 0 7,570,908 3,039,213 3,043,454
- ---------------------------------------------------------------------------------- ---------------------------
Total $227,753,915 $ 92,180 $ (2,863,186) $224,982,909 $254,833,749 $253,850,295
================================================================================== ===========================
Investment Securities Available for Sale - increased $26.1 million to $168.1
million at March 31, 2005 from $142.0 million at December 31, 2004. The increase
is the result of purchases of $15.5 million of Governmental Bonds, $14.8 million
of U.S. Agency Notes, $5.0 million of CMO's and $5.0 million of mortgage-backed
securities, partially offset by principal paydowns of $7.1 million of CMO's and
MBS's and $5.2 million in calls of U.S. Agency Notes in the first quarter of
2005. Investment securities available for sale consisted of $147.4 million in
fixed rate securities and $20.7 million in adjustable rate securities at March
31, 2005. A comparison of cost and approximate market values of investment
securities available for sale as of March 31, 2005 and December 31, 2004
follows:
March 31, 2005 December 31, 2004
- -------------------------------------------------------------------------------- ---------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- -------------------------------------------------------------------------------- ---------------------------
Governmental Bonds $ 15,475,000 $ 0 $ 0 $ 15,475,000 $ 0 $ 0
U. S. Agency Notes 40,114,655 0 (589,254) 39,525,401 30,537,053 30,316,735
CMO's 39,255,549 6,731 (585,459) 38,676,821 37,677,754 37,601,576
MBS's 74,525,303 348,414 (437,878) 74,435,839 73,326,684 74,080,969
- -------------------------------------------------------------------------------- ---------------- ----------
Total $169,370,507 $ 355,145 $ (1,612,591) $168,113,061 $141,541,491 $141,999,280
================================================================================ ================= ==========
7
Mortgage-Backed Securities Held to Maturity - decreased $16.0 million to $253.2
million at March 31, 2005 from $269.2 million at December 31, 2004. The decrease
is the result of principal paydowns of $15.7 million in the first quarter of
2005. Mortgage-backed securities at March 31, 2005 consisted of $219.1 million
in fixed rate securities and $34.0 million in adjustable rate securities. A
comparison of cost and approximate market values of mortgage-backed securities
as of March 31, 2005 and December 31, 2004 follows:
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------- ----------------------------
Gross Gross Estimated Estimated
Amortized Unrealized Unrealized Market Amortized Market
Cost Gains Losses Value Cost Value
- ----------------------------------------------------------------------- ----------------------------
GNMA $ 6,816,797 $ 320,493 $ (135) $ 7,137,155 $ 7,598,918 $ 7,975,978
FNMA 127,169,919 1,701,441 (684,788) 128,186,572 136,076,364 138,720,205
FHLMC 59,510,021 518,275 (658,541) 59,369,755 63,157,460 63,710,920
Pass Thru 59,655,097 78,728 (1,011,862) 58,721,963 62,389,155 62,119,115
- ----------------------------------------------------------------------- ----------------------------
Total $253,151,834 $ 2,618,937 $ (2,355,326) $253,415,445 $269,221,897 $272,526,218
======================================================================= ============================
The following table shows the gross unrealized losses and fair value of the
Bank's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in continuous unrealized loss position
at March 31, 2005:
Less Than 12 Months 12 Months or Greater Total
-------------------------------------------------------------------------------------------
Unrealized Unrealized Unrealized
Description of Security Fair Value Losses Fair Value Losses Fair Value Losses
- ---------------------------------------------------------------------------------------------------------------------
Available for Sale:
- -------------------
U.S. Agency Notes $ 39,525,401 $ (589,254) $ 0 $ 0 $ 39,525,401 $ (589,254)
CMO's 26,757,507 (398,336) 4,330,421 (187,123) 31,087,928 (585,459)
MBS's 25,356,267 (286,797) 7,551,521 (151,081) 32,907,788 (437,878)
------------ ------------ ------------ ------------ ------------ ------------
Total Available for Sale 91,639,175 (1,274,387) 11,881,942 (338,204) 103,521,117 (1,612,591)
------------ ------------ ------------ ------------ ------------ ------------
Held to Maturity:
- -----------------
U.S. Agency Notes 98,709,697 (1,047,313) 10,216,506 (236,904) 108,926,203 (1,284,217)
CMO's 36,943,573 (592,819) 35,057,586 (986,150) 72,001,159 (1,578,969)
MBS's 103,768,932 (1,369,167) 40,913,729 (986,159) 144,682,661 (2,355,326)
------------ ------------ ------------ ------------ ------------ ------------
Total Held to Maturity 239,422,202 (3,009,299) 86,187,821 (2,209,213) 325,610,023 (5,218,512)
------------ ------------ ------------ ------------ ------------ ------------
Total $331,061,377 $ (4,283,686) $ 98,069,763 $ (2,547,417) $429,131,140 $ (6,831,103)
============ ============ ============ ============ ============ ============
8
Loans, net - increased $3.2 million to $422.0 million at March 31, 2005 from
$418.8 million at December 31, 2004. This increase was primarily the result of
$23.1 million of loans originated, partially offset by approximately $19.8
million of principal collected on loans during the three months ended March 31,
2005. The following table shows loans receivable by major categories at the
dates indicated.
March 31, December 31,
2005 2004
- ---------------------------------------------------------------------
Mortgage Loans $ 275,986,354 $ 275,842,765
Construction Loans 405,967 897,264
Commercial Construction 11,742,995 11,971,241
Consumer Loans 2,602,940 2,471,624
Commercial Real Estate 119,034,542 116,380,045
Commercial Business 17,284,842 16,311,618
- ---------------------------------------------------------------------
Subtotal 427,057,640 423,874,557
- ---------------------------------------------------------------------
Less:
Deferred loan fees 298,003 356,732
Allowance for
loan losses 4,790,097 4,719,192
- ---------------------------------------------------------------------
Total loans, net $ 421,969,540 $ 418,798,633
- ---------------------------------------------------------------------
At March 31, 2005, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $1.7 million of
which $985 thousand related to loans that were individually measured for
impairment with a valuation allowance of $414 thousand and $745 thousand of
loans that were collectively measured for impairment with a valuation allowance
of $17 thousand. The Bank had $4.8 million in total reserves for loan losses at
March 31, 2005, representing approximately 200% of non-performing assets and
1.1% of total loans. For the three months ended March 31, 2005, the average
recorded investment in impaired loans was approximately $1.7 million. The Bank
recognized $20 thousand of interest income on impaired loans for the three
months ended March 31, 2005, all of which was recognized on the cash basis.
As of March 31, 2005 the Bank had outstanding loan commitments of $15.5 million,
of which $8.9 million represented variable rate loans and $6.6 million
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled amortization of loans and mortgage-backed securities, additional
borrowings, and if necessary, the sale of investment securities available for
sale.
9
Non-Performing Assets - The following table sets forth information regarding
non-accrual loans, troubled debt restructured and real estate owned assets by
the Bank.
March 31, December 31,
2005 2004
----------- -------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 745,285 $ 819,076
Commercial real estate 984,924 984,924
---------- ----------
Total non-accrual loans $1,730,209 $1,804,000
---------- ----------
Troubled debt restructuring $ 668,818 $ 718,047
Real estate owned, net 0 0
---------- ----------
Total non-performing assets, net $2,399,027 $2,522,047
---------- ----------
Total non-accrual loans to net loans 0.41% 0.43%
========== ==========
Total non-accrual loans to total assets 0.14% 0.14%
========== ==========
Total non-performing assets to total assets 0.19% 0.20%
========== ==========
Deposits - increased $23.8 million to $965.3 million at March 31, 2005 from
$941.5 million at December 31, 2004. Non-interest checking accounts increased
$18.6 million, savings accounts increased $6.5 million and checking accounts
increased $2.3 million for the three months ended March 31, 2005. These
increases were partially offset by a decrease in certificate of deposit accounts
of $2.8 million during this period. Interest credited to depositors accounts for
the three months ended March 31, 2005 amounted to $1.4 million. The following
table sets forth certain information concerning deposits at the dates indicated.
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
- ----------------------------------------------------------------------------------------------------------------
Non-interest checking $194,733,218 20.17% 0.00% $176,047,722 18.70% 0.00%
Checking accounts 216,365,133 22.41% 1.50% 214,059,142 22.74% 0.55%
Savings accounts 201,622,665 20.89% 0.58% 195,039,302 20.71% 0.86%
Money market accounts 144,582,614 14.98% 0.80% 145,612,332 15.47% 0.72%
Certificates 207,975,574 21.55% 2.00% 210,748,322 22.38% 1.82%
- ----------------------------------------------------------------------------------------------------------------
Total Deposits $965,279,204 100.00% 1.04% $941,506,820 100.00% 0.84%
================================================================================================================
10
Borrowings - at March 31, 2005 amounted to $175.0 million. Borrowings consisted
of $165.0 million in securities sold under the agreement to repurchase with a
weighted average interest rate of 4.90% and $10.0 million in Federal Home Loan
Bank Advances with a weighted average interest rate of 3.07%. At December 31,
2004, borrowings consisted of $195.0 million in securities sold under agreements
to repurchase with a weighted average rate of 4.49%, and $10.0 million in
Federal Home Loan Bank Advances with a weighted average interest rate of 2.53%.
Long-term debt - at March 31, 2005 and December 31, 2004 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, 2005 and 2004 the interest rate was 6.69% and 4.71%,
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, 2005 of
$1.7 million, or $.26 diluted earnings per share as compared to $2.1 million, or
$.32 diluted earnings per share for the comparable period in 2004.
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 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.
11
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:
Year-to-Date Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans $ 426,983 $ 6,188 5.80% $ 408,995 $ 6,052 5.92%
Interest-bearing deposits 54,859 315 2.30% 41,206 105 1.02%
Mortgage-backed securities 328,965 3,726 4.53% 361,008 3,941 4.37%
Investment securities 332,657 3,774 4.54% 318,363 3,543 4.45%
--------------------------------------------------------------------------------------
Total interest-earning
assets 1,143,464 14,003 4.90% 1,129,572 13,641 4.83%
--------------------------------------------------------------------------------------
Interest-bearing liabilities:
Checking deposits 386,170 797 0.83% 342,684 256 0.30%
Savings deposits 196,190 286 0.58% 189,026 260 0.55%
Money market deposits 144,194 284 0.79% 131,104 213 0.65%
Time deposits 210,504 1,036 1.97% 222,907 1,051 1.89%
Borrowings 187,273 2,155 4.60% 235,545 2,355 4.00%
Long-term Debt 25,774 409 6.35% 25,774 304 4.72%
--------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 1,150,105 4,967 1.73% $ 1,147,040 4,439 1.55%
============-------------------------=======================--------------------------
Net interest income $ 9,036 $ 9,202
======== ========
Interest rate spread 3.17% 3.28%
========= =========
Net yield on average interest-earning assets 3.16% 3.26%
========= =========
Ratio of average interest-earning assets
to average interest-bearing liabilities 99.42% 98.48%
========= =========
12
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rate, (ii) changes in volume and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). A higher level of non-performing loans affects the
changes in both volume and rate.
Three Months Ended March 31,
2005 vs. 2004
Increase (Decrease) due to Change in:
-------------------------------------
Rate Volume Total
(In Thousands)
------------------------------
Interest income:
Loans $ (130) $ 266 $ 136
Interest-bearing deposits 175 35 210
Mortgage-backed securities 135 (350) (215)
Investment securities 72 159 231
------- ------- -------
Total change - interest income 252 110 362
------- ------- -------
Interest expense:
Checking deposits 509 32 541
Savings deposits 16 10 26
Money market deposits 50 21 71
Time deposits 43 (58) (15)
Borrowings 283 (483) (200)
Long-Term Debt 105 0 105
------- ------- -------
Total change - interest expense 1,006 (478) 528
------- ------- -------
Net change in net interest income $ (754) $ 588 $ (166)
======= ======= =======
Net Interest Income - for the three months ended March 31, 2005 totaled $9.0
million. Net interest income for the three months ended March 31, 2005 decreased
$166 thousand compared to the same period in 2004 due primarily to increases in
interest expense on checking deposits of $541 thousand, money market deposits of
$71 thousand, savings deposits of $26 thousand and long-term debt of $105
thousand coupled with a decrease in interest income on mortgage-backed
securities of $215 thousand, partially offset by an increase in interest income
on investment securities of $231 thousand, interest-bearing deposits of $210
thousand, loans of $136 thousand and a decrease in interest expense on
borrowings of $200 thousand and time deposits of $15 thousand.
13
Interest income on mortgage-backed securities decreased by $215 thousand to $3.7
million for the three months ended March 31, 2005 from $3.9 million for the same
period in 2004. The average balance of MBS's decreased $32.0 million to $329.0
million for the three months ended March 31, 2005 from $361.0 million for the
same period in 2004, which resulted in an interest income volume decrease of
$350 thousand. The decrease in the average balance during this period was due to
principal paydowns of $80.8 million, partially offset by purchases of MBS's of
$13.4 million from the first quarter of 2004. The average yield of the MBS
portfolio increased 16 basis points to 4.53% for the quarter ended March 31,
2005 from 4.37% for the same period in 2004, which resulted in an interest
income increase of $135 thousand due to changes in rates.
Interest expense on checking deposits increased $541 thousand to $797 thousand
for the three months ended March 31, 2005 from $256 thousand for the same period
in 2004. The average rate on checking deposits increased 53 basis points to
0.83% for the quarter ended March 31, 2005 from 0.30% for the same period in
2004, which resulted in an increase in interest expense of $509 thousand. This
increase was due to an increase in the average rate paid on municipal government
checking accounts to 3.03% for the three months ended March 31, 2005 from 1.19%
for the same period in 2004. The average balance of checking deposits increased
$43.5 million to $386.2 million for the three months ended March 31, 2005 from
$342.7 million for the same period in 2004, which resulted in a volume increase
in interest expense of $32 thousand.
Interest expense on savings deposits increased $26 thousand to $286 thousand for
the three months ended March 31, 2005 from $260 thousand for the same period in
2004. The average rate on savings deposits increased 3 basis points to 0.58% for
the quarter ended March 31, 2005 from 0.55% for the same period in 2004, which
resulted in a rate increase in interest expense of $16 thousand. The average
balance of savings deposits increased $7.2 million to $196.2 million for the
quarter ended March 31, 2005 from $189.0 million for the same period in 2004,
which resulted in an increase in interest expense of $10 thousand.
Interest expense on money market deposits increased $71 thousand to $284
thousand for the three months ended March 31, 2005 from $213 thousand for the
same period in 2004. The average rate on money market deposits increased 14
basis points to 0.79% for the quarter ended March 31, 2005 from 0.65% for the
same period in 2004, which resulted in an increase in interest expense of $50
thousand. The average balance of money market deposits increased $13.1 million
to $144.2 million for the three months ended March 31, 2005 from $131.1 million
for the same period in 2004, which resulted in a volume increase in interest
expense of $21 thousand.
Interest expense on long term debt increased $105 thousand to $409 thousand for
the three months ended March 31, 2005 from $304 thousand for the same period in
2004. The average rate increased 163 basis points to 6.35% for the three months
ended March 31, 2005 from 4.72% for the same period in 2004, which increased
interest expense on long-term debt $105 thousand due to rate changes.
Interest income on investment securities increased $231 thousand to $3.8 million
for the three months ended March 31, 2005 from $3.5 million for the same period
in 2004. The average balance of investment securities increased $14.3 million to
$332.7 million for the three months ended March 31, 2005 from $318.4 million for
the same period in 2004, which resulted in a volume increase in interest income
of $159 thousand. The increase in the average volume during this period is due
to purchases of $286.4 million, partially offset by investment calls and
maturities of $198.5 million and principal paydowns of $79.8 million since March
31, 2004. The average yield of the investment portfolio increased 9 basis points
to 4.54% for the quarter ended March 31, 2005 from 4.45% for the same period in
2004, which resulted in an interest income increase of $72 thousand due to rate
changes.
14
Interest income on interest-bearing deposit investments increased $210 thousand
to $315 thousand for the three months ended March 31, 2005 from $105 thousand
for the same period in 2004. The average yield of interest-bearing deposit
investments increased 128 basis points to 2.30% for the quarter ended March 31,
2005 from 1.02% for the same period in 2004, which resulted in an interest
income increase of $175 thousand due to rate changes. The average balance of
interest-bearing deposit investments increased $13.7 million to $54.9 million
for the three months ended March 31, 2005 from $41.2 million for the same period
in 2004, which resulted in a volume increase in interest income of $35 thousand.
Interest income on loans increased $136 thousand to $6.2 million for the three
months ended March 31, 2005 from $6.1 million for the same period in 2004. The
average balance of the loan portfolio increased $18.0 million to $427.0 million
for the three months ended March 31, 2005 from $409.0 million for the same
period in 2004, which resulted in a volume increase in interest income of $266
thousand. The increase in the average balance is principally due to loan
originations of $121.8 million since the first quarter of 2004, partially offset
by principal collected on loans of $104.8 million during this period. The
average rate on loans decreased 12 basis points to 5.80% for the three months
ended March 31, 2005 from 5.92% for the same period in 2004, which resulted in a
decrease in interest income of $130 thousand due to rate changes.
Interest expense on borrowings decreased $200 thousand to $2.2 million for the
three months ended March 31, 2005 from $2.4 million for the same period in 2004.
The average balance of borrowings decreased $48.2 million to $187.3 million at
March 31, 2005 from $235.5 million for the same period in 2004, which resulted
in a volume decrease in interest expense of $483 thousand. The average rate paid
on borrowings increased 60 basis points to 4.60% for the quarter ended March 31,
2005 from 4.00% for the same period in 2004, which resulted in an increase in
interest expense of $283 thousand due to rate changes.
Interest expense on time deposits decreased $15 thousand to $1.0 million for the
three months ended March 31, 2005 from $1.1 million for the same period in 2004.
The average balance of time deposits decreased $12.4 million to $210.5 million
for the three months ended March 31, 2005 from $222.9 million for the same
period in 2004, which resulted in a volume decrease in interest expense of $58
thousand. The average rate on time deposits increased 8 basis points to 1.97%
for the quarter ended March 31, 2005 from 1.89% for the same period in 2004,
which resulted in an increase in interest expense of $43 thousand.
Critical Accounting Estimate-Provision for Loan Losses - A critical accounting
estimate is the provision for loan losses. The provision increased $15 thousand
to $90 thousand for the three months ended March 31, 2005 from $75 thousand for
the same period in 2004. At March 31, 2005 the allowance for loan losses
amounted to $4.8 million compared to $4.7 million at December 31, 2004. 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
15
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 month period ended March 31, 2005 was $1.3 million
compared to $1.4 million for the same period in 2004. The decrease from 2004 is
due to the absence of a $100 thousand gain on the sale of investment securities
that occurred in the first quarter ended March 31, 2004.
Operating Expenses - for the three month period ended March 31, 2005 totaled
$7.4 million compared to $7.0 million for the same period in 2004. The increase
in operating expenses was primarily due to an increase in salaries and benefits
and occupancy and equipment.
Salaries and Employee Benefits - for the three month period ended March 31, 2005
were $4.4 million compared to $4.1 million for the same period in 2004. The
increase was primarily due to annual compensation increases and additional staff
in a new branch opened since the first quarter of 2004. Average full time
equivalent employees were 518 at March 31, 2005 as compared to 512 at March 31,
2004.
Occupancy and Equipment- increased $57 thousand to $1.4 million for the three
month period ended March 31, 2005 to $1.4 million compared to the same period in
2004 due to primarily to increases in property taxes of $14 thousand, computer
license and maintenance expense of $12 thousand, building maintenance expense of
$11 thousand and utilities expense of $11 thousand.
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the three months ended March 31, 2005 from
the information presented in the annual report on Form 10-K for the year ended
December 31, 2004.
ITEM 4: 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.
16
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
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 28, 2005 and the following matters were presented:
The Election of Directors: Edward J. Staats, Jr., Mary
Wells, Craig W. Yates and Joseph W. Clarke, Jr. were
re-elected as directors for terms of three years ending 2008
and until their successors are elected and qualified. Mr.
Staats received 5,928,842 votes in favor and 65,806 votes
were withheld; Ms Wells received 5,984,500 votes in favor
and 10,148 votes were withheld; Mr. Yates received 5,984,104
votes in favor and 10,544 were withheld; Mr. Clarke received
5,984,760 votes in favor and 9,888 were witheld.
Ratification of the appointment of PricewaterhouseCoopers
LLP the Company's auditors, for the 2005 fiscal year.
PriceWaterhouseCoopers LLP was ratified as the Company's
auditors with 5,985,715 votes for, 56 votes against and
8,877 abstentions.
Item 5: Other Information
None
Item 6: Exhibits
(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.
17
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, 2005 /s/Craig W. Yates
-------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2005 /s/Channing L. Smith
-------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
18