UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
____________________________________
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
- ---------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
76 S. MAIN STREET, 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 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: 2,253,375 shares of common
stock, $5 Par Value, outstanding on May 9, 2003.
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 11
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
CERTIFICATIONS 32
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
2003 2002
---------------- ---------------
ASSETS
Total Cash and Cash Eqivalents $ 20,698 $ 22,741
Interst-Bearing Deposits with Banks 10,547 5,002
Investment Securities Held-to-Maturity
(Fair Value: March 31, 2003 $69,831
Dec. 31, 2002 - $30,791) 69,461 30,297
Securities Available-for-Sale at Fair Value 254,930 283,481
Mortgage Loans Held-for-Sale 848 1,263
Total Loans, Net of Uneamed Discount 252,624 255,844
LESS: Allowance for Possible Loan Losses (3,112) (3,084)
---------------- ---------------
Net Loans 249,512 252,760
Premises and Equipment, Net 6,399 6,375
Accrued Interest Income 2,914 3,142
Other Real Estate Owned 180 -
Other Assets 5,229 6,531
---------------- ---------------
TOTAL ASSETS $ 620,718 $ 611,592
================ ===============
LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 69,115 $ 64,150
Interest-Bearing Deposits 414,262 408,648
---------------- ---------------
Total Deposits 483,377 472,798
Securities Sold Under Agreements to Repurchase 8,774 8,801
Long-Term Debt 67,039 67,921
Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures 15,000 15,000
Accrued Interest Payable 3,167 3,129
Other Liabilities 2,873 3,629
---------------- ---------------
TOTAL LIABILITIES 580,230 571,278
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 -
2,239,861 shares at March 31, 2003
and 2,217,971 shares at Dec. 31, 2002 11,199 11,090
Additional Paid in Capital 21,154 20,786
Retained Earnings 8,950 8,430
Deferred Stock Compensation: None at March 31, 2003
and 10,500 at Dec. 31, 2002 - (220)
Employee Stock Ownership Plan Debt (1,093) (1,093)
Accumulated Other Comprehensive Income 278 1,321
---------------- ---------------
Total Shareholders' Equity 40,488 40,314
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 620,718 $ 611,592
================ ===============
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
March 31, March 31,
2003 2002
--------------- ----------------
INTEREST INCOME:
Interest and Fees on Loans $ 4,176 $ 4,264
Investment Securities Income
Taxable 2,758 2,368
Tax-Exempt 610 438
Interest on Deposits with Banks and
Federal Funds Sold 35 40
--------------- ----------------
Total Interest Income 7,579 7,110
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INTEREST EXPENSE:
Interest on Deposits 2,139 2,479
Interest on Short-Term Debt 27 58
Interest on Long-Term Debt 730 498
Interest on Trust-Preferred Securities 181 -
--------------- ----------------
Total Interest Expense 3,077 3,035
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NET INTEREST INCOME: 4,502 4,075
Provision for Possible Loan Losses 200 400
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Net Interest Income After Provision
For Possible Loan Losses 4,302 3,675
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OTHER INCOME:
Trust Revenue 285 284
Service Charges on Deposit Accounts 619 599
Investment Securities Gains, Net 765 369
Gains on the Sale of Mortgage Loans 417 76
Other Operating Income 180 229
--------------- ----------------
Total Other Income 2,266 1,557
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OTHER EXPENSES:
Salaries and Employee Benefits 2,576 2,047
Net Occupancy and Equipment Expense 643 666
Impairment of Mortgage Servicing Rights 637 -
Other Operating Expenses 1,645 1,565
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Total Other Expenses 5,501 4,278
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Income Before Income Taxes 1,067 954
Provision for Income Taxes 135 143
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NET INCOME $ 932 $ 811
=============== ================
Per Share Data
Basic Net Income $ 0.43 $ 0.37
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Diluted Net Income $ 0.41 $ 0.37
=============== ----------------
Cash Dividends $ 0.19 $ 0.18
=============== ================
Per share data has been restated to reflect the 5% stock dividend of June 2002.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
====================================================================================================================================
(Dollars in Thousands), (Unaudited) Additional Deferred Accumulated
Common Paid-In Retained Stock Treasury ESOP Other Comprehensive
For the Three Months Ended March 31, 2003 Stock Capital Earnings Compensation Stock Debt Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 11,090 $ 20,786 $ 8,430 $ (220) $ - $ (1,093) $ 1,321 $ 40,314
Comprehensive Income (Loss)
Net Income 932 932
Change in Unrealized
Securities Gains, Net (1,043) (1,043)
--------
Total Comprehensive Income (Loss) (111)
Distribution of Stock Compensation
(10,000 shares) 220 220
Sale of Common Stock under
Dividend Reinvestment Plan
(3,771 shares) 18 80 98
Sale of Common Stock under
Stock Option Plans (18,119 shares) 91 288 379
Cash Dividends Paid (412) (412)
-------- -------- -------- -------- ------ -------- -------- --------
Balance at March 31, 2003 $ 11,199 $ 21,154 $ 8,950 $ - $ - $ (1,093) $ 278 $ 40,488
====================================================================================================================================
See accompanying notes to interim consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
OPERATING ACTIVITIES March 31, 2003 March 31, 2002
--------------------- --------------------
Net Income $ 932 $ 811
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses 200 400
Depreciation and Amortization 370 352
Accretion of Security Discounts (29) (69)
Amortization of Security Premiums 562 206
Deferred Taxes (226) -
Amortization of Deferred Fees on Loans 109 58
Gain on Sale of Other Real Estate Loans - (6)
Investment Securities Gains, Net (765) (369)
Gain on Sale of Mortgage Loans (417) (76)
Mortgage Loans Originated for Sale (7,406) (4,889)
Mortgage Loan Sales 16,154 9,672
Changes in Assets and Liabilities:
Decrease (Increase) in Accrued Interest Income 228 (108)
Increase (Decrease) in Accrued Interest Payable 38 (81)
Decrease (Increase) in Other Assets 1,168 (792)
(Decrease) Increase in Other Liabilities (30) 82
--------------------- --------------------
Net Cash Provided By Operating Activities: 10,888 5,191
--------------------- --------------------
INVESTING ACTIVITIES
Proceeds from Calls and Maturities of Securities Available-for-Sale 23,366 15,464
Proceeds from Calls and Maturities of Securities Held-to-Maturity 4,555 4,491
Proceeds from Sales of Securities Available-for-Sale 50,908 28,053
Purchase of Securities Available-for-Sale (47,022) (30,789)
Purchase of Securities Held-to-Maturity (43,768) (15,959)
Net Increase in Interest Bearing Deposits With Banks (5,545) (18,482)
Net Increase in Loans (5,157) (11,196)
Purchase of Premises and Equipment, Net (223) (21)
Proceeds from Sale of Other Real Estate Owned - 98
--------------------- --------------------
Net Cash Used In Investing Activities (22,886) (28,341)
--------------------- --------------------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest Bearing
Demand Deposits, Savings and Money Market Accounts 5,867 24,813
Net Increase (Decrease) in Certificates of Deposit 4,712 (4,524)
Proceeds from Long-Term Debt - 90
Payments on Long-TermDebt (882) (2)
Net (Decrease) Increase in Repurchase Agreements (27) 3,399
Proceeds from Issuance of Common Stock 477 164
Proceeds from Sale of Treasury Stock - 80
Purchase of Treasury Stock - (146)
Distribution of Deferred Stock Compensation 220 -
Cash Dividends Paid (412) (380)
--------------------- --------------------
Net Cash Provided by Financing Activities 9,955 23,486
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(Decrease) Increase in Cash & Cash Equivalents (2,043) 336
Cash and Cash Equivalents, January 1, 22,741 17,270
--------------------- --------------------
Cash and Cash Equivalents, March 31, $ 20,698 $ 17,606
===================== ====================
See accompanying notes to interim consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
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 on Form 10-K for the year ended
December 31, 2002.
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 months ended March 31, 2003 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.
NOTE C - CASH AND STOCK DIVIDENDS
On February 14, 2003, the Company paid its 2003 first quarter dividend on its
common stock of $0.19 per share to shareholders of record on January 31, 2003.
On February 15, 2002, the Company paid its 2002 first quarter dividend on its
common stock of $0.19 per share (adjusted for the 5% stock dividend of May 2002)
to shareholders of record on February 1, 2001.
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 this 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:
For the Three Months Ended March 31, Average
Income Shares Per Share
(numerator) (denominator) Amount
---------------------------------------------------
2003
- --------------------------------------------------------------
Net Income $ 932
Basic Earnings Per Share
Income Available to Common Shareholders $ 932 2,177,482 $ 0.43
Effect of Dilutive Securities
Stock Options 97,513 $ (0.02)
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 932 2,274,995 $ 0.41
---------------------------------------------------
2002
- --------------------------------------------------------------
Net Income $ 811
Basic Earnings Per Share
Income Available to Common Shareholders $ 811 2,144,552 $ 0.37
Effect of Dilutive Securities
Stock Options 33,602 -
---------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 811 2,178,154 $ 0.37
---------------------------------------------------
Average common shares outstanding at March 31, 2003 and March 31, 2002 do not
include 48,943 and 57,413, respectively of average weighted unallocated shares
held by the ESOP. The exclusion of these unallocated shares held by the ESOP is
due to the Company's adoption of SOP 93-6.
There were no antidilutive securities stock options at March 31, 2003. At March
31, 2002 there were 31,912 antidilutive securities stock options outstanding.
NOTE E - STOCK BASED COMPENSATION
Under the Company's Stock Option Plans, options to acquire shares of common
stock are granted to certain officers, key employees and directors. In January
of 2003, options to purchase 59,950 shares of the Company's stock at an average
price of $23.83 per share were granted to certain officers and directors of the
Company. During the first quarter of 2003, options for 18,119 shares of the
Company's common stock issued pursuant to the Plan were exercised at an average
price of $20.90 per share.
The Company's Stock Option Plans are accounted for under SFAS No. 123,
"Accounting for Stock-Based Compensation". This standard contains a fair
value-based method for valuing stock-based compensation which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under APB Opinion
No. 25. Entities that continue to account for stock options using APB Opinion
No. 25 are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied. The Company's stock option plans are accounted for under APB
Opinion No. 25. Had compensation cost for the Plans been determined based on the
fair value of the options at the grant dates consistent with the method required
by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
- -------------------------------------------------------------------------------------------
Three Months Ended, March 31, 2003 2002
===========================================================================================
Net Income (loss) As reported $ 932 $ 811
Stock-based Compensation
Cost Determined under Fair Value
Method for all Awards
Net of Related Tax Effect (1,161) (95)
---------- ----------
Pro forma $ (229) $ 716
========== ==========
Basic earnings (loss) As reported $ 0.43 $ 0.37
per share Pro forma $(0.11) $ 0.33
Diluted earnings (loss) As reported $ 0.41 $ 0.37
per share Pro forma $(0.11) $ 0.33
===========================================================================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 2003 and 2002, respectively: dividend yield of
1.8% and 3.3%; expected volatility of 53.5% and 43.5%; risk-free interest rates
of 4.1% and 4.9%; and expected lives of 7.7 years and 10 years.
The stock-based compensation cost for the three months ended March 31, 2003 was
affected by the accelerated vesting of all stock options as a result of the
execution of the merger agreement with Keystone Savings Bank.
NOTE F - MERGER AGREEMENT
On March 6, 2003, First Colonial Group, Inc. and Keystone Savings Bank announced
that they had signed an Agreement and Plan of Merger to combine into a new bank
holding company to be formed, KNBT Bancorp, Inc. In addition, First Colonial's
subsidiary bank, Nazareth National Bank and Trust Company and Keystone Savings
Bank will combine into a new bank, Keystone Nazareth Bank & Trust Company.
The transaction involves the conversion of Keystone Savings Bank from a mutual
savings bank to a stock institution and the formation of a holding company, KNBT
Bancorp, Inc. Each share of First Colonial Group, Inc. common stock will be
valued at $37.00 and exchanged for shares of KNBT Bancorp, Inc. common stock
based on the initial public offering ("IPO") price of KNBT Bancorp, Inc.'s
common stock.
The transaction is subject to certain conditions, including the receipt of
various regulatory approvals, the approval of First Colonial Group's
shareholders and the approval of Keystone Savings Bank's depositors.
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." The Company adopted the disclosure provisions of FIN No. 45 in the
fourth quarter of 2002 and, for guarantees issued or modified after December 31,
2002, adopted the initial recognition and measurement provisions on January 1,
2003. Adoption of the initial recognition and measurement provisions did not
materially impact the Company's financial condition or results of operations at
or for the three months ended March 31, 2003.
While certain guarantees are only subject to the disclosure provisions of this
Interpretation, others are subject to both the disclosure and initial
recognition and measurement provisions. For guarantees that fall within the
scope of the initial recognition and measurement provisions, FIN No. 45 requires
a guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. Under the
previous accounting rules, the Company did not record a liability when
guaranteeing obligations unless it became probable that the Company would have
to perform under the guarantee.
The Company issues financial and performance standby letters of credit, both of
which are subject to the disclosure and initial recognition and measurement
provisions of FIN No. 45. Financial and performance standby letters of credit
are conditional commitments issued by the Bank to assure the financial and
performance obligations of a customer to a third party. At March 31, 2003, the
Company was contingently liable on financial and performance standby letters of
credit totaling $47,000 and $1,297,000, respectively, none of which were
originated in the first quarter of 2003. The Company's commitments under standby
letters of credit expire at various dates through 2005. Amounts due under these
letters of credit would be reduced by any proceeds that the Company would be
able to obtain in liquidating the collateral for the loans, which varies
depending on the customer. The Bank generally holds collateral and/or obtains
personal guarantees supporting these commitments. The extent of collateral held
for these commitments at March 31, 2003 varied from 0% to 100%, and averaged
92.9%.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a Company if that Company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a Company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company is currently evaluating the impact
that FIN 46 will have on its consolidated financial position and results of
operations.
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-month period ended March 31, 2003.
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, the discussion of
the planned merger with Keystone Savings Bank, 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 risk that the
transactions contemplated by the Agreement and Plan of Merger with Keystone
Savings Bank may not be completed, 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, 2002 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, 2002 a copy of which can be obtained
from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main
Street, Nazareth, PA 18064.
Merger Agreement
On March 6, 2003, First Colonial Group, Inc. and Keystone Savings Bank announced
that they had signed an Agreement and Plan of Merger to combine, forming the
largest locally controlled bank in the greater Lehigh Valley-Poconos market
area.
The resulting bank, Keystone Nazareth Bank & Trust Company, and its newly
created bank holding company, KNBT Bancorp, Inc., will have combined assets of
more than $1.6 billion and 36 branches covering Lehigh, Northampton, Monroe and
Carbon counties. Both banks will continue to operate independently until the
close of the transaction, which is expected to occur in the fourth quarter of
2003.
The transaction involves the conversion of Keystone Savings Bank from a mutual
savings bank to a stock institution; the formation of a holding company, KNBT
Bancorp, Inc., and the mergers of First Colonial Group into KNBT Bancorp, Inc.
and Nazareth National Bank into Keystone Savings Bank. Each share of First
Colonial will be valued at $37 and exchanged for shares of KNBT Bancorp, Inc.,
common stock based on the initial public offering ("IPO") price of KNBT
Bancorp's common stock.
The transaction is subject to certain conditions, including the receipt of
various regulatory approvals, as well as the approval of First Colonial Group's
shareholders and Keystone Savings Bank's depositors.
Jeffrey P. Feather, chairman of the board of trustees of Keystone Savings Bank,
will serve as chairman of the newly created holding company and bank. Six
members of the First Colonial Group board will join nine members of the Keystone
Savings board to form a new 15-member KNBT Bancorp, Inc. board.
Scott V. Fainor, currently president and chief executive officer of Nazareth
National Bank and First Colonial Group, will become the president and chief
executive officer of Keystone Nazareth Bank & Trust Company and KNBT Bancorp,
Inc., effective upon completion of the transaction.
All branches from both banks are slated to remain open. Also, within the past
six months, both banks have embarked on multi-branch expansion programs that are
expected to continue. Together, the banks currently employ 602 people.
As part of this transaction, a multi-million dollar charitable foundation will
be formed to help fund local projects and programs of civic, charitable and
cultural organizations throughout the region.
Each of the directors of First Colonial Group has agreed to vote their shares of
First Colonial Group in favor of the merger, and each of the trustees of
Keystone Savings Bank has agreed to vote their deposits in favor of the
conversion.
The proposed merger will be submitted to First Colonial Group's shareholders for
their consideration. KNBT Bancorp and First Colonial Group will file a
registration statement, a proxy statement/prospectus and other relevant
documents concerning the proposed transaction with the SEC. Shareholders of
First Colonial are urged to read the registration statement and the proxy
statement/prospectus when it becomes available and any other relevant documents
filed with the SEC, as well as any amendments or supplements to those documents,
because they will contain important information, before making any decision
regarding the merger. Shareholders of First Colonial will be able to obtain a
free copy of the proxy statement/prospectus, as well as other filings containing
information about KNBT Bancorp, Keystone Savings and First Colonial Group, at
the SEC's Internet site (http://www.sec.gov). Copies of the proxy
statement/prospectus can be obtained, without charge, by directing a request to
the Secretary of First Colonial, First Colonial Group, Inc., 76 South Main
Street, Nazareth, Pennsylvania 18064 (610-861-5721).
First Colonial Group and its directors and executive officers may be deemed to
be participants in the solicitation of proxies from the shareholders of First
Colonial Group in connection with the merger. Information about the directors
and executive officers of First Colonial Group and their ownership of First
Colonial Group common stock is set forth in First Colonial Group's Annual Report
on Form 10-K for the year ended December 31, 2002, as filed with the SEC on
March 28, 2003. Additional information about the interests of those participants
may be obtained from
reading the definitive proxy statement/prospectus regarding the proposed merger
when it becomes available.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States of America and general
practices within the financial services industry. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and the 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
it requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts and
timing of expected future cash flows on impaired loans, 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 acquisition. 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 values 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 goodwill to the proper carrying value. As of March 31,
2003, the Company determined that no impairment write-offs of goodwill were
necessary.
The Company recognizes deferred tax assets and liabilities for 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. If
management determines that the Company may be unable 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 2002 financial statements contained in the Company's Annual Report on
form 10-K for the year ended December 31, 2002.
Results of Operations
Basic earnings per share for the three months ended March 31, 2003 were $0.43 as
compared to $0.37 for the corresponding period in 2002. Diluted earnings per
share for the three months ended March 31, 2003 were $0.41 as compared to $0.37
for the same period in 2002. Average basic shares outstanding during this
three-month period were 2,177,482 in 2003 and 2,144,552 in 2002. Average diluted
shares outstanding during the three-month period were 2,274,995 in 2003 and
2,178,154 in 2002. 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 March 31, 2003 was $932,000 compared
to $811,000 for the same period in 2002. This was an increase of $121,000 or
14.9%. The earnings increase was due in part to an increase in net interest
income of $427,000 or 10.5% (see discussion on Net Interest Income), a $396,000
increase in net gains on the sale of available-for-sale securities, a $341,000
increase in the gains on the sales of mortgage loans, a decrease of $200,000 in
the provision for loan losses, a decrease of $8,000 in Federal income taxes and
a $1,000 increase in Trust and Wealth Management revenues. These earnings
increases were offset in part by an increase of total other operating expenses
of $1,223,000 or 28.6%. This increase in total other operating expense included
a charge of $637,000 for the impairment of mortgage servicing rights in 2003
with no similar expense in 2002. Also affecting earnings was a $49,000 decrease
in other operating income.
Net Interest Income
Net interest income amounted to $4,502,000 for the three months ended March 31,
2003 compared to $4,075,000 for the three months ended March 31, 2002, an
increase of $427,000 or 10.5%. This increase was primarily the result of an
increase in interest earned on investments, a decrease in interest paid on
deposits reduced in part by a decrease in interest earned on loans and an
increase in interest paid on debt. The total interest income earned on loans and
investments amounted to $7,579,000 for the first quarter of 2003, an increase of
$469,000 or 6.6% over the $7,110,000 earned in the same period in 2002. The
total interest expense paid on deposits and debt was $3,077,000 and $3,035,000
for the three-month period ended March 31, 2003 and 2002, respectively. This
increase in first quarter of 2003 from 2002 was $42,000 or 1.4%. The increase in
interest income was primarily due to higher volume of loans and investments
reduced in part by declining interest rates. The increase in interest expense
was primarily the result of higher volumes of deposits reduced in part by
declining interest rates.
The fully taxable-equivalent net interest income was $4,834,000 for the first
three months of 2003, compared to $4,313,000 for the same period in 2002, a
12.1% or $521,000 increase. This increase in taxable-equivalent net interest
income was primarily due to a $877,000 increase related to volume partially
reduced by a $356,000 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 three months ended
March 31, 2003 as compared to the same period in 2002, 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 three months
ended March 31, 2003. 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)
Three Months Ended
March 31, 2003
Over / (Under)
March 31, 2002
CHANGE DUE TO:
TOTAL RATE VOLUME
--------------------------------------------------
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ (6) $ (17) $ 11
Federal Funds Sold 1 1 -
Investment Securities 651 (928) 1,579
Loans (83) (502) 419
-------------- -------------- --------------
Total Interest Income $ 563 $(1,446) $ 2,009
-------------- -------------- --------------
INTEREST EXPENSE
Interest Bearing Deposits
Demand Deposits $ (31) $ (39) $ 8
Money Market Deposits 96 (265) 361
Savings & Club Deposits (81) (112) 31
CD's Over $100,000 (28) (9) (19)
All Other Time Deposits (296) (401) 105
-------------- -------------- --------------
Total Interest-Bearing Deposits (340) (826) 486
Securities Sold Under Agreements
to Repurchase (31) (29) (2)
Long-Term Debt 232 (235) 467
Guaranteed Preferred Beneficial Interests
in Company's Subordinated Debentures 181 - 181
-------------- -------------- --------------
Total Interest Expense 42 (1,090) 1,132
-------------- -------------- --------------
Net Increase (Decrease) in Interest Income $ 521 $ (356) $ 877
============== ============== ==============
Total taxable-equivalent interest income for the three months ended March 31,
2003 increased by $563,000 or 7.7% compared to the same period in 2002. This
increase was primarily the result of higher volumes of investments and loans
reduced in part by lower interest rates earned on these investments and loans.
Interest income on investments on a fully taxable equivalent basis was $651,000
or 21.5% higher during the first quarter of 2003 as compared to the same period
in 2002. This increase was comprised of a $1,579,000 increase due to a higher
volume of investment securities reduced in part by a decrease of $928,000 due to
lower interest rates. The interest income earned on loans on a fully taxable
equivalent basis decreased by $83,000 or 1.9% for the three months ended March
31, 2003 as compared to the same period in 2002. This decrease was comprised of
a $502,000 decrease due to lower interest rates reduced in part by a $419,000
increase due to growth in average loans outstanding. Average year-to-date
earning assets increased to $577,529,000 at March 31, 2003 from $445,787,000 at
March 31, 2002. This was an increase of $131,742,000 or 29.5%
Total interest expense increased by $42,000 or 1.4% during the first three
months of 2003, over the same period in 2002. The increase was the result of
growth in deposits, long-term debt and the subordinated debentures, reduced in
part by lower interest rates paid on deposits and debt. The interest expense on
debt increased by $232,000 or 46.6% during the first three months of 2003 as
compared to the first three months of 2002. This was comprised of an increase of
$467,000 due to higher levels of debt offset in part by a $235,000 decrease due
to lower interest rates. Also affecting the increase in interest expense was the
$181,000 of interest paid on the $15,000,000 of subordinated debentures issued
in June 2002. The increase in interest expense were offset in part by a decrease
of $340,000 or 13.7% on the interest paid on interest-bearing deposits and
$31,000 or 53.4% on the interest paid on the securities sold under agreements to
repurchase. The reduction of the interest paid on interest-bearing deposits was
comprised of a decrease of $826,000 due to lower interest rates partially offset
by an increase of $486,000 due to growth in deposits. The change in interest
paid on securities sold under agreements to repurchase was due to a $29,000
decrease related to lower interest rates and a $2,000 decrease due to lower
volume.
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)
Three Months Ended March 31, 2003 2002
------------------------------------------ --------------------------------------------
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 $ 13,298 $ 34 1.02% $ 10,523 $ 40 1.52%
Federal Funds Sold 333 1 1.01 178 -- --
Investment Securities
Taxable 258,259 2,758 4.27 168,379 2,368 5.63
Non-Taxable (1) 53,898 925 6.86 36,872 664 7.20
Loans (1) (2) 254,925 4,193 6.58 232,172 4,276 7.37
Reserve for Loan Losses (3,184) -- -- (2,337) -- --
--------- --------- --------- ---------
Net Loans 251,741 4,193 6.66 229,835 4,276 7.44
--------- --------- --------- ---------
Total Interest-Earning Assets 577,529 7,911 5.48 445,787 7,348 6.59
Non-Interest Earning Assets 31,111 -- -- 28,250 -- --
--------- --------- --------- ---------
TOTAL ASSETS, INTEREST INCOME $ 608,640 7,911 5.20 $ 474,037 7,348 6.20
========= --------- ========= ---------
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 61,987 69 0.44 $ 57,265 100 0.70
Money Market Deposits 89,979 365 1.62 38,419 269 2.80
Savings & Club Deposits 76,206 165 0.86 67,751 246 1.45
CD's over $100,000 5,138 39 3.02 7,242 67 3.70
All Other Time Deposits 172,273 1,501 3.49 162,706 1,797 4.42
--------- --------- --------- ---------
Total Interest-Bearing Deposits 405,583 2,139 2.11 333,383 2,479 2.97
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 9,637 27 1.12 9,951 58 2.33
Short-Term Debt 51 -- 1.43 8 -- --
Long-Term Debt 67,523 730 4.32 34,842 498 5.72
Guaranteed Preferred Beneficial Interests
in Company's Subordinated Debentures 15,000 181 4.84 -- -- --
--------- --------- --------- ---------
Total Interest-Bearing Liabilities 497,794 3,077 2.47 378,184 3,035 3.21
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 63,211 -- -- 53,775 -- --
Other Liabilities 7,007 -- -- 7,304 -- --
--------- --------- --------- ---------
TOTAL LIABILITIES 568,012 3,077 2.17 439,263 3,035 2.76
SHAREHOLDERS' EQUITY 40,628 -- -- 34,774 -- --
--------- --------- --------- ---------
TOTAL LIABILITIES AND EQUITY $ 608,640 3,077 2.02 $ 474,037 3,035 2.56
========= --------- ========= ---------
NET INTEREST INCOME $ 4,834 $ 4,313
========= ==========
Net Interest Spread (3) 3.01 3.38
Effect of Interest-Free Sources
Used to Fund Earnings 0.34 0.49
Net Interest Margin (4) 3.35% 3.87%
======== ========
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The tax equivalent adjustments included above are
$131,000 and $239,000 for the three months ended March 31, 2003 and March
31, 2002, respectively. The effective tax rate used for the taxable
equivalent adjustment was 34%.
(2) Loan fees of $(49,000) and $(14,000) for the three months ended March 31,
2003 and March 31, 2002, respectively, are included in interest income.
Average loan balances include non-accruing loans and average loans
held-for-sale of $3,851,000 and $5,167,000 for the three months ended March
31, 2003 and March 31, 2002, 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 3.35% for the three-month period ended March 31,
2003, decreased from the 3.87% net interest margin for the first three months of
2002. The yield on interest earning assets was 5.48% during the first three
months of 2003 as compared to 6.59% in 2002. The average interest rate paid on
interest bearing deposits and other borrowings was 2.47% for the first three
months of 2003 as compared to 3.21% in 2002.
Other Income and Other Expenses
Other income for the three months ended March 31, 2003, including service
charges, trust and wealth management revenues, gains on the sale of mortgage
loans, net securities gains and other miscellaneous income was $2,266,000 as
compared to $1,557,000 for the same period in 2002. This was an increase of
$709,000 or 45.4%. This increase was the result of the increased gains on the
sale of securities available-for-sale, increased gains on the sale of mortgage
loans, increases in service charges, and an increase in trust and wealth
management revenues, reduced in part by a decrease in and other miscellaneous
income. The net gains on securities available-for-sale for the three-month
period ended March 31 were $765,000 in 2003 and $369,000 in 2002. This was an
increase of $396,000 or 107.3%. In the three month period ended March 31, 2003,
the gains on the sale of mortgage loans amounted to $417,000 as compared to
gains of $76,000 for the same period in 2002. This was an increase of $341,000.
Mortgage loan sales amounted to $16,154,000 during the three-month period ended
March 31, 2003 as compared to $9,672,000 during the same period in 2002. Service
charges were $619,000, during the three months ended March 31, 2003, a $20,000
or 3.3% increase over the 2002 amount of $599,000. The increase in service
charges was due to higher volumes of debit card transactions. The trust and
wealth management revenues were $285,000 for the three months ended March 31,
2003 as compared to $284,000 for the three months ended March 31, 2002, an
increase of $1,000. Other miscellaneous income for the three months ended March
31, 2003 was $180,000, a decrease of $49,000 or 21.4% compared to $229,000 for
the same period in 2002.
Total other expenses for the three-month period ended March 31, 2003 were
$5,501,000 as compared to $4,278,000 for the same period in 2002. This was an
increase of $1,223,000 or 28.6%. A major factor affecting the increase in total
other expenses was an expense of $637,000 for the impairment of mortgage
servicing rights due to a larger than normal number of customers prepaying their
residential mortgage loans as a result of lower interest rates. Also affecting
the increase in total other expenses was an increase of $529,000 or 25.8% in
salary and benefit expenses, which were $2,576,000 in 2003 as compared to
$2,047,000 in 2002. This increase was primarily the result of a charge of
$175,000 due to accelerated vesting and distribution of the deferred stock
compensation as a result of the execution of the merger agreement with Keystone
Savings Bank, 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 during the third and
fourth quarters of 2002 in the commercial loan, and trust and wealth management
areas of the Bank. Other operating expenses for the three-month period ended
March 31, 2003 were $1,645,000, an increase of $80,000 or 5.1% from the
$1,565,000 for the same period in 2002. Partially offsetting these increases was
a decrease in occupancy and equipment expenses of $23,000 or 3.5%. Occupancy and
equipment expenses were $643,000 and $666,000 for the three months ended March
31, 2003 and 2002, respectively.
FINANCIAL CONDITION
Assets and Liabilities
Total assets at March 31, 2003 were $620,718,000, representing an increase of
$9,126,000 or 1.5% over total assets of $611,592,000 at December 31, 2002.
Deposits increased by $10,579,000 or 2.2% from $472,798,000 on December 31, 2002
to $483,377,000 on March 31, 2003. Contributing to this increase in total
deposits were increases in certificates of deposit over $100,000 of $5,715,000,
non-interest bearing checking deposits of $4,965,000, savings deposits of
$4,551,000 and interest bearing checking deposits of $3,048,000, partially
offset by a decrease in money market deposits of $6,696,000, and certificates of
deposit under $100,000 of $1,004,000. Loans outstanding at March 31, 2003 were
$252,624,000 as compared to $255,844,000 at December 31, 2002. This was a
decrease of $3,220,000 or 1.3%. The decrease in loans was primarily the result
of a decrease of $4,069,000 or 8.3% in residential real estate loans and a
decrease of $2,390,000 or 2.3% in consumer loans. These decreases were offset in
part by an increase in commercial loans of $3,239,000 or 3.2%. The reduction in
residential real estate loans was the result of the sale of $16,154,000 of these
loans during the three-month period of 2003. There were $848,000 of residential
real estate loans identified as held-for-sale at March 31, 2003. There were
$1,263,000 residential real estate loans held-for sale at December 31, 2002. The
loan to deposit ratio was 52.3% and 54.1% at March 31, 2003 and December 31,
2002, 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 $200,000 for the first three months
of 2003 as compared to $400,000 for the same period in 2002. Net charge offs
were $172,000 for the three months ended March 31, 2003 compared with $314,000
for the three months ended March 31, 2002. The ratio of the allowance for loan
losses to total loans was 1.23% at March 31, 2003 and 1.21% at December 31,
2002. The allowance for possible loan losses at March 31, 2003 totaled
$3,112,000, an increase of $28,000 or 0.9% over the December 31, 2002 amount of
$3,084,000.
At March 31, 2003, $6,000 of the allowance for possible loans losses was
allocated to impaired loans.
Transactions in the allowance for loan losses were as follows:
2003 2002
------------------- ===================
Balance, January 1, $ 3,084,000 $ 2,264,000
Loans Charged Off (191,000) (359,000)
Loans Recovered 19,000 45,000
------------------- -------------------
Net Loans Charged Off (172,000) (314,000)
Provision Charged to Expenses 200,000 400,000
------------------- -------------------
Balance, March 31, $ 3,112,000 $ 2,350,000
=================== ===================
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.
March 31, December 31, March 31,
2003 2002 2002
- -------------------------------------------------------------------------------------------------------
Non-accrual loans on a cash basis $1,395,000 $ 1,351,000 $ 875,000
Non-accrual loans as a percentage
of total loans 0.55% 0.53% 0.38%
- -------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 432,000 $ 874,000 $ 1,794,000
Accruing loans past due 90 days or more
as a percentage of total loans 0.17% 0.34% 0.78%
- -------------------------------------------------------------------------------------------------------
Total nonperforming loans
(Non-accrual loans plus accruing loans
past due 90 days or more) $1,827,000 $ 2,225,000 $ 2,669,000
Allowance for loan losses to
nonperforming loans 170.33% 138.60% 88.05%
Nonperforming loans to total loans 0.72% 0.87% 1.15%
Allowance for loan losses to total loans 1.23% 1.21% 1.02%
- -------------------------------------------------------------------------------------------------------
Total non-performing loans (non-accruing loans and loans past due over 90 days)
amounted to $1,827,000 at March 31, 2003 as compared to $2,225,000 at December
31, 2002 and $2,669,000 at March 31, 2002. The ratio of non-performing loans to
total loans was 0.72%, 0.87% and 1.15% at March 31, 2003, December 31, 2002 and
March 31, 2002, respectively. The decrease in this ratio was primarily the
result of a decrease in total non-performing loans due to collection efforts.
Non-accruing loans at March 31, 2003 of $1,395,000 increased from the December
31, 2002 amount of $1,351,000 and increased over the March 31, 2002 level of
$875,000. The amount of increase from December 31, 2002 to March 31, 2003 was
$44,000. This increase was primarily the result of the poor performance of
certain consumer and residential real estate loans. 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 March 31, 2003, loans past due 90 days or more and still
accruing interest were $432,000 compared to
$874,000 at December 31, 2002 and $1,794,000 at March 31, 2002. The $442,000
decrease in loans past due 90 days from December 31, 2002 to March 31, 2003 was
the result of decreases in commercial, mortgage and consumer loans past due 90
days or more.
Other Real Estate Owned
Other Real Estate Owned at March 31, 2003 was $180,000 as compared to none at
December 31, 2002. This increase resulted from the foreclosure of a residential
real estate property.
Investment Securities
The Company had $254,930,000 in available-for-sale securities at March 31, 2003
with a net unrealized gain of $278,000. At December 31, 2002 available-for-sale
securities amounted to $283,481,000 with a net unrealized gain of $1,321,000.
During the three-month period ended March 31, 2003, $50,908,000 of securities
available-for-sale were sold for a net gain of $765,000 as compared to
$28,053,000 of securities available-for-sale sold for a net gain of $369,000 for
the same time period in 2002. Most of the securities sold were longer term
agency mortgage-backed bonds and fixed rate agency 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 $69,461,000 at March 31, 2003 are carried
at amortized cost. At December 31, 2002, the held-to-maturity securities totaled
$30,297,000. The Company has the intent and ability to hold the held-to-maturity
securities until maturity. The Company, at March 31, 2003, 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 March 31,
2003, 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 March 31, 2003 Amount Ratio Amount Ratio Amount Ratio
====================================================================================================================================
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 57,284 18.64% $ 24,580 8.00% -
Bank $ 47,326 15.63% $ 24,222 8.00% $ 30,278 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 52,230 17.00% $ 12,290 4.00% -
Bank $ 43,214 14.27% $ 12,111 4.00% $ 18,167 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company, (Consolidated) $ 52,230 8.58% $ 24,341 4.00% -
Bank $ 43,214 7.16% $ 24,157 4.00% $ 30,196 5.00%
====================================================================================================================================
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- ------------------------------
(Dollars in Thousands)
At December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
====================================================================================================================================
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 56,032 18.45% $ 24,301 8.00% -
Bank $ 46,767 15.63% $ 23,935 8.00% $ 29,918 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 50,598 16.66% $ 12,151 4.00% -
Bank $ 42,683 14.27% $ 11,967 4.00% $ 17,951 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company, (Consolidated) $ 50,598 8.81% $ 22,978 4.00% -
Bank $ 42,683 7.48% $ 22,833 4.00% $ 28,541 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 March 31, 2003, cash, due from banks, Federal funds sold and interest bearing
deposits with banks totaled $31,245,000, and securities maturing within one year
totaled $126,000. At December 31, 2002, cash, due from banks, Federal funds sold
and interest bearing deposits with banks, totaled $27,743,000, and securities
maturing within one year were $1,033,000. Securities sold under an agreement to
repurchase totaled $8,774,000 at March 31, 2003 and $8,801,000 at December 31,
2002. 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 $10,491,000 at March 31, 2003 and $4,968,000 at December 31,
2002. 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 March 31, 2003 and at December 31, 2002.
The Federal Home Loan Bank of Pittsburgh provided the Bank with a line of credit
in the amount of $25,000,000 at March 31, 2003, subject to certain collateral
requirements. The Bank had no short-term (overnight) borrowings against this
line at March 31, 2003 and December 31, 2002.
The Company had long-term debt from the Federal Home Loan Bank of Pittsburgh
totaling $67,039,000 at March 31, 2003 and $67,921,000 at December 31, 2002. The
loans are secured by the Bank's residential real estate loans and investment
securities. These funds were used to fund residential real estate loans,
community reinvestment projects and securities in the investment portfolio.
The loans outstanding are as follows:
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
Interest
Balance at: Balance at: Rate at:
Date Original March 31, December 31, Due March 31,
Originated Amount 2003 2002 Date 2003
- ------------------------ ---------------- ----------------- ------------------- ------------------- -----------------
October 1998 $ 7,000 $ 7,000 $ 7,000 October 2008 4.86% (1)
August 1999 10,000 10,000 10,000 August 2004 6.06% (2)
August 2000 12,000 12,000 12,000 August 2010 6.23% (3)
November 2001 805 793 795 November 2016 6.43% (5)
December 2001 5,000 5,000 5,000 January 2007 4.45% (4)
February 2002 90 89 89 February 2017 5.65% (5)
October 2002 3,050 3,016 3,037 October 2007 3.18% (5)
December 2002 15,000 14,300 15,000 December 2007 2.90% (5)
December 2002 10,000 10,000 10,000 December 2007 3.21% (6)
December 2002 5,000 4,841 5,000 December 2009 3.40% (5)
---------------- ----------------- -------------------
$ 67,945 $ 67,039 $ 67,921
================ ================= ===================
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) The interest rate on this loan is fixed until maturity. This loan
amortizes with monthly principal and interest payments.
(6) The interest rate on this loan is fixed until December, 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
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.
- --------------------------------------------------------------------------------
On June 26, 2002, the Company issued $15,000,000 of subordinated debentures to
First Colonial 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 (4.74% at March 31,
2003 and 4.85% at December 31, 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 also has an obligation as a party to the Employee Stock Ownership
Plan (ESOP) debt. There were four loans to ESOP as March 31, 2003 and December
31, 2002. The total outstanding on these loans was $1,093,000 at March 31, 2003
and December 31, 2002.
The ESOP loans outstanding at March 31, 2003 and December 31, 2002 are as
follows:
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
Interest
Balance at: Balance at: Rate at:
Date Original March 31, December 31, Due March 31,
Originated Amount 2003 2002 Date 2003
- ------------------------ ---------------- ----------------- ------------------- ------------------- -----------------
April 1998 $ 500 $ 175 $ 175 October 2005 4.25%
February 1999 1,000 800 800 October 2018 4.25%
October 2000 72 58 58 October 2010 4.25%
December 2000 100 60 60 October 2005 4.25%
---------------- ----------------- -------------------
$ 1,672 $ 1,093 $ 1,093
================ ================= ===================
The interest rates on these loans are variable at the Bank's prime rate.
- --------------------------------------------------------------------------------------------------------------------------
Cash flows for the three months ended March 31, 2003 consisted of cash used in
investing activities of $22,886,000 offset in part by cash provided by operating
activities of $10,888,000 and cash provided by financing activities of
$9,955,000. The result was a net decrease in cash and cash equivalents of
$2,043,000.
Cash was used in investing activities for the purchase of securities
available-for-sale and held-to-maturity of $47,022,000 and $43,768,000,
respectively, a net increase in loans of $5,157,000, an increase in interest
bearing deposits with banks of $5,545,000 and purchase of premises and equipment
of $223,000. These were partially offset by proceeds from the sales of
securities available-for-sale of $50,908,000, proceeds from calls and maturities
of securities available-for-sale of $23,366,000, and proceeds from calls and
maturities of securities held-to-maturity of $4,555,000.
Cash provided by operating activities was the result of net income of $932,000,
proceeds from the sale of residential real estate loans of $16,154,000, a
decrease in other assets of $1,168,000, amortization of security premiums of
$562,000, depreciation and amortization of
$370,000, the provision for possible loan losses of $200,000, and amortization
of deferred fees on loans of $109,000. These were offset in part by mortgage
loans originated for sale of $7,406,000, net gains on the sale of investment
securities of $765,000, gains on the sale of residential real estate loans of
$417,000, and deferred taxes of $226,000.
Cash provided by financing activities consisted principally of a net increase in
interest and non-interest bearing demand deposits, and savings accounts and
money market accounts of $5,867,000, an increase in certificates of deposit of
$4,712,000, proceeds from the issuance of stock of $477,000, and a decrease in
deferred stock compensation of $220,000. These were partially offset by payments
on long-term debt of $882,000, the payment of cash dividends of $412,000, and a
decrease in repurchase agreements of $27,000.
During the first quarter of 2003, the Bank received final approval to establish
a full service branch office at 9th and Hamilton Streets in Allentown,
Pennsylvania. In addition, the Bank filed an application with the Office of the
Comptroller of the Currency to establish a branch on MacArthur Road in
Whitehall, Pennsylvania. It is expected that both of these branches will open
during the third quarter of 2003. In addition, the new branch at Rt. 248 in
Lower Nazareth Township, Pennsylvania that was announced during the third
quarter of 2002 is expected to open in the second quarter of 2003. 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 March 31, 2003 was $40,488,000 as compared
to $40,314,000 at December 31, 2002, for an increase of $174,000 or 0.4%. This
increase resulted from net income of $932,000, the proceeds from the sale of
stock of $477,000, the distribution of the deferred stock compensation of
$220,000, reduced in part by a decrease in accumulated other comprehensive
income related to a reduction in the unrealized gains in securities
available-for-sale of $1,043,000 and the payment of dividends of $412,000.
On February 14, 2003 the Company paid its 2003 first quarter cash dividend on
its common stock of $0.19 per share to shareholders of record on January 31,
2003.
The Company maintained a Dividend Reinvestment and Stock Purchase Plan. This
Plan was suspended as of March 5, 2003 as a result of the merger agreement with
Keystone Savings Bank. During the first quarter of 2003, 3,771,shares of common
stock were purchased from authorized and unissued shares at an average price of
$25.99 per share for proceeds of approximately $98,000.
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, key
employees and directors of the Company. In January of 2003, options to purchase
59,950 shares of the Company's common stock at an average price of $23.83 per
share were granted to certain officers and Company directors. During the first
three months of 2003, options for 18,119 shares of the Company's common stock
issued pursuant to the Plan were exercised at an average price of $20.90 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 2002 annual report to shareholders
and its 2002 Form 10-K for the year ended December 31, 2002 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") Scott
V. Fainor and Chief Financial Officer ("CFO") Reid L. Heeren.
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls 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, controls 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 accordance with SEC requirements, 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
On January 16, 2003, First Colonial filed a report on Form
8-K, which reported under Item 9 the release of its December
31, 2002 year-end earnings. A copy of the release was filed as
an exhibit.
On January 17, 2003, First Colonial filed a report on Form
8-K, which reported under Item 9 the announcement of its first
quarter 2003 dividend. A copy of this announcement was filed
as an exhibit.
On February 10, 2003, First Colonial filed a report on
Form 8-K, which was reported under Item 9 an announcement of
branch expansion plans. A copy of this announcement was filed
as an exhibit.
On March 7, 2003, First Colonial filed a report on Form
8-K, which was reported under Items 5 and 7 the announcement
that First Colonial had entered into a definitive agreement
with Keystone Savings Bank relating to a merger. The Agreement
and Plan of Merger and press releases were filed as exhibits.
On March 28, 2003, First Colonial filed a report on Form
8-K, which was reported under Item 9 an announcement of branch
expansion plans. A copy of this announcement was filed as an
exhibit.
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: May 14, 2003 BY: /S/ SCOTT V. FAINOR
------------- ----------------------------------
SCOTT V. FAINOR
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: May 14, 2003 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: May 14, 2003 /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: May 14, 2003 /s/ Reid L. Heeren
----------------------------
Vice President and Treasurer