FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-11526
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FIRST COLONIAL GROUP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2228154
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
76 S. MAIN ST., NAZARETH, PA 18064
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300
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 SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO _____
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 2,210,270 SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON JUNE 30, 2002
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
ITEM 1 - Financial Statements
Consolidated Balance Sheet 2
Consoliated Statement of Income 3
Consolidated Statement of Changes in Shareholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
ITEM 3 - Quantitative and Qualitative Discussion About
Market Risk 26
PART 11 - OTHER INFORMATION
ITEM 1 - Legal Proceedings 27
ITEM 2 - Changes in Securites and Use of Proceeds 27
ITEM 3 - Defaults Upon Senior Securities 27
ITEM 4 - Submission of Matters to a Vote of Security Holders 28
ITEM 5 - Other Information 28
ITEM 6 - Exhibits and Reports on Form 8-K 28
SIGNATURES 29
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30 Dec. 31
2002 2001
---------------- ---------------
ASSETS
Total Cash and Cash Equivalents $ 17,103 $ 17,270
Interest-Bearing Deposits With Banks 13,564 919
Investment Securities Held-to-Maturity
(Fair Value: June 30,2002 $19,917, Dec. 31, 2001 - $23,160) 19,465 23,004
Securities Available-for-Sale at Fair Value 213,187 181,302
Mortgage Loans Held-for-Sale 1,249 3,808
Total Loans, Net of Unearned Discount 248,089 225,757
LESS: Allowance for Possible Loan Losses (2,544) (2,264)
---------------- ---------------
Net Loans 245,545 223,493
Premises and Equipment, Net 6,230 6,562
Accrued Interest Income 2,963 2,888
Other Real Estate Owned - 93
Other Assets 6,267 5,805
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TOTAL ASSETS $ 525,573 $ 465,144
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LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 59,065 $ 57,931
Interest-Bearing Deposits 359,335 321,955
---------------- ---------------
Total Deposits 418,400 379,886
Securities Sold Under Agreements to Repurchase 13,110 8,380
Long-Term Debt 34,889 34,804
Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures 15,000 -
Accrued Interest Payable 3,311 3,949
Other Liabilities 2,997 2,799
---------------- ---------------
TOTAL LIABILITIES 487,707 429,818
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $5.00 a share
Authorized - 500,000 shares, none issued - -
Common Stock, Par Value $5.00 a share
Authorized - 10,000,000 shares Issued -
2,209,317 Shares at June 30, 2002
and 2,085,778 shares at Dec. 31, 2001 11,051 10,429
Additional Paid in Capital 20,610 18,304
Retained Earnings 7,043 8,581
Less: Treasury stock at cost: 953 shares at June 30, 2002
and 2,463 shares at Dec. 31, 2001 (24) (59)
Deferred Stock Compensation: 10,000 shares at June 30, 2002
and none at Dec. 31, 2001 (220) -
Employee Stock Ownership Plan Debt (1,235) (1,235)
Accumulated Other Comprehensive Income (Loss) 641 (694)
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Total Shareholders' Equity 37,866 35,326
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 525,573 $ 465,144
---------------- ---------------
See accompanying notes to interim consolidated financial statements.
2
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
INTEREST INCOME:
Interest and Fees on Loans $ 4,309 $ 5,029 $ 8,573 $ 9,764
Investment Securities Income
Taxable 2,390 2,228 4,758 4,700
Tax-Exempt 488 434 926 839
Interest on Deposits with Banks and
Federal Funds Sold 40 33 80 56
------- ------- ------- -------
Total Interest Income 7,227 7,724 14,337 15,359
------- ------- ------- -------
INTEREST EXPENSE:
Interest on Deposits 2,458 2,911 4,937 5,955
Interest on Short-Term Debt 57 132 115 281
Interest on Long-Term Debt 507 502 1,005 1,016
Interest on Trust-Preferred Securities 11 - 11 -
------- ------- ------- -------
Total Interest Expense 3,033 3,545 6,068 7,252
------- ------- ------- -------
NET INTEREST INCOME: 4,194 4,179 8,269 8,107
Provision for Possible Loan Losses 361 230 761 330
------- ------- ------- -------
Net Interest Income After Provision
For Possible Loan Losses 3,833 3,949 7,508 7,777
------- ------- ------- -------
OTHER INCOME:
Trust and Wealth Management Revenue 291 312 575 653
Service Charges on Deposit Accounts 641 582 1,240 1,098
Investment Securities Gains, Net 294 88 663 225
Net Gains on the Sale of Mortgage Loans 121 103 197 103
Other Operating Income 190 153 419 332
------- ------- ------- -------
Total Other Income 1,537 1,238 3,094 2,411
------- ------- ------- -------
OTHER EXPENSES:
Salaries and Employee Benefits 2,111 1,962 4,158 3,783
Net Occupancy and Equipment Expense 642 632 1,308 1,260
Other Operating Expenses 1,422 1,467 2,987 3,036
------- ------- ------- -------
Total Other Expenses 4,175 4,061 8,453 8,079
------- ------- ------- -------
Income Before Income Taxes 1,195 1,126 2,149 2,109
Income Taxes 215 214 358 392
------- ------- ------- -------
NET INCOME $ 980 $ 912 $ 1,791 $ 1,717
======= ======= ======= =======
Per Share Data
Basic Net Income $ 0.46 $ 0.43 $ 0.83 $ 0.82
======= ======= ======= =======
Diluted Net Income $ 0.45 $ 0.43 $ 0.82 $ 0.82
======= ======= ======= =======
Cash Dividends $ 0.19 $ 0.17 $ 0.37 $ 0.34
======= ======= ======= =======
See accompanying notes to interim consolidated financial statements.
3
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
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Accumulated
(Dollars in Thousands), (Unaudited) Additional Deferred Other
For the Six Months Ended Common Paid-In Retained Stock Treasury ESOP Comprehensive
June 30, 2002 Stock Capital Earnings Comensation Stock Debt Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $10,429 $ 18,304 $ 8,581 $ - $ (59) $(1,235) $ (694) $ 35,326
Comprehensive Income
Net Income 1,791 1,791
Change in Unrealized
Securities Gains, Net 1,335 1,335
--------
Total Comprehensive Income 3,126
Deferred Stock Compensation
Issued (10,000 shares) 50 170 (220)
Purchase of Treasury Stock
(5,850 shares) (146) (146)
Sale of Treasury Stock under
Dividend Reinvestment Plan
(7,358 shares) (12) 181 169
Sale of Common Stock under
Stock Option Plan (9,651 shares) 48 125 173
Cash Dividends Paid (777) (777)
Stock Dividend of 5% (104,843 shares) 524 2,023 (2,547) -
Cash Paid in Lieu of Fractional Shares (5) (5)
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Balance at June 30, 2002 $11,051 $ 20,610 $ 7,043 $ (220) $ (24) $(1,235) $ 641 $ 37,866
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See accompanying notes to interim consolidated financial statements.
4
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
OPERATING ACTIVITIES June 30, 2002 June 30, 2001
-------------------- ---------------------
Net Income $ 1,791 $ 1,717
Adjustments to Reconcile Net Income to Net Cash Provided By
(Used In) Operating Activities:
Provision for Possible Loan Losses 761 330
Depreciation and Amortization 660 606
Amortization of Security Discounts (153) (225)
Amortization of Security Premiums 442 140
Amortization of Deferred Fees on Loans 213 64
Gain on Sale of Other Real Estate Owned (2) (39)
Mortgage Loans Originated for Sale (10,294) (9,091)
Mortgage Loan Sales 20,918 26,915
Gain on Sale of Mortgage Loans (197) (103)
Investment Securities Gains, Net (663) (225)
Changes in Assets and Liabilities:
(Increase) Decrease in Accrued Interest Income (75) 532
Decrease in Accrued Interest Payable (638) (1,342)
Net Increase in Other Assets (955) (1,639)
Net Decrease in Other Liabilities (177) (1,870)
-------------------- ---------------------
Net Cash Provided By Operating Activities: 11,631 15,770
-------------------- ---------------------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities Available-for-Sale 26,291 34,625
Proceeds from Maturities of Securities Held-to-Maturity 21,775 872
Proceeds from Sales of Securities Available-for-Sale 48,244 10,824
Purchase of Securities Available-for-Sale (104,049) (30,109)
Purchase of Securities Held-to-Maturity (18,209) (6,149)
Net Increase in Interest Bearing Deposits With Banks (12,645) (21,452)
Net Increase in Loans (31,060) (14,247)
Purchase of Premises and Equipment, Net (149) (121)
Proceeds from Sale of Other Real Estate Owned 261 586
-------------------- ---------------------
Net Cash Used In Investing Activities (69,541) (25,171)
-------------------- ---------------------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest Bearing
Demand Deposits and Savings Accounts 44,875 15,462
Net Decrease in Certificates of Deposit (6,361) (10,660)
Net Increase in Repurchase Agreements 4,730 7,246
Net Decrease in Short-Term Debt - (5,695)
Net Increase in Long-Term Debt 85 -
Proceeds from Issuance of Common Stock 173 155
Purchase of Treasury Stock 169 -
Proceeds from Sale of Trreasury Stock (146) -
Proceeds from Issuance of Guaranteed Preferred
Beneficial Interest in Company's Subordinated Debentures 15,000 -
Cash Dividends Paid (777) (723)
Cash in Lieu of Fractional Shares (5) (2)
-------------------- ---------------------
Net Cash Provided by Financing Activities 57,743 5,783
-------------------- ---------------------
Decrease in Cash and Cash Equivalents (167) (3,618)
Cash and Cash Equivalents, January 1, 17,270 17,738
-------------------- ---------------------
Cash and Cash Equivalents, June 30, $ 17,103 $ 14,120
-------------------- ---------------------
See accompanying notes to interim consolidated financial statements.
5
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - GENERAL
The accompanying financial statements, footnotes and discussion should be read
in conjunction with the audited financial statements, footnotes, and discussion
contained in the Company's Annual Report for the year ended December 31, 2001.
The financial information presented herein is unaudited; however, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the unaudited financial information have been made.
The results for the three and six months ended June 30, 2002 are not necessarily
indicative of results to be expected for the full year or any other interim
period.
NOTE B - SUBSIDIARIES
First Colonial Group, Inc. (the "Company") is a Pennsylvania business
corporation which is registered as a bank holding company under the Bank Holding
Company Act of 1956. The Company has three wholly-owned subsidiaries, Nazareth
National Bank and Trust Company (the "Bank") founded in 1897, First C. G.
Company, Inc. founded in 1986 and First Colonial Statutory Trust I (the
"Statutory Trust I") founded on June 3, 2002, (see Note E).
NOTE C - CASH AND STOCK DIVIDENDS
On May 17, 2002 the Company paid its 2002 second quarter dividend on its common
stock of $0.19 per share to shareholders of record on May 3, 2002.
On May 31, 2002 the Company paid a 5% stock dividend to shareholders of record
on May 17, 2002. Net income per share and average shares outstanding have been
restated to reflect the 5% stock dividend.
NOTE D - EARNINGS PER SHARE
The Company calculates earning per share as provided by the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS
128)". Basic and diluted earnings per share were calculated as follows:
6
For the Three Months Ended June 30, Average
Income Shares Per Share
(numerator) (denominator) Amount
---------------------------------------------------
2002
- --------------------------------------------------------------
Net Income $ 980
Basic Earnings Per Share
Income Available to Common Shareholders $ 980 2,152,664 $ 0.46
Effect of Dilutive Securities 42,571
Stock Options
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 980 2,195,235 $ 0.45
---------------------------------------------------
2001
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Net Income $ 912
Basic Earnings Per Share
Income Available to Common Shareholders $ 912 2,101,857 $ 0.43
Effect of Dilutive Securities
Stock Options 2,623
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 912 2,104,470 $ 0.43
---------------------------------------------------
7
For the Six Months Ended June 30, Average
Income Shares Per Share
(numerator) (denominator) Amount
---------------------------------------------------
2002
- --------------------------------------------------------------
Net Income $ 1,791
Basic Earnings Per Share
Income Available to Common Shareholders $ 1,791 2,149,896 $ 0.83
Effect of Dilutive Securities
Stock Options 38,223
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 1,791 2,188,119 $ 0.82
2001
- --------------------------------------------------------------
Net Income $ 1,717
Basic Earnings Per Share
Income Available to Common Shareholders $ 1,717 2,104,687 $ 0.82
Effect of Dilutive Securities
Stock Options 2,618
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 1,717 2,107,305 $ 0.82
---------------------------------------------------
NOTE E - GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S SUBORDINATED
DEBENTURES
On June 3, 2002, the Company formed the statutory trust company, First Colonial
Statutory Trust I (the "Statutory Trust I"), a wholly-owned Connecticut
statutory business trust subsidiary of the Company, for the sole purpose of
issuing trust preferred securities that are fully and unconditionally guaranteed
by the Company. On June 26, 2002, the Company issued $15,000,000 of subordinated
debentures to Statutory Trust I and the Statutory Trust I issued $15,000,000 in
pooled trust preferred securities. The subordinated debentures are the sole
asset of the Statutory Trust. The trust preferred securities are classified as
long-term debt for the financial statements, but are included as Tier I capital
for regulatory purposes. The interest rate on this security (5.34% at June 30,
2002) is variable, adjusting quarterly at three-month LIBOR plus 3.45%. The
interest is payable quarterly. The trust preferred securities mature in June
2032, and may be redeemed at the option of the Company on or after June 2007, or
may be redeemed at any time in the event that the deduction of related interest
for federal income tax purposes is prohibited, treatment as Tier I capital is no
longer permitted, or certain other contingencies arise. The net proceeds of the
trust preferred securities are to be used to support the Company's growth and
expansion plans and other general corporate purposes.
8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following financial review and analysis is of the financial condition and
earnings performance of the Company and its wholly owned subsidiaries for the
three and six month period ended June 30, 2002.
The information contained in this Quarterly Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to
future loan and deposit volumes, future expansion plans, the allowance and
provision for possible loan losses, future interest rates and their effect on
the Company's financial condition or results of operations, the classification
of the Company's investment portfolio, the discussion in "Item 3 - Quantitative
and Qualitative Discussion About Market Risk", statements as to litigation and
the amount of reserves, statements as to trends, and other statements which are
not historical facts or as to the Company's, the Bank's or management's
intentions, plans, beliefs, expectations or opinions. Such forward looking
statements are subject to risks and uncertainties and may be affected by various
factors which may cause actual results to differ materially from those in the
forward looking statements, including without limitation, the effect of economic
conditions and related uncertainties, the effect of interest rates on the
Company and the Bank, Federal and state government regulation, competition,
changes in accounting standards and policies, and results of litigation. These
and other risks, uncertainties and other factors are discussed in this Quarterly
Report or in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 a copy of which may be obtained from the Company upon request
and without charge (except for the exhibits thereto) as described below.
In analyzing whether to make, or to continue, an investment in the Company,
investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 a copy of which can be obtained
from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main
Street, Nazareth, PA 18064.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States and general practices within
the financial services industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
The Company considers that the determination of the allowance for loan losses
involves a higher degree of judgment and complexity than its other significant
accounting policies. The allowance for loan losses is calculated with the
objective of maintaining a reserve level believed by management to be sufficient
to absorb estimated probable credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
9
it requires material estimates, including, among others, expected default
probabilities, expected commitment usage, the amounts and timing of expected
future cash flows on impaired loans, value of collateral, estimated losses on
commercial loans, consumer loans and residential mortgages, and general amounts
for historical loss experience. The process also considers economic conditions,
uncertainties in estimating losses and inherent risks in the loan portfolio. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from management estimates, additional provisions for loan losses
may be required that would adversely impact earnings in future periods.
With the adoption of SFAS No. 142 on January 1, 2002, the Company discontinued
the amortization of goodwill resulting from acquisitions. Goodwill is now
subject to impairment testing at least annually to determine whether write-downs
of the recorded balances are necessary. The Company tests for impairment based
on the goodwill maintained at each defined reporting unit. A fair value is
determined for each reporting unit based on at least on of three various market
valuation methodologies. If the fair value of the reporting units exceed their
book values, no write-down of recorded goodwill is necessary. If the fair value
of the reporting unit is less, an expense may be required on the Company's books
to write-down the related good will to the proper carrying value. As of June 30,
2002, the Company determined that no impairment write-offs were necessary.
The Company recognizes deferred tax assets and liabilities for the future tax
effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. In the event
management determines the inability to realize all or part of net deferred tax
assets in the future, a direct charge to income tax expense may be required to
reduce the recorded value of the net deferred tax asset to the expected
realizable amount.
Results of Operations
Basic earnings per share for the three months ended June 30, 2002 were $0.46 as
compared to $0.43 for the corresponding period in 2001. Diluted earnings per
share for the three months ended June 30, 2002 where $0.45 as compared to $0.43
for the same period in 2001. Average basic shares outstanding during this three
month period were 2,152,664 in 2002 and 2,101,857 in 2001. Basic earnings per
share for the six months ended June 30, 2002 were $0.83 as compared to $0.82 for
the corresponding period in 2001. Average diluted earnings per share for the six
months ended June 30, 2002 were $0.82 as compared to $0.82 for the same period
in 2001. Average basic shares outstanding during this six month period were
2,149,896 in 2002 and 2,104,687 in 2001. Average diluted shares outstanding
during the six month period were 2,188,199 in 2002 and 2,107,305 in 2001. Per
10
share earnings and average shares outstanding have been restated to reflect the
5% stock dividend paid on May 17, 2002. (see Note D)
The net income for the three months ended June 30, 2002 was $980,000 compared to
$912,000 for the same period in 2001. This was an increase of $68,000 or 7.5%.
The earnings increase was attributable in part to an increase in net interest
income of $15,000 or 0.4% (see discussion on Net Interest Income), a $75,000 or
7.2% increase in other income exclusive of gains on the sale of
available-for-sale securities and the gains on the sale of mortgage loans
held-for-sale. Also contributing to higher earnings was a $18,000 increase in
the gains on the sale of mortgage loans and an increase on the gains on the sale
of Available for Sale Securities of $206,000. These were offset in part by a
$114,000 or 2.8% increase in total other expenses, an increase of $131,000 in
the provision for possible loan losses, and an increase of $1,000 in Federal
income taxes.
Net income for the six months ended June 30, 2002 was $1,791,000 compared to
$1,717,000 for the same period in 2001 an increase of $74,000 or 4.3%. The
earnings increase was primarily attributable to an increase of $162,000 or 2% in
net interest income, an increase of $151,000 or 7.2% in other income exclusive
of gains on the sale of available-for-sale securities and the gains on the sale
of mortgage loans. The other factors affecting the higher earnings were the
increase in gains on the sale of mortgage loans of $94,000 an increase of
$438,000 in the gains on the sale of available-for-sale securities and a
decrease of $34,000 in Federal income taxes. These were partially offset by a
$374,000 or 4.6% increase on total other expenses, and a $431,000 increase in
the provision for possible loan losses.
Net Interest Income
Net interest income amounted to $4,194,000 for the three months ended June 30,
2002 compared to $4,179,000 for the three months ended June 30, 2001, an
increase of $15,000 or 0.4%. This increase was primarily the result of decreases
in interest paid on deposit and debt exceeding the decreases in the interest
earned on loans and investments. The total interest income earned on loans and
investments amounted to $7,227,000 for the second quarter of 2002, a decrease of
$497,000 or 6.4% from the $7,724,000 earned in the same period in 2001. The
total interest expense paid on deposits and debt was $3,033,000 and $3,545,000
for the three month period ended June 30, 2002 and 2001, respectively. This was
a decrease in second quarter of 2002 from 2001 of $512,000 or 14.4%. The
decreases in interest income and interest expense were the result of lower
interest rates due to a declining interest rate environment. The growth In net
interest income was primarily the result of higher volumes, of deposits, loans
and investments (see the following discussion on rate/volume)
Net interest income for the six months ended June 30, 2002 was $8,269,000
compared to $8,107,000 for the same period in 2001. This was an increase of
$162,000 or 2.0%. The interest income earned on loans and investments during the
first half of 2002 was $14,337,000, which was $1,022,000 or 6.7% lower than the
11
2001 amount of $15,359,000. Total interest expense for the six month period was
$6,068,000 and $7,252,000 in 2002 and 2001, respectively. This was a decrease of
$1,184,000 or 16.3%.
The fully taxable-equivalent net interest income was $8,775,000 for the first
six months of 2002, compared to $8,568,000 for the same period in 2001, a 2.4%
or $207,000 increase. This increase in taxable-equivalent net interest income
was primarily due to a $1,189,000 increase related to volume partially reduced
by a $982,000 decrease due to interest rates.
The "Rate/Volume Analysis" table segregates, in detail, the major factors that
contributed to the changes in net interest income, for the six months ended June
30, 2002 as compared to the same period in 2001, into amounts attributable to
both rate and volume variances. In calculating the variances, the changes were
first segregated into (1) changes in volume (change in volume times the old
rate), (2) changes in rate (changes in rate times the old volume) and (3)
changes in rate/volume (changes in rate times the change in volume). The changes
in rate/volume have been allocated in their entirety to the change in rates. Non
accruing loans have been used in the daily average balances to determine changes
in interest income due to volume. Loan fees included in the interest income
calculation are not material.
12
The following table sets forth a "Rate/Volume Analysis" for the six months ended
June 30, 2002. The interest income included in the table has been adjusted to a
fully taxable equivalent amount using the Federal statutory tax rate of 34%.
Six Months Ended
June 30, 2002
Over / (Under)
June 30, 2001
CHANGE DUE TO:
TOTAL RATE VOLUME
---------------------------------------------------
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ 25 $ (136) $ 160
Federal Funds Sold - (7) 7
Investment Securities 189 (967) 1,156
Loans (1,190) (1,405) 215
--------------- --------------- ---------------
Total Interest Income $ (977) $ (2,515) $ 1,538
--------------- --------------- ---------------
INTEREST EXPENSE
Demand Deposits, Money Market, $ 109 $ (239) $ 348
Savings & Clubs
Time Deposits and CD's over $100,000 (1,127) (1,194) 67
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase (86) (57) (29)
Short-Term Debt (80) (7) (73)
Long-Term Debt (10) (36) 25
Guaranteed Preferred Beneficial
Interest in Compnay's
Subordinated Debentures 11 - 11
--------------- --------------- ---------------
Total Interest Expense (1,184) (1,533) 349
--------------- --------------- ---------------
Net Increase in Interest Income $ 207 $ (982) $ 1,189
=============== =============== ===============
Total taxable-equivalent interest income for the six months ended June 30, 2002
decreased by $977,000 or 6.2% compared to the same period in 2001, primarily the
result of lower interest rates on loans and investments, offset in part by the
higher volumes in loans and investment securities. Interest income from loans on
a fully-taxable equivalent basis was $1,190,000 or 12.2% lower during the six
months ended June 30, 2002 as compared to the same period in 2001. This decrease
13
was comprised of a $1,405,000 decrease due to lower interest rates partially
offset by a $215,000 increase due to higher volume. Income from investment
securities for the six months ended June 30, 2002 increased $189,000 or 3.2%
over the same period in 2001. This was comprised of a $1,156,000 increase due to
volume reduced in part by a $967,000 decrease due to rates. Average year-to-date
earning assets increased to $458,303,000 at June 30, 2002 from $410,976,000 at
June 30, 2001 a $47,327,000 or 11.5% increase.
Total interest expense decreased by $1,184,000 or 16.3% during the first six
months of 2002, over the same period in 2001. This decrease was principally the
result of lower interest rates paid on deposits and debt partially offset by
higher volumes, primarily due to an increase in all deposit categories,
repurchase agreements, and long-term debt. Interest expense attributed to time
deposits decreased $1,127,000 during the first six months of 2002, over the
first six months of 2001. This was comprised of a $1,194,000 decrease due to
rates reduced by a $67,000 increase due to volume. The interest expense on
demand, money market, savings and club deposits increased by $109,000 during the
first six months of 2002 over the same period in 2001. This increase was the
result of an increase due to volume of $348,000 offset in part by a decrease of
$239,000 due to lower interest rates. The increase in deposits was used to
finance the earning asset growth.
The following table "Consolidated Comparative Statement Analysis" sets forth a
comparison of average daily balances, interest income and interest expense on a
fully taxable equivalent basis and interest rates calculated for each major
category of interest-earning assets and interest-bearing liabilities. For the
purposes of this analysis, the computations in the "Consolidated Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
were no state or local taxes on income applicable to the Company.
14
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
Six Months Ended, June 30, 2002 2001
------------------------------------------- --------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------------------- --------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS
Interest-Bearing Deposits with Banks $ 9,685 $ 75 1.55% $ 2,338 $ 51 4.36%
Federal Funds Sold 619 5 1.62 254 5 3.94
Investment Securities
Taxable 173,424 4,758 5.49 142,602 4,699 6.59
Non-Taxable (1) 39,106 1,403 7.18 35,469 1,273 7.18
Loans (1) (2) 237,837 8,602 7.23 232,729 9,792 8.41
Reserve for Loan Losses (2,368) - - (2,416) - -
---------------- ------------- ---------------- ---------------
Net Loans 235,469 8,602 7.31 230,313 9,792 8.50
---------------- ------------- ---------------- ---------------
Total Interest-Earning Assets 458,303 14,843 6.48 410,976 15,820 7.70
Non-Interest Earning Assets 27,799 - - 30,081 - -
---------------- ------------- ---------------- ---------------
TOTAL ASSETS, INTEREST INCOME $ 486,102 14,843 6.11 $ 441,057 15,820 7.17
---------------- ------------- ---------------- ---------------
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 57,624 201 0.70 $ 54,650 262 0.96
Money Market Deposits 45,079 606 2.69 15,621 243 3.11
Savings & Club Deposits 70,727 517 1.46 64,643 710 2.20
CD's over $100,000 8,214 137 3.35 5,325 160 6.01
All Other Time Deposits 161,337 3,476 4.31 161,867 4,580 5.66
---------------- ------------- ---------------- ---------------
Total Interest-Bearing Deposits 342,981 4,937 2.88 302,106 5,955 3.94
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 10,829 111 2.05 12,726 197 3.10
Short-Term Debt 376 4 2.13 3,217 84 5.16
Long-Term Debt 34,866 1,005 5.77 34,000 1,016 5.98
Guaranteed Preferred Beneficial Interest
in Compnay Subordinated debentures 249 11 5.34 - - -
---------------- ------------- ---------------- ---------------
Total Interest-Bearing Liabilities 389,301 6,068 3.12 352,049 7,252 4.12
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 54,146 - - 46,300 - -
Other Liabilities 6,865 - - 8,395 - -
---------------- ------------- ---------------- ---------------
TOTAL LIABILITIES 450,312 6,068 2.69 406,744 7,252 3.57
SHAREHOLDERS' EQUITY 35,790 - - 34,313 - -
---------------- ------------- ---------------- ---------------
TOTAL LIABILITIES AND EQUITY,
INTEREST EXPENSE $ 486,102 6,068 2.50 $ 441,057 7,252 3.29
---------------- ------------- ---------------- ---------------
NET INTEREST INCOME $ 8,775 $ 8,568
------------- ---------------
Net Interest Spread (3) 3.36 3.58
Effect of Interest-Free Sources
Used to Fund Earnings 0.47 0.59
Net Interest Margin (4) 3.83% 4.17%
----------- ----------
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The tax equivalent adjustments included above are
$506,000 and $461,000 for the six months ended June 30, 2002 and June 30,
2001, respectively. The effective tax rate used for the taxable equivalent
adjustment was 34%.
(2) Loan fees of ($127,000) and $23,000 for the six months ended June 30, 2002
and June 30, 2001, respectively, are included in interest income. Average
loan balances include non-accruing loans and average loans held-for-sale of
$4,316,000 and $1,642,000 for the six months ended June 30, 2002 and June
30, 2001, respectively.
(3) Net interest spread is the arithmetic difference between the yield on
average interest-earning assets and the rate paid on interest-bearing
liabilities.
(4) Net interest margin is computed by dividing net interest income by average
interest-earning assets.
15
The net interest margin of 3.83% for the six month period ended June 30, 2002,
decreased from the 4.17% net interest margin for the first six months of 2001.
The yield on interest earning assets was 6.48% during the first six months of
2002 as compared to 7.70% in 2001. The average interest rate paid on interest
bearing deposits and other borrowings was 3.12% for the first six months of 2002
as compared to 4.12% in 2001.
Other Income and Other Expenses
Other income for the three months ended June 30, 2002, including service
charges, trust and wealth management revenues, gains on the sale of mortgage
loans and other miscellaneous income, but exclusive of securities gains or
losses, was $1,243,000 as compared to $1,150,000 for the same period in 2001.
This was an increase of $93,000 or 8.1%. This increase was the result of the
higher gains on the sale of mortgage loans, and increases in service charges,
and other operating income, reduced in part by a decline in trust and wealth
management revenues. In the three month period ended June 30, 2002, the gains on
the sale of mortgage loans amounted to $121,000 as compared to a gain of
$103,000 for the same period in 2001, an increase of $18,000 or 17.5%. Mortgage
loan sales amounted to $11,246,000 during the three month period ended June 30,
2002 as compared to $26,915,000 during the same period in 2001. Service charges
were $641,000 during the three months ended June 30, 2002, a $59,000 or 10.1%
increase over the 2001 amount of $582,000. The increase in service charges was
due to growth in checking accounts. Other operating income for the three months
ended June 30, 2002 was $190,000, an increase of $37,000 or 24.2% compared to
$153,000 for the same period in 2001. The increase in miscellaneous income was
primarily the result of an increase in the use of various fee-based services.
The trust and wealth management revenues were $291,000 for the three months
ended June 30, 2002 as compared to $312,000 for the three months ended June 30,
2001, a decrease of $21,000 or 6.7%. The revenues from trust and wealth
management operations decreased as a result of lower estate fees and a reduction
in the market value of securities on which trust fees are assessed.
Other income for the six months ended June 30, 2002, including service charges,
trust and wealth management revenues, gains on the sale of mortgage loans and
other miscellaneous income, but exclusive of securities gains or losses, was
$2,431,000 as compared to $2,186,000 for the same period in 2001. This was an
increase of $245,000 or 11.2%. In the six month period ended June 30, 2002,
service charges were $1,240,000, a $142,000 or 12.9% increase over the 2001
amount of $1,098,000. The increase in service charge income was the result of a
higher number of checking account customers. The gains on the sale of mortgage
loans were $197,000 during the first six months of 2002 compared to $103,000 in
the first six months of 2001, an increase of $94,000 or 91.3%. Mortgage loan
sales amounted to $20,918,000 and $26,915,000 in the first six months of 2002
and 2001, respectively. The increase in the mortgage sales gains was the result
of lower interest rates. Other operating income was $419,000 for the first six
months of 2002 as compared to $332,000 for the same period in 2001. This was an
increase of $87,000 or 26.2%. The revenues from the trust and wealth management
16
operations were $575,000 for the six months ended June 30, 2002 as compared to
$653,000 for the six months ended June 30, 2001, a decrease of $78,000 or 12.0%.
Total other expenses for the three month period ended June 30, 2002 increased by
$114.000 or 2.8% to $4,175,000 over total other expenses for the same period in
2001 of $4,061,000. Included in this increase was a $149,000 or 7.6% increase in
salary and benefit expenses which were $2,111,000 in 2002 as compared to
$1,962,000 in 2001. These increases were primarily due to general salary
increases of approximately 4% and the addition of staff in the commercial, trust
and wealth management and executive area of the bank. Occupancy and equipment
expenses were $642,000 for the three months ended June 30, 2002 and $632,000 for
the three months ended June 30, 2001, an increase of $10,000 or 1.6%. The
increase in occupancy expenses were related to rent increase at some branches
and general maintenance. Other operating expenses for the three month period
ended June 30, 2002 were $1,422,000, a decrease of $45,000 or 3.1% from the
$1,467,000 in other expenses for the same period in 2001. This decrease was
primarily the result of a continuing expense reduction program.
Total other expenses for the six month period ended June 30, 2002 increased by
$374,000 or 4.6% to $8,453,000 over total other expenses for the same period in
2001 of $8,079,000. Included in this increase was a $375,000 or 9.9% increase in
salary and benefit expenses which were $4,158,000 in 2002 as compared to
$3,783,000 in 2001 These increases were primarily due to general salary
increases of approximately 4% and additional staff in the commercial lending,
trust and wealth management and executive areas of the bank. Occupancy and
equipment expenses were $1,308,000 for the six months ended June 30, 2002 and
$1,260,000 for the six months ended June 30, 2001, an increase of $48,000 or
3.8%. The increase in occupancy expenses were related to renovations at some
branches, rent increases and general maintenance. Other operating expenses for
the six month period ended June 30, 2002 were $2,987,000, a decrease of $49,000
or 1.6% from the $3,036,000 in other expenses for the same period in 2001.
17
FINANCIAL CONDITION
Assets and Liabilities
Total assets at June 30, 2002 were $525,573,000, representing an increase of
$60,429,000 or 13.0% over total assets of $465,144,000 at December 31, 2001.
Deposits increased by $38,514,000 or 10.1% from $379,886,000 on December 31,
2001 to $418,400,000 on June 30, 2002. Contributing to this increase in total
deposits were increases in savings and money market deposits of $40,667,000,
interest-bearing checking deposits of $3,074,000 and non-interest bearing
checking deposits of $1,134,000, partially offset by a decrease in certificates
of deposit over $100,000 of $4,008,000 and certificates of deposit less than
$100,000 of $2,353,000. Loans outstanding at June 30, 2002 were $248,089,000 as
compared to $225,757,000 at December 31, 2001. This was an increase of
$22,332,000 or 9.9%. The increase in loans was primarily the result of an
increase of $20,333,000 or 32.0% in commercial loans. Also contributing to the
increase in outstanding loans was an increase in residential real estate loans
of $1,404,000 and an increase in consumer loans of $595,000 or 0.6%. There were
$1,249,000 of residential real estate loans identified as held-for-sale at June
30, 2002. There were $3,808,000 residential real estate loans held-for sale at
December 31, 2001. The loan to deposit ratio was 59.3% at June 30, 2002 and
59.4% at December 31, 2001.
Allowance and Provision for Possible Loan Losses
The provision for possible loan losses is based on management's analysis of the
adequacy of the allowance for possible loan losses. In its evaluation,
management considers past loan experience, overall characteristics of the loan
portfolio, current economic conditions and other relevant factors. Management
currently believes that the allowance is adequate to absorb known and inherent
losses in the loan portfolio. Ultimately, however, the adequacy of the allowance
is largely dependent upon economic conditions which are beyond the scope of
management's control.
For the first six months of 2002, the provision for possible loan losses was
$761,000. Net charge offs were $481,000 for the six months ended June 30, 2002
compared with $440,000 for the six months ended June 30, 2001. The ratio of the
allowance for possible loan losses to total loans at June 30, 2002 was 1.03%
compared to 1.00% at December 31, 2001. The slightly higher ratio of the
allowance for possible loan losses to total loans was the result of the increase
in the provision for possible loan losses due to an increase in actual charge
offs for the first six months of 2002, and the analysis by management of
non-performing loans and the risks in the loan portfolio. The allowance for
possible loan losses at June 30, 2002 totaled $2,544,000, an increase of
$280,000 or 12.4% over the December 31, 2001 amount of $2,264,000.
At June 30, 2002, $14,000 of the allowance for possible loans losses was
allocated to impaired loans.
18
Transactions in the allowance for possible loan losses were as follows:
2002 2001
------------------- -----------------
Balance, January 1, $ 2,264,000 $ 2,411,000
Loans Charged-Off (583,000) (482,000)
Loans Recovered 102,000 42,000
------------------- -----------------
Net Loans Charged-Off 481,000 440,000
Provision Charged to Expense 761,000 330,000
------------------- -----------------
Balance, June 30, $ 2,544,000 $ 2,301,000
Non-Performing Loans
The following discussion relates to the Bank's non-performing loans which
consist of those on a non-accrual basis and accruing loans which are past due
ninety days or more.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection effort, that the
borrower's financial condition is such that the collection of interest is
doubtful. The Company views these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Interest on these loans is recognized
only when received. The following table shows the balance of non-performing
loans for each of the periods indicated.
Non-Performing Loans
June 30, December 31, June 30,
2002 2001 2001
- ----------------------------------------------------------------------------------------------------
Non-accrual loans on a cash basis $ 1,093,000 $ 1,019,000 $ 1,022,000
Non-accrual loans as a percentage
of total loans 0.44% 0.45% 0.46%
Accruing loans past due 90 days or more $ 1,581,000 $ 2,185,000 $ 1,327,000
Accruing loans past due 90 days or more
as a percentage of total loans 0.64% 0.97% 0.60%
Allowance for loan losses to
nonperforming loans 95.14% 70.66% 97.96%
Nonperforming loans to total loans 1.08% 1.42% 1.06%
Allowance for loan losses to total loans 1.03% 1.00% 1.04%
- ----------------------------------------------------------------------------------------------------
There are no significant loans classified for regulatory purposes that have not
been included in the above table of non-performing loans.
19
Total non-performing loans (non-accruing loans and loans past due over 90 days)
amounted to $2,674,000 at June 30, 2002 as compared to $3,204,000 at December
31, 2001 and $2,349,000 at June 30, 2001. The ratio of non-performing loans to
total loans was 1.08%, 1.42% and 1.06% at June 30, 2002, December 31, 2001 and
June 30, 2001, respectively. The decrease in this ratio from year end 2001 was
primarily the result of a decrease in total non-performing loans due to
collection efforts.
Non-accruing loans at June 30, 2002 of $1,093,000 increased from the December
31, 2001 amount of $1,019,000 and the June 30, 2001 level of $1,022,000. The
amount of increase from December 31, 2001 to June 30, 2002 was $74,000. This
increase was primarily the result of an increase in non-accrual residential real
estate mortgages. At the present time, management is of the opinion that these
loans present a minimal amount of exposure to the Bank.
Loans past due 90 days or more and still accruing interest are loans that are
generally well secured and expected to be restored to a current status in the
near future. As of June 30, 2002, loans past due 90 days or more and still
accruing interest were $1,581,000 compared to $2,185,000 at December 31, 2001
and $1,327,000 at June 30, 2001. The $604,000 decrease in loans past due 90 days
from December 31, 2001 to June 30, 2002 was the result of decreases in
commercial, mortgage and consumer loans past due 90 days or more.
Other Real Estate Owned
The Company did not hold any other real estate owned at June 30, 2002. This
represents a decrease from the December 31, 2001, level of $93,000. This
decrease resulted from the sale of one residential real estate property.
Investment Securities
The Company had $213,187,000 in available-for-sale securities at June 30, 2002
with a net unrealized gain of $641,000. At December 31, 2001,available-for-sale
securities amounted to $181,302,000 with a net unrealized loss of $694,000.
During the six month period ended June 30, 2002, $48,244,000 of securities
available-for-sale were sold for a net gain of $663,000 as compared to
$10,824,000 of securities available-for-sale sold for a net gain of $225,000
during the same time period in 2001.
Held-to-maturity securities totaling $19,465,000 at June 30, 2002 are carried at
amortized cost. At December 31, 2001, the held-to-maturity securities totaled
$23,004,000. The Company has the intent and ability to hold the held-to-maturity
securities until maturity. The Company, at June 30, 2002, did not hold any
securities identified as derivatives.
20
Capital Resources and Liquidity
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
of Tier I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, that as of June 30, 2002, the Company and the Bank met all
capital adequacy requirements to which they were subject.
21
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- ------------------------------
(Dollars in Thousands)
At June 30, 2002 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 54,136 19.72% $ 21,965 8.00% -
Bank $ 35,606 13.15% $ 21,668 8.00% $ 27,085 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 48,790 17.77% $ 10,982 4.00% -
Bank $ 32,062 11.84% $ 10,834 4.00% $ 16,251 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company, (Consolidated) $ 48,790 9.80% $ 19,913 4.00% -
Bank $ 32,062 6.48% $ 19,781 4.00% $ 24,727 5.00%
- ----------------------------------------------------------------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- ------------------------------
(Dollars in Thousands)
At December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 37,926 15.38% $ 19,738 8.00% -
Bank $ 32,931 13.50% $ 19,515 8.00% $ 24,393 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 35,662 14.46% $ 9,869 4.00% -
Bank $ 30,667 12.58% $ 9,757 4.00% $ 14,636 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company, (Consolidated) $ 35,662 7.65% $ 18,661 4.00% -
Bank $ 30,667 6.61% $ 18,575 4.00% $ 23,218 5.00%
- ----------------------------------------------------------------------------------------------------------------------------------
22
The Company is not aware of any trends, events or uncertainties that will have a
material effect on the Company's liquidity, capital resources or operations,
except for higher interest rates which could cause deposit disintermediation and
an increase in interest expense and the possibility of inflationary trends, the
results of which cannot be determined at this time. The Company is not under any
agreement with the regulatory authorities nor is it aware of any current
recommendation by regulatory authorities which, if they were implemented, would
have a material adverse effect on liquidity, capital resources, or the
operations of the Company.
Liquidity is a measure of the Company's ability to raise funds to support asset
growth, meet deposit withdrawal and other borrowing needs, maintain reserve
requirements and otherwise operate the Company on an ongoing basis. The Company
manages its assets and liabilities to maintain liquidity and earnings stability.
Among the sources of liquidity are money market investments, securities
available-for-sale, funds received from the repayment of loans, short-term
borrowings and borrowings from the Federal Home Loan Bank.
At June 30, 2002, cash, due from banks, Federal funds sold and interest bearing
deposits with banks totaled $30,667,000, and securities maturing within one year
totaled $3,079,000. At December 31, 2001, cash, due from banks, Federal funds
sold and interest bearing deposits with banks, totaled $18,189,000, and
securities maturing within one year were $8,050,000. Securities sold under an
agreement to repurchase totaled $13,110,000 at June 30, 2002 and $8,380,000 at
December 31, 2001. The Bank is a member of the Federal Home Loan Bank of
Pittsburgh. The Bank had interest bearing demand deposits at the Federal Home
Loan Bank of Pittsburgh in the amount of $13,555,000 at June 30, 2002 and
$891,000 at December 31, 2001. These deposits are included in due from banks on
the Company's financial statements. As a result of this relationship, the
Company places most of its short-term funds at the Federal Home Loan Bank of
Pittsburgh. There were $2,000,000 in Federal funds sold at June 30, 2002. There
were no Federal Funds sold at December 31, 2001.
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit
in the amount of $25,000,000 at June 30, 2002, subject to certain collateral
requirements. The Bank had no short-term (overnight) borrowings against this
line at June 30, 2002 and December 31, 2001.
The Company had long-term debt from the Federal Home Loan Bank of Pittsburgh
totaling $34,889,000 at June 30, 2002 and $34,804,000 at December 31, 2001. Of
the loans outstanding at June 30, 2002, $10,000,000 matures in August 2004,
$5,000,000 matures in January 2007, $7,000,000 matures in October 2008,
$12,000,000 matures in August 2010, $800,000 amortizes with monthly payments and
matures in November 2016, and $89,000 amortizes with monthly payments and
matures in February 2017. The interest rates associated with these loans are
6.06% fixed but may be converted at the option of the lender to a variable rate
of LIBOR plus 15 basis points if LIBOR is 7.5% or higher, 4.45% fixed to
December 2002 at which time the rate may be converted at the option of the
lender to a variable rate of LIBOR plus 15 basis points if LIBOR is 7.5% or
higher, 4.86% fixed to October 2003 at which time the rate may be converted at
the option of the lender to a variable rate of LIBOR plus 15 basis points, 6.23%
23
fixed to August 2001 at which time the rate may be converted at the option of
the lender to three-month LIBOR plus 15 basis points if LIBOR is 8.0% or higher,
6.43% fixed, and 5.65% fixed, respectively. The loans are secured by the Bank's
residential real estate loans and investment securities. These funds were
borrowed to improve liquidity and to fund loans.
On June 3, 2002, the Company formed the statutory trust company, First Colonial
Statutory Trust I (the "Statutory Trust I"), a wholly-owned Connecticut
statutory business trust subsidiary of the Company, for the sole purpose of
issuing trust preferred securities that are fully and unconditionally guaranteed
by the Company. On June 26, 2002, the Company issued $15,000,000 of subordinated
debentures to Statutory Trust I and the Statutory Trust I issued $15,000,000 in
pooled trust preferred securities. The subordinated debentures are the sole
asset of the Statutory Trust. The Trust Preferred securities are classified as
long-term debt for the financial statements, but are included as Tier I capital
for regulatory purposes. The interest rate on this security (5.34% at June 30,
2002) is variable, adjusting quarterly at three-month LIBOR plus 3.45%. The
interest is payable quarterly. The trust preferred securities mature in June
2032, and may be redeemed at the option of the Company on or after June 2007, or
may be redeemed at any time in the event that the deduction of related interest
for federal income tax purposes is prohibited, treatment as Tier I capital is no
longer permitted, or certain other contingencies arise. The net proceeds of the
trust preferred securities are to be used to support the Company's growth and
expansion plans and other general corporate purposes.
The Company's Employee Stock Ownership Plan (ESOP) has four loans outstanding
totaling $1,235,000 at June 30, 2002 and December 31, 2001. The first loan with
an outstanding principal balance of $240,000 is due in 2005. The second loan
with an outstanding balance of $850,000 is due in 2018. The third loan with an
outstanding balance of $65,000 is due in 2010. The fourth loan with an
outstanding balance of $80,000 is due in 2005. The interest is due quarterly on
these loans. Principal payments are made annually in October. The interest rate
on these loans is at the Bank's prime rate (4.75% at June 30,2002 and December
31, 2001).
Cash flows for the six months ended June 30, 2002 consisted of cash used in
investing activities of $69,541,000, offset in part by cash provided by
operating activities of $11,631,000, and cash provided by financing activities
of $57,743,000, resulting in a net decrease in cash and cash equivalents of
$167,000.
Cash was used in investing activities for the purchase of securities
available-for-sale and held-to-maturity of $104,049,000 and $18,209,000,
respectively, a net increase in loans of $31,060,000, a net increase in
interest-bearing deposits with banks of $12,645,000, and a net purchase of
premises and equipment of $149,000, partially offset by proceeds from sales of
securities available-for-sale of $48,244,000, proceeds from the calls and
maturities of securities available-for-sale of $26,291,000, proceeds from the
24
calls and maturities of securities held-to-maturity of $21,775,000, and proceeds
of $261,000 from the sale of other real estate owned.
Cash provided by operating activities was the result of net income for the first
six-month period of $1,791,000, proceeds from the sale of residential real
estate loans of $20,918,000, the provision for possible loan losses of $761,000,
depreciation and amortization of $660,000, and amortization of security premiums
and deferred fees on loans of $442,000 and $213,000, respectively, partially
offset by residential mortgage loans originated for sale of $10,294,000, a net
increase in other assets of $955,000, net gains on the sale of investment
securities of $663,000, a decrease in accrued interest payable of $638,000,
gains on the sale of residential mortgage loans of $197,000, a decrease in other
liabilities of $177,000, the accretion of security discounts of $153,000, an
increase in accrued interest income of $75,000, and a gain on the sale of other
real estate owned of $2,000.
Cash provided by financing activities consisted principally of a net increase in
interest and non-interest-bearing demand deposits and savings accounts of
$44,875,000, proceeds from the issuance of trust preferred securities of
$15,000,000, an increase in repurchase agreements of $4,730,000, proceeds from
the issuance of common stock of $173,000, proceeds from the sale of treasury
stock of $169,000, and an increase in long term debt of $85,000, partially
offset by a decrease in certificates of deposit of $6,361,000, the payment of
cash dividends of $777,000, the purchase of treasury stock of $146,000, and the
$5,000 payment of cash in lieu of fractional shares as a result of the 5% stock
dividend of May 2002.
The Company recognizes the importance of maintaining adequate capital levels to
support sound, profitable growth and to encourage depositor and investor
confidence. Shareholder's equity at June 30, 2002 was $37,866,000 as compared to
$35,326,000 at December 31, 2001, for an increase of $2,540,000 or 7.2%. This
increase resulted from net income of $1,791,000, an increase in accumulated
other comprehensive income related to unrealized gains in securities
available-for-sale of $1,335,000, the proceeds from sale of stock of $342,000,
reduced in part by the payment of dividends of $782,000 ant the purchase of
Treasury stock of $146,000.
On May 17, 2002 the Company paid its 2002 second quarter cash dividend on its
common stock of $0.19 per share to shareholders of record on May 3, 2002. On May
31, 2002 the Company paid a 5.0% stock dividend to shareholders of record on May
17, 2002.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. During
the first six months of 2002, 7,358 shares of common stock were purchased from
treasury stock at an average price of $22.97 per share for proceeds of
approximately $169,000.
The Company has a Stock Option Plan adopted in 2001, which provides for the
granting of options to acquire the Company's common stock for officers and key
employees. During the first six months of 2002, options to purchase 128,375
25
shares of the Company's common stock at an average price of $21.12 per share
were granted to certain officers. During the first half of 2002, 10,137 options
were exercised under this Plan during the first six months of 2002 at an average
price of $17.12 per share.
ITEM 3. Quantitative and Qualitative Discussion About Market Risk
As a financial institution, the Company's primary component of market
risk is interest rate volatility. Fluctuations in interest will ultimately
impact both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest earning
assets, other than those which possess a short term to maturity. Because most of
the Company's interest-bearing assets and liabilities are located at the Bank,
the majority of the Company's interest rate risk is at the Bank level. As a
result, most interest rate risk management procedures are performed at the Bank
level.
There have been no material changes in the Bank's assessment of its sensitivity
to market risk since its presentation in the 2001 annual report to shareholders
and its 2001 Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission.
26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
From time-to-time, the Company and the Bank are parties to
routine litigation incidental to their business.
Neither the Company, the Bank nor any of their properties is
subject to any material legal proceedings, nor are any such proceedings known to
be contemplated by any governmental authorities.
ITEM 2. Changes in Securities and Use of Proceeds
On June 3, 2002, the Company formed the statutory trust company,
First Colonial Statutory Trust I (the "Statutory Trust I"), a wholly-owned
Connecticut statutory business trust subsidiary of the Company, for the sole
purpose of issuing trust preferred securities that are fully and unconditionally
guaranteed by the Company. On June 26, 2002, the Company issued $15,000,000 of
subordinated debentures to Statutory Trust I and the Statutory Trust I issued
$15,000,000 in pooled trust preferred securities. The subordinated debentures
are the sole asset of the Statutory Trust. The Trust Preferred Securities are
classified as long-term debt for the financial statements, but are included as
Tier I capital for regulatory purposes. The interest rate on this security
(5.34% at June 30, 2002) is variable, adjusting quarterly at three-month LIBOR
plus 3.45%. The interest is payable quarterly. The trust preferred securities
mature in June 2032, and may be redeemed at the option of the Company on or
after June 2007, or may be redeemed at any time in the event that the deduction
of related interest for federal income tax purposes is prohibited, treatment as
Tier I capital is no longer permitted, or certain other contingencies arise. The
net proceeds of the trust preferred securities are to be used to support the
Company's growth and expansion plans and other general corporate purposes.
The Trust Preferred Securities were issued without registration
under the Securities Act of 1933 pursuant to the exemption provided by Section 4
(2) of the Act.
ITEM 3. Defaults Upon Senior Securities
None
27
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 2, 2002, the Company held it annual meeting of
shareholders. At the annual meeting, the shareholders elected Gordon B. Mowrer
and Maria Zumas Thulin as class 4 Directors of the Company to serve for a term
of four years and until their successors are duly elected and qualified. The
following is a tabulation of the vote for these directors.
Votes
Withheld
For Authority
---------------- --------------
Gordon B Mowrer 1,724,840 13,142
Maria Zumas Thulin 1,721,691 16,292
The terms of the following directors continued after the annual
meeting: Robert J. Bergren, Scott V. Fainor, Christian F. Martin, IV, Daniel B.
Mulholland, Charles J. Peischl, John H. Ruhle, Jr. and Richard Stevens, III.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter
during which this report is filed.
28
SIGNATURES
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.
FIRST COLONIAL GROUP, INC.
DATE: August 14, 2002 BY: /S/ SCOTT V. FAINOR
-------------------
SCOTT V. FAINOR
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: August 14, 2002 BY: /S/ REID. L. HEEREN
-------------------
REID L. HEEREN
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
29