UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, DC 20549
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______________________
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period ended September 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
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(Exact name of registrant as specified in its charter)
New Jersey 22-2916440
- ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Sunset Road, Burlington, New Jersey 08016
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 386-2400
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES NO X .
--- ---
As of November 5, 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
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QUARTERLY REPORT ON FORM 10-Q
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September 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
September 30, 2004 (unaudited) and December 31, 2003................................1
Consolidated Statements of Operations (unaudited)
for the three and nine months ended
September 30, 2004 and September 30, 2003...........................................2
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2004
and September 30, 2003..............................................................3
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the nine months ended September 30, 2004
and September 30, 2003............................................................. 4
Notes to Consolidated Financial Statements................................................5-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................7-18
Item 3 - Disclosure about Market Risk............................................................19
Item 4 - Controls and Procedures.................................................................19
PART II - Other Information
- ---------------------------
Item 1 - Legal Proceedings ..............................................................20
Item 2 - Unregistered Sale of Equity Securities
and Use of Proceeds ..............................................................20
Item 3 - Defaults Upon Senior Securities.........................................................20
Item 4 - Submission of Matters to Vote Security of Holders.......................................20
Item 5 - Other Information.......................................................................20
Item 6 - Exhibits................................................................................20
Signatures ..................................................................................... 21
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
September 30, 2004 December 31, 2003
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and amounts due from depository institutions $ 47,888,451 $ 41,022,232
Interest-bearing deposits 52,525 142,929
Short term funds 23,681,478 31,169,476
--------------- ---------------
Total cash and cash equivalents 71,622,454 72,334,637
Investment securities held to maturity 219,906,141 250,383,262
Investment securities available for sale 174,558,268 149,230,862
Loans, net 420,868,876 402,606,056
Mortgage-backed securities held to maturity 289,031,700 294,915,606
Accrued interest receivable 6,441,292 5,203,748
Federal Home Loan Bank stock 10,250,120 11,809,620
Real estate owned, net 0 48,294
Office properties and equipment, net 31,019,569 31,429,069
Deferred income taxes 2,115,489 2,043,909
Core deposit intangible 2,771,082 3,308,238
Prepaid expenses and other assets 2,097,519 1,603,294
FMS Statutory Trust 1 issue costs, net 581,772 640,154
--------------- ---------------
TOTAL ASSETS $ 1,231,264,282 $ 1,225,556,749
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 923,705,511 $ 893,006,498
Securities sold under agreements to repurchase 195,000,000 225,000,000
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 2,238,939 2,142,499
Accrued interest payable 1,207,816 1,319,501
Dividends payable 195,029 194,576
Other liabilities 4,431,137 4,098,885
--------------- ---------------
Total liabilities 1,162,552,432 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
September 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 572,045 802,239
Retained earnings 69,731,669 63,657,664
Less: Treasury stock (1,489,182 shares, at cost, as of
September 30, 2004 and December 31, 2003) (10,934,999) (10,934,999)
--------------- ---------------
Total stockholders' equity 68,711,850 62,829,743
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,231,264,282 $ 1,225,556,749
=============== ===============
See notes to consolidated financial statements.
1
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
INTEREST INCOME:
Interest income on:
Loans $ 6,219,024 $ 6,023,654 $ 18,329,907 $ 18,308,107
Mortgage-backed securities 4,224,347 3,508,199 12,237,351 11,814,678
Investments 3,706,263 2,135,917 10,808,357 7,414,628
------------ ------------ ------------ ------------
Total interest income 14,149,634 11,667,770 41,375,615 37,537,413
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest expense on:
Deposits 1,942,196 1,917,653 5,548,386 6,755,394
Borrowings 2,305,113 2,386,311 7,006,011 7,093,661
Long term debt 353,489 314,282 992,527 973,424
------------ ------------ ------------ ------------
Total interest expense 4,600,798 4,618,246 13,546,924 14,822,479
------------ ------------ ------------ ------------
NET INTEREST INCOME 9,548,836 7,049,524 27,828,691 22,714,934
PROVISION FOR LOAN LOSSES 90,000 75,000 240,000 195,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,458,836 6,974,524 27,588,691 22,519,934
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Loan service charges and other fees 21,384 19,566 80,560 63,300
Gain on sale of real estate held for development, net 0 0 0 600,780
Gain on sale of loans 228 232 229 283
Gain on sale of investment securities 433,518 63,103 533,574 285,846
Gain on disposal of fixed assets 0 0 46,080 (141,151)
Real estate owned operations, net (39) (4,265) (4,586) 16,940
Service charges on accounts 1,308,036 1,159,714 3,834,588 3,415,956
Other income 35,633 33,566 99,948 103,031
------------ ------------ ------------ ------------
Total other income 1,798,760 1,271,916 4,590,393 4,344,985
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries and employee benefits 4,209,679 3,876,483 12,409,459 11,607,680
Occupancy and equipment 1,361,072 1,384,007 4,043,164 4,072,723
Purchased services 699,781 744,658 2,144,793 2,142,416
Federal deposit insurance premiums 32,412 32,466 97,959 96,048
Professional fees 161,864 157,366 495,542 498,785
Advertising 106,565 112,879 322,591 345,735
Amortization of core deposit intangible 179,052 65,757 537,156 131,514
Other 319,439 384,516 1,020,789 1,309,431
------------ ------------ ------------ ------------
Total operating expenses 7,069,864 6,758,132 21,071,453 20,204,332
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,187,732 1,488,308 11,107,631 6,660,587
INCOME TAXES 1,679,599 587,873 4,448,954 2,620,257
------------ ------------ ------------ ------------
NET INCOME $ 2,508,133 $ 900,435 $ 6,658,677 $ 4,040,330
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.39 $ 0.14 $ 1.03 $ 0.62
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.38 $ 0.14 $ 1.02 $ 0.62
============ ============ ============ ============
Dividends declared per common share $ 0.03 $ 0.03 $ 0.09 $ 0.09
============ ============ ============ ============
Weighted average common shares outstanding 6,500,960 6,484,466 6,493,267 6,473,959
Potential dilutive effect of the exercise of stock options 36,763 36,009 38,020 36,420
------------ ------------ ------------ ------------
Adjusted weighted average common shares outstanding 6,537,723 6,520,475 6,531,287 6,510,379
============ ============ ============ ============
See notes to consolidated financial statements.
2
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months ended
September 30,
-------------------------------
2004 2003
OPERATING ACTIVITIES:
Net income $ 6,658,677 $ 4,040,330
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 240,000 195,000
Depreciation and Amortization 5,637,346 7,548,803
Realized (gains)
and losses on:
Sale of loans (229) (283)
Disposal and sale of fixed assets (46,080) 141,151
Sale of investment securities (533,574) (285,846)
Sale of real estate owned (654) (33,432)
Sale of real estate held for development, net 0 (600,780)
(Increase) Decrease in accrued interest receivable (1,237,544) 293,587
Increase in prepaid expenses and other assets (494,225) (285,940)
Decrease in accrued interest payable (111,685) (79,426)
Increase (Decrease) in other liabilities 485,327 (557,840)
(Benefit) Provision for deferred income taxes (71,580) 1,068,497
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Net cash provided by operating activities 10,525,779 11,443,821
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INVESTING ACTIVITIES:
Proceeds from sale of:
Education loans 60,279 98,685
Real estate held for development 0 688,706
Real estate owned 48,948 332,877
Property and equipment 238,871 148,619
Investment securities available for sale 17,723,462 7,503,529
Principal collected and proceeds from maturities of investment securities held to maturity 88,067,249 178,121,234
Proceeds from maturities of investment securities available for sale 39,787,375 100,982,096
Principal collected on mortgage-backed securities held to maturity 82,180,283 168,304,986
Principal collected on loans, net 83,858,710 107,109,449
Loans originated or acquired, net (102,474,901) (141,250,672)
Purchase of investment securities and mortgage-backed securities held to maturity (136,349,712) (385,731,684)
Purchase of investment securities and mortgage-backed securities available for sale (83,735,389) (131,343,250)
Redemption of Federal Home Loan Bank stock 1,559,500 227,100
Purchase of office property and equipment (1,261,120) (3,615,921)
Net cash received from deposit purchase, net 0 16,539,246
------------- -------------
Net cash used by investing activities (10,296,445) (81,885,000)
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FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 43,869,502 57,996,689
Net decrease in time deposits (13,170,489) (8,224,918)
Net decrease in FHLB advances (1,191,047) (41,056)
Repayment of securities sold under agreement to repurchase (30,000,000) 0
Increase in advances from borrowers for taxes and insurance 96,440 142,569
Purchase of treasury stock 0 (48,419)
Dividends paid on common stock (584,219) (582,353)
Net proceeds from issuance of common stock 38,296 230,333
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Net cash (used) provided by financing activities (941,517) 49,472,845
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DECREASE IN CASH AND CASH EQUIVALENTS (712,183) (20,968,334)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 72,334,637 88,410,346
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 71,622,454 $ 67,442,012
============= =============
Supplemental Disclosures:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 13,658,609 $ 14,901,905
Income taxes 4,243,000 2,255,500
Non-cash investing and financing activities:
Dividends declared and not paid at year end 195,029 194,578
Non-monetary transfers from loans to real estate owned
through foreclosure 0 405,598
See notes to consolidated financial statements.
3
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common shares Common Paid-in comprehensive Retained Treasury Stockholders'
outstanding stock capital income (loss) earnings stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 6,463,811 $794,981 $8,279,525 $1,216,053 $58,233,840 $(10,886,580) $57,637,819
Net Income 4,040,330 4,040,330
Other comprehensive incomealized loss on securities available
for sale, net of taxes of $341,738 and
reclassification adjustment of $285,846 (513,890) (513,890)
-----------
Total comprehensive income 3,526,440
-----------
Dividends declared ($.09) (583,016) (583,016)
Exercise of stock options 25,250 2,525 227,808 230,333
Purchase of common stock (3,184) (48,419) (48,419)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2003 6,485,877 $797,506 $8,507,333 $ 702,163 $61,691,154 $(10,934,999) $60,763,157
- ------------------------------------------------------------------------------------------------------------------------------------
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 6,658,677 6,658,677
Other comprehensive income
Unrealized gain on securities available
for sale, net of taxes of ($153,075) (230,194) (230,194)
-----------
Total comprehensive income 6,428,483
-----------
Dividends declared ($.09) (584,672) (584,672)
Exercise of stock options 15,083 1,508 36,788 38,296
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2004 6,500,960 $799,014 $8,544,121 $ 572,045 $69,731,669 $(10,934,999) $68,711,850
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 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
nine months ended September 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 2003 Comparative Statement of Financial
Condition was derived from the audited financial statements. The consolidated
financial statements include the Corporation's wholly-owned subsidiary, Farmers
& Mechanics Bank (the "Bank").
2-LONG-TERM DEBT
Long-Term Debt at September 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 September 30, 2004 and 2003 the interest rate was 5.55% and
4.61%, respectively.
3-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered "well capitalized" by OTS regulations at September 30,
2004. The Bank's regulatory tangible and tier 1 (core) capital ratios are $79.8
million or 6.50% of total bank assets and $84.0 million or 16.91% 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 nine months ended
September 30, 2004 and 2003.
5
5-PENSION PLAN
The Corporation maintains a defined benefit Pension Plan for active employees.
The Corporation contributed $953 thousand to its Pension Plan during the nine
months ended September 30, 2004. The components of the net pension cost are as
follows:
Nine Months ended September 30,
--------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------
Service cost ($653,280) ($537,459)
Interest cost (423,276) (364,791)
Return on assets 474,150 346,092
Net amortization and deferral (9,201) (44,184)
--------------------------------------------------------------------
Net periodic pension cost ($611,607) ($600,342)
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6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 2004 were $1.23 billion as compared with total
assets at December 31, 2003 of $1.22 billion.
Short Term Funds - decreased $7.5 million to $23.7 million at September 30, 2004
from $31.2 million at December 31, 2003 due to the purchase of investment
securities.
Investment Securities Held to Maturity - decreased $30.5 million to $219.9
million at September 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
$45.3 million in U.S. Agency Notes, principal paydowns of $40.9 million in
collateralized mortgage obligations (CMO's) and the maturity of $1.9 million in
municipal bonds, partially offset by purchases of $104.4 million in U.S. Agency
Notes, $16.0 million of CMO's and $2.4 million of municipal bonds during the
period. Investment securities held to maturity at September 30, 2004 consisted
of $219.9 million in fixed rate securities. A comparison of cost and approximate
market values of investment securities held to maturity as of September 30, 2004
and December 31, 2003 follows:
September 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 $131,382,480 $508,897 $ (307,666) $131,583,711 $ 72,256,272 $ 72,994,187
CMO's 85,688,761 261,990 (965,950) 84,984,801 175,727,450 175,279,820
Municipal bonds 2,834,900 4,830 0 2,839,730 2,399,540 2,404,563
- ----------------------------------------------------------------------------------- -------------------------------
Total $219,906,141 $775,717 $(1,273,616) $219,408,242 $250,383,262 $250,678,570
=================================================================================== ===============================
Investment Securities Available for Sale - increased $25.4 million to $174.6
million at September 30, 2004 from $149.2 million at December 31, 2003. The
increase is the result of purchases of $49.5 million of U.S. Agency Notes, $24.0
million of CMO's and $10.0 million of mortgage-backed securities (MBS's),
partially offset by principal paydowns of $31.9 million of CMO's and MBS's,
sales of $17.7 million of CMO's and MBS's, $8.1 million of calls of U.S. Agency
Notes and $383 thousand in market adjustments at September 30, 2004. Investment
securities available for sale consisted of $174.2 million in fixed rate
securities and $351 thousand in adjustable rate securities at September 30,
2004. A comparison of cost and approximate market values of investment
securities available for sale as of September 30, 2004 and December 31, 2003
follows:
September 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 $ 54,507,034 $ 110,950 $(159,600) $ 54,458,384 $ 13,100,525 $ 13,188,525
CMO's 41,710,873 321,277 (280,604) 41,751,546 48,250,773 48,419,522
MBS's 77,403,156 1,109,972 (164,790) 78,348,338 86,559,090 87,622,815
--------------------------------------------------------------- -------------------------
Total $173,621,063 $1,542,199 $(604,994) $174,558,268 $147,910,388 $149,230,862
==================================================================================== =========================
8
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 September 30, 2004:
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 $ 19,248,890 $ (159,599) - - $ 19,248,890 $ (159,599)
MBS's & CMO's 11,809,012 (255,282) $13,337,023 $ (190,113) 25,146,035 (445,395)
--------------------------- ----------------------------- --------------------------
Total Available for Sale 31,057,902 (414,881) 13,337,023 (190,113) 44,394,925 (604,994)
--------------------------- ----------------------------- --------------------------
Held to Maturity:
U.S. Agency Notes 32,178,985 (307,666) - - 32,178,985 (307,666)
MBS's & CMO's 79,719,263 (728,980) 56,365,327 (956,411) 136,084,590 (1,685,391)
--------------------------- ----------------------------- --------------------------
Total Held to Maturity 111,898,248 (1,036,646) 56,365,327 (956,411) 168,263,575 (1,993,057)
--------------------------- ----------------------------- ---------------------------
Total $142,956,150 $(1,451,527) $69,702,350 $(1,146,524) $212,658,500 $(2,598,051)
=========================== ============================= ==========================
U.S. Agency Notes - The unrealized losses on the investments in U.S. Agency
Notes were a result of interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price
materially less than the amortized cost of the investment. Since the Bank has
the ability and intent to hold these investments until a recovery of fair value,
which may be at maturity, it does not consider these investments to be
other-than-temporarily impaired at September 30, 2004.
Mortgage-Backed Securities and Collateralized Mortgage Obligations - The
unrealized losses on the investments in MBS's and CMO's were caused by interest
rate increases. The Bank purchased most of these investments at either a
discount or a premium relative to their face amount, and the contractual cash
flows of each is guaranteed by the issuer organization. Accordingly, it is
expected that the securities would not be settled at a price materially less
than the amortized cost of the investment. Since the decline in the market value
is attributable to changes in interest rates and not credit quality and because
the Bank has the ability to hold these investments until a recovery of fair
value, which may be at maturity, it does not consider these investments to be
other-than-temporarily impaired at September 30, 2004.
9
Loans, net - increased $18.3 million to $420.9 million at September 30, 2004
from $402.6 million at December 31, 2003. This increase was primarily the result
of $102.4 million of loans originated, partially offset by approximately $83.9
million of principal collected on loans during the nine months ended September
30, 2004. The following table shows loans receivable by major categories at the
dates indicated.
September 30, December 31,
2004 2003
---------------------------------------
Mortgage Loans $279,872,160 $280,663,785
Construction Loans 868,534 1,324,699
Commercial Construction 12,290,896 5,993,838
Consumer Loans 2,836,124 3,186,549
Commercial Real Estate 112,248,581 104,352,118
Commercial Business 17,886,948 12,180,496
---------------------------------------
Subtotal 426,003,243 407,701,485
---------------------------------------
Less:
Deferred loan fees 485,884 687,877
Allowance for
loan losses 4,648,483 4,407,552
---------------------------------------
Total loans, net $420,868,876 $402,606,056
=======================================
At September 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 $852 thousand of
loans that were collectively measured for impairment with a valuation allowance
of $26 thousand. The Bank had $4.6 million in total reserves for loan losses at
September 30, 2004, representing approximately 253% of non-accrual loans and
1.1% of total loans. For the nine months ended September 30, 2004, the average
recorded investment in impaired loans was approximately $1.9 million. The Bank
recognized $93 thousand of interest income on impaired loans for the nine months
ended September 30, 2004, all of which was recognized on the cash basis.
As of September 30, 2004, the Bank had outstanding loan commitments of $14.4
million, of which $9.1 million represented variable rate loans and $5.3 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.
10
Non-Performing Assets - The following table sets forth information regarding
non-accrual loans, troubled debt restructuring and real estate owned assets by
the Bank.
September 30, December 31,
------------- ------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 639,023 $ 507,317
Commercial real estate 1,197,753 1,188,504
Consumer and other 0 0
---------- ----------
Total non-accrual loans $1,836,776 $1,695,821
---------- ----------
Troubled debt restructuring $ 570,959 $1,027,054
$eal estate owned, net 0 48,294
other non-performing assets 0 0
---------- ----------
Total non-performing assets, net $2,407,735 $2,771,169
---------- ----------
Total non-accrual loans to net loans 0.44% 0.42%
========== ==========
Total non-accrual loans to total assets 0.15% 0.14%
========== ==========
Total non-performing assets to total assets 0.20% 0.23%
========== ==========
Mortgage-Backed Securities Held to Maturity - decreased $5.9 million to $289.0
million at September 30, 2004 from $294.9 million at December 31, 2003. The
decrease is the result of principal paydowns of $82.2 million, partially offset
by a reclassification of $64.9 million of pass-thru securities from investments
held to maturity, and purchases of $13.4 million. Mortgage-backed securities at
September 30, 2004 consisted of $250.1 million in fixed rate securities and
$38.9 million in adjustable rate securities. Mortgage-backed securities held to
maturity at September 30, 2004 and December 31, 2003 are summarized below:
September 30, 2004 December 31, 2003
- -------------------------------------------------------------------------------- -----------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Estimated
Cost Gains Losses Market Value Cost Market Value
- ------------------------------------------------------------------------------- -----------------------------
GNMA $ 8,859,870 $ 482,754 $ (364) $ 9,342,260 $ 13,948,013 $ 14,684,540
FNMA 147,462,586 3,054,943 (143,175) 150,374,354 194,437,708 197,881,404
FHLMC 67,646,743 955,787 (309,450) 68,293,080 86,529,885 87,076,088
Pass-Thru 65,062,501 541,377 (266,452) 65,337,426 0 0
- ------------------------------------------------------------------------------- ----------------------------
Total $289,031,700 $5,034,861 $(719,441) $293,347,120 $294,915,606 $299,642,032
================= ============================================================= ============================
11
Deposits - increased $30.7 million to $923.7 million at September 30, 2004 from
$893.0 million at December 31, 2003. Non-interest bearing checking accounts
increased $13.2 million, interest-bearing checking accounts increased $11.1
million, savings accounts increased $4.3 million, money market accounts
increased $15.3 million and certificates of deposits decreased $13.2 million for
the nine months ended September 30, 2004. Interest credited to depositors
accounts for the nine months ended September 30, 2004 amounted to $5.5 million.
The following table sets forth certain information concerning deposits at the
dates indicated.
September 30, 2004 December 31, 2003
- --------------------------------------------------------------- --------------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate
- --------------------------------------------------------------- --------------------------------------
Non-interest checking $170,826,123 18.49% 0.00% $157,637,346 17.65% 0.00%
Checking accounts 197,673,173 21.41% 0.73% 186,572,464 20.89% 0.55%
Savings accounts 192,540,903 20.84% 0.55% 188,235,776 21.08% 0.69%
Money market accounts 148,002,904 16.02% 0.69% 132,728,015 14.87% 0.78%
Certificates 214,662,408 23.24% 1.82% 227,832,897 25.51% 2.40%
- ------------------------------------------------------------ -----------------------------------
Total Deposits $923,705,511 100.00% 0.80% $893,006,498 100.00% 1.01%
============================================================ ===================================
Borrowings - at September 30, 2004 amounted to $205.0 million. Borrowings
consisted of $195.0 million in securities sold under the agreement to repurchase
with a weighted average interest rate of 4.49% and $10.0 million in Federal Home
Loan Bank Advances with a weighted average interest rate of 1.94%. At December
31, 2003 borrowings consisted of $225.0 million in securities sold under
agreements to repurchase with a weighted average rate of 4.08% and $11.2 million
in Federal Home Loan Bank Advances with a weighted average interest rate of
1.56%.
Long-term debt - at September 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 September 30, 2004 and 2003 the interest rate was 5.55% 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.
12
The Corporation recorded net income for the three months ended September 30,
2004 of $2.5 million, or $.38 diluted earnings per share as compared to $900
thousand, or $.14 diluted earnings per share for the comparable period in 2003.
The Corporation recorded net income for the nine months ended September 30, 2004
of $6.7 million, or $1.02 diluted earnings per share as compared to $4.0
million, or $.62 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.
13
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 September 30,
- --------------------------------------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 424,548 $ 6,219 5.86% $ 391,661 $ 6,024 6.15%
Interest-bearing deposit 49,734 174 1.40% 44,450 115 1.03%
Mortgage-backed securities 377,060 4,224 4.48% 391,044 3,508 3.59%
Investment securities 293,920 3,533 4.81% 261,423 2,021 3.09%
----------- ------- ------- ---------- ------- -------
Total interest-earning
assets 1,145,262 14,150 4.94% 1,088,578 11,668 4.29%
----------- ------- ------- ---------- ------- -------
Interest-bearing liabilities:
Checking deposits 369,586 444 0.48% 321,628 190 0.24%
Savings deposits 196,151 272 0.55% 183,699 268 0.58%
Money Market deposits 143,936 270 0.75% 131,979 219 0.66%
Time deposit 214,861 956 1.78% 224,232 1,241 2.21%
Borrowings 211,989 2,305 4.35% 236,191 2,386 4.04%
Long-Term Debt 25,774 354 5.49% 25,774 314 4.87%
----------- ------- ------- ---------- ------- -------
Total interest-bearing
liabilities $ 1,162,297 4,601 1.58% $1,123,503 4,618 1.64%
=========== ------- ------- ========== ------- -------
Net interest income $ 9,549 $ 7,050
======= =======
Interest rate spread 3.36% 2.65%
======= =======
Net yield on average
interest-earning assets 3.34% 2.59%
======= =======
Ratio of average interest-
earning assets to average
interest -bearing liabilities 98.53% 96.89%
======= =======
Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 416,519 $18,330 5.87% $ 383,148 $18,308 6.37%
Interest-bearing deposit 25,644 438 2.28% 44,706 402 1.20%
Mortgage-backed securities 412,464 12,237 3.95% 383,435 11,815 4.11%
Investment securities 265,187 10,371 5.21% 256,162 7,012 3.65%
----------- ------- ------- ---------- ------- -------
Total interest-earning
assets 1,119,814 41,376 4.93% 1,087,451 37,537 4.69%
----------- ------- ------- ---------- ------- -------
Interest-bearing liabilities:
Checking deposits 359,829 1,059 0.39% 305,735 709 0.31%
Savings deposits 194,071 803 0.55% 177,110 987 0.74%
Money Market deposits 135,745 698 0.69% 129,721 799 0.82%
Time deposit 218,550 2,988 1.82% 224,896 4,260 2.52%
Borrowings 227,511 7,006 4.10% 236,202 7,094 4.00%
Long-Term Debt 25,774 993 5.14% 25,774 973 5.03%
----------- ------- ------- ---------- ------- -------
Total interest-bearing
liabilities $ 1,161,480 13,547 1.55% $1,099,438 14,822 1.80%
=========== ------- ------- ========== ------- -------
Net interest income $27,829 $22,715
======= =======
Interest rate spread 3.38% 2.89%
======= =======
Net yield on average
interest-earning assets 3.31% 2.84%
======= =======
Ratio of average interest-
earning assets to average
interest -bearing liabilities 96.41% 97.09%
======= =======
16
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Bank's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
rate, (ii) changes in volume and (iii) total changes in rate and volume (the
combined effect of changes in both volume and rate, not separately identified,
has been allocated to rate). A higher level of non-performing loans affects the
changes in both volume and rate.
Three Months Ended September 30, Nine Months Ended September 30,
2004 vs. 2003 2004 vs. 2003
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
----------------------------- -----------------------------
Rate Volume Total Rate Volume Total
(In Thousands) (In Thousands)
----------------------------- -----------------------------
Interest income:
Loans $ (311) $ 506 $ 195 $(1,573) $ 1,595 22
Interest-bearing deposits 45 14 59 207 (171) 36
Mortgage-backed securities 841 (125) 716 (472) 894 422
Investment securities 1,261 251 1,512 3,112 247 3,359
----------------------------- -----------------------------
Total change - interest income 1,836 646 2,482 1,274 2,565 3,839
----------------------------- -----------------------------
Interest expense:
Checking deposits 226 28 254 225 125 350
Savings deposit (14) 18 4 (279) 95 (184)
Money market deposit 31 20 51 (138) 37 (101)
Time deposit (233) (52) (285) (1,152) (120) (1,272)
Borrowings 163 (244) (81) 173 (261) (88)
Long-Term Debt 40 - 40 20 - 20
----------------------------- -----------------------------
Total change - interest expense 213 (230) (17) (1,151) (124) (1,275)
----------------------------- -----------------------------
Net change in net interest income $ 1,623 $ 876 $ 2,499 $ 2,425 $ 2,689 $ 5,114
============================= =============================
15
Net Interest Income - Net interest income for the three months ended September
30, 2004 increased $2.5 million to $9.5 million compared to $7.0 million for the
same period in 2003 due primarily to increases in interest income on investment
securities of $1.5 million, mortgage-backed securities of $716 thousand, loans
of $195 thousand and decreases in interest expense on time deposits of $285
thousand, partially offset by an increase in interest expense on checking
accounts of $254 thousand.
The increase in interest income was primarily the result of an increase in
interest income on investment securities of $1.5 million to $3.5 million for the
three months ended September 30, 2004 from $2.0 million for the same period in
2003. The average yield of the investment portfolio increased 172 basis points
to 4.81% for the quarter ended September 30, 2004 from 3.09% for the same period
in 2003, which resulted in an interest income increase of $1.3 million due to
rate changes. The average balance of investment securities increased $32.5
million to $293.9 million for the three months ended September 30, 2004 from
$261.4 million for the same period in 2003, which resulted in a volume increase
in interest income of $251 thousand.
Interest income on mortgage-backed securities increased $716 thousand to $4.2
million for the three months ended September 30, 2004 from $3.5 million for the
same period in 2003. The average yield of the MBS portfolio increased 89 basis
points to 4.48% for the quarter ended September 30, 2004 from 3.59% for the same
period in 2003, which resulted in an interest income increase of $841 thousand
due to rate changes. The average balance of MBS's decreased $13.9 million to
$377.1 million for the three months ended September 30, 2004 from $391.0 million
for the same period in 2003, which resulted in an interest income volume
decrease of $125 thousand.
Interest income on loans increased $195 thousand to $6.2 million for the three
months ended September 30, 2004 from $6.0 million for the same period in 2003.
The average balance of the loan portfolio increased $32.8 million to $424.5
million for the three months ended September 30, 2004 from $391.7 million for
the same period in 2003, which resulted in a volume increase in interest income
of $506 thousand. The average rate on loans decreased 29 basis points to 5.86%
for the three months ended September 30, 2004 from 6.15% for the same period in
2003, which resulted in a decrease in interest income of $311 thousand due to
rate changes.
Interest expense on time deposits decreased $285 thousand to $956 thousand for
the three months ended September 30, 2004 from $1.2 million for the same period
in 2003. The average rate on time deposits decreased 43 basis points to 1.78%
for the quarter ended September 30, 2004 from 2.21% for the same period in 2003,
which resulted in a decrease in interest expense of $233 thousand. The average
balance of time deposits decreased $9.3 million to $214.9 million for the three
months ended September 30, 2004 from $224.2 million for the same period in 2003,
which resulted in a volume decrease in interest expense of $52 thousand.
Interest expense on checking deposits increased $254 thousand to $444 thousand
for the three months ended September 30, 2004 from $190 thousand for the same
period in 2003. The average rate on checking deposits increased 24 basis points
to 0.48% for the quarter ended September 30, 2004 from 0.24% for the same period
in 2003, which resulted in an increase in interest expense of $226 thousand. The
average balance of checking deposits increased $48.0 million to $369.6 million
for the three months ended September 30, 2004 from $321.6 million for the same
period in 2003, which resulted in a volume increase in interest expense of $28
thousand.
Interest expense on borrowings decreased $81 thousand to $2.3 million for the
three months ended September 30, 2004 from $2.4 million for the same period in
2003. The average balance borrowed decreased $24.2 million to $212.0 million for
the three months ended September 30, 2004 from $236.2 million for the same
period in 2003 which resulted in a volume decrease in interest expense of $244
thousand. The average rate on borrowings increased 31 basis points to 4.35%
increasing interest expense on borrowings $163 thousand for the quarter ended
September 30, 2004.
16
Net interest income for the nine months ended September 30, 2004 increased $5.1
million to $27.8 million compared to $22.7 million for the same period in 2003
primarily due to an increase in interest income on investment securities of $3.4
million, mortgage-backed securities of $422 thousand and decreases in interest
expense on time deposits of $1.3 million, savings deposits of $184 thousand and
money market accounts of $101 thousand, partially offset by increases in
interest expense on checking deposits of $350 thousand as compared to the same
nine 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 156 basis points to 5.21%
for the nine months ended September 30, 2004 from 3.65% for the same period in
2003, which resulted in an increase in interest income of $3.1 million due to
interest rate changes. The average balance of the portfolio increased $9.0
million to $265.2 million for the nine months ended September 30, 2004 from
$256.2 million for the same period in 2003, which resulted in a volume increase
in interest income of $247 thousand. The increase in the average balance was
primarily due to purchases of $294.7 million, partially offset by investment
calls and maturities of $85.0 million, the sale of $17.0 million of investments
available for sale and principal paydowns of $104.0 million.
Interest income on mortgage-backed securities increased $422 thousand for the
nine months ended September 30, 2004 to $12.2 million from $11.8 million for the
same period in 2003. The increase in interest income was due to an increase in
the average balance of the portfolio of $29.1 million to $412.5 million for the
nine months ended September 30, 2004 from $383.4 million for the nine months
ended September 30, 2003, which resulted in a $894 thousand volume increase in
interest income. The increase in the average balance was due to purchases of
$20.1 million and a reclassification of $64.9 million of pass-thru securities
from investments held to maturity to mortgage-backed securities, partially
offset by principal paydowns of $116.9 million from September 2003 through
September 2004. The average yield on the portfolio decreased 16 basis points to
3.95% for the nine months ended September 30, 2004 from 4.11% for the same
period in 2003, which resulted in a decrease in interest income of $472 thousand
due to interest rate changes.
Interest expense on time deposits decreased $1.3 million to $3.0 million for the
nine months ended September 30, 2004 from $4.3 million for the same period in
2003. The average rate on time deposits decreased 70 basis points to 1.82% for
the nine months ended September 30, 2004 from 2.52% for the same period in 2003,
which resulted in a decrease in interest expense of $1.2 million. The average
balance of time deposits decreased $6.3 million to $218.6 million for the nine
months ended September 30, 2004 from $224.9 million for the same period in 2003,
which resulted in a volume decrease in interest expense of $120 thousand.
Interest expense on savings deposits decreased $184 thousand to $803 thousand
for the nine months ended September 30, 2004 from $987 thousand for the same
period in 2003. The average rate on savings deposits decreased 19 basis points
to 0.55% for the nine months ended September 30, 2004 from 0.74% for the same
period in 2003, which resulted in a decrease in interest expense of $279
thousand. The average balance of savings deposits increased $17.0 million to
$194.1 million for the nine months ended September 30, 2004 from $177.1 million
for the same period in 2003, which resulted in a volume increase in interest
expense of $95 thousand.
Interest expense on money market deposits decreased $101 thousand to $698
thousand for the nine months ended September 30, 2004 from $799 thousand for the
same period in 2003. The average rate on money market deposits decreased 13
basis points to 0.69% for the nine months ended September 30, 2004 from 0.82%
for the same period in 2003, which resulted in a decrease in interest expense of
$138 thousand. The average balance of money market deposits increased $6.0
million to $135.7 million for the nine months ended September 30, 2004 from
$129.7 million for the same period in 2003, which resulted in a volume increase
in interest expense of $37 thousand.
17
Interest expense on checking deposits increased $350 thousand to $1.1 million
for the nine months ended September 30, 2004 from $709 thousand for the same
period in 2003. The average rate on checking deposits increased 8 basis points
to 0.39% for the nine months ended September 30, 2004 from 0.31% for the same
period in 2003, which resulted in an increase in interest expense of $225
thousand due to rate changes. The average balance of checking deposits increased
$54.1 million to $359.8 million for the nine months ended September 30, 2004
from $305.7 million for the nine months ended September 30, 2003, which resulted
in a $125 thousand volume increase in interest expense.
Critical Accounting Estimate-Provision for Loan Losses - A critical accounting
estimate is the provision for loan losses which increased $45 thousand to $240
thousand for the nine months ended September 30, 2004 from $195 thousand for the
same period in 2003. At September 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 nine month periods ended September 30, 2004 was
$1.8 million and $4.6 million, respectively, as compared to $1.3 million and
$4.3 million for the same periods in 2003. The increase was primarily due to a
$534 thousand gain on the sale of $17.7 million of investments available for
sale and a $419 thousand increase in service charges on accounts for the nine
months ended September 30, 2004.
Salaries and Employee Benefits - for the three and nine month periods ended
September 30, 2004 were $4.2 million and $12.4 million, respectively, as
compared to $3.9 million and $11.6 million for the same period in 2003. The
increase is due to annual compensation increases for the nine months ended
September 30, 2004. Average full time equivalent employees at September 30, 2004
were 514 as compared to 507 at September 30, 2003.
Purchased Services - for the three and nine month periods ended September 30,
2004 totaled $700 thousand and $2.1 million, as compared to $745 thousand and
$2.1 million for the same periods in 2003. Check processing costs increased $37
thousand for the nine months ended September 30, 2004 compared to the same
period in 2003 due to higher transaction volume.
18
ITEM 3: DISCLOSURE ABOUT MARKET RISK
There were no significant changes for the nine months ended September 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.
19
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
------- -----------------
None
Item 2: Unregistered Sale 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
------- ----------------------------------------------------
None
Item 5: Other Information
------- -----------------
None
Item 6: Exhibits
------- --------
31 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
20
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMS FINANCIAL CORPORATION
Date: November 10, 2004 /s/ Craig W. Yates
-------------------------------------
Craig W. Yates
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 2004 /s/ Channing L. Smith
-------------------------------------
Channing L. Smith
Vice President and
Chief Financial Officer
(Principal Financial Officer)
21