10-Q 1 nnb6-02q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------------------ (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File No. 0-11526 ----------------------------------------------------- FIRST COLONIAL GROUP, INC. -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-2228154 -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 76 S. MAIN ST., NAZARETH, PA 18064 -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _____ INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 2,210,270 SHARES OF COMMON STOCK, $5 PAR VALUE, OUTSTANDING ON JUNE 30, 2002 FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES INDEX PART 1 - FINANCIAL INFORMATION PAGE NO. ITEM 1 - Financial Statements Consolidated Balance Sheet 2 Consoliated Statement of Income 3 Consolidated Statement of Changes in Shareholders' Equity 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 6 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM 3 - Quantitative and Qualitative Discussion About Market Risk 26 PART 11 - OTHER INFORMATION ITEM 1 - Legal Proceedings 27 ITEM 2 - Changes in Securites and Use of Proceeds 27 ITEM 3 - Defaults Upon Senior Securities 27 ITEM 4 - Submission of Matters to a Vote of Security Holders 28 ITEM 5 - Other Information 28 ITEM 6 - Exhibits and Reports on Form 8-K 28 SIGNATURES 29 PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
June 30 Dec. 31 2002 2001 ---------------- --------------- ASSETS Total Cash and Cash Equivalents $ 17,103 $ 17,270 Interest-Bearing Deposits With Banks 13,564 919 Investment Securities Held-to-Maturity (Fair Value: June 30,2002 $19,917, Dec. 31, 2001 - $23,160) 19,465 23,004 Securities Available-for-Sale at Fair Value 213,187 181,302 Mortgage Loans Held-for-Sale 1,249 3,808 Total Loans, Net of Unearned Discount 248,089 225,757 LESS: Allowance for Possible Loan Losses (2,544) (2,264) ---------------- --------------- Net Loans 245,545 223,493 Premises and Equipment, Net 6,230 6,562 Accrued Interest Income 2,963 2,888 Other Real Estate Owned - 93 Other Assets 6,267 5,805 ---------------- --------------- TOTAL ASSETS $ 525,573 $ 465,144 ---------------- --------------- LIABILITIES Deposits Non-Interest Bearing Deposits $ 59,065 $ 57,931 Interest-Bearing Deposits 359,335 321,955 ---------------- --------------- Total Deposits 418,400 379,886 Securities Sold Under Agreements to Repurchase 13,110 8,380 Long-Term Debt 34,889 34,804 Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures 15,000 - Accrued Interest Payable 3,311 3,949 Other Liabilities 2,997 2,799 ---------------- --------------- TOTAL LIABILITIES 487,707 429,818 SHAREHOLDERS' EQUITY Preferred Stock, Par Value $5.00 a share Authorized - 500,000 shares, none issued - - Common Stock, Par Value $5.00 a share Authorized - 10,000,000 shares Issued - 2,209,317 Shares at June 30, 2002 and 2,085,778 shares at Dec. 31, 2001 11,051 10,429 Additional Paid in Capital 20,610 18,304 Retained Earnings 7,043 8,581 Less: Treasury stock at cost: 953 shares at June 30, 2002 and 2,463 shares at Dec. 31, 2001 (24) (59) Deferred Stock Compensation: 10,000 shares at June 30, 2002 and none at Dec. 31, 2001 (220) - Employee Stock Ownership Plan Debt (1,235) (1,235) Accumulated Other Comprehensive Income (Loss) 641 (694) ---------------- --------------- Total Shareholders' Equity 37,866 35,326 ---------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 525,573 $ 465,144 ---------------- ---------------
See accompanying notes to interim consolidated financial statements. 2
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ------- ------- ------- ------- INTEREST INCOME: Interest and Fees on Loans $ 4,309 $ 5,029 $ 8,573 $ 9,764 Investment Securities Income Taxable 2,390 2,228 4,758 4,700 Tax-Exempt 488 434 926 839 Interest on Deposits with Banks and Federal Funds Sold 40 33 80 56 ------- ------- ------- ------- Total Interest Income 7,227 7,724 14,337 15,359 ------- ------- ------- ------- INTEREST EXPENSE: Interest on Deposits 2,458 2,911 4,937 5,955 Interest on Short-Term Debt 57 132 115 281 Interest on Long-Term Debt 507 502 1,005 1,016 Interest on Trust-Preferred Securities 11 - 11 - ------- ------- ------- ------- Total Interest Expense 3,033 3,545 6,068 7,252 ------- ------- ------- ------- NET INTEREST INCOME: 4,194 4,179 8,269 8,107 Provision for Possible Loan Losses 361 230 761 330 ------- ------- ------- ------- Net Interest Income After Provision For Possible Loan Losses 3,833 3,949 7,508 7,777 ------- ------- ------- ------- OTHER INCOME: Trust and Wealth Management Revenue 291 312 575 653 Service Charges on Deposit Accounts 641 582 1,240 1,098 Investment Securities Gains, Net 294 88 663 225 Net Gains on the Sale of Mortgage Loans 121 103 197 103 Other Operating Income 190 153 419 332 ------- ------- ------- ------- Total Other Income 1,537 1,238 3,094 2,411 ------- ------- ------- ------- OTHER EXPENSES: Salaries and Employee Benefits 2,111 1,962 4,158 3,783 Net Occupancy and Equipment Expense 642 632 1,308 1,260 Other Operating Expenses 1,422 1,467 2,987 3,036 ------- ------- ------- ------- Total Other Expenses 4,175 4,061 8,453 8,079 ------- ------- ------- ------- Income Before Income Taxes 1,195 1,126 2,149 2,109 Income Taxes 215 214 358 392 ------- ------- ------- ------- NET INCOME $ 980 $ 912 $ 1,791 $ 1,717 ======= ======= ======= ======= Per Share Data Basic Net Income $ 0.46 $ 0.43 $ 0.83 $ 0.82 ======= ======= ======= ======= Diluted Net Income $ 0.45 $ 0.43 $ 0.82 $ 0.82 ======= ======= ======= ======= Cash Dividends $ 0.19 $ 0.17 $ 0.37 $ 0.34 ======= ======= ======= =======
See accompanying notes to interim consolidated financial statements. 3 FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------------- Accumulated (Dollars in Thousands), (Unaudited) Additional Deferred Other For the Six Months Ended Common Paid-In Retained Stock Treasury ESOP Comprehensive June 30, 2002 Stock Capital Earnings Comensation Stock Debt Income Total ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $10,429 $ 18,304 $ 8,581 $ - $ (59) $(1,235) $ (694) $ 35,326 Comprehensive Income Net Income 1,791 1,791 Change in Unrealized Securities Gains, Net 1,335 1,335 -------- Total Comprehensive Income 3,126 Deferred Stock Compensation Issued (10,000 shares) 50 170 (220) Purchase of Treasury Stock (5,850 shares) (146) (146) Sale of Treasury Stock under Dividend Reinvestment Plan (7,358 shares) (12) 181 169 Sale of Common Stock under Stock Option Plan (9,651 shares) 48 125 173 Cash Dividends Paid (777) (777) Stock Dividend of 5% (104,843 shares) 524 2,023 (2,547) - Cash Paid in Lieu of Fractional Shares (5) (5) ------------------------------------------------------------------------------------------- Balance at June 30, 2002 $11,051 $ 20,610 $ 7,043 $ (220) $ (24) $(1,235) $ 641 $ 37,866 -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements. 4
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended OPERATING ACTIVITIES June 30, 2002 June 30, 2001 -------------------- --------------------- Net Income $ 1,791 $ 1,717 Adjustments to Reconcile Net Income to Net Cash Provided By (Used In) Operating Activities: Provision for Possible Loan Losses 761 330 Depreciation and Amortization 660 606 Amortization of Security Discounts (153) (225) Amortization of Security Premiums 442 140 Amortization of Deferred Fees on Loans 213 64 Gain on Sale of Other Real Estate Owned (2) (39) Mortgage Loans Originated for Sale (10,294) (9,091) Mortgage Loan Sales 20,918 26,915 Gain on Sale of Mortgage Loans (197) (103) Investment Securities Gains, Net (663) (225) Changes in Assets and Liabilities: (Increase) Decrease in Accrued Interest Income (75) 532 Decrease in Accrued Interest Payable (638) (1,342) Net Increase in Other Assets (955) (1,639) Net Decrease in Other Liabilities (177) (1,870) -------------------- --------------------- Net Cash Provided By Operating Activities: 11,631 15,770 -------------------- --------------------- INVESTING ACTIVITIES Proceeds from Maturities of Securities Available-for-Sale 26,291 34,625 Proceeds from Maturities of Securities Held-to-Maturity 21,775 872 Proceeds from Sales of Securities Available-for-Sale 48,244 10,824 Purchase of Securities Available-for-Sale (104,049) (30,109) Purchase of Securities Held-to-Maturity (18,209) (6,149) Net Increase in Interest Bearing Deposits With Banks (12,645) (21,452) Net Increase in Loans (31,060) (14,247) Purchase of Premises and Equipment, Net (149) (121) Proceeds from Sale of Other Real Estate Owned 261 586 -------------------- --------------------- Net Cash Used In Investing Activities (69,541) (25,171) -------------------- --------------------- FINANCING ACTIVITIES Net Increase in Interest and Non-Interest Bearing Demand Deposits and Savings Accounts 44,875 15,462 Net Decrease in Certificates of Deposit (6,361) (10,660) Net Increase in Repurchase Agreements 4,730 7,246 Net Decrease in Short-Term Debt - (5,695) Net Increase in Long-Term Debt 85 - Proceeds from Issuance of Common Stock 173 155 Purchase of Treasury Stock 169 - Proceeds from Sale of Trreasury Stock (146) - Proceeds from Issuance of Guaranteed Preferred Beneficial Interest in Company's Subordinated Debentures 15,000 - Cash Dividends Paid (777) (723) Cash in Lieu of Fractional Shares (5) (2) -------------------- --------------------- Net Cash Provided by Financing Activities 57,743 5,783 -------------------- --------------------- Decrease in Cash and Cash Equivalents (167) (3,618) Cash and Cash Equivalents, January 1, 17,270 17,738 -------------------- --------------------- Cash and Cash Equivalents, June 30, $ 17,103 $ 14,120 -------------------- --------------------- See accompanying notes to interim consolidated financial statements.
5 FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - GENERAL The accompanying financial statements, footnotes and discussion should be read in conjunction with the audited financial statements, footnotes, and discussion contained in the Company's Annual Report for the year ended December 31, 2001. The financial information presented herein is unaudited; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the unaudited financial information have been made. The results for the three and six months ended June 30, 2002 are not necessarily indicative of results to be expected for the full year or any other interim period. NOTE B - SUBSIDIARIES First Colonial Group, Inc. (the "Company") is a Pennsylvania business corporation which is registered as a bank holding company under the Bank Holding Company Act of 1956. The Company has three wholly-owned subsidiaries, Nazareth National Bank and Trust Company (the "Bank") founded in 1897, First C. G. Company, Inc. founded in 1986 and First Colonial Statutory Trust I (the "Statutory Trust I") founded on June 3, 2002, (see Note E). NOTE C - CASH AND STOCK DIVIDENDS On May 17, 2002 the Company paid its 2002 second quarter dividend on its common stock of $0.19 per share to shareholders of record on May 3, 2002. On May 31, 2002 the Company paid a 5% stock dividend to shareholders of record on May 17, 2002. Net income per share and average shares outstanding have been restated to reflect the 5% stock dividend. NOTE D - EARNINGS PER SHARE The Company calculates earning per share as provided by the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS 128)". Basic and diluted earnings per share were calculated as follows: 6
For the Three Months Ended June 30, Average Income Shares Per Share (numerator) (denominator) Amount --------------------------------------------------- 2002 -------------------------------------------------------------- Net Income $ 980 Basic Earnings Per Share Income Available to Common Shareholders $ 980 2,152,664 $ 0.46 Effect of Dilutive Securities 42,571 Stock Options --------------------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 980 2,195,235 $ 0.45 --------------------------------------------------- 2001 -------------------------------------------------------------- Net Income $ 912 Basic Earnings Per Share Income Available to Common Shareholders $ 912 2,101,857 $ 0.43 Effect of Dilutive Securities Stock Options 2,623 --------------------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 912 2,104,470 $ 0.43 --------------------------------------------------- 7 For the Six Months Ended June 30, Average Income Shares Per Share (numerator) (denominator) Amount --------------------------------------------------- 2002 -------------------------------------------------------------- Net Income $ 1,791 Basic Earnings Per Share Income Available to Common Shareholders $ 1,791 2,149,896 $ 0.83 Effect of Dilutive Securities Stock Options 38,223 --------------------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 1,791 2,188,119 $ 0.82 2001 -------------------------------------------------------------- Net Income $ 1,717 Basic Earnings Per Share Income Available to Common Shareholders $ 1,717 2,104,687 $ 0.82 Effect of Dilutive Securities Stock Options 2,618 --------------------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 1,717 2,107,305 $ 0.82 ---------------------------------------------------
NOTE E - GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S SUBORDINATED DEBENTURES On June 3, 2002, the Company formed the statutory trust company, First Colonial Statutory Trust I (the "Statutory Trust I"), a wholly-owned Connecticut statutory business trust subsidiary of the Company, for the sole purpose of issuing trust preferred securities that are fully and unconditionally guaranteed by the Company. On June 26, 2002, the Company issued $15,000,000 of subordinated debentures to Statutory Trust I and the Statutory Trust I issued $15,000,000 in pooled trust preferred securities. The subordinated debentures are the sole asset of the Statutory Trust. The trust preferred securities are classified as long-term debt for the financial statements, but are included as Tier I capital for regulatory purposes. The interest rate on this security (5.34% at June 30, 2002) is variable, adjusting quarterly at three-month LIBOR plus 3.45%. The interest is payable quarterly. The trust preferred securities mature in June 2032, and may be redeemed at the option of the Company on or after June 2007, or may be redeemed at any time in the event that the deduction of related interest for federal income tax purposes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The net proceeds of the trust preferred securities are to be used to support the Company's growth and expansion plans and other general corporate purposes. 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following financial review and analysis is of the financial condition and earnings performance of the Company and its wholly owned subsidiaries for the three and six month period ended June 30, 2002. The information contained in this Quarterly Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to future loan and deposit volumes, future expansion plans, the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, the discussion in "Item 3 - Quantitative and Qualitative Discussion About Market Risk", statements as to litigation and the amount of reserves, statements as to trends, and other statements which are not historical facts or as to the Company's, the Bank's or management's intentions, plans, beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements, including without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Company and the Bank, Federal and state government regulation, competition, changes in accounting standards and policies, and results of litigation. These and other risks, uncertainties and other factors are discussed in this Quarterly Report or in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto) as described below. In analyzing whether to make, or to continue, an investment in the Company, investors should consider, among other factors, certain investment considerations more particularly described in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 a copy of which can be obtained from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main Street, Nazareth, PA 18064. Critical Accounting Policies, Judgments and Estimates The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated probable credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as 9 it requires material estimates, including, among others, expected default probabilities, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on commercial loans, consumer loans and residential mortgages, and general amounts for historical loss experience. The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. With the adoption of SFAS No. 142 on January 1, 2002, the Company discontinued the amortization of goodwill resulting from acquisitions. Goodwill is now subject to impairment testing at least annually to determine whether write-downs of the recorded balances are necessary. The Company tests for impairment based on the goodwill maintained at each defined reporting unit. A fair value is determined for each reporting unit based on at least on of three various market valuation methodologies. If the fair value of the reporting units exceed their book values, no write-down of recorded goodwill is necessary. If the fair value of the reporting unit is less, an expense may be required on the Company's books to write-down the related good will to the proper carrying value. As of June 30, 2002, the Company determined that no impairment write-offs were necessary. The Company recognizes deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carryforwards and tax credits. Deferred tax assets are subject to management's judgment based upon available evidence that future realization is more likely than not. In the event management determines the inability to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount. Results of Operations Basic earnings per share for the three months ended June 30, 2002 were $0.46 as compared to $0.43 for the corresponding period in 2001. Diluted earnings per share for the three months ended June 30, 2002 where $0.45 as compared to $0.43 for the same period in 2001. Average basic shares outstanding during this three month period were 2,152,664 in 2002 and 2,101,857 in 2001. Basic earnings per share for the six months ended June 30, 2002 were $0.83 as compared to $0.82 for the corresponding period in 2001. Average diluted earnings per share for the six months ended June 30, 2002 were $0.82 as compared to $0.82 for the same period in 2001. Average basic shares outstanding during this six month period were 2,149,896 in 2002 and 2,104,687 in 2001. Average diluted shares outstanding during the six month period were 2,188,199 in 2002 and 2,107,305 in 2001. Per 10 share earnings and average shares outstanding have been restated to reflect the 5% stock dividend paid on May 17, 2002. (see Note D) The net income for the three months ended June 30, 2002 was $980,000 compared to $912,000 for the same period in 2001. This was an increase of $68,000 or 7.5%. The earnings increase was attributable in part to an increase in net interest income of $15,000 or 0.4% (see discussion on Net Interest Income), a $75,000 or 7.2% increase in other income exclusive of gains on the sale of available-for-sale securities and the gains on the sale of mortgage loans held-for-sale. Also contributing to higher earnings was a $18,000 increase in the gains on the sale of mortgage loans and an increase on the gains on the sale of Available for Sale Securities of $206,000. These were offset in part by a $114,000 or 2.8% increase in total other expenses, an increase of $131,000 in the provision for possible loan losses, and an increase of $1,000 in Federal income taxes. Net income for the six months ended June 30, 2002 was $1,791,000 compared to $1,717,000 for the same period in 2001 an increase of $74,000 or 4.3%. The earnings increase was primarily attributable to an increase of $162,000 or 2% in net interest income, an increase of $151,000 or 7.2% in other income exclusive of gains on the sale of available-for-sale securities and the gains on the sale of mortgage loans. The other factors affecting the higher earnings were the increase in gains on the sale of mortgage loans of $94,000 an increase of $438,000 in the gains on the sale of available-for-sale securities and a decrease of $34,000 in Federal income taxes. These were partially offset by a $374,000 or 4.6% increase on total other expenses, and a $431,000 increase in the provision for possible loan losses. Net Interest Income Net interest income amounted to $4,194,000 for the three months ended June 30, 2002 compared to $4,179,000 for the three months ended June 30, 2001, an increase of $15,000 or 0.4%. This increase was primarily the result of decreases in interest paid on deposit and debt exceeding the decreases in the interest earned on loans and investments. The total interest income earned on loans and investments amounted to $7,227,000 for the second quarter of 2002, a decrease of $497,000 or 6.4% from the $7,724,000 earned in the same period in 2001. The total interest expense paid on deposits and debt was $3,033,000 and $3,545,000 for the three month period ended June 30, 2002 and 2001, respectively. This was a decrease in second quarter of 2002 from 2001 of $512,000 or 14.4%. The decreases in interest income and interest expense were the result of lower interest rates due to a declining interest rate environment. The growth In net interest income was primarily the result of higher volumes, of deposits, loans and investments (see the following discussion on rate/volume) Net interest income for the six months ended June 30, 2002 was $8,269,000 compared to $8,107,000 for the same period in 2001. This was an increase of $162,000 or 2.0%. The interest income earned on loans and investments during the first half of 2002 was $14,337,000, which was $1,022,000 or 6.7% lower than the 11 2001 amount of $15,359,000. Total interest expense for the six month period was $6,068,000 and $7,252,000 in 2002 and 2001, respectively. This was a decrease of $1,184,000 or 16.3%. The fully taxable-equivalent net interest income was $8,775,000 for the first six months of 2002, compared to $8,568,000 for the same period in 2001, a 2.4% or $207,000 increase. This increase in taxable-equivalent net interest income was primarily due to a $1,189,000 increase related to volume partially reduced by a $982,000 decrease due to interest rates. The "Rate/Volume Analysis" table segregates, in detail, the major factors that contributed to the changes in net interest income, for the six months ended June 30, 2002 as compared to the same period in 2001, into amounts attributable to both rate and volume variances. In calculating the variances, the changes were first segregated into (1) changes in volume (change in volume times the old rate), (2) changes in rate (changes in rate times the old volume) and (3) changes in rate/volume (changes in rate times the change in volume). The changes in rate/volume have been allocated in their entirety to the change in rates. Non accruing loans have been used in the daily average balances to determine changes in interest income due to volume. Loan fees included in the interest income calculation are not material. 12 The following table sets forth a "Rate/Volume Analysis" for the six months ended June 30, 2002. The interest income included in the table has been adjusted to a fully taxable equivalent amount using the Federal statutory tax rate of 34%.
Six Months Ended June 30, 2002 Over / (Under) June 30, 2001 CHANGE DUE TO: TOTAL RATE VOLUME --------------------------------------------------- (Fully Taxable Equivalent) INTEREST INCOME Interest-Bearing Balances With Banks $ 25 $ (136) $ 160 Federal Funds Sold - (7) 7 Investment Securities 189 (967) 1,156 Loans (1,190) (1,405) 215 --------------- --------------- --------------- Total Interest Income $ (977) $ (2,515) $ 1,538 --------------- --------------- --------------- INTEREST EXPENSE Demand Deposits, Money Market, $ 109 $ (239) $ 348 Savings & Clubs Time Deposits and CD's over $100,000 (1,127) (1,194) 67 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (86) (57) (29) Short-Term Debt (80) (7) (73) Long-Term Debt (10) (36) 25 Guaranteed Preferred Beneficial Interest in Compnay's Subordinated Debentures 11 - 11 --------------- --------------- --------------- Total Interest Expense (1,184) (1,533) 349 --------------- --------------- --------------- Net Increase in Interest Income $ 207 $ (982) $ 1,189 =============== =============== ===============
Total taxable-equivalent interest income for the six months ended June 30, 2002 decreased by $977,000 or 6.2% compared to the same period in 2001, primarily the result of lower interest rates on loans and investments, offset in part by the higher volumes in loans and investment securities. Interest income from loans on a fully-taxable equivalent basis was $1,190,000 or 12.2% lower during the six months ended June 30, 2002 as compared to the same period in 2001. This decrease 13 was comprised of a $1,405,000 decrease due to lower interest rates partially offset by a $215,000 increase due to higher volume. Income from investment securities for the six months ended June 30, 2002 increased $189,000 or 3.2% over the same period in 2001. This was comprised of a $1,156,000 increase due to volume reduced in part by a $967,000 decrease due to rates. Average year-to-date earning assets increased to $458,303,000 at June 30, 2002 from $410,976,000 at June 30, 2001 a $47,327,000 or 11.5% increase. Total interest expense decreased by $1,184,000 or 16.3% during the first six months of 2002, over the same period in 2001. This decrease was principally the result of lower interest rates paid on deposits and debt partially offset by higher volumes, primarily due to an increase in all deposit categories, repurchase agreements, and long-term debt. Interest expense attributed to time deposits decreased $1,127,000 during the first six months of 2002, over the first six months of 2001. This was comprised of a $1,194,000 decrease due to rates reduced by a $67,000 increase due to volume. The interest expense on demand, money market, savings and club deposits increased by $109,000 during the first six months of 2002 over the same period in 2001. This increase was the result of an increase due to volume of $348,000 offset in part by a decrease of $239,000 due to lower interest rates. The increase in deposits was used to finance the earning asset growth. The following table "Consolidated Comparative Statement Analysis" sets forth a comparison of average daily balances, interest income and interest expense on a fully taxable equivalent basis and interest rates calculated for each major category of interest-earning assets and interest-bearing liabilities. For the purposes of this analysis, the computations in the "Consolidated Comparative Statement Analysis" were prepared using the Federal statutory rate of 34%; there were no state or local taxes on income applicable to the Company. 14
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS (Dollars in Thousands) (Unaudited) Six Months Ended, June 30, 2002 2001 ------------------------------------------- -------------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------------------------------------- -------------------------------------------- ASSETS: INTEREST-EARNING ASSETS Interest-Bearing Deposits with Banks $ 9,685 $ 75 1.55% $ 2,338 $ 51 4.36% Federal Funds Sold 619 5 1.62 254 5 3.94 Investment Securities Taxable 173,424 4,758 5.49 142,602 4,699 6.59 Non-Taxable (1) 39,106 1,403 7.18 35,469 1,273 7.18 Loans (1) (2) 237,837 8,602 7.23 232,729 9,792 8.41 Reserve for Loan Losses (2,368) - - (2,416) - - ---------------- ------------- ---------------- --------------- Net Loans 235,469 8,602 7.31 230,313 9,792 8.50 ---------------- ------------- ---------------- --------------- Total Interest-Earning Assets 458,303 14,843 6.48 410,976 15,820 7.70 Non-Interest Earning Assets 27,799 - - 30,081 - - ---------------- ------------- ---------------- --------------- TOTAL ASSETS, INTEREST INCOME $ 486,102 14,843 6.11 $ 441,057 15,820 7.17 ---------------- ------------- ---------------- --------------- LIABILITIES INTEREST-BEARING LIABILITIES Interest-Bearing Deposits Demand Deposits $ 57,624 201 0.70 $ 54,650 262 0.96 Money Market Deposits 45,079 606 2.69 15,621 243 3.11 Savings & Club Deposits 70,727 517 1.46 64,643 710 2.20 CD's over $100,000 8,214 137 3.35 5,325 160 6.01 All Other Time Deposits 161,337 3,476 4.31 161,867 4,580 5.66 ---------------- ------------- ---------------- --------------- Total Interest-Bearing Deposits 342,981 4,937 2.88 302,106 5,955 3.94 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 10,829 111 2.05 12,726 197 3.10 Short-Term Debt 376 4 2.13 3,217 84 5.16 Long-Term Debt 34,866 1,005 5.77 34,000 1,016 5.98 Guaranteed Preferred Beneficial Interest in Compnay Subordinated debentures 249 11 5.34 - - - ---------------- ------------- ---------------- --------------- Total Interest-Bearing Liabilities 389,301 6,068 3.12 352,049 7,252 4.12 NON-INTEREST-BEARING LIABILITIES Non-Interest-Bearing Deposits 54,146 - - 46,300 - - Other Liabilities 6,865 - - 8,395 - - ---------------- ------------- ---------------- --------------- TOTAL LIABILITIES 450,312 6,068 2.69 406,744 7,252 3.57 SHAREHOLDERS' EQUITY 35,790 - - 34,313 - - ---------------- ------------- ---------------- --------------- TOTAL LIABILITIES AND EQUITY, INTEREST EXPENSE $ 486,102 6,068 2.50 $ 441,057 7,252 3.29 ---------------- ------------- ---------------- --------------- NET INTEREST INCOME $ 8,775 $ 8,568 ------------- --------------- Net Interest Spread (3) 3.36 3.58 Effect of Interest-Free Sources Used to Fund Earnings 0.47 0.59 Net Interest Margin (4) 3.83% 4.17% ----------- ---------- (1) The indicated interest income and average yields are presented on a taxable equivalent basis. The tax equivalent adjustments included above are $506,000 and $461,000 for the six months ended June 30, 2002 and June 30, 2001, respectively. The effective tax rate used for the taxable equivalent adjustment was 34%. (2) Loan fees of ($127,000) and $23,000 for the six months ended June 30, 2002 and June 30, 2001, respectively, are included in interest income. Average loan balances include non-accruing loans and average loans held-for-sale of $4,316,000 and $1,642,000 for the six months ended June 30, 2002 and June 30, 2001, respectively. (3) Net interest spread is the arithmetic difference between the yield on average interest-earning assets and the rate paid on interest-bearing liabilities. (4) Net interest margin is computed by dividing net interest income by average interest-earning assets.
15 The net interest margin of 3.83% for the six month period ended June 30, 2002, decreased from the 4.17% net interest margin for the first six months of 2001. The yield on interest earning assets was 6.48% during the first six months of 2002 as compared to 7.70% in 2001. The average interest rate paid on interest bearing deposits and other borrowings was 3.12% for the first six months of 2002 as compared to 4.12% in 2001. Other Income and Other Expenses Other income for the three months ended June 30, 2002, including service charges, trust and wealth management revenues, gains on the sale of mortgage loans and other miscellaneous income, but exclusive of securities gains or losses, was $1,243,000 as compared to $1,150,000 for the same period in 2001. This was an increase of $93,000 or 8.1%. This increase was the result of the higher gains on the sale of mortgage loans, and increases in service charges, and other operating income, reduced in part by a decline in trust and wealth management revenues. In the three month period ended June 30, 2002, the gains on the sale of mortgage loans amounted to $121,000 as compared to a gain of $103,000 for the same period in 2001, an increase of $18,000 or 17.5%. Mortgage loan sales amounted to $11,246,000 during the three month period ended June 30, 2002 as compared to $26,915,000 during the same period in 2001. Service charges were $641,000 during the three months ended June 30, 2002, a $59,000 or 10.1% increase over the 2001 amount of $582,000. The increase in service charges was due to growth in checking accounts. Other operating income for the three months ended June 30, 2002 was $190,000, an increase of $37,000 or 24.2% compared to $153,000 for the same period in 2001. The increase in miscellaneous income was primarily the result of an increase in the use of various fee-based services. The trust and wealth management revenues were $291,000 for the three months ended June 30, 2002 as compared to $312,000 for the three months ended June 30, 2001, a decrease of $21,000 or 6.7%. The revenues from trust and wealth management operations decreased as a result of lower estate fees and a reduction in the market value of securities on which trust fees are assessed. Other income for the six months ended June 30, 2002, including service charges, trust and wealth management revenues, gains on the sale of mortgage loans and other miscellaneous income, but exclusive of securities gains or losses, was $2,431,000 as compared to $2,186,000 for the same period in 2001. This was an increase of $245,000 or 11.2%. In the six month period ended June 30, 2002, service charges were $1,240,000, a $142,000 or 12.9% increase over the 2001 amount of $1,098,000. The increase in service charge income was the result of a higher number of checking account customers. The gains on the sale of mortgage loans were $197,000 during the first six months of 2002 compared to $103,000 in the first six months of 2001, an increase of $94,000 or 91.3%. Mortgage loan sales amounted to $20,918,000 and $26,915,000 in the first six months of 2002 and 2001, respectively. The increase in the mortgage sales gains was the result of lower interest rates. Other operating income was $419,000 for the first six months of 2002 as compared to $332,000 for the same period in 2001. This was an increase of $87,000 or 26.2%. The revenues from the trust and wealth management 16 operations were $575,000 for the six months ended June 30, 2002 as compared to $653,000 for the six months ended June 30, 2001, a decrease of $78,000 or 12.0%. Total other expenses for the three month period ended June 30, 2002 increased by $114.000 or 2.8% to $4,175,000 over total other expenses for the same period in 2001 of $4,061,000. Included in this increase was a $149,000 or 7.6% increase in salary and benefit expenses which were $2,111,000 in 2002 as compared to $1,962,000 in 2001. These increases were primarily due to general salary increases of approximately 4% and the addition of staff in the commercial, trust and wealth management and executive area of the bank. Occupancy and equipment expenses were $642,000 for the three months ended June 30, 2002 and $632,000 for the three months ended June 30, 2001, an increase of $10,000 or 1.6%. The increase in occupancy expenses were related to rent increase at some branches and general maintenance. Other operating expenses for the three month period ended June 30, 2002 were $1,422,000, a decrease of $45,000 or 3.1% from the $1,467,000 in other expenses for the same period in 2001. This decrease was primarily the result of a continuing expense reduction program. Total other expenses for the six month period ended June 30, 2002 increased by $374,000 or 4.6% to $8,453,000 over total other expenses for the same period in 2001 of $8,079,000. Included in this increase was a $375,000 or 9.9% increase in salary and benefit expenses which were $4,158,000 in 2002 as compared to $3,783,000 in 2001 These increases were primarily due to general salary increases of approximately 4% and additional staff in the commercial lending, trust and wealth management and executive areas of the bank. Occupancy and equipment expenses were $1,308,000 for the six months ended June 30, 2002 and $1,260,000 for the six months ended June 30, 2001, an increase of $48,000 or 3.8%. The increase in occupancy expenses were related to renovations at some branches, rent increases and general maintenance. Other operating expenses for the six month period ended June 30, 2002 were $2,987,000, a decrease of $49,000 or 1.6% from the $3,036,000 in other expenses for the same period in 2001. 17 FINANCIAL CONDITION Assets and Liabilities Total assets at June 30, 2002 were $525,573,000, representing an increase of $60,429,000 or 13.0% over total assets of $465,144,000 at December 31, 2001. Deposits increased by $38,514,000 or 10.1% from $379,886,000 on December 31, 2001 to $418,400,000 on June 30, 2002. Contributing to this increase in total deposits were increases in savings and money market deposits of $40,667,000, interest-bearing checking deposits of $3,074,000 and non-interest bearing checking deposits of $1,134,000, partially offset by a decrease in certificates of deposit over $100,000 of $4,008,000 and certificates of deposit less than $100,000 of $2,353,000. Loans outstanding at June 30, 2002 were $248,089,000 as compared to $225,757,000 at December 31, 2001. This was an increase of $22,332,000 or 9.9%. The increase in loans was primarily the result of an increase of $20,333,000 or 32.0% in commercial loans. Also contributing to the increase in outstanding loans was an increase in residential real estate loans of $1,404,000 and an increase in consumer loans of $595,000 or 0.6%. There were $1,249,000 of residential real estate loans identified as held-for-sale at June 30, 2002. There were $3,808,000 residential real estate loans held-for sale at December 31, 2001. The loan to deposit ratio was 59.3% at June 30, 2002 and 59.4% at December 31, 2001. Allowance and Provision for Possible Loan Losses The provision for possible loan losses is based on management's analysis of the adequacy of the allowance for possible loan losses. In its evaluation, management considers past loan experience, overall characteristics of the loan portfolio, current economic conditions and other relevant factors. Management currently believes that the allowance is adequate to absorb known and inherent losses in the loan portfolio. Ultimately, however, the adequacy of the allowance is largely dependent upon economic conditions which are beyond the scope of management's control. For the first six months of 2002, the provision for possible loan losses was $761,000. Net charge offs were $481,000 for the six months ended June 30, 2002 compared with $440,000 for the six months ended June 30, 2001. The ratio of the allowance for possible loan losses to total loans at June 30, 2002 was 1.03% compared to 1.00% at December 31, 2001. The slightly higher ratio of the allowance for possible loan losses to total loans was the result of the increase in the provision for possible loan losses due to an increase in actual charge offs for the first six months of 2002, and the analysis by management of non-performing loans and the risks in the loan portfolio. The allowance for possible loan losses at June 30, 2002 totaled $2,544,000, an increase of $280,000 or 12.4% over the December 31, 2001 amount of $2,264,000. At June 30, 2002, $14,000 of the allowance for possible loans losses was allocated to impaired loans. 18 Transactions in the allowance for possible loan losses were as follows: 2002 2001 ------------------- ----------------- Balance, January 1, $ 2,264,000 $ 2,411,000 Loans Charged-Off (583,000) (482,000) Loans Recovered 102,000 42,000 ------------------- ----------------- Net Loans Charged-Off 481,000 440,000 Provision Charged to Expense 761,000 330,000 ------------------- ----------------- Balance, June 30, $ 2,544,000 $ 2,301,000 Non-Performing Loans The following discussion relates to the Bank's non-performing loans which consist of those on a non-accrual basis and accruing loans which are past due ninety days or more. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection effort, that the borrower's financial condition is such that the collection of interest is doubtful. The Company views these loans as non-accrual, but considers the principal to be substantially collectible because the loans are protected by adequate collateral or other resources. Interest on these loans is recognized only when received. The following table shows the balance of non-performing loans for each of the periods indicated. Non-Performing Loans
June 30, December 31, June 30, 2002 2001 2001 ---------------------------------------------------------------------------------------------------- Non-accrual loans on a cash basis $ 1,093,000 $ 1,019,000 $ 1,022,000 Non-accrual loans as a percentage of total loans 0.44% 0.45% 0.46% Accruing loans past due 90 days or more $ 1,581,000 $ 2,185,000 $ 1,327,000 Accruing loans past due 90 days or more as a percentage of total loans 0.64% 0.97% 0.60% Allowance for loan losses to nonperforming loans 95.14% 70.66% 97.96% Nonperforming loans to total loans 1.08% 1.42% 1.06% Allowance for loan losses to total loans 1.03% 1.00% 1.04% ----------------------------------------------------------------------------------------------------
There are no significant loans classified for regulatory purposes that have not been included in the above table of non-performing loans. 19 Total non-performing loans (non-accruing loans and loans past due over 90 days) amounted to $2,674,000 at June 30, 2002 as compared to $3,204,000 at December 31, 2001 and $2,349,000 at June 30, 2001. The ratio of non-performing loans to total loans was 1.08%, 1.42% and 1.06% at June 30, 2002, December 31, 2001 and June 30, 2001, respectively. The decrease in this ratio from year end 2001 was primarily the result of a decrease in total non-performing loans due to collection efforts. Non-accruing loans at June 30, 2002 of $1,093,000 increased from the December 31, 2001 amount of $1,019,000 and the June 30, 2001 level of $1,022,000. The amount of increase from December 31, 2001 to June 30, 2002 was $74,000. This increase was primarily the result of an increase in non-accrual residential real estate mortgages. At the present time, management is of the opinion that these loans present a minimal amount of exposure to the Bank. Loans past due 90 days or more and still accruing interest are loans that are generally well secured and expected to be restored to a current status in the near future. As of June 30, 2002, loans past due 90 days or more and still accruing interest were $1,581,000 compared to $2,185,000 at December 31, 2001 and $1,327,000 at June 30, 2001. The $604,000 decrease in loans past due 90 days from December 31, 2001 to June 30, 2002 was the result of decreases in commercial, mortgage and consumer loans past due 90 days or more. Other Real Estate Owned The Company did not hold any other real estate owned at June 30, 2002. This represents a decrease from the December 31, 2001, level of $93,000. This decrease resulted from the sale of one residential real estate property. Investment Securities The Company had $213,187,000 in available-for-sale securities at June 30, 2002 with a net unrealized gain of $641,000. At December 31, 2001,available-for-sale securities amounted to $181,302,000 with a net unrealized loss of $694,000. During the six month period ended June 30, 2002, $48,244,000 of securities available-for-sale were sold for a net gain of $663,000 as compared to $10,824,000 of securities available-for-sale sold for a net gain of $225,000 during the same time period in 2001. Held-to-maturity securities totaling $19,465,000 at June 30, 2002 are carried at amortized cost. At December 31, 2001, the held-to-maturity securities totaled $23,004,000. The Company has the intent and ability to hold the held-to-maturity securities until maturity. The Company, at June 30, 2002, did not hold any securities identified as derivatives. 20 Capital Resources and Liquidity The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of risk-adjusted assets and of Tier 1 capital of at least 4% of average assets (leverage ratio). Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Tier 2 capital may be comprised of limited life preferred stock, qualifying debt instruments, and the allowance for possible loan losses. Management believes, that as of June 30, 2002, the Company and the Bank met all capital adequacy requirements to which they were subject. 21 CAPITAL RATIOS
---------------------------------------------------------------------------------------------------------------------------------- Required To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------- -------------------------- ------------------------------ (Dollars in Thousands) At June 30, 2002 Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------------------------------------------------------------------------- Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $ 54,136 19.72% $ 21,965 8.00% - Bank $ 35,606 13.15% $ 21,668 8.00% $ 27,085 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $ 48,790 17.77% $ 10,982 4.00% - Bank $ 32,062 11.84% $ 10,834 4.00% $ 16,251 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $ 48,790 9.80% $ 19,913 4.00% - Bank $ 32,062 6.48% $ 19,781 4.00% $ 24,727 5.00% ---------------------------------------------------------------------------------------------------------------------------------- Required To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------- -------------------------- ------------------------------ (Dollars in Thousands) At December 31, 2001 Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------------------------------------------------------------------------- Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $ 37,926 15.38% $ 19,738 8.00% - Bank $ 32,931 13.50% $ 19,515 8.00% $ 24,393 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $ 35,662 14.46% $ 9,869 4.00% - Bank $ 30,667 12.58% $ 9,757 4.00% $ 14,636 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $ 35,662 7.65% $ 18,661 4.00% - Bank $ 30,667 6.61% $ 18,575 4.00% $ 23,218 5.00% ----------------------------------------------------------------------------------------------------------------------------------
22 The Company is not aware of any trends, events or uncertainties that will have a material effect on the Company's liquidity, capital resources or operations, except for higher interest rates which could cause deposit disintermediation and an increase in interest expense and the possibility of inflationary trends, the results of which cannot be determined at this time. The Company is not under any agreement with the regulatory authorities nor is it aware of any current recommendation by regulatory authorities which, if they were implemented, would have a material adverse effect on liquidity, capital resources, or the operations of the Company. Liquidity is a measure of the Company's ability to raise funds to support asset growth, meet deposit withdrawal and other borrowing needs, maintain reserve requirements and otherwise operate the Company on an ongoing basis. The Company manages its assets and liabilities to maintain liquidity and earnings stability. Among the sources of liquidity are money market investments, securities available-for-sale, funds received from the repayment of loans, short-term borrowings and borrowings from the Federal Home Loan Bank. At June 30, 2002, cash, due from banks, Federal funds sold and interest bearing deposits with banks totaled $30,667,000, and securities maturing within one year totaled $3,079,000. At December 31, 2001, cash, due from banks, Federal funds sold and interest bearing deposits with banks, totaled $18,189,000, and securities maturing within one year were $8,050,000. Securities sold under an agreement to repurchase totaled $13,110,000 at June 30, 2002 and $8,380,000 at December 31, 2001. The Bank is a member of the Federal Home Loan Bank of Pittsburgh. The Bank had interest bearing demand deposits at the Federal Home Loan Bank of Pittsburgh in the amount of $13,555,000 at June 30, 2002 and $891,000 at December 31, 2001. These deposits are included in due from banks on the Company's financial statements. As a result of this relationship, the Company places most of its short-term funds at the Federal Home Loan Bank of Pittsburgh. There were $2,000,000 in Federal funds sold at June 30, 2002. There were no Federal Funds sold at December 31, 2001. The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000 at June 30, 2002, subject to certain collateral requirements. The Bank had no short-term (overnight) borrowings against this line at June 30, 2002 and December 31, 2001. The Company had long-term debt from the Federal Home Loan Bank of Pittsburgh totaling $34,889,000 at June 30, 2002 and $34,804,000 at December 31, 2001. Of the loans outstanding at June 30, 2002, $10,000,000 matures in August 2004, $5,000,000 matures in January 2007, $7,000,000 matures in October 2008, $12,000,000 matures in August 2010, $800,000 amortizes with monthly payments and matures in November 2016, and $89,000 amortizes with monthly payments and matures in February 2017. The interest rates associated with these loans are 6.06% fixed but may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points if LIBOR is 7.5% or higher, 4.45% fixed to December 2002 at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points if LIBOR is 7.5% or higher, 4.86% fixed to October 2003 at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points, 6.23% 23 fixed to August 2001 at which time the rate may be converted at the option of the lender to three-month LIBOR plus 15 basis points if LIBOR is 8.0% or higher, 6.43% fixed, and 5.65% fixed, respectively. The loans are secured by the Bank's residential real estate loans and investment securities. These funds were borrowed to improve liquidity and to fund loans. On June 3, 2002, the Company formed the statutory trust company, First Colonial Statutory Trust I (the "Statutory Trust I"), a wholly-owned Connecticut statutory business trust subsidiary of the Company, for the sole purpose of issuing trust preferred securities that are fully and unconditionally guaranteed by the Company. On June 26, 2002, the Company issued $15,000,000 of subordinated debentures to Statutory Trust I and the Statutory Trust I issued $15,000,000 in pooled trust preferred securities. The subordinated debentures are the sole asset of the Statutory Trust. The Trust Preferred securities are classified as long-term debt for the financial statements, but are included as Tier I capital for regulatory purposes. The interest rate on this security (5.34% at June 30, 2002) is variable, adjusting quarterly at three-month LIBOR plus 3.45%. The interest is payable quarterly. The trust preferred securities mature in June 2032, and may be redeemed at the option of the Company on or after June 2007, or may be redeemed at any time in the event that the deduction of related interest for federal income tax purposes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The net proceeds of the trust preferred securities are to be used to support the Company's growth and expansion plans and other general corporate purposes. The Company's Employee Stock Ownership Plan (ESOP) has four loans outstanding totaling $1,235,000 at June 30, 2002 and December 31, 2001. The first loan with an outstanding principal balance of $240,000 is due in 2005. The second loan with an outstanding balance of $850,000 is due in 2018. The third loan with an outstanding balance of $65,000 is due in 2010. The fourth loan with an outstanding balance of $80,000 is due in 2005. The interest is due quarterly on these loans. Principal payments are made annually in October. The interest rate on these loans is at the Bank's prime rate (4.75% at June 30,2002 and December 31, 2001). Cash flows for the six months ended June 30, 2002 consisted of cash used in investing activities of $69,541,000, offset in part by cash provided by operating activities of $11,631,000, and cash provided by financing activities of $57,743,000, resulting in a net decrease in cash and cash equivalents of $167,000. Cash was used in investing activities for the purchase of securities available-for-sale and held-to-maturity of $104,049,000 and $18,209,000, respectively, a net increase in loans of $31,060,000, a net increase in interest-bearing deposits with banks of $12,645,000, and a net purchase of premises and equipment of $149,000, partially offset by proceeds from sales of securities available-for-sale of $48,244,000, proceeds from the calls and maturities of securities available-for-sale of $26,291,000, proceeds from the 24 calls and maturities of securities held-to-maturity of $21,775,000, and proceeds of $261,000 from the sale of other real estate owned. Cash provided by operating activities was the result of net income for the first six-month period of $1,791,000, proceeds from the sale of residential real estate loans of $20,918,000, the provision for possible loan losses of $761,000, depreciation and amortization of $660,000, and amortization of security premiums and deferred fees on loans of $442,000 and $213,000, respectively, partially offset by residential mortgage loans originated for sale of $10,294,000, a net increase in other assets of $955,000, net gains on the sale of investment securities of $663,000, a decrease in accrued interest payable of $638,000, gains on the sale of residential mortgage loans of $197,000, a decrease in other liabilities of $177,000, the accretion of security discounts of $153,000, an increase in accrued interest income of $75,000, and a gain on the sale of other real estate owned of $2,000. Cash provided by financing activities consisted principally of a net increase in interest and non-interest-bearing demand deposits and savings accounts of $44,875,000, proceeds from the issuance of trust preferred securities of $15,000,000, an increase in repurchase agreements of $4,730,000, proceeds from the issuance of common stock of $173,000, proceeds from the sale of treasury stock of $169,000, and an increase in long term debt of $85,000, partially offset by a decrease in certificates of deposit of $6,361,000, the payment of cash dividends of $777,000, the purchase of treasury stock of $146,000, and the $5,000 payment of cash in lieu of fractional shares as a result of the 5% stock dividend of May 2002. The Company recognizes the importance of maintaining adequate capital levels to support sound, profitable growth and to encourage depositor and investor confidence. Shareholder's equity at June 30, 2002 was $37,866,000 as compared to $35,326,000 at December 31, 2001, for an increase of $2,540,000 or 7.2%. This increase resulted from net income of $1,791,000, an increase in accumulated other comprehensive income related to unrealized gains in securities available-for-sale of $1,335,000, the proceeds from sale of stock of $342,000, reduced in part by the payment of dividends of $782,000 ant the purchase of Treasury stock of $146,000. On May 17, 2002 the Company paid its 2002 second quarter cash dividend on its common stock of $0.19 per share to shareholders of record on May 3, 2002. On May 31, 2002 the Company paid a 5.0% stock dividend to shareholders of record on May 17, 2002. The Company maintains a Dividend Reinvestment and Stock Purchase Plan. During the first six months of 2002, 7,358 shares of common stock were purchased from treasury stock at an average price of $22.97 per share for proceeds of approximately $169,000. The Company has a Stock Option Plan adopted in 2001, which provides for the granting of options to acquire the Company's common stock for officers and key employees. During the first six months of 2002, options to purchase 128,375 25 shares of the Company's common stock at an average price of $21.12 per share were granted to certain officers. During the first half of 2002, 10,137 options were exercised under this Plan during the first six months of 2002 at an average price of $17.12 per share. ITEM 3. Quantitative and Qualitative Discussion About Market Risk As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest earning assets, other than those which possess a short term to maturity. Because most of the Company's interest-bearing assets and liabilities are located at the Bank, the majority of the Company's interest rate risk is at the Bank level. As a result, most interest rate risk management procedures are performed at the Bank level. There have been no material changes in the Bank's assessment of its sensitivity to market risk since its presentation in the 2001 annual report to shareholders and its 2001 Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission. 26 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings From time-to-time, the Company and the Bank are parties to routine litigation incidental to their business. Neither the Company, the Bank nor any of their properties is subject to any material legal proceedings, nor are any such proceedings known to be contemplated by any governmental authorities. ITEM 2. Changes in Securities and Use of Proceeds On June 3, 2002, the Company formed the statutory trust company, First Colonial Statutory Trust I (the "Statutory Trust I"), a wholly-owned Connecticut statutory business trust subsidiary of the Company, for the sole purpose of issuing trust preferred securities that are fully and unconditionally guaranteed by the Company. On June 26, 2002, the Company issued $15,000,000 of subordinated debentures to Statutory Trust I and the Statutory Trust I issued $15,000,000 in pooled trust preferred securities. The subordinated debentures are the sole asset of the Statutory Trust. The Trust Preferred Securities are classified as long-term debt for the financial statements, but are included as Tier I capital for regulatory purposes. The interest rate on this security (5.34% at June 30, 2002) is variable, adjusting quarterly at three-month LIBOR plus 3.45%. The interest is payable quarterly. The trust preferred securities mature in June 2032, and may be redeemed at the option of the Company on or after June 2007, or may be redeemed at any time in the event that the deduction of related interest for federal income tax purposes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The net proceeds of the trust preferred securities are to be used to support the Company's growth and expansion plans and other general corporate purposes. The Trust Preferred Securities were issued without registration under the Securities Act of 1933 pursuant to the exemption provided by Section 4 (2) of the Act. ITEM 3. Defaults Upon Senior Securities None 27 ITEM 4. Submission of Matters to a Vote of Security Holders On May 2, 2002, the Company held it annual meeting of shareholders. At the annual meeting, the shareholders elected Gordon B. Mowrer and Maria Zumas Thulin as class 4 Directors of the Company to serve for a term of four years and until their successors are duly elected and qualified. The following is a tabulation of the vote for these directors. Votes Withheld For Authority ---------------- -------------- Gordon B Mowrer 1,724,840 13,142 Maria Zumas Thulin 1,721,691 16,292 The terms of the following directors continued after the annual meeting: Robert J. Bergren, Scott V. Fainor, Christian F. Martin, IV, Daniel B. Mulholland, Charles J. Peischl, John H. Ruhle, Jr. and Richard Stevens, III. ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed for the quarter during which this report is filed. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST COLONIAL GROUP, INC. DATE: August 14, 2002 BY: /S/ SCOTT V. FAINOR ------------------- SCOTT V. FAINOR PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) DATE: August 14, 2002 BY: /S/ REID. L. HEEREN ------------------- REID L. HEEREN VICE PRESIDENT (PRINCIPAL FINANCIAL OFFICER) 29