FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
____________________________________
(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, 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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 23-2228154
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
76 S. MAIN STREET, NAZARETH, PA 18064
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(Address of Principal Executive Office)
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 by check mark whether the registrant is an accelerated filer as defined
in rule 12b-2 of the Exchange Act.
YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 2,213,550 shares of common
stock, $5 Par Value, outstanding on November 13, 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 29
Market Risk
29
ITEM 4 - Controls and Procedures
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 30
ITEM 2 - Changes in Securities and Use of Proceeds 30
ITEM 3 - Defaults Upon Senior Securities 30
ITEM 4 - Submission of Matters to a Vote of Security Holders 30
ITEM 5 - Other Information 30
ITEM 6 - Exhibits and Reports on Form 8-K 30
SIGNATURES 31
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
Sept. 30 Dec. 31
2002 2001
--------- ---------
ASSETS
Total Cash and Cash Eqivalents $ 20,640 $ 17,270
Interst-Bearing Deposits with Banks 1,845 919
Investment Securities Held-to-Maturity
(Fair Value: Sept. 30, 2002 $31,524
Dec. 31, 2001 - $23,160) 31,026 23,004
Securities Available-for-Sale at Fair Value 235,330 181,302
Mortgage Loans Held-for-Sale 1,476 3,808
Total Loans, Net of Uneamed Discount 249,881 225,757
LESS: Allowance for Possible Loan Losses (2,919) (2,264)
--------- ---------
Net Loans 246,962 223,493
Premises and Equipment, Net 6,364 6,562
Accrued Interest Income 3,223 2,888
Other Real Estate Owned 1 93
Other Assets 5,864 5,805
--------- ---------
TOTAL ASSETS $ 552,731 $ 465,144
--------- ---------
LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 65,490 $ 57,931
Interest-Bearing Deposits 379,381 321,955
--------- ---------
Total Deposits 444,871 379,886
Securities Sold Under Agreements to Repurchase 11,578 8,380
Long-Term Debt 34,887 34,804
Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures 15,000 -
Accrued Interest Payable 2,724 3,949
Other Liabilities 4,002 2,799
--------- ---------
TOTAL LIABILITIES 513,062 429,818
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 - 2,213,413 shares at Sept. 30, 2002
and 2,085,778 shares at Dec. 31, 2001 11,067 10,429
Additional Paid in Capital 20,667 18,304
Retained Earnings 7,717 8,581
Less: Treasury stock at cost: none at Sept. 30, 2002
and 2,463 shares at Dec. 31, 2001 - (59)
Deferred Stock Compensation: 10,000 shares at Sept. 30, 2002
and none at Dec. 31, 2001 (220) -
Employee Stock Ownership Plan Debt (1,235) (1,235)
Accumulated Other Comprehensive Income 1,673 (694)
--------- ---------
Total Shareholders' Equity 39,669 35,326
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 552,731 $ 465,144
--------- ---------
See accompanying notes to interim consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
------- ------- ------- -------
INTEREST INCOME:
Interest and Fees on Loans $ 4,599 $ 4,498 $13,172 $14,262
Investment Securities Income
Taxable 2,504 2,426 7,262 7,126
Tax-Exempt 554 454 1,480 1,293
Interest on Deposits with Banks and
Federal Funds Sold 41 82 121 138
------- ------- ------- -------
Total Interest Income 7,698 7,460 22,035 22,819
------- ------- ------- -------
INTEREST EXPENSE:
Interest on Deposits 2,395 2,913 7,332 8,868
Interest on Short-Term Borrowing 38 94 153 375
Interest on Long-Term Debt 512 492 1,517 1,508
Inteest on Trust-Preferred Securities 205 - 216 -
------- ------- ------- -------
Total Interest Expense 3,150 3,499 9,218 10,751
------- ------- ------- -------
NET INTEREST INCOME: 4,548 3,961 12,817 12,068
Provision for Possible Loan Losses 475 125 1,236 455
------- ------- ------- -------
Net Interest Income After Provision
For Possible Loan Losses 4,073 3,836 11,581 11,613
------- ------- ------- -------
OTHER INCOME:
Trust and Wealth Management Revenue 227 310 802 963
Service Charges on Deposit Accounts 647 599 1,887 1,697
Investment Securities Gains, Net 311 207 974 432
Gain on the Sale of Mortgage Loans 568 84 765 187
Other Operating Income 165 202 584 534
------- ------- ------- -------
Total Other Income 1,918 1,402 5,012 3,813
------- ------- ------- -------
OTHER EXPENSES:
Salaries and Employee Benefits 2,472 1,980 6,630 5,763
Net Occupancy and Equipment Expense 634 617 1,942 1,877
Other Operating Expenses 1,562 1,483 4,549 4,519
------- ------- ------- -------
Total Other Expenses 4,668 4,080 13,121 12,159
------- ------- ------- -------
Income Before Income Taxes 1,323 1,158 3,472 3,267
Provision for Income Taxes 241 221 599 613
------- ------- ------- -------
NET INCOME $ 1,082 $ 937 $ 2,873 $ 2,654
======= ======= ======= =======
Per Share Data
Basic Net Income $ 0.51 $ 0.44 $ 1.34 $ 1.26
======= ======= ======= =======
Diluted Net Income $ 0.50 $ 0.44 $ 1.31 $ 1.26
======= ======= ======= =======
Cash Dividends $ 0.19 $ 0.18 $ 0.56 $ 0.52
======= ======= ======= =======
See accompanying notes to interim financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands), (Unaudited) Accumulated
Additional Deferred Other
For the Nine Months Ended Common Paid-In Retained Stock Treasury ESOP Comprehensive
Sept. 30, 2002 Stock Capital Earnings Compensation 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 2,873 2,873
Change in Unrealized Securities
Gains, Net 2,367 2,367
----------
Total Comprehensive Income 5,240
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
(8,313 shares) (13) 205 192
Sale of Common Stock under
Dividend Reinvestment Plan
(3,141 shares) 16 58 74
Sale of Common Stock under
Stock Option Plans (9,651 shares) 48 125 173
Stock Dividend of 5% (104,843 shares) 524 2,023 (2,547) -
Cash in Lieu of Fractional Shares (5) (5)
Cash Dividends Paid (1,185) (1,185)
--------- ---------- ---------- ---------- ------------ ---------- ----------- ----------
Balance at Sept. 30, 2002 $ 11,067 $ 20,667 $ 7,717 $ (220) $ - $ (1,235) $ 1,673 $ 39,669
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
OPERATING ACTIVITIES Sept. 30, 2002 Sept. 30, 2001
-------------- --------------
Net Income $ 2,873 $ 2,654
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses 1,236 455
Depreciation and Amortization 1,000 925
Accretion of Security Discounts (243) (297)
Amortization of Security Premiums 775 252
Amortization of Deferred Fees on Loans 336 218
Gain on Sale of Other Real Estate Loans (3) (33)
Mortgage Loans Originated for Sale (21,317) (19,261)
Mortgage Loan Sales 40,753 35,317
Gain on Sale of Mortgage Loans (765) (187)
Investment Securities Gains, Net (974) (432)
Changes in Assets and Liabilities:
(Increase) Decrease in Accrued Interest Income (335) 716
(Decrease) in Accrued Interest Payable (1,225) (1,420)
Net Increase in Other Assets (574) (2,516)
Net Increase (Decrease) in Other Liabilities 189 (1,708)
--------- ---------
Net Cash Provided By Operating Activities: 21,726 14,683
--------- ---------
INVESTING ACTIVITIES
Proceeds from Calls and Maturities of Securities Available-for-Sale 51,252 53,840
Proceeds from Calls and Maturities of Securities Held-to-Maturity 26,668 9,059
Proceeds from Sales of Securities Available-for-Sale 68,539 16,549
Purchase of Securities Available-for-Sale (172,503) (83,774)
Purchase of Securities Held-to-Maturity (31,975) (11,033)
Net Increase in Interest Bearing Deposits With Banks (926) (8,179)
Net Increase in Loans (41,625) (15,446)
Purchase of Premises and Equipment, Net (495) (222)
Proceeds from Sale of Other Real Estate Owned 340 664
--------- ---------
Net Cash Used In Investing Activities (100,725) (38,542)
--------- ---------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest Bearing
Demand Deposits and Savings Accounts 73,328 15,976
Net (Decrease) Increase in Certificates of Deposit (8,343) 4,880
Net Increase in Long-Term Debt 83 -
Net Decrease in Short-Term Debt - (5,695)
Net Increase in Repurchase Agreements 3,198 6,158
Proceeds from Issuance of Stock 247 244
Proceeds from Sale of Treasury Stock 192 -
Purchase of Treasury Stock (146) -
Proceeds From Issuance of Guaranteed Preferred
Beneficial Interest in Company's Subordinated Debentures 15,000 -
Cash Dividends Paid (1,185) (1,105)
Cash Paid in Lieu of Fractional Shares (5) (2)
--------- ---------
Net Cash Provided by Financing Activities 82,369 20,456
--------- ---------
Increase (Decrease) in Cash & Cash Equivalents 3,370 (3,403)
Cash and Cash Equivalents, January 1, 17,270 17,738
--------- ---------
Cash and Cash Equivalents, September 30, $ 20,640 $ 14,335
========= =========
See accompanying notes to interim consolidated financial statements.
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 nine months ended September 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 August 16, 2002, the Company paid its 2002 third quarter dividend on its
common stock of $0.19 per share to shareholders of record on August 2, 2002. On
August 17, 2001, the Company paid its 2001 third quarter dividend on its common
stock of $0.18 per share (adjusted for the 5% stock dividend of May 2002) to
shareholders of record on August 3, 2001.
On May 31, 2002, the Company paid a 5% stock dividend to shareholders of record
on May 17, 2002. On June 22, 2001 the Company paid a 5% stock dividend to
shareholders of record on June 4, 2001. Net income per share and average shares
outstanding have been restated to reflect these 5% stock dividends.
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:
For the Three Months Ended Sept. 30, Average
Income Shares Per Share
(numerator) (denominator) Amount
--------------------------------------------------
2002
- ----------------------------------------------------
Net Income $ 1,082
Basic Earnings Per Share
Income Available to Common Shareholders $ 1,082 2,131,695 $ 0.51
Effect of Dilutive Securities
Stock Options 46,834
--------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 1,082 2,178,529 $ 0.50
--------------------------------------------------
2001
- ----------------------------------------------------
Net Income $ 937
Basic Earnings Per Share
Income Available to Common Shareholders $ 937 2,110,215 $ 0.44
Effect of Dilutive Securities
Stock Options 4,203
--------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 937 2,114,418 $ 0.44
--------------------------------------------------
For the Nine Months Ended Sept. 30, Average
Income Shares Per Share
(numerator) (denominator) Amount
---------------------------------------------------
2002
- ----------------------------------------------------
Net Income $ 2,873
Basic Earnings Per Share
Income Available to Common Shareholders $ 2,873 2,151,655 $ 1.34
Effect of Dilutive Securities
Stock Options 41,195
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 2,873 2,192,850 $ 1.31
---------------------------------------------------
2001
- ----------------------------------------------------
Net Income $ 2,654
Basic Earnings Per Share
Income Available to Common Shareholders $ 2,654 2,104,674 $ 1.26
Effect of Dilutive Securities
Stock Options 3,102
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 2,654 2,107,776 $ 1.26
---------------------------------------------------
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 for other general corporate purposes.
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 nine-month periods ended September 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 and new branches, 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,
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 believes that the following accounting policies include estimates
that are the most critical and could have the most potential impact on its
results of operations.
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
it requires material estimates, including, among others, expected default
probabilities, the amounts and timing of expected future cash flows on impaired
loans, value of collateral, estimated losses on commercial loans, consumer loans
and residential mortgage loans, 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 one of three various market
valuation methodologies. If the fair value of the reporting units exceeds 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
September 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.
These and other significant accounting policies are described in Note A to the
Company's 2001 financial statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
Results of Operations
Basic earnings per share for the three months ended September 30, 2002 were
$0.51 as compared to $0.44 for the corresponding period in 2001. Diluted
earnings per share for the three months ended September 30, 2002 were $0.50 as
compared to $0.44 for
the same period in 2001. Average basic shares outstanding during this
three-month period were 2,131,695 in 2002 and 2,110,215 in 2001. Average diluted
shares outstanding during the three-month period were 2,178,529 in 2002 and
2,114,418 in 2001. Basic earnings per share for the nine months ended September
30, 2002 were $1.34 as compared to $1.31 for the corresponding period in 2001.
Diluted earnings per share for the nine months ended September 30, 2002 were
$1.31 and $1.26 in 2002 and 2001, respectively. Average basic shares outstanding
during this nine-month period were 2,151,655 in 2002 and 2,104,674 in 2001.
Average diluted shares outstanding during the nine-month period were 2,192,850
in 2002 and 2,107,776 in 2001. Per share earnings and average shares outstanding
have been restated to reflect the 5% stock dividend paid on May 31, 2002. (see
Note D)
The net income for the three months ended September 30, 2002 was $1,082,000
compared to $937,000 for the same period in 2001. This was an increase of
$145,000 or 15.5%. The earnings increase was attributable in part to an increase
in net interest income of $587,000 or 14.8% (see discussion on Net Interest
Income), a $484,000 increase in the gains on the sale of mortgage loans, a
$104,000 increase in the gains on the sale of available-for-sale securities and
a $48,000 increase in service charges on deposit accounts. These were offset in
part by an increase in operating expenses of $588,000 or 14.4%, an increase of
$350,000 in the provision for loan losses, and a decrease of $83,000 in Trust
and Wealth Management revenues, a decrease of $37,000 in other operating income
and an increase of $20,000 in Federal income taxes.
Net income for the nine months ended September 30, 2002 was $2,873,000 compared
to $2,654,000 for the same period in 2001, an increase of $219,000 or 8.3%. The
earnings increase was primarily attributable to an increase of $749,000 or 6.2%
in net interest income, an increase of $578,000 in gains on the sale of mortgage
loans, an increase of $542,000 in the gains on the sale of available-for-sale
securities, an increase of $190,000 in service charges on deposit accounts, an
increase in other operating income of $50,000, and a $14,000 reduction in
Federal income taxes. These were partially offset by a $962,000 or 7.9% increase
on total other expenses, a $781,000 increase in the provision for possible loan
losses, and a $161,000 decrease in Trust and Wealth Management revenues.
Net Interest Income
Net interest income amounted to $4,548,000 for the three months ended September
30, 2002 compared to $3,961,000 for the three months ended September 30, 2001,
an increase of $587,000 or 14.8%. This increase was primarily the result of
increases in interest earned on loans and investments and decreases in interest
paid on deposits and debt. The total interest income earned on loans and
investments amounted to $7,698,000 for the third quarter of 2002, an increase of
$238,000 or 3.2% over the $7,460,000 earned in the same period in 2001. The
total interest expense paid on deposits and debt was $3,150,000 and $3,499,000
for the three-month period ended September 30, 2002 and 2001, respectively. This
was a decrease in third quarter of
2002 from 2001 of $349,000 or 10%. The increase in interest income was primarily
due to higher volume of loans and investments. The decrease in interest expense
was primarily the result of declining interest rates.
Net interest income for the nine months ended September 30, 2002 was $12,817,000
compared to $12,068,000 for the same period in 2001. This was an increase of
$749,000 or 6.2%. The interest income earned on loans and investments during the
first nine months of 2002 was $22,035,000, which was $784,000 or 3.4% lower than
the 2001 amount of $22,819,000. Total interest expense for the nine-month period
was $9,218,000 and $10,751,000 in 2002 and 2001, respectively. The decrease in
interest expense in 2002 from 2001 was $1,533,000 or 14.3%. These decreases were
primarily due to declining interest rates offset in part by increased volumes of
deposits and debt.
The fully taxable-equivalent net interest income was $13,625,000 for the first
nine months of 2002, compared to $12,776,000 for the same period in 2001, a 6.6%
or $849,000 increase. This increase in taxable-equivalent net interest income
was primarily due to a $2,415,000 increase related to volume partially reduced
by a $1,566,000 decrease due to lower interest rates.
The "Rate/Volume Analysis" table segregates, in detail, the major factors that
contributed to the changes in net interest income, for the nine months ended
September 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.
The following table sets forth a "Rate/Volume Analysis" for the nine months
ended September 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%.
RATE / VOLUME ANALYSIS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30, 2002
Over / (Under)
September 30, 2001
CHANGE DUE TO:
TOTAL RATE VOLUME
--------------------------------------------------
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ (16) $ (152) $ 136
Federal Funds Sold (1) (10) 9
Investment Securities 418 (1,512) 1,930
Loans (1,085) (1,954) 869
-------------- -------------- --------------
Total Interest Income $ (684) $(3,628) $ 2,944
-------------- -------------- --------------
INTEREST EXPENSE
Demand Deposits, Money Market, Savings & Clubs $ 213 $ (415) $ 628
Time Deposits and CD's over $100,000 (1,749) (1,741) (8)
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase (137) (85) (52)
Short-Term Borrowings (85) (7) (78)
Long-Term Borrowings 9 (30) 39
Guaranteed Preferred Beneficial Interests
in Company's Subordinated Debentures 216 - 216
-------------- -------------- --------------
Total Interest Expense (1,533) (2,278) 745
-------------- -------------- --------------
Net Increase (Decrease) in Interest Income $ 849 $(1,350) $ 2,199
============== ============== ==============
Total taxable-equivalent interest income for the nine months ended September 30,
2002 declined by $684,000 or 2.8% compared to the same period in 2001, primarily
the result of lower interest rates earned on loans and investments offset in
part by higher volumes. Interest income from loans on a fully taxable equivalent
basis was $1,085,000 or 7.6% lower during the nine months ended September 30,
2002 as compared to the same period in 2001. This decrease was comprised of a
$1,954,000 decrease due to lower interest rates reduced in part by an $869,000
increase due to growth in average loans outstanding. Income from investment
securities for the nine months ended September 30, 2002 increased $418,000 or
4.6% over the same period in 2001. This was comprised of a $1,930,000 increase
due to a higher volume of investments reduced in part by a $1,512,000 decrease
due to lower interest rates. Average year-to-date earning assets increased to
$473,598,000 at September 30, 2002 from $415,469,000 at September 30, 2001, a
$58,129,000 or 14% increase.
Total interest expense decreased by $1,533,000 or 14.3% during the first nine
months of 2002, over the same period in 2001. This decline was principally the
result of lower interest rates paid on deposits and debt partially offset by
growth in deposits and the new subordinated debentures. Interest expense
attributed to time deposits and certificates of deposit over $100,000 decreased
$1,749,0000 or 25.1% during the first nine months of 2002, over the first nine
months of 2001. This was comprised of a $1,741,000 decrease due to lower
interest rates and an $8,000 decrease due to lower balances. The interest
expense on demand, savings, money market and club deposits increased $213,000
during the first nine months of 2002, over the first nine months of 2001. This
was comprised of a $628,000 increase due to growth in these deposit balances
reduced in part by a $415,000 decrease due to lower rates paid on these
deposits. The increase in deposits was used to finance the earning asset growth.
Also affecting interest expense was the $216,000 of interest paid on $15,000,000
of subordinated debentures ("Trust Preferred") issued on June 26, 2002.
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.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended, Sept. 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 $ 9,518 $ 112 1.57% $ 4,618 $ 128 3.70%
Federal Funds Sold 791 9 1.52 425 10 3.14
Investment Securities
Taxable 180,555 7,262 5.36 147,097 7,126 6.46
Non-Taxable (1) 41,977 2,242 7.12 36,440 1,960 7.17
Loans (1) (2) 243,215 13,218 7.25 229,286 14,303 8.32
Reserve for Loan Losses (2,458) - - (2,397) - -
--------------- -------------- ---------------- ----------------
Net Loans 240,757 13,218 7.32 226,889 14,303 8.41
--------------- -------------- ---------------- ----------------
Total Interest-Earning Assets 473,598 22,843 6.43 415,469 23,527 7.55
Non-Interest Earning Assets 27,919 - - 29,614 - -
--------------- -------------- ---------------- ----------------
TOTAL ASSETS, INTEREST INCOME $ 502,517 22,843 6.07 $ 445,083 23,527 7.05
=============== -------------- ================ ----------------
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 58,196 293 0.67 $ 55,180 396 0.96
Money Market Deposits 53,330 1,047 2.62 17,431 418 3.20
Savings & Club Deposits 71,850 765 1.42 65,079 1,078 2.21
CD's over $100,000 7,511 184 3.27 5,622 233 5.52
All Other Time Deposits 160,269 5,043 4.20 162,341 6,743 5.54
--------------- -------------- ---------------- ----------------
Total Interest-Bearing Deposits 351,157 7,332 2.78 305,654 8,868 3.87
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 10,501 149 1.89 12,822 286 2.97
Short-Term Debt 294 4 1.81 2,336 89 5.09
Long-Term Debt 34,874 1,517 5.80 34,000 1,508 5.91
Guaranteed Preferred Beneficial Interests
in Company's Subordinated Debentures 5,220 216 5.52 - - -
--------------- -------------- ---------------- ----------------
Total Interest-Bearing Liabilities 402,046 9,218 3.06 354,812 10,751 4.04
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 55,831 - - 47,658 - -
Other Liabilities 6,761 - - 7,983 - -
--------------- -------------- ---------------- ----------------
TOTAL LIABILITIES 464,638 9,218 2.65 410,453 10,751 3.49
SHAREHOLDERS' EQUITY 36,879 - - 34,630 - -
--------------- -------------- ---------------- ----------------
TOTAL LIABILITIES AND EQUITY $ 501,517 9,218 2.45 $ 445,083 10,751 3.22
=============== -------------- ================ ----------------
NET INTEREST INCOME $ 13,625 $ 12,776
============== ================
Net Interest Spread (3) 3.37 3.51
Effect of Interest-Free Sources
Used to Fund Earnings 0.47 0.59
Net Interest Margin (4) 3.84% 4.10%
=========== ========
(1) The indicated interest income and average yields are presented on a taxable equivalent basis. The tax equivalent adjustments
included above are $808,000 and $708,000 for the nine months ended September 30, 2002 and September 30, 2001, respectively. The
effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of $(121,000) and $(82,000) for the nine months ended September 30, 2002 and September 30, 2001, respectively, are
included in interest income. Average loan balances include non-accruing loans and average loans held-for-sale of $3,665,000 and
$2,357,000 for the nine months ended September 30, 2002 and September 30, 2001, respectively.
(3) Net interest spread is the arithmetic difference between yield on interest-earning assets and the rate paid on interest-bearing
liabilities.
(4) Net interest margin is computed by dividing annualized net interest income by average interest-earning assets.
The net interest margin of 3.84% for the nine-month period ended September 30,
2002, decreased from the 4.10% net interest margin for the first nine months of
2001. The yield on interest earning assets was 7.32% during the first nine
months of 2002 as compared to 7.55% in 2001. The average interest rate paid on
interest bearing deposits and other borrowings was 3.06% for the first nine
months of 2002 as compared to 4.04% in 2001.
Other Income and Other Expenses
Other income for the three months ended September 30, 2002, including service
charges, trust and wealth management revenues, gains on the sale of mortgage
loans, net securities gains and other miscellaneous income was $1,918,000 as
compared to $1,402,000 for the same period in 2001. This was an increase of
$516,000 or 36.8%. This increase was the result of the increased gains on the
sale of mortgage loans, increased gains on the sale of securities
available-for-sale, and increases in service charges, reduced in part by a
decline in trust and wealth management revenues and other miscellaneous income.
In the three month period ended September 30, 2002, the gains on the sale of
mortgage loans amounted to $568,000 as compared to gains of $84,000 for the same
period in 2001. This was an increase of $484,000. Mortgage loan sales amounted
to $19,835,000 during the three-month period ended September 30, 2002 as
compared to $8,166,000 during the same period in 2001. The net gains on
securities available-for-sale for the three-month period ended September 30 were
$311,000 in 2002 and $207,000 in 2001. This was an increase of $104,000 or
50.2%. Service charges were $647,000, during the three months ended September
30, 2002, a $48,000 or 8% increase over the 2001 amount of $599,000. The
increase in service charges was due to growth in checking accounts. The trust
and wealth management revenues were $227,000 for the three months ended
September 30, 2002 as compared to $310,000 for the three months ended September
30, 2001, a decrease of $83,000 or 26.8%. The revenue from trust and wealth
management operations decreased as a result of a reduction in the market values
of securities on which trust fees are assessed. Other miscellaneous income for
the three months ended September 30, 2002 was $165,000, a decrease of $37,000 or
18.3% compared to $202,000 for the same period in 2001.
Other income for the nine months ended September 30, 2002, including service
charges, trust and wealth management revenues, gains on the sale of mortgage
loans, net securities gains and other miscellaneous income was $5,012,000 as
compared to $3,813,000 for the same period in 2001. This was an increase of
$1,199,000 or 31.4%. In the nine-month period ended September 30, 2002, service
charges were $1,887,000, a $190,000 or 11.2% increase over the 2001 amount of
$1,697,000. 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 $765,000 during the first nine months of 2002 compared to gains of $187,000
in the first nine months of 2001. This was an increase of $578,000. Mortgage
loan sales amounted to $40,753,000 and $35,317,000 in the first nine months of
2002 and 2001, respectively. The increase in the mortgage sales gains was the
result of lower interest rates and a higher volume of
mortgage sales. The net gains on securities available-for-sale for the first
nine months of 2002 was $974,000 as compared to $432,000 for the first nine
months of 2001. This was an increase of $542,000. Other operating income was
$584,000 for the first nine months of 2002 as compared to $534,000 for the same
period in 2001. This was an increase of $50,000 or 9.4%. The revenues from the
trust and wealth management operations were $802,000 for the nine months ended
September 30, 2002 as compared to $963,000 for the nine months ended September
30, 2001, a decrease of $161,000 or 16.7%. This decrease was the result of the
lower market values of the assets on which these fees are based.
Total other expenses for the three-month period ended September 30, 2002 were
$4,668,000 as compared to $4,080,000 for the same period in 2001. This was an
increase of $588,000 or 14.4%. This increase was the result of an increase of
$492,000 or 24.8% in salary and benefit expenses, which were $2,472,000 in 2002
as compared to $1,980,000 in 2001. This increase was primarily the result of
general salary increases of approximately 4%, the payment of higher commissions
and incentives to certain loan officers as a result of increased new loan
business and the addition of staff in the commercial loan, trust and wealth
management and executive areas of the Bank. Occupancy and equipment expenses
were $634,000 for the three months ended September 30, 2002 and $617,000 for the
three months ended September 30, 2001, an increase of $17,000 or 2.8%. The
increase in occupancy expenses was related to rent increases at some branches
and purchases of some new computer equipment. Other operating expenses for the
three-month period ended September 30, 2002 were $1,562,000, an increase of
$79,000 or 5.3% from the $1,483,000 for the same period in 2001.
Total other expenses for the nine-month period ended September 30, 2002
increased by $962,000 or 7.9% to $13,121,000 over total other expenses for the
same period in 2001 of $12,159,000. Included in this increase was an $867,000 or
15% increase in salary and benefit expenses which were $6,630,000 in 2002 as
compared to $5,763,000 in 2001. These increases were primarily due to general
salary increases of approximately 4% and the additions to staff and increases in
commissions and incentives. Occupancy and equipment expenses were $1,942,000 for
the nine months ended September 30, 2002 and $1,877,000 for the nine months
ended September 30, 2001, an increase of $65,000 or 3.5%. The increase in
occupancy expenses was related to rent increases, general maintenance and new
equipment. Other operating expenses for the nine-month period ended September
30, 2002 were $4,549,000, an increase of $30,000 or 0.7% from the $4,519,000 in
other expenses for the same period in 2001.
FINANCIAL CONDITION
Assets and Liabilities
Total assets at September 30, 2002 were $552,731,000, representing an increase
of $87,587,000 or 18.8% over total assets of $465,144,000 at December 31, 2001.
Deposits increased by $64,985,000 or 17.1% from $379,886,000 on December 31,
2001 to $444,871,000 on September 30, 2002. Contributing to this increase in
total deposits were increases in savings and money market deposits of
$61,878,000, non-interest bearing checking deposits of $7,559,000 and interest
bearing checking deposits of $3,891,000, partially offset by a decrease in
certificates of deposit over $100,000 of $7,357,000, and certificates of deposit
under $100,000 of $986,000. Loans outstanding at September 30, 2002 were
$249,881,000 as compared to $225,757,000 at December 31, 2001. This was an
increase of $24,124,000 or 10.7%. The increase in loans was primarily the result
of an increase of $33,005,000 or 51.9% in commercial loans and an increase of
$1,189,000 or 1.1% in consumer loans. These increases were offset in part by a
decrease in residential real estate loans of $10,070,000 or 17.8%. The reduction
in residential real estate loans was the result of the sale of $40,753,000 of
these loans during the nine-month period of 2002. There were $1,476,000 of
residential real estate loans identified as held-for-sale at September 30, 2002.
There were $3,808,000 residential real estate loans held-for sale at December
31, 2001. The loan to deposit ratio was 56.2% and 59.4% at September 30, 2002
and December 31, 2001, respectively.
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 that are beyond the scope of
management's control.
The provision for possible loan losses was $1,236,000 for the first nine months
of 2002 as compared to $455,000 for the same period in 2001. Net charge offs
were $581,000 for the nine months ended September 30, 2002 compared with
$520,000 for the nine months ended September 30, 2001. The ratio of the
allowance for loan losses to total loans was 1.17% at September 30, 2002 and
1.00% at December 31, 2001. The 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 of actual charge offs for the nine
months of 2002 and the analysis by management of non-performing loans and the
other risks in the loan portfolio. The allowance for possible loan losses at
September 30, 2002 totaled $2,919,000, an increase of $655,000 or 28.93% over
the December 31, 2001 amount of $2,264,000.
At September 30, 2002, $8,000 of the allowance for possible loans losses was
allocated to impaired loans.
Transactions in the allowance for loan losses were as follows:
2002 2001
-------------- -------------
Balance, January 1, $2,264,000 $2,411,000
Loans Charged Off (772,000) (666,000)
Loans Recovered 191,000 146,000
-------------- -------------
Net Loans Charged Off (581,000) (520,000)
Provision Charged to Expenses 1,236,000 455,000
-------------- -------------
Balance, September 30, $2,919,000 $2,346,000
============== =============
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 substantially collectible because adequate collateral or other
resources protect the loans. 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.
Sept. 30, December 31, Sept. 30,
2002 2001 2001
- --------------------------------------------------------------------------------------------------------
Non-accrual loans on a cash basis $ 944,000 $ 1,019,000 $ 913,000
Non-accrual loans as a percentage
of total loans 0.38% 0.45% 0.41%
- --------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $1,864,000 $ 2,185,000 $ 1,038,000
Accruing loans past due 90 days or more
as a percentage of total loans 0.75% 0.97% 0.47%
- --------------------------------------------------------------------------------------------------------
Total nonperforming loans
(Non-accrual loans plus accruing loans
past due 90 days or more) $2,808,000 $ 3,204,000 $ 1,951,000
Allowance for loan losses to
nonperforming loans 103.95% 70.66% 120.25%
Nonperforming loans to total loans 1.12% 1.42% 0.88%
Allowance for loan losses to total loans 1.17% 1.00% 1.06%
- --------------------------------------------------------------------------------------------------------
Total non-performing loans (non-accruing loans and loans past due over 90 days)
amounted to $2,808,000 at September 30, 2002 as compared to $3,204,000 at
December 31, 2001 and $1,951,000 at September 30, 2001. The ratio of
non-performing loans to total loans was 1.12%, 1.42% and 0.88% at September 30,
2002, December 31, 2001 and September 30, 2001, respectively. The decrease in
this ratio is primarily the result of a decrease in total non-performing loans
due to collection efforts. Also affecting this ratio was an increase in loans
outstanding (see discussion on "Assets and Liabilities").
Non-accruing loans at September 30, 2002 of $944,000 decreased from the December
31, 2001 amount of $1,019,000 and increased over the September 30, 2001 level of
$913,000. The amount of decrease from December 31, 2001 to September 30, 2002
was $75,000. This decrease was primarily the result of collection efforts. 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 September 30, 2002, loans past due 90 days or more and still
accruing interest were $1,864,000 compared to $2,185,000 at December 31, 2001
and $1,038,000 at September 30, 2001. The $321,000 decrease in loans past due 90
days from December 31, 2001 to September 30, 2002 was the result of decreases in
mortgage and consumer loans past due 90 days or more.
The Bank also had certain loans that are performing as agreed as to both
interest and principal which are classified by the Bank with certain credit
weaknesses. These loans totaled $1,733,000 at September 30, 2002, $1,503,000 at
December 31, 2001 and $2,023,000 at September 30, 2001.
Other Real Estate Owned
Other Real Estate Owned at September 30, 2002 of $1,000 decreased from the
December 31, 2001 level of $93,000. This $92,000 decrease resulted from the sale
of a residential real estate property.
Investment Securities
The Company had $235,000,000 in available-for-sale securities at September 30,
2002 with a net unrealized gain of $1,673,000. At December 31, 2001
available-for-sale securities amounted to $181,302,000 with a net unrealized
loss of $694,000.
During the nine-month period ended September 30, 2002, $68,539,000 of securities
available-for-sale were sold for a net gain of $989,000 as compared to
$16,549,000 of securities available-for-sale sold for a net gain of $432,000 for
the same time period in 2001. Most of the securities sold were longer term
agency mortgage-backed bonds and longer term municipal bonds. These securities
were replaced with shorter-term agency mortgage-backed securities. The purpose
of these sales was to shorten the investment portfolio and reduce the Company's
interest rate risk.
Held-to-maturity securities totaling $31,026,000 at September 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 September 30, 2002,
did not hold any securities identified as derivatives.
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. The $15 million of trust preferred securities issued by
Statutory Trust I are included in Tier 1 capital. 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 September
30, 2002, the Company and the Bank met all capital adequacy requirements to
which they were subject.
CAPITAL RATIOS
- -----------------------------------------------------------------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- ------------------------------
(Dollars in Thousands)
At September 30, 2002 Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 55,416 19.31% $ 22,959 8.00% -
Bank $ 46,264 16.37% $ 22,608 8.00% $ 28,261 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 49,996 17.42% $ 11,480 4.00% -
Bank $ 42,345 14.98% $ 11,304 4.00% $ 16,956 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company, (Consolidated) $ 49,996 9.40% $ 21,269 4.00% -
Bank $ 42,345 8.00% $ 21,164 4.00% $ 26,455 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%
- -----------------------------------------------------------------------------------------------------------------------------------
The Company is not aware of any trends, events or uncertainties that will have a
material adverse 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 September 30, 2002, cash, due from banks, Federal funds sold and interest
bearing deposits with banks totaled $22,485,000, and securities maturing within
one year totaled $1,008,000. 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 $11,578,000 at
September 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
$1,460,000 at September 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 September 30, 2002. There were no Federal Funds sold at
December 31, 2001.
The Federal Home Loan Bank of Pittsburgh provided the Bank with a line of credit
in the amount of $25,000,000 at September 30, 2002, subject to certain
collateral requirements. The Bank had no short-term (overnight) borrowings
against this line at September 30, 2002 and December 31, 2002.
The Company had long-term debt from the Federal Home Loan Bank of Pittsburgh
totaling $34,887,000 at September 30, 2002 and $34,804,000 at December 31, 2001.
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 real
estate loans.
The loans outstanding are as follows:
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousand)
- -------------------------------------------------------------------------------------------------------------------------
Balance at: Balance at:
Date September 30, December 31, Due Interest
Originated 2002 2001 Date Rate
- ------------------------ --------------------- ---------------- ------------------------ --------------
August 1999 $ 10,000 $ 10,000 August 2004 6.06% (1)
December 2001 5,000 5,000 January 2007 4.45% (2)
October 1998 7,000 7,000 October 2008 4.86% (3)
August 2000 12,000 12,000 August 2010 6.23% (4)
November 2001 798 804 November 2016 6.43% (5)
February 2002 89 - February 2017 5.65% (5)
--------------------- ----------------
$ 34,887 $ 34,804
===================== ================
- -------------------------------------------------------------------------------------------------------------------------
(1) The interest rate on this loan may, on any quarter, be converted at the option of the lender to a variable rate of
three-month LIBOR plus 15 basis points if the three-month LIBOR is 7.5% or higher. If the lender elects to convert to
a variable rate, the Bank may pre-pay the loan without a penalty.
(2) The interest rate on this loan is fixed until December, 2002, after which the interest rate may, on any quarter, be
converted at the option of the lender to a variable rate of three-month LIBOR plus 15 basis points if the three-month
LIBOR is 7.5% or higher. If the lender elects to convert to a variable rate, the Bank may pre-pay the loan without a
penalty.
(3) The interest rate on this loan is fixed until October, 2003, after which the interest rate may, on any quarter, be
converted at the option of the lender to a variable rate of three-month LIBOR plus 15 basis points. If the lender
elects to convert to a variable rate, the Bank may pre-pay the loan without a penalty.
(4) The interest rate on this loan may, on any quarter, be converted at the option of the lender to a variable rate of
three-month LIBOR plus 15 basis points if the three-month LIBOR is 8% or higher. If the lender elects to convert to a
variable rate, the Bank may pre-pay the loan without a penalty.
(5) The interest rate on this loan is fixed until maturity. This loan amortizes with monthly principal and interest
payments.
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 (5.24% at September
30, 2002) is variable, adjusting quarterly at three-month LIBOR plus 3.45%. The
interest is payable quarterly. The interest expense was $205,000 for the three
months ended September 30, 2002 and $216,000 for the nine-month period. 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 September 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 September 30, 2002 and
December 31, 2001).
Cash flows for the nine months ended September 30, 2002 consisted of cash
provided by operating activities of $21,726,000 and cash provided by financing
activities of $82,369,000 offset in part by cash used in financing activities of
$100,725,000. The result was a net increase in cash and cash equivalents of
$3,370,000.
Cash provided by operating activities was the result of net income of
$2,873,000, proceeds from the sale of residential real estate loans of
$40,753,000, the provision for possible loan losses of $1,236,000, depreciation
and amortization of $1,000,000, amortization of security premiums of $775,000
and amortization of deferred fees on loans of $336,000. These were offset in
party by mortgage loans originated for sale of $21,317,000, a decrease in
accrued interest payable of $1,225,000, net gains on the sale of investment
securities of $974,000, gains on the sale of residential real estate loans of
$765,000, a net increase in other assets of $574,000, an increase in accrued
interest income of $335,000 and accretion of security discounts of $243,000.
Cash provided by financing activities consisted principally of a net increase in
interest and non-interest bearing demand deposits and savings accounts of
$73,328,000,
proceeds from the issuance of trust preferred securities of $15,000,000, an
increase in repurchase agreements of $3,198,000, proceeds from the issuance of
stock of $247,000, proceeds from the sale of Treasury stock of $192,000, and an
increase in long-term debt of $83,000. These were partially offset by a decrease
in certificates of deposit of $8,343,000, the payment of cash dividends of
$1,185,000, 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.
Cash was used in investing activities for the purchase of securities
available-for-sale and held-to-maturity of $172,503,000 and $31,975,000,
respectively, a net increase in loans of $41,625,000, an increase in interest
bearing deposits with banks of $926,000 and purchase of premises and equipment
of $495,000. These were partially offset by proceeds from the sales of
securities available-for-sale of $68,539,000, proceeds from calls and maturities
of securities available-for-sale of $51,252,000, proceeds from calls and
maturities of securities held-to-maturity of $26,668,000 and proceeds from the
sale of other real estate owned of $340,000.
During the third quarter, the Bank received final approval to begin construction
of a full service branch at its current ATM location on Route 248 in Lower
Nazareth Township, Northampton County, Pennsylvania. It is expected that this
branch will open in the first quarter of 2003. In addition, the Bank has
acquired land for a future branch on Freemansburg Avenue in Bethlehem Township,
Northampton County, Pennsylvania. The Bank continues to investigate possible
locations for additional branches.
The Company recognizes the importance of maintaining adequate capital levels to
support sound, profitable growth and to encourage depositor and investor
confidence. Shareholders' equity at September 30, 2002 was $39,669,000 as
compared to $35,326,000 at December 31, 2001, for an increase of $4,343,000 or
12.3%. This increase resulted from net income of $2,873,000, an increase in
accumulated other comprehensive income related to unrealized gains in securities
available-for-sale of $2,367,000, the proceeds from the sale of stock of
$439,000, reduced in part by the payment of dividends of $1,190,000 and the
purchase of Treasury stock of $146,000.
On August 16, 2002 the Company paid its 2002 third quarter cash dividend on its
common stock of $0.19 per share to shareholders of record on August 2, 2002. On
May 31, 2002 the Company paid a 5% stock dividend to shareholders of record on
May 17, 2002.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. During
the first nine months of 2002, 3,141,shares of common stock were purchased from
authorized and unissued shares at an average price of $23.48 per share for
proceeds of approximately $74,000. Also during the first nine months of 2002,
8,702 shares of common stock were purchased from Treasury stock at an average
price of $22.06 per share for proceeds of $192,000. The number of shares and
price per share has been adjusted for the 5% stock dividend of May 2002.
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, key
employees and directors of the Company. During the first nine months of 2002,
options to purchase 128,375 shares of the Company's common stock at an average
price of $21.12 per share were granted to certain officers and Company
directors.
During the first nine months of 2002, certain officers exercised 10,137 options
granted in prior years under the Company stock option plans 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.
ITEM 4. Controls and Procedures
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or and
its "internal controls and procedures for financial reporting" ("Internal
Controls" ) will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective to timely alert management to material information relating to the
Company during the period when its periodic reports are being prepared.
In accord with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Quarterly Report, there have
been no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
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 other material legal proceedings.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8K
No reports on Form 8K were filed for the quarter during
which this report is filed.
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: November 13, 2002 BY: /S/ SCOTT V. FAINOR
-----------------------------
SCOTT V. FAINOR
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: November 13, 2002 BY: /S/ REID L. HEEREN
-----------------------------
REID L. HEEREN
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
CERTIFICATION
I, SCOTT V. FAINOR, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Colonial Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectives of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Scott V. Fainor
President and Chief Executive Officer
CERTIFICATION
I, REID L. HEEREN, Vice President and Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Colonial Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectives of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Reid L. Heeren
Vice President and Treasurer