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 June 30, 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.
- --------------------------------------------------------------------------------
(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: 2,266,360 shares of common
stock, $5 Par Value, outstanding on July 22, 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 12
ITEM 3 - Quantitative and Qualitative Discussion About 33
Market Risk
33
ITEM 4 - Controls and Procedures
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 34
ITEM 2 - Changes in Securities and Use of Proceeds 34
ITEM 3 - Defaults Upon Senior Securities 34
ITEM 4 - Submission of Matters to a Vote of Security Holders 34
ITEM 5 - Other Information 34
ITEM 6 - Exhibits and Reports on Form 8-K 35
SIGNATURES 37
CERTIFICATIONS 38
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2003 2002
----------------- --------------
ASSETS
Total Cash and Cash Eqivalents $ 25,002 $ 22,741
Interst-Bearing Deposits with Banks 12,848 5,002
Investment Securities Held-to-Maturity
(Fair Value: June 30, 2003 $68,996
Dec. 31, 2002 - $30,791) 68,277 30,297
Securities Available-for-Sale at Fair Value 255,847 283,481
Mortgage Loans Held-for-Sale 2,803 1,263
Total Loans, Net of Uneamed Discount 265,597 255,844
LESS: Allowance for Possible Loan Losses (3,228) (3,084)
----------------- --------------
Net Loans 262,369 252,760
Premises and Equipment, Net 6,751 6,375
Accrued Interest Income 2,750 3,142
Other Assets 5,597 6,531
----------------- --------------
TOTAL ASSETS $ 642,244 $ 611,592
================= ==============
LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 77,147 $ 64,150
Interest-Bearing Deposits 429,181 408,648
----------------- --------------
Total Deposits 506,328 472,798
Securities Sold Under Agreements to Repurchase 7,198 8,801
Long-Term Debt 66,152 67,921
Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures 15,000 15,000
Accrued Interest Payable 2,951 3,129
Other Liabilities 2,663 3,629
----------------- --------------
TOTAL LIABILITIES 600,292 571,278
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 -
2,264,065 shares at June 30, 2003
and 2,217,971 shares at Dec. 31, 2002 11,320 11,090
Additional Paid in Capital 21,520 20,786
Retained Earnings 9,580 8,430
Deferred Stock Compensation: None at June 30, 2003
and 10,500 at Dec. 31, 2002 - (220)
Employee Stock Ownership Plan Debt (1,093) (1,093)
Accumulated Other Comprehensive Income 625 1,321
----------------- --------------
Total Shareholders' Equity 41,952 40,314
----------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 642,244 $ 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 Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---------------- ------------ ------------- ------------
INTEREST INCOME:
Interest and Fees on Loans $ 4,136 $ 4,309 $ 8,312 $ 8,573
Investment Securities Income
Taxable 2,570 2,390 5,328 4,758
Tax-Exempt 610 488 1,220 926
Interest on Deposits with Banks and
Federal Funds Sold 40 40 75 80
---------------- ------------ ------------- ------------
Total Interest Income 7,356 7,227 14,935 14,337
---------------- ------------ ------------- ------------
INTEREST EXPENSE:
Interest on Deposits 1,955 2,458 4,094 4,937
Interest on Short-Term Debt 25 57 52 115
Interest on Long-Term Debt 753 507 1,483 1,005
Interest on Trust-Preferred Securities 180 11 361 11
---------------- ------------ ------------- ------------
Total Interest Expense 2,913 3,033 5,990 6,068
---------------- ------------ ------------- ------------
NET INTEREST INCOME: 4,443 4,194 8,945 8,269
Provision for Possible Loan Losses 375 361 575 761
---------------- ------------ ------------- ------------
Net Interest Income After Provision
For Possible Loan Losses 4,068 3,833 8,370 7,508
---------------- ------------ ------------- ------------
OTHER INCOME:
Trust and Wealth Management Revenue 325 291 610 575
Service Charges on Deposit Accounts 611 641 1,230 1,240
Investment Securities Gains, Net 709 294 1,474 663
Net Gains on the Sale of Mortgage Loans 393 121 810 197
Other Operating Income 230 190 410 419
---------------- ------------ ------------- ------------
Total Other Income 2,268 1,537 4,534 3,094
---------------- ------------ ------------- ------------
OTHER EXPENSES:
Salaries and Employee Benefits 2,404 2,111 4,980 4,158
Net Occupancy and Equipment Expense 667 642 1,310 1,308
Impairment of Mortgage Servicing Rights 238 - 875 -
Other Operating Expenses 1,738 1,422 3,383 2,987
---------------- ------------ ------------- ------------
Total Other Expenses 5,047 4,175 10,548 8,453
---------------- ------------ ------------- ------------
Income Before Income Taxes 1,289 1,195 2,356 2,149
Income Taxes 240 215 375 358
---------------- ------------ ------------- ------------
NET INCOME $ 1,049 $ 980 $ 1,981 $ 1,791
================ ============ ============= ============
Per Share Data
Basic Net Income 0.47 0.45 0.90 0.83
================ ============ ============= ============
Diluted Net Income 0.44 0.44 0.85 0.82
================ ============ ============= ============
Cash Dividends 0.19 0.18 0.38 0.36
================ ============ ============= ============
See accompanying notes to interim financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
(Dollars in Thousands), (Unaudited) Additional Deferred Other
Common Paid-In Retained Stock Treasury ESOP Comprehensive
For the Six Months Ended June 30, 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 1,981 1,981
Change in Unrealized Securities Gains, Net (696) (696)
-------
Total Comprehensive Income (Loss) 1,285
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 (42,323 shares) 212 654 866
Cash Dividends Paid (831) (831)
-------- -------- -------- ------ ----- -------- -------- ---------
Balance at June 30, 2003 $ 11,320 $ 21,520 $ 9,580 $ -- $-- $ (1,093) $ 625 $ 41,952
====================================================================================================================================
See accompanying notes to interim consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
OPERATING ACTIVITIES June 30, 2003 June 30, 2002
------------- -------------
Net Income $ 1,981 $ 1,791
Adjustments to Reconcile Net Income to Net Cash Provided By
(Used In) Operating Activities:
Provision for Possible Loan Losses 575 761
Depreciation and Amortization 714 660
Accretion of Security Discounts (63) (153)
Amortization of Security Premiums 1,206 442
Deferred Taxes (226) -
Amortization of Deferred Fees on Loans 272 213
Gain on Sale of Other Real Estate Owned (28) (2)
Investment Securities Gains, Net (1,474) (663)
Gain on Sale of Mortgage Loans (810) (197)
Mortgage Loans Originated for Sale (21,730) (10,294)
Mortgage Loan Sales 29,957 20,918
Changes in Assets and Liabilities:
Decrease (Increase) in Accrued Interest Income 392 (75)
Decrease in Accrued Interest Payable (178) (638)
Decrease (Increase) in Other Assets 538 (955)
Decrease in Other Liabilities (301) (177)
----------- ------------
Net Cash Provided By Operating Activities: 10,825 11,631
----------- ------------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities Available-for-Sale 41,262 26,291
Proceeds from Maturities of Securities Held-to-Maturity 18,042 21,775
Proceeds from Sales of Securities Available-for-Sale 133,168 48,244
Purchase of Securities Available-for-Sale (147,348) (104,049)
Purchase of Securities Held-to-Maturity (56,193) (18,209)
Net Increase in Interest Bearing Deposits With Banks (7,846) (12,645)
Net Increase in Loans (19,593) (31,060)
Purchase of Premises and Equipment (775) (149)
Proceeds from Sale of Other Real Estate Owned 208 261
----------- ------------
Net Cash Used In Investing Activities (39,075) (69,541)
----------- ------------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest Bearing
Demand Deposits, Savings and Money Market Accounts 12,343 44,875
Net Increase (Decrease) in Certificates of Deposit 21,187 (6,361)
Proceeds from Long-Term Debt - 90
Payments on Long-Term Debt (1,769) (5)
Net (Decrease) Increase in Repurchase Agreements (1,603) 4,730
Proceeds from Issuance of Common Stock 964 173
Proceeds from Sale of Treasury Stock - (146)
Purchase of Treasury Stock - 169
Proceeds from Issuance of Guaranteed Preferred
Beneficial Interest in Company's Subordinated Debentures - 15,000
Decrease in Deferred Stock Compensation 220 -
Cash Dividends Paid (831) (777)
Cash in Lieu of Fractional Shares - (5)
----------- ------------
Net Cash Provided by Financing Activities 30,511 57,743
----------- ------------
Increase (Decrease) in Cash and Cash Equivalents 2,261 (167)
Cash and Cash Equivalents, January 1, 22,741 17,270
----------- ------------
Cash and Cash Equivalents, June 30, $ 25,002 $ 17,103
----------- ------------
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 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 and six months ended June 30, 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 May 16, 2003, the Company paid its 2003 second quarter dividend on its common
stock of $0.19 per share to shareholders of record on May 2, 2003. On May 17,
2002, the Company paid its 2002 first quarter dividend on its common stock of
$0.181 per share (adjusted for the 5% stock dividend of May 2002) to
shareholders of record on May 3, 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 June 30, Average
Income Shares Per Share
(numerator) (denominator) Amount
---------------------------------------------------------------
2003
- ------------------------------------------------------
Net Income $ 1,049
Basic Earnings Per Share $ 1,049 2,207,138 $ 0.47
Income Available to Common Shareholders
Effect of Dilutive Securities 149,607 $ (0.03)
Stock Options
---------------------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 1,049 2,356,745 $ 0.44
---------------------------------------------------------------
2002
- ------------------------------------------------------
Net Income $ 980
Basic Earnings Per Share
Income Available to Common Shareholders $ 980 2,152,664 $ 0.45
Effect of Dilutive Securities
Stock Options 42,571 $ (0.01)
---------------------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 980 2,195,235 $ 0.44
---------------------------------------------------------------
For the Six Months Ended June 30, Average
Income Shares Per Share
(numerator) (denominator) Amount
---------------------------------------------------------------
2003
- ---------------------------------------------------
Net Income $ 1,981
Basic Earnings Per Share $ 1,981 2,192,445 $ 0.90
Income Available to Common Shareholders
Effect of Dilutive Securities 132,383 $ (0.05)
Stock Options
---------------------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 1,981 2,324,828 $ 0.85
---------------------------------------------------------------
2002
- ---------------------------------------------------
Net Income $ 1,791
Basic Earnings Per Share
Income Available to Common Shareholders $ 1,791 2,149,896 $ 0.83
Effect of Dilutive Securities
Stock Options 38,223 $ (0.01)
---------------------------------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 1,791 2,188,119 $ 0.82
---------------------------------------------------------------
Average common shares outstanding for the three months ended June 30, 2003 and
June 30, 2002 do not include 48,943 and 57,413, respectively of average weighted
unallocated shares held by the ESOP. Average common shares outstanding for the
six months ended June 30, 2003 and June 30, 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 June 30, 2003. At June
30, 2002 there were 31,910 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. There were no options issued during the second quarter of 2003. During
the second quarter of 2003, options for 24,204 shares of the Company's common
stock issued pursuant to the Plan were exercised at an average price of $20.13
per share. During the first six months of 2003, options for 42,323 shares of the
Company's common stock were exercised at an average price of $20.46.
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.
- ------------------------------------------------------------------------------------------------------------------------------------
3 Months Ended 6 Months Ended
June 30, June 30,
2003 2002 2003 2002
====================================================================================================================================
Net Income (loss) As reported $ 1,049 $ 980 $ 1,981 $ 1,791
Stock-based Compensation
Cost Determined under Fair Value
Method for all Awards
Net of Related Tax Effect - (1) (95) (1,161) (190)
---------------- ------------ ----------- ------------
Pro forma $ 1,049 $ 885 $ 820 $ 1,601
================ ============ =========== ============
Basic earnings (loss) As reported $ 0.47 $ 0.45 $ 0.90 $ 0.83
per share Pro forma $ 0.47 $ 0.41 $ 0.36 $ 0.74
Diluted earnings (loss) As reported $ 0.44 $ 0.44 $ 0.85 $ 0.82
per share Pro forma $ 0.44 $ 0.40 $ 0.33 $ 0.73
(1) There were no options awarded in the second quarter of 2003 and 2002.
====================================================================================================================================
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 June 30, 2003, the
Company was contingently liable on financial and performance standby letters of
credit totaling $47,000 and $2,363,000, respectively, $1,066,000 of which were
originated in the second 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 June 30, 2003 varied from 0% to 100%,
and averaged 96.1%.
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 has also evaluated the impact of
FIN 46 on variable interest entities consolidated by the Company prior to the
issuance of FIN 46. Management has determined that First Colonial Statutory
Trust I qualifies as a variable interest entity under FIN 46. First Colonial
Statutory Trust I issued mandatorily redeemable preferred stock to investors and
loaned the proceeds to the Company. First Colonial Statutory Trust I holds, as
its sole asset, subordinated debentures issued by the Company in 2002. The
timing and amount of payments on the subordinated debentures are the same as the
timing and amount of payments by First Colonial Statutory Trust I on the
mandatorily redeemable preferred stock. First Colonial Statutory Trust I is
currently included in the Company's consolidated balance sheet and statements of
income. Management believes that First Colonial Statutory Trust I should
continue to be included in the Company's consolidated financial statements after
the effective date of FIN 46. However, as additional interpretations related to
entities similar to First Colonial Statutory Trust I become available,
management will reevaluate its conclusion that First Colonial Statutory Trust I
should be included in the consolidated financial statements and its potential
impact to its Tier I capital calculation under such interpretations.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. All provisions of this
Statement shall be applied prospectively. Based on the Corporation's current
business operations, management expects that the provisions of SFAS No. 149 will
not materially impact the Corporation's financial condition, results of
operations, or disclosures.
The FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position to liabilities
and requires an issuer of those financial instruments from either equity or
mezzanine presentation to liabilities and requires an issuer of those financial
statements to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS No. 150 is effective for public companies for
financial instruments entered into or modified after May 31, 2003 and is
effective at the beginning of the first interim period beginning after June 15,
2003. Management has not entered into any financial instruments that would
qualify under SFAS No. 150. The Company currently classifies its Guaranteed
Preferred Beneficial Interest in the Company's Subordinated Debt as a liability.
As a result, management does not anticipate the adoption of SFAS No. 150 to have
a material impact on the Company's financial position or 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 and six month period ended June 30, 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 when it becomes available, 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.
On January 1, 2002, First Colonial adopted SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". At June 30, 2003, and
December 31, 2002, First Colonial had goodwill with a carrying value of
approximately $127,000 resulting from previous branch acquisitions. In
accordance with SFAS No. 142, First Colonial has discontinued the amortization
of goodwill resulting from these acquisitions, and subject's goodwill to
impairment testing 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 First Colonial's books
to write-down the related goodwill to the proper carrying value. As of June 30,
2003 and December 31, 2002, First Colonial determined that no impairment
write-offs 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 June 30, 2003 were $0.47 as
compared to $0.45 for the corresponding period in 2002. Diluted earnings per
share for the three months ended June 30, 2003 where $0.44 as compared to $0.44
for the same period in 2002. Average basic shares outstanding during this three
month period were 2,207,138 in 2003 and 2,152,664 in 2002. Average diluted
shares outstanding for the three month period were 2,356,745 in 2003 and
2,195,235 in 2002. Basic earnings per share for the six months ended June 30,
2003 were $0.90 as compared to $0.83 for the corresponding period in 2002.
Average diluted earnings per share for the six months ended June 30, 2003 were
$0.85 as compared to $0.82 for the same period in 2002. Average basic shares
outstanding during this six month period were 2,192,445 in 2003 and 2,149,896 in
2002. Average diluted shares outstanding during the six month period were
2,324,828 in 2003 and 2,188,199 in 2002. Per share earnings and average shares
outstanding have been restated to reflect the 5% stock dividend paid on May 17,
2002. (see Note D)
The net income for the three months ended June 30, 2003 was $1,049,000 compared
to $980,000 for the same period in 2002. This was an increase of $69,000 or
7.0%. The earnings increase was attributable to an increase on the gains on the
sale of Available for Sale Securities of $415,000, or 141.2%, a $272,000, or
224.8%, increase in the gains on the sale of mortgage loans, an increase in net
interest income of $249,000 or 5.9% (see discussion on Net Interest Income), a
$44,000 or 3.9% increase in other income exclusive of gains on the sale of
available-for-sale securities and the gains on the sale of mortgage loans
held-for-sale. These were offset in part by a $872,000 or 20.9% increase in
total other expenses, an increase of $14,000 or 3.9% in the provision for
possible loan losses, and an increase of $25,000 or 11.6% in Federal income
taxes.
Net income for the six months ended June 30, 2003 was $1,981,000 compared to
$1,791,000 for the same period in 2002 an increase of $190,000 or 10.6%. The
earnings increase was primarily attributable to an increase of $811,000, or
122.3%, in the gains on the sale of available-for-sale securities, an increase
of $676,000 or 8.2% in net interest income, an increase in gains on the sale of
mortgage loans of $613,000, or 311.2%, an increase of $16,000 or 0.7% in other
income exclusive of gains on the sale of available-for-sale securities and the
gains on the sale of mortgage loans. These were partially offset by a $2,095,000
or 24.8% increase on total other expenses, a decrease of $186,000 or 24.4% in
the provision for possible loan losses and a $17,000 or 4.7% increase in Federal
income taxes.
Net Interest Income
Net interest income amounted to $4,443,000 for the three months ended June 30,
2003 compared to $4,194,000 for the three months ended June 30, 2002, an
increase of $249,000 or 5.9%. This increase was primarily the result of
decreases in interest paid on deposit and debt exceeding the decreases in the
interest earned on loans and investments. The total interest income earned on
loans and investments amounted to $7,356,000 for the second quarter of 2003, an
increase of $129,000 or 1.8% from the $7,227,000 earned in the same period in
2002. The total interest expense paid on deposits and debt was $2,913,000 and
$3,033,000 for the three month period ended June 30, 2003 and 2002,
respectively. This was a decrease in second quarter of 2003 from 2002 of
$120,000 or 4.0%. The increase in interest income was the result of increased
average loans outstanding which was reduced in part by lower interest rates. The
reduction of interest expense is attributed to lower interest rates paid on
deposits
and debt as a result of a general declining interest rate environment. The
effect of these lower interest rates were offset in part by an increase in
deposit balances.
Net interest income for the six months ended June 30, 2003 was $8,945,000
compared to $8,269,000 for the same period in 2002. This was an increase of
$676,000 or 8.2%. The interest income earned on loans and investments during the
first half of 2003 was $14,935,000, which was $598,000 or 4.2% higher than the
2002 amount of$14,337,000. Total interest expense for the six-month period was
$5,990,000 and $6,068,000 in 2003 and 2002, respectively. This was a decrease of
$78,000 or 1.3%. The growth in net interest income was primarily the result of
lower interest rates in a declining rate environment and higher volumes of
deposits, loans and investments.
The fully taxable-equivalent net interest income was $9,605,000 for the first
six months of 2003, compared to $8,775,000 for the same period in 2002, a 9.5%
or $830,000 increase. This increase in taxable-equivalent net interest income
was primarily due to a $1,610,000 increase related to volume partially reduced
by a $780,000 decrease due to interest rates.
First Colonial's provision for possible loan losses was $375,000 for the three
months ended June 30, 2003 as compared to $361,000 for the same period in 2002.
The provision for possible loan losses was $575,000 for the six months ended
June 30, 2003 as compared to $761,000 for the six months ended June 30, 2002.
The provision was determined in accordance with SAB No. 102, considering all
credit quality risk associated with the loan portfolio (see management's
discussion on "Allowance and Provision for Possible Loan Losses") .
The "Rate/Volume Analysis" table segregates, in detail, the major factors that
contributed to the changes in net interest income, for the six months ended June
30, 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.
RATE / VOLUME ANALYSIS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30, 2003
Over / (Under)
June 30, 2002
CHANGE DUE TO:
TOTAL RATE VOLUME
------------------------------------------------------------
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ (3) $ (34) $ 31
Federal Funds Sold (2) (1) (1)
Investment Securities 1,016 (2,056) 3,072
Loans (259) (968) 709
---------------- ---------------- ---------------
Total Interest Income $ 752 $(3,059) $ 3,811
---------------- ---------------- ---------------
INTEREST EXPENSE
Interest Bearing Deposits
Demand Deposits $ (87) $ (105) $ 18
Money Market Deposits 46 (581) 627
Savings & Club Deposits (234) (286) 52
CD's Over $100,000 (26) (25) (1)
All Other Time Deposits (542) (779) 237
---------------- ---------------- ---------------
Total Interest-Bearing Deposits (843) (1,776) 933
Securities Sold Under Agreements
to Repurchase (60) (50) (10)
Short-Term Debt (3) (1) (2)
Long-Term Debt 478 (452) 930
Guaranteed Preferred Beneficial Interests
in Company's Subordinated Debentures 350 - 350
---------------- ---------------- ---------------
Total Interest Expense (78) (2,279) 2,201
---------------- ---------------- ---------------
Net Increase (Decrease) in Interest Income $ 830 $ (780) $ 1,610
================ ================ ===============
Total taxable-equivalent interest income for the six months ended June 30, 2003
increased by $752,000 or 5.1% 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 $1,016,000 or
16.5% higher during the first half of 2003 as compared to the same period in
2002. This increase was comprised of a $3,072,000 increase due to a higher
volume of investment securities reduced in part by a decrease of $2,056,000 due
to lower interest rates. The interest income earned on loans on a fully taxable
equivalent basis decreased by $259,000 or 3.0% for the six months ended June 30,
2003 as compared to the same period in 2002. This decrease was comprised of a
$968,000 decrease due to lower interest rates reduced in part by a $709,000
increase due to growth in average loans outstanding. Average year-to-date
earning assets increased to $586,960,000 at June 30, 2003 from $458,303,000 at
June 30, 2002. This was an increase of $128,657,000 or 28.1%
Total interest expense decreased by $78,000 or 1.3% during the first six months
of 2003, over the same period in 2002. The decrease was the result of lower
interest rates paid on deposits and debt reduced in part by growth in deposits
and debt. The interest expense on interest-bearing deposits decreased by
$843,000 or 17.1% during the first six months of 2003 as compared to the first
six months of 2002. This was comprised of a decrease of $1,776,000 due to lower
interest rates offset in part by a $933,000 increase due to deposit growth. Also
affecting the decrease in interest expense was a $60,000 decrease in interest
paid on securities sold under agreements to repurchase and a decrease of $3,000
on the interest paid on short-term debt. The decrease in interest expense was
offset in part by an increase of $478,000 or 47.6% on the interest paid on
long-term debt and $350,000 on the interest paid on the $15,000,000 of
subordinated debentures issued in June 2002. The increase of the interest paid
on long-term debt was comprised of an increase of $930,000 due to higher level
of debt partially offset by a decrease of $452,000 due to lower interest rates.
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)
Six Months Ended, June 30, 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 $ 13,645 $ 72 1.06% $ 9,685 $ 75 1.55%
Federal Funds Sold 530 3 1.13 619 5 1.62
Investment Securities
Taxable 264,015 5,328 4.04 173,424 4,758 5.49
Non-Taxable (1) 54,499 1,849 6.79 39,106 1,403 7.18
Loans (1) (2) 257,475 8,343 6.48 237,837 8,602 7.23
Reserve for Loan Losses (3,204) - - (2,368) - -
---------- ---------- ----------- ----------
Net Loans 254,271 8,343 6.56 235,469 8,602 7.31
---------- ---------- ----------- ----------
Total Interest-Earning Assets 586,960 15,595 5.31 458,303 14,843 6.48
Non-Interest Earning Assets 30,830 - - 27,799 - -
---------- ---------- ----------- ----------
TOTAL ASSETS, INTEREST INCOME $ 617,790 15,595 5.05 $ 486,102 14,843 6.11
---------- ---------- ----------- ----------
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 62,771 114 0.36 $ 57,624 201 0.70
Money Market Deposits 91,641 652 1.42 45,079 606 2.69
Savings & Club Deposits 77,843 283 0.73 70,727 517 1.46
CD's over $100,000 8,145 111 2.73 8,214 137 3.35
All Other Time Deposits 172,320 2,934 3.41 161,337 3,476 4.31
---------- ---------- ----------- ----------
Total Interest-Bearing Deposits 412,720 4,094 1.98 342,981 4,937 2.88
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 9,833 51 1.04 10,829 111 2.05
Short-Term Debt 168 1 1.19 376 4 2.13
Long-Term Debt 67,066 1,483 4.42 34,866 1,005 5.77
Guaranteed Preferred Beneficial Interest
in Company Subordinated debentures 15,000 361 4.81 249 11 5.34
---------- ---------- ----------- ----------
Total Interest-Bearing Liabilities 504,787 5,990 2.37 389,301 6,068 3.12
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 65,426 - - 54,146 - -
Other Liabilities 6,596 - - 6,865 - -
---------- ---------- ----------- ----------
TOTAL LIABILITIES 576,809 5,990 2.08 450,312 6,068 2.69
SHAREHOLDERS' EQUITY 40,981 - - 35,790 - -
---------- ---------- ----------- ----------
TOTAL LIABILITIES AND EQUITY,
TOTAL LIABILITIES AND EQUITY
INTEREST EXPENSE $ 617,790 5,990 1.94 $ 486,102 6,068 2.50
---------- ---------- ----------- ----------
NET INTEREST INCOME $ 9,605 $ 8,775
---------- ----------
Net Interest Spread (3) 2.94 3.36
Effect of Interest-Free Sources
Used to Fund Earnings 0.33 0.47
Net Interest Margin (4) 3.27% 3.83%
------------- ----------
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The tax equivalent adjustments included above are $660,000 and
$506,000 for the six months ended June 30, 2003 and June 30, 2002, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of ($148,000) and $(127,000) for the six months ended June 30,
2003 and June 30, 2002, respectively, are included in interest income. Average
loan balances include non-accruing loans and average loans held-for-sale of
$3,709,060 and $4,316,000 for the six months ended June 30, 2003 and June 30,
2002, respectively.
(3) Net interest spread is the arithmetic difference between the yield on
average interest-earning assets and the rate paid on interest-bearing
liabilities.
(4) Net interest margin is computed by dividing net interest income by average
interest-earning assets.
The net interest margin of 3.27% for the six-month period ended June 30, 2003,
decreased from the 3.83% net interest margin for the first six months of 2002.
The yield on interest earning assets was 5.31% during the first six months of
2003 as compared to 6.48% in 2002. The average interest rate paid on interest
bearing deposits and other borrowings was 2.37% for the first six months of 2003
as compared to 3.12% in 2002.
Other Income and Other Expenses
Other income for the three months ended June 30, 2003, including service
charges, trust and wealth management revenues, gains on the sale of mortgage
loans, net securities gains and other miscellaneous income was $2,268,000 as
compared to $1,537,000 for the same period in 2002. This was an increase of
$731,000 or 47.6%. This increase was the result of increased gains on the sale
of securities available-for-sale, the higher gains on the sale of mortgage
loans, and increases in trust and wealth management revenues and other operating
income, reduced in part by a decline in service charges. The net gains on
securities available-for-sale for the three-month period ended June 30 were
$709,000 in 2003 and $415,000 in 2002. This was an increase of $415,000 or
141.2%. In the three month period ended June 30, 2003, the gains on the sale of
mortgage loans amounted to $393,000 as compared to a gain of $121,000 for the
same period in 2002, an increase of $272,000 or 224.8%. Mortgage loan sales
amounted to $13,803,000 during the three month period ended June 30, 2003 as
compared to $11,246,000 during the same period in 2002. Other operating income
for the three months ended June 30, 2003 was $230,000, an increase of $40,000 or
21.1% compared to $190,000 for the same period in 2002. The increase in
miscellaneous income was primarily the result of an increase in the use of
various fee-based services. The trust and wealth management revenues were
$325,000 for the three months ended June 30, 2003 as compared to $291,000 for
the three months ended June 30, 2002, an increase of $34,000 or 11.7%. The
revenues from trust and wealth management operations increased as a result of
additional new accounts. Service charges on deposit accounts declined by $30,000
or 4.7% during the three-month period ended June 30, 2003 as compared to the
same period in 2002. The service charges for the three months ended June 30 were
$611,000 and $641,000 in 2003 and 2002, respectively. The decline in service
charge income is due to a lower level of overdraft service charges.
Other income for the six months ended June 30, 2003, including service charges,
trust and wealth management revenues, gains on the sale of mortgage loans, net
securities gains and other miscellaneous income was $4,534,000 as compared to
$3,094,000 for the same period in 2002. This was an increase of $1,440,000 or
46.5%. This increase was the result of increased gains on the sale of securities
available-for-sale, the higher gains on the sale of mortgage loans, and
increases in trust and wealth management revenues, reduced in part by a decline
in service charges and a decline in other operating income. The gains on the
sale of securities available-for-sale for the six months ended June 30, 2003
were $1,474,000 as compared to $663,000 for the same period in 2002. This was an
increase of $811,000 or 122.3%. The gains on the sale of mortgage loans were
$810,000 during the first six months of 2003 compared to $197,000 in the first
six months of 2002, an increase of $613,000 or 311.2%. Mortgage loan sales
amounted to $29,957,000 and $20,918,000 in the first six months of 2003 and
2002, respectively. The increase in the mortgage sales gains was the result of
lower interest rates. In the six-month period ended June 30, 2003, service
charges were $1,230,000, a $10,000 or 0.8% decrease from the 2002 amount of
$1,240,000. The decrease in service charge income is primarily the result of a
reduction in the number of overdraft fees collected. The revenues from the trust
and wealth management operations were $610,000 for the six months ended June 30,
2003 as compared to $575,000 for the six months ended June 30,
2002, an increase of $35,000 or 6.1%. Other operating income was $410,000 for
the first six months of 2003 as compared to $419,000 for the same period in
2002. This was a decrease of $9,000 or 2.1%.
Total other expenses for the three-month period ended June 30, 2003 increased by
$872,000 or 20.9% to $5,047,000 over total other expenses for the same period in
2002 of $4,175,000. Included in this increase was a $293,000 or 13.9% increase
in salary and benefit expenses which were $2,404,000 in 2003 as compared to
$2,111,000 in 2002. These increases were primarily due to general salary
increases of approximately 4% and the addition of staff for the new branch at
3856 Easton-Nazareth Highway and the other three new branches that will open in
the third or fourth quarter of 2003. Occupancy and equipment expenses were
$667,000 for the three months ended June 30, 2003 and $642,000 for the three
months ended June 30, 2002, an increase of $25,000 or 3.9%. The increase in
occupancy expenses were related to rent increase at some branches and general
maintenance. During the three months ended June 30, 2003, the expense for the
impairment of mortgage servicing rights amounted to $238,000. There was no such
expense during the same period of 2002. This impairmentexpense was due to a
larger than normal number of customers prepaying their residential mortgage
loans as a result of lower interest rates. Other operating expenses for the
three month period ended June 30, 2003 were $1,738,000, an increase of $316,000
or 22.2% from the $1,422,000 in other expenses for the same period in 2002. This
increase was primarily the result of higher data processing, advertising and
professional services expenses.
Total other expenses for the six-month period ended June 30, 2003 increased by
$2,095,000 or 24.8% to $10,548,000 over total other expenses for the same period
in 2002 of $8,453,000. A major factor affecting the increase in total other
expenses was the expense of $875,000 for the impairment of mortgage servicing
rights during the first half of 2003. There was no mortgage impairment expense
during the first half of 2002. This impairment expense is due to a larger than
normal number of customers prepaying their residential mortgage loans as a
result of lower interest rates. Also included in the increase of other expenses
was an $822,000 or 19.8% increase in salary and benefit expenses which were
$4,980,000 in 2003 as compared to $4,158,000 in 2002. These increases were
primarily due to a charge of $175,000 due to the accelerated vesting and
distribution of the deferred stock compensation as a result of the merger
agreement with Keystone Savings Bank, general salary increases of approximately
4% and additional staff for the new branches opening in 2003 and staff additions
in the third and fourth quarter of 2002, in the commercial lending and trust and
wealth management area of the bank. Occupancy and equipment expenses were
$1,310,000 for the six months ended June 30, 2003 and $1,308,000 for the six
months ended June 30, 2002, an increase of $2,000 or 0.2%. Other operating
expenses for the six month period ended June 30, 2003 were $3,383,000, an
increase of $396,000 or 13.3% from the $2,987,000 in other expenses for the same
period in 2002. This increase was primarily due to higher data processing,
advertising and professional services expenses.
FINANCIAL CONDITION
Assets and Liabilities
Total assets at June 30, 2003 were $642,244,000, representing an increase of
$30,652,000 or 5.0% over total assets of $611,592,000 at December 31, 2002.
Deposits increased by $33,530,000 or 7.1% from $472,798,000 on December 31, 2002
to $506,328,000 on June 30, 2003. Contributing to this increase in total
deposits were increases in non-interest bearing checking deposits of
$12,997,000, certificates of deposit under $100,000 of $12,828,000, certificates
of deposits over $100,000 of $8,359,000, savings and club deposits of
$6,556,000, and interest-bearing checking accounts of $4,342,000, partially
offset by a decrease in money market accounts of $11,552,000. Loans outstanding
at June 30, 2003 were $265,597,000 as compared to $255,844,000 at December 31,
2002. This was an increase of $9,753,000 or 3.8%. The increase in loans was
primarily the result of increases in commercial loans of $12,199,000 and
residential real estate loans of $2,592,000. These increases were offset in part
by a decrease in consumer loans of $5,038,000. Also affecting loan growth was
the sale of $29,957,000 of residential real estate loans during the first six
months of 2003. There were $2,803,000 of residential real estate loans
identified as held-for-sale at June 30, 2003. There were $1,263,000 residential
real estate loans held-for sale at December 31, 2002. The loan to deposit ratio
was 52.5% and 54.1% at June 30, 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 $375,000 for the three months ended
June 30, 2003. The provision for possible loan losses for the same period in
2002 was $361,000. Net charge-offs were $260,000 and $167,000 for the three
month period ended June 30, 2003 and 2002, respectively.
The provision for possible loan losses was $575,000 for the first six months of
2003 as compared to $761,000 for the same period in 2002. Net charge offs were
$432,000 for the six months ended June 30, 2003 compared with $481,000 for the
six months ended June 30, 2002. The ratio of the allowance for loan losses to
total loans was 1.22% at June 30, 2003 and 1.21% at December 31, 2002. The
allowance for possible loan losses at June 30, 2003 totaled $3,228,000, an
increase of $144,000 or 4.7% over the December 31, 2002 amount of $3,084,000.
At June 30, 2003, the net loan charge-offs to average loans outstanding for
First Colonial increased slightly to .34% from .29% at December 31, 2002. The
charge-offs were concentrated in the consumer loan portfolio. Loan portfolio
risk increased as the level of commercial loans increased $12,199,000 or 14.7%
from $82,742,000 at December 31, 2002 to $94,941,000 at June 30, 2003.
Residential real estate loans also increased by $2,592,000 or 2.3% from
$114,448,000 at December 31, 2002 to $117,040,000 at June 30, 2003. At the same
time, consumer loans totaling $53,616,000 at June 30, 2003 decreased $5,038,000
or 8.6% from the December 31, 2002 amount of $58,654,000. The ratio of the
allowance to non-performing loans increased from 138.6% at December 31, 2002 to
161.5% at June 31, 2003. The continued growth in commercial loans and the
potential higher risk of these types of loans warranted the $144,000 increase in
the allowance for possible loan losses, through a loan loss provision of
$575,000 for the first six months of 2003. The provision is determined by
applying First Colonial's allowance methodology and is deemed to be adequate.
At June 30, 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 (486,000) (583,000)
Loans Recovered 55,000 102,000
------------------- -------------------
Net Loans Charged Off (431,000) (481,000)
Provision Charged to Expenses 575,000 761,000
------------------- -------------------
Balance, June 30, $ 3,228,000 $ 2,544,000
=================== ===================
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.
June 30, December 31, June 30,
2003 2002 2002
- ---------------------------------------------------------------------------------------------------------
Non-accrual loans on a cash basis $ 1,321,000 $ 1,351,000 $ 1,093,000
Non-accrual loans as a percentage
of total loans 0.50% 0.53% 0.44%
- ---------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 678,000 $ 874,000 $ 1,581,000
Accruing loans past due 90 days or more
as a percentage of total loans 0.26% 0.34% 0.64%
- ---------------------------------------------------------------------------------------------------------
Total nonperforming loans
(Non-accrual loans plus accruing loans
past due 90 days or more) $ 1,999,000 $ 2,225,000 $ 2,674,000
Allowance for loan losses to
nonperforming loans 161.48% 138.60% 95.14%
Nonperforming loans to total loans 0.76% 0.87% 1.08%
Allowance for loan losses to total loans 1.22% 1.21% 1.03%
- ---------------------------------------------------------------------------------------------------------
Total non-performing loans (non-accruing loans and loans past due over 90 days)
amounted to $1,999,000 at June 30, 2003 as compared to $2,225,000 at December
31, 2002 and $2,674,000 at June 30, 2002. The ratio of non-performing loans to
total loans was 0.76%, 0.87% and 1.08% at June 30, 2003, December 31, 2002 and
June 30, 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 June 30, 2003 of $1,321,000 decreased from the December
31, 2002 amount of $1,351,000 and increased over the June 30, 2002 level of
$1,093,000. The amount of decrease from December 31, 2002 to June 30, 2003 was
$30,000. This decrease was primarily the result of the charge-off of certain
consumer loans. At the present time, management is of the opinion that these
non-accruing loans present a minimal amount of exposure to the Bank.
Loans past due 90 days or more and still accruing interest are loans that are
generally well secured and expected to be restored to a current status in the
near future. As of June 30, 2003, loans past due 90 days or more and still
accruing interest were $678,000 compared to
$874,000 at December 31, 2002 and $1,581,000 at June 30, 2002. The $196,000
decrease in loans past due 90 days from December 31, 2002 to June 30, 2003 was
the result of decreases in commercial, mortgage and consumer loans past due 90
days or more.
Other Real Estate Owned
There was no Other Real Estate Owned at June 30, 2003 and at December 31, 2002.
Investment Securities
The Company had $255,847,000 in available-for-sale securities at June 30, 2003
with a net unrealized gain of $625,000. 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 June 30, 2003, $82,260,000 of securities
available-for-sale were sold for a net gain of $709,000 as compared to
$28,053,000 of securities available-for-sale sold for a net gain of $294,000 for
the same period in 2002. Most of the securities sold were agency mortgage-backed
bonds, fixed rate agency bonds and equities. These securities were replaced with
shorter term agency mortgage-backed securities, agency bonds with step-up
features and other equity securities. The purpose of these sales was to shorten
the investment portfolio, reduce interest-rate risk and reposition the equity
portfolio.
During the six-month period ended June 30, 2003, $133,168,000 of securities
available-for-sale were sold for a net gain of $1,474,000 as compared to
$48,244,000 of securities available-for-sale sold for a net gain of $663,000 for
the same time period in 2002. Most of the securities sold were longer term
agency mortgage-backed bonds, fixed rate agency bonds and equity securities.
These securities were replaced with shorter-term agency mortgage-backed
securities, fixed rate agency bonds, agency bonds with step-up features and
equities. The purpose of these sales was to shorten the investment portfolio and
reduce the Company's interest rate risk and reposition the equity portfolio.
Held-to-maturity securities totaling $68,277,000 at June 30, 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 June 30, 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 June 30,
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 June 30, 2003 Amount Ratio Amount Ratio Amount Ratio
===============================================================================================================================
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 58,035 17.91% $ 25,927 8.00% -
Bank $ 47,167 14.79% $ 25,513 8.00% $ 31,891 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $ 53,076 16.38% $ 12,963 4.00% -
Bank $ 42,939 13.46% $ 12,756 4.00% $ 19,135 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company, (Consolidated) $ 53,076 8.47% $ 25,068 4.00% -
Bank $ 42,939 6.91% $ 24,869 4.00% $ 31,087 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 June 30, 2003, cash, due from banks, Federal funds sold and interest bearing
deposits with banks totaled $37,850,000, and securities maturing within one year
totaled $117,000. 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 $7,198,000 at June 30, 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 $12,721,000 at June 30, 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 June 30, 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 June 30, 2003, subject to certain collateral
requirements. The Bank had no short-term (overnight) borrowings against this
line at June 30, 2003 and December 31, 2002.
The Company had long-term debt from the Federal Home Loan Bank of Pittsburgh
totaling $66,152,000 at June 30, 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 June 30, December 31, Due June 30,
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 805 790 795 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 2,996 3,037 October 2007 3.18% (5)
December 2002 15,000 13,596 15,000 December 2007 2.90% (5)
December 2002 10,000 10,000 10,000 December 2007 3.21% (6)
December 2002 5,000 4,681 5,000 December 2009 3.40% (5)
-------------- -------------- --------------
$ 67,945 $ 66,152 $ 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 (4.46% at June 30,
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 June 30, 2003 and December
31, 2002. The total outstanding on these loans was $1,093,000 at June 30, 2003
and December 31, 2002.
The ESOP loans outstanding at June 30, 2003 and December 31, 2002 are as
follows:
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------
Interest
Balance at: Balance at: Rate at:
Date Original June 30, 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 six months ended June 30, 2003 consisted of cash provided by
financing activities of $30,511,000 and cash provided by operating activities of
$10,825,000 offset in part by cash used in investing activities of $39,075,00.
The result was a net increase in cash and cash equivalents of $2,261,000.
Cash provided by operating activities was the result of net income of
$1,981,000, proceeds from the sale of residential real estate loans of
$29,957,000, amortization of security premiums of $1,206,000, depreciation and
amortization of $714,000, the provision for possible loan losses of $575,000, a
decrease in other assets of $538,000, a decrease in accrued interest income of
$392,000, and amortization of deferred fees on loans of $272,000. These were
offset in part by mortgage loans originated for sale of $21,730,000, net gains
on the sale of investment securities of $1,474,000, gains on the sale of
residential real estate loans of $810,000, a decrease in other liabilities of
$301,000, a decrease in accrued interest payable of $178,000, and deferred taxes
of $226,000.
Cash provided by financing activities consisted principally of an increase in
certificates of deposit of $21,187,000, a net increase in interest and
non-interest bearing demand deposits, and savings accounts and money market
accounts of $12,343,000, proceeds from the issuance of stock of $964,000, and a
decrease in deferred stock compensation of $220,000. These were partially offset
by payments on long-term debt of $1,769,000, a decrease in repurchase agreements
of $1,603,000, and the payment of cash dividends of $831,000
Cash was used in investing activities for the purchase of securities
available-for-sale of $147,348,000, the purchase of securities held-to-maturity
of $56,193,000, a net increase in loans of $19,593,000, a net increase in
interest-bearing deposits with banks of $7,846,000 and the purchase of premises
and equipment of $775,000. These were partially offset by the proceeds from the
sale of securities available-for-sale of $133,168,000, proceeds from the
maturities of securities available-for-sale of $41,262,000, proceeds from the
maturities of securities held-to-maturity of $18,042,000 and proceeds from the
sale of other real estate owned of $208,000.
In June, 2003, the Bank opened a new full-service branch office in Northampton
Crossings Shopping Center, 3856 Easton-Nazareth Highway (Route 248), in Lower
Nazareth Township, Northampton County, Pennsylvania. During the second quarter
of 2003, the Bank received final approval from the Officer of the Comptroller of
the Currency to establish full-service branches at 2510 MacArthur Road,
Whitehall Township, Lehigh County, Pennsylvania and 1504 South Fourth Street in
the City of Allentown, Lehigh County, Pennsylvania. It is expected that both of
these branches will open during the third quarter of 2003. In addition, the
future branch at 29 North Ninth Street in the City of Allentown, Lehigh County,
Pennsylvania is expected to open in the third quarter of 2003. The Bank received
approval to establish this branch during the first 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 June 30, 2003 was $41,952,000 as compared to
$40,314,000 at December 31, 2002, for an increase of $1,638,000 or 4.1%. This
increase resulted from net income of $1,981,000, the proceeds from the sale of
stock of $964,000, 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 $696,000 and the payment of dividends of $831,000.
On May 16, 2003 the Company paid its 2003 second quarter cash dividend on its
common stock of $0.19 per share to shareholders of record on May 2, 2003.
The Company maintains 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. The Company also has a non-employee director's stock option
plan that was adopted in 1994 and a stock option plan that was adopted in 1986
and the 1996 stock option plan that was adopted in 1996. No new options may be
issued under these plans. During the three months ended June 30, 2003, options
for 24,204 shares of the Company's common stock issued pursuant to the Plan were
exercised at an average price of $20.13 per share. During the first six months
of 2003, a total of options for 42,323 shares of the Company's common stock
issued pursuant to the Plan were exercised at an average price of $20.46 per
share for proceeds of approximately $866,000.
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.
The Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls") as of June 30,
2003. This evaluation ("Controls Evaluation") was done under the supervision and
with the participation of management, including Scott V. Fainor, the Chief
Executive Officer ("CEO") and Reid L. Heeren, the Chief Financial Officer
("CFO").
Limitations on the Effectiveness of Controls. 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. The Company
conducts periodic evaluations of its internal controls to enhance, where
necessary, its controls and procedures.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded
that the Disclosure Controls are effective in reaching a reasonable level of
assurance that management is timely alerted to material information relating to
the Company during the period when its periodic reports are being prepared. In
accordance with SEC requirements, the CEO and CFO conducted an evaluation of
internal control over financial reporting ("Internal Controls") to determine
whether any changes in Internal Controls occurred during the quarter that have
materially affected or which are reasonably likely to materially affect Internal
Controls. Based on this evaluation, there has been no such change during the
quarter covered by this report.
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
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
32 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 April 17, 2003, First Colonial filed a report on Form
8-K, which reported under Item 9 the release of its March 31,
2003 earnings. A copy of the release was filed as an exhibit.
On April 18, 2003, First Colonial filed a report on Form
8-K, which reported under Item 9 the announcement of its
second quarter 2003 dividend. A copy of this announcement was
filed as an exhibit.
On June 5, 2003, First Colonial filed a report on Form
8-K, which was reported under Item 9 the announcement of the
opening of a new branch office located in the Northampton
Crossing Shopping Center in Lower Nazareth Township. A copy of
this announcement was filed as an exhibit.
On June 11, 2003, First Colonial filed a report on Form
8-K, which was reported under Item 9 and 12 the announcement
that First Colonial had mailed its first quarter report to
shareholders. A copy of the report was filed as an exhibit.
On June 11, 2003, First Colonial filed a report on Form
8-K, which was reported under Item 9 the announcement of the
filing of regulatory applications for the proposed merger of
Keystone Savings Bank and Nazareth National Bank and the
filing of a registration statement by KNBT Bancorp, Inc. with
the Securities and Exchange Commission with respect to an
offering of common stock in connection with Keystone's
previously announced intent to conduct a mutual-to-stock
conversion. A copy of this release was filed as an exhibit.
On July 18, 2003, First Colonial filed a report on Form
8-K, which reported under Item 9 the release of its June 30,
2003 earnings. A copy of the release was filed as an exhibit.
On July 18, 2003, First Colonial filed a report on Form
8-K, which reported under Item 9 the announcement of its third
quarter 2003 dividend. A copy of this announcement was filed
as an exhibit.
On July 21, 2003, First Colonial filed a report on Form
8-K, which reported under Item 9 the disclosure of certain
information concerning the financial position and results of
operations of First Colonial Group, Inc. at an for the periods
ended June 30, 2003, as well as certain comparison periods, in
the Pre-Effective Amendment No. 1 to KNBT Bancorp, Inc.'s
Registration Statement on Form S-1. A copy of the disclosure
was filed as an exhibit.
On July 28, 2003, First Colonial filed a report on Form
8-K, which was reported under Item 9 the announcement of plans
to open a full-service branch at 1504 S. 4th Street, Allentown
in August. A copy of this announcement was filed as an
exhibit.
On July 29, 2003, First Colonial filed a report on Form
8-K, which was reported under Item 5 reporting the Annual
Meeting of Shareholders of the Company will be held on October
1, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST COLONIAL GROUP, INC.
DATE: August 14, 2003 BY: /S/ SCOTT V. FAINOR
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SCOTT V. FAINOR
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: August 14, 2003 BY: /S/ REID L. HEEREN
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REID L. HEEREN
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)