SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
__X__ Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for (fee required) for the fiscal year ended December 31, 1996.
_____ Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to __________.
Commission File Number 0-11526
FIRST COLONIAL GROUP, INC.
(Name of Small Business Issuer in its charter)
Pennsylvania 23-2228154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
76 South Main Street, Nazareth, Pennsylvania 18064
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 610-746-7300
Securities registered under Section 12 (b) of the Exchange Act:
None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $5.00 Par Value
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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
<PAGE>
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
X
The Issuer's revenues for the fiscal year ended December 31, 1996 were
$25,777,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant is $31,529,520. (1)
The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of March 18, 1997 was 1,562,673.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of the 1996 Proxy Statement
(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the registrant's Common Stock outstanding, reduced by the
amount of Common Stock held by executive officers, directors and shareholders
owning in excess of 10% of the registrant's Common Stock, multiplied by the last
sale price for the registrant's Common Stock on March 18, 1997. Includes an
aggregate of 135,254 shares, with an aggregate market value of $3,246,096, held
by the Trust Department of Nazareth National Bank & Trust Company in Trust for
persons other than executive officers, directors and 10% shareholders of the
registrant. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder may be deemed an
affiliate of the registrant or that such person is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
<PAGE>
PART I
Item 1. Description of Business
Investment Considerations
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:
Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control, may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earning assets, may adversely
affect loan demand and the cost of funds and, consequently, the profitability of
the Company. Any future decreases in interest rates may adversely affect the
Company's profitability because such decreases may reduce the amounts which the
Company may earn on its assets. Economic downturns could result in the
delinquency of outstanding loans. Management does not expect any one particular
factor to affect the Company's results of operations. However, a downtrend in
several areas, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to remain profitable.
Effect of Interest Rates on the Bank and the Company. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest which in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. At December 31, 1996 total interest earning assets
maturing or repricing within one year was less than total interest bearing
liabilities maturing or repricing during the same time period by $17,825,000,
representing a negative cumulative one year gap of .89%. If interest rates rise,
the Company could experience a decrease in net interest income. Like all
financial institutions, the Company's balance sheet is affected by fluctuations
in interest rates. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from financial institutions
into direct investments, such as U. S. Government and corporate securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than financial institutions. See "Item 6, Management's
Discussion and Analysis or Plan of Operation".
<PAGE>
Federal and State Government Regulations. The operations of the Company and
the Bank are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
Accounting Standards. The operations of the Company and the Bank are
affected by accounting standards issued by the Financial Accounting Standards
Board ("FASB") which the Company is required to adopt. The adoption of such
standards can have the effect of reducing the Company's earnings and capital.
Information on current FASB standards that affect the Company can be found in
the Notes to Consolidated Financial Statements contained under the caption,
"Item 7, Financial Statements".
Competition. The Company faces strong competition from many other banks,
savings institutions and other financial institutions which have branch offices
or otherwise operate in the Company's market area, as well as many other
companies now offering a range of financial services. Most of these competitors
have substantially greater financial resources than the Company including a
larger capital base which allows them to attract customers seeking larger loans
than the Bank is able to make. In addition, many of the Bank's competitors have
higher legal lending limits than does the Bank. Particularly intense competition
exists for sources of funds including savings and retail time deposits and for
loans, deposits and other services that the Bank offers.
Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset potential losses
on the Company's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan losses through a charge to earnings resulting in reduced profitability.
Dividends. While the Board of Directors presently intends to follow a
policy of paying cash dividends, the dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends will
be paid in the future. See the information contained under the caption in "Item
5, Market for Common Equity and Related Stockholder Matters".
<PAGE>
Market for Common Stock. While the Company's common stock is listed on the
Nasdaq Stock Market, there is no assurance that an active trading market for the
Company's common stock will exist at a particular time. See the information
contained under the caption in "Item 5, Market for Common Equity and Related
Stockholder Matters".
"Anti-Takeover" and "Anti-Greenmail" Provisions and Management
Implications. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to
discourage, make more costly or more difficult, or prevent a future takeover
offer, prevent shareholders from receiving a premium for their securities in a
takeover offer, and enhance the possibility that a future bidder for control of
the Company will be required to act through arms-length negotiation with the
Company's Board of Directors. Copies of the Company's Articles of the
Incorporation are on file with the SEC and Pennsylvania Department of State.
Stock Not an Insured Deposit. Investments in the shares of the Company's
common stock are not deposits insured against loss by the FDIC or any other
entity.
Bespeaks Caution Doctrine. Investor should be aware that the U. S. Court of
Appeals for the Third Circuit in In Re: Donald J. Trump Casino Securities
Litigation Taj Mahal, (No. 92-5350 filed October 14, 1993) adopted a legal
doctrine entitled the "Bespeaks Caution Doctrine" which may prevent them from
recovering from the Company based upon material misrepresentations or omissions
contained in the Company's disclosure documents to the extent that such
documents contained sufficient cautionary statements to apprise investors of the
risks of an investment in the Company's securities. The foregoing investment
considerations may have the effect of bringing this document, as well as other
Company disclosure documents, within the purview of the "Bespeaks Caution
Doctrine".
General
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, as amended (the "Holding Company Act"). The Company was
incorporated on December 30, 1982 for the purpose of acquiring Nazareth National
Bank and Trust Company (the "Bank") and thereby enabling the Bank to operate
within a bank holding company structure. The Company became an active bank
holding company on November 25, 1983 when it acquired the Bank. The Bank is a
wholly-owned subsidiary of the Company. In July, 1986, the Company established
another wholly-owned subsidiary, First C. G. Company, Inc. This subsidiary is a
Delaware business corporation formed for the purpose of investing in various
types of securities.
<PAGE>
The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
business. The Company, through the Bank, derives substantially all of its income
from the furnishing of banking and banking-related services. The Bank has its
principal banking office as well as three branch offices in Nazareth,
Pennsylvania. It also presently has two branch offices in Bethlehem,
Pennsylvania, three branch offices in Easton, Pennsylvania, one branch in
Brodheadsville, Pennsylvania, one branch in Stroudsburg, Pennsylvania and one
branch in Allentown, Pennsylvania. The Bank has sixteen automated teller
machines (ATMs), one at each branch office (except the Main Street Nazareth and
Hall Square Nazareth branches), four free-standing drive-up machines at the
Northampton Crossings Shopping Center, Easton, Pennsylvania and free-standing
machines at its operation center, The First Colonial Building in the Bethlehem
Business Park, Hanover Township, Pennsylvania and at St. Luke's Hospital,
Fountain Hill, Pennsylvania. On January 29, 1997, the Bank opened an additional
branch in a Wal-Mart Supercenter located in East Stroudsburg, Pennsylvania.
Included within this branch is an ATM.
The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in distributions of the assets or earnings of the
Bank, are necessarily subject to the prior claims of creditors of the Bank,
except to the extent that claims of the Company itself as a creditor may be
recognized. Such claims on the Bank by creditors other than the Company include
obligations relating to federal funds purchased and certain other borrowings, as
well as deposit liabilities.
The Company directs the policies and coordinates the financial resources of
the Bank. The Company provides and performs various technical, advisory and
auditing services for the Bank, coordinates the Bank's general policies and
activities, and participates in the Bank's major business decisions.
As of December 31, 1996 the Company, on a consolidated basis, had total
assets of $322,352,000, total deposits of $267,668,000, and total shareholders'
equity of $26,805,000.
<PAGE>
Nazareth National Bank and Trust Company
History and Business
The Bank was incorporated under the laws of the United States of America as
a national bank in 1897 under its present name. Since that time, the Bank has
operated as a banking institution doing business at several locations in
Northampton County, Pennsylvania. The Bank is a member of the Federal Reserve
System.
As of December 31, 1996, the Bank had total assets of $319,292,000, total
deposits of $268,402,000 and total shareholders' equity of $22,633,000. Its
deposits are insured by the Bank Insurance Fund ("BIF") maintained by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law.
The Bank engages in a full service commercial and consumer banking and
trust business. The Bank, with its main office at 76 South Main Street,
Nazareth, Pennsylvania, also provides services to its customers through its
branch network of twelve full service banks, which includes drive-in facilities
at most locations, ATMs at each branch office (except the Main Street Nazareth
and Hall Square Nazareth branches) and bank-by-mail services. Nine of the Bank's
full service offices are located in Northampton County, Pennsylvania. Two
offices are located in Monroe County, Pennsylvania. One office is located in
Lehigh County, Pennsylvania. The Bank also has free standing ATMs located in its
Operations Center, the First Colonial Building in the Bethlehem Business Park,
Hanover Township, Pennsylvania, in the lobby of St. Luke's Hospital in the
Borough of Fountain Hill, Pennsylvania and four free-standing drive-up ATM's at
Northampton Crossings Shopping Center, Lower Nazareth Township, Easton,
Pennsylvania.
On January 29, 1997, the Bank opened an additional full service branch
within the Wal-Mart Super Store located in East Stroudsburg, Pennsylvania. This
new branch has extended hours and is open seven days a week. There is also an
ATM at this location.
The Bank's services include accepting time, demand and savings deposits,
including NOW accounts (Flex Checking), regular savings accounts, money market
accounts, fixed rate certificates of deposit and club accounts, including the
Vacation Club, the College Club and the Christmas Club. The Bank offers
Mastercard and VISA, as well as a Constant Cash account (a pre-approved line of
credit activated by writing checks against a checking account) and the First
Colonial Club and Quality Checking (deposit package programs which provide
checking accounts with other services including credit card protection, discount
travel, shopping services and other related financial services). Its services
also include making secured and unsecured commercial and consumer loans,
financing commercial transactions either directly or through regional industrial
development corporations, making construction and mortgage loans, and renting
safe deposit facilities. Additional services include making residential mortgage
loans (both fixed rate and variable rate), home equity lines of credit, loans to
purchase manufactured homes, revolving credit loans with overdraft checking
protection, small business loans, student loans, recreational vehicles and new
and used car and truck loans.
<PAGE>
The Bank's business loans include seasonal credit and collateral loans and
term loans as well as accounts receivable and inventory financing. Most of the
Bank's commercial customers are small to medium size businesses operating in
Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in
the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas of
Pennsylvania.
Trust services provided by the Bank include services as executor and
trustee under wills and deeds, as guardian, custodian and as trustee and agent
for pension, profit sharing and other employee benefit trusts as well as various
investment, pension and estate planning services. Trust services also include
service as transfer agent and registrar of stock and bond issues and as escrow
agent. In addition, the Bank provides discount brokerage through an outside
supplier of this service, and various tax services.
The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
Competition
All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trade area of Northampton and Lehigh Counties (known as the
Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the
Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas. In order to
keep pace with its competition and the continuing growth of these areas, the
Bank may, in the future, consider establishing additional new branches, although
no assurance can be given that any new branches will be opened or if opened,
that they will be successful. The Bank competes with local commercial banks as
well as other commercial banks with branches in the Bank's market area. The Bank
considers its major competition to be Lafayette Bank, headquartered in Easton,
Pennsylvania, with a branch in Nazareth; First Union Bank, headquartered in
Charlotte, North Carolina, with branch offices in Easton and Bethlehem,
Pennsylvania; Summit Bancorporation, headquartered in Princeton, New Jersey,
with branches in Bethlehem, Easton and Allentown, Pennsylvania; PNC Bank,
headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth,
Brodheadsville, Easton and Allentown, Pennsylvania; and Corestates Bank,
headquartered in Philadelphia, Pennsylvania, with branches in Bethlehem, Easton
and Allentown, Pennsylvania.
The Bank, along with other commercial banks, competes with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies, regulated small loan
companies, credit unions and the issuers of commercial paper and other
securities, such as shares in money market funds. The Bank also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in the corporate trust and investment management
services. Many of the Bank's competitors have financial resources larger than
the Bank's.
<PAGE>
Management believes that the Bank is generally competitive with all
competing financial institutions in its service areas with respect to interest
rates paid on time and savings deposits, service charges on deposit accounts and
interest rates charged on loans.
First C. G. Company, Inc.
In July 1986, the Company established a wholly-owned subsidiary, First C.
G. Company, Inc., a Delaware corporation, for the purpose of investing in
various types of securities. As of December 31, 1996, First C. G. Company, Inc.
had total assets of $3,364,000, of which $1,430,000 was invested in tax-exempt
municipal obligations and most of the remaining assets were in other taxable
securities and interest-bearing bank deposits. The total shareholders' equity at
December 31, 1996 was $3,073,000.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the Company and the Bank.
The Company
The Company is registered as a "bank holding company" under the Bank
Holding Act of 1956, as amended (the "Holding Company Act"), and is, therefore,
subject to regulation by the Board of Governors of the Federal Reserve Board
(the "Federal Reserve Board").
Under the Holding Company Act, the Company is required to secure the prior
approval of the Federal Reserve Board before it can merge or consolidate with
any other bank holding company or acquire all or substantially all of the assets
of any bank or acquire direct or indirect ownership or control of any voting
shares of any bank that is not already majority owned by it, if after such
acquisition, it would directly or indirectly own or control more than 5% of the
voting shares of such bank. See "Recent Legislation".
The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in non-banking activities unless the
Federal Reserve Board, by order or regulation, has found such activities to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making such determination, the Federal Reserve Board
considers whether the performance of these activities by a bank holding company
can reasonably be expected to produce benefits to the public which outweigh
possible adverse effects. The Federal Reserve Board has by regulation determined
<PAGE>
that certain activities including, among others, operating a mortgage, finance,
credit card or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as insurance agent or
underwriter for certain types of credit-related insurance; leasing personal
property on a full-payout, nonoperating basis; and, certain stock brokerage and
investment advisory services are closely related to banking within the meaning
of the Holding Company Act.
Under the policy of the Federal Reserve Board with respect to bank holding
company operations, a bank holding company is deemed to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee
that any "undercapitalized" (as such term is defined in the statute) insured
depository institution subsidiary will comply with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards as of the time the institution failed to
comply with such capital restoration plan.
Under the Holding Company Act, the Company is required to file periodic
reports and other information concerning its operations with, and is subject to
examination by, the Federal Reserve Board. In addition, under the Banking Code
of 1965, the Pennsylvania Department of Banking has the authority to examine the
books, records and affairs of any Pennsylvania bank holding company or to
require any documentation deemed necessary to ensure compliance with the Banking
code.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities, and is subject to the Securities and
Exchange Commission's rules and regulations relating to periodic reporting,
reporting to shareholders, proxy solicitation and insider trading.
<PAGE>
The Bank
The Bank, as a national bank, is subject to The National Bank Act. The Bank
is also subject to the supervision of, and is regularly examined by, the Office
of the Comptroller of the Currency of the United States (the "OCC") and is
required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions. Under current Pennsylvania
law, banking institutions located in Pennsylvania, such as the Bank, may
establish branches within any county in the Commonwealth, subject to the prior
approval of the OCC.
As a national bank, the Bank is a member of the FDIC and a member of the
Federal Reserve System and, therefore, is subject to additional regulation by
these agencies. Some of the aspects of the lending and deposit business of the
Bank which are regulated by these agencies include personal lending, mortgage
lending and reserve requirements. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
Fair Value of Financial Instruments
The Financial Accounting Standards Board ("FASB") issued statement of
financial accounting standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires all entities to disclose the estimated
fair value of its assets and liabilities considered to be financial instruments.
Financial instruments consist primarily of securities, loans and deposits. The
Company has provided these disclosures as of December 31, 1996 and 1995 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 7, Financial Statements".
Accounting for Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Trading securities are measured at fair value with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1996 and 1995. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements. The classification of securities can be found in Note B of the Notes
to Consolidated Financial Statements contained under the caption, "Item 7,
Financial Statements".
<PAGE>
Capital Regulation
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
1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of 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, as
of December 31, 1996, that the Company and the Bank meet all capital adequacy
requirements to which it is subject.
The following tables provide a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated.
<PAGE>
CAPITAL RATIOS
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $28,596 15.20% $15,046 8.00% N/A
Bank $25,591 13.59% $15,065 8.00% $18,831 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $26,243 13.95% $ 7,522 4.00 N/A
Bank $22,435 11.91% $ 7,532 4.00% $11,299 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $26,243 8.35% $12,578 4.00% N/A
Bank $22,435 7.20% $12,456 4.00% $15,570 5.00%
</TABLE>
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Action
(Dollars in Thousands)
At December 31, 1995 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $26,060 15.86% $13,142 8.00% N/A
Bank $22,308 13.66% $13,061 8.00% $16,327 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $24,014 14.62% $ 6,571 4.00% N/A
Bank $20,262 12.41% $ 6,531 4.00% $ 9,796 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $24,014 8.20% $11,719 4.00% N/A
Bank $20,262 6.80% $11,915 4.00% $14,895 5.00%
</TABLE>
CAPITAL RATIOS
<PAGE>
Recent Legislation
On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state one year after enactment. Pennsylvania law was amended to
authorize any out-of-state bank holding company to acquire control of any state
bank or national bank located in Pennsylvania after it receives written approval
from the Pennsylvania Department of Banking. Beginning June 1, 1997, a bank may
merge with a bank in another state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997. States may enact laws opting out of interstate branching before June
1, 1997, subject to certain conditions. States may also enact laws permitting
interstate merger transactions before June 1, 1997 and host states may impose
conditions on a branch resulting from an interstate merger transaction that
occurs before June 1, 1997, if the conditions do not discriminate against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance after May 31, 1997. Pennsylvania has enacted a law opting in
immediately to interstate merger and interstate branching transactions.
Interstate acquisitions and mergers would both be subject, in general, to
certain concentration limits and state entry rules relating to the age of the
bank.
Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de novo" branches. Pennsylvania has
enacted such a law.
The foregoing necessarily is a summary and general description of certain
provisions of the Interstate Act and Pennsylvania law, and does not purport to
be complete. Many of the provisions of each will be implemented through the
adoption of regulations by the various Federal and state banking agencies.
Moreover, many of the significant provisions of the legislation have not yet
become effective. As of the date hereof, the Company is continuing to study the
legislation and regulations relating to the legislation but cannot yet assess
its impact on the Company.
National Monetary Policy
In addition to being affected by general economic conditions, the earnings
and growth of the Bank and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
Federal Reserve Board and the FDIC. An important function of the Federal Reserve
Board is to regulate the money supply, credit conditions and interest rates.
Among the instruments used to implement these objectives are open market
operations in United States Government securities, setting the discount rate and
changes in reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall growth and distribution of
credit, bank loans, investments and deposits, and their use may also affect
interest rates charged on loans or paid on deposits.
<PAGE>
The monetary policies and regulations of the Federal Reserve Board have had
a significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Company and the
Bank cannot be predicted.
Employees
As of December 31, 1996 the Company had approximately 202 employees, of
whom 48 were part-time. The Company considers its relationship with its
employees to be good.
Additional Information
The tables listed below, which are set forth on pages 16 through 23 herein,
contain unaudited information relevant to the business of the Company and the
Bank:
Investment Securities
Investment Securities Yield by Maturity
Loan Portfolio by Type
Loan Maturities and Interest Sensitivity
Allocation of the Allowance for Possible Loan Losses
Percentage of Total Loans in each Category to Total Loans
Average Deposit Balances by Major Classification
Maturities of Certificates of Deposit of $100,000 or more
<PAGE>
INVESTMENT SECURITIES
(Unaudited)
Summary of Available-for-Sale and Held-to-Maturity Securities at December 31,
<TABLE>
Available-for-Sale Securities 1996
Carrying
Amount at
Amortized Cost Fair Value
<S> <C> <C>
U. S. Treasury $ 7,020 $ 7,054
U. S. Government Agencies 14,272 14,161
States and Political Subdivisions 11,808 11,864
Mortgage Backed Securities 19,131 19,145
Other Debt Securities 796 800
Equity Securities 3,226 3,755
------- -------
Total Available-for-Sale Securities $56,253 $56,779
======= =======
</TABLE>
<TABLE>
Available-for-Sale Securities 1995
Carrying
Amount at
Amortized Cost Fair Value
<S> <C> <C>
U. S. Treasury $ 7,002 $ 7,050
U. S. Government Agencies 17,066 17,159
States and Political Subdivisions 6,638 6,689
Mortgage Backed Securities 24,529 24,689
Other Debt Securities 300 307
Equity Securities 2,727 3,155
------- -------
Total Available-for-Sale Securities $58,262 $59,049
======= =======
</TABLE>
<TABLE>
Available-for-Sale Securities 1994
Carrying
Amount at
Amortized Cost Fair Value
<S> <C> <C>
U. S. Treasury $ 2,999 $ 2,922
U. S. Government Agencies 13,246 12,807
States and Political Subdivisions 4,507 4,431
Mortgage Backed Securities 21,759 20,720
Other Debt Securities --- ---
Equity Securities 2,666 2,730
------- -------
Total Available-for-Sale Securities $45,177 $43,610
======= =======
</TABLE>
<TABLE>
Held-to-Maturity Securities 1996
Carrying
Amount at
Amortized Cost Fair Value
<S> <C> <C>
U. S. Treasury $ 999 $ 1,003
U. S. Government Agencies 10,229 10,243
States and Political Subdivisions 3,217 3,261
Mortgage Backed Securities 6,554 6,617
Other Debt Securities --- ---
------- -------
Total Available-for-Sale Securities $20,999 $21,124
======= =======
</TABLE>
<PAGE>
<TABLE>
Held-to-Maturity Securities 1995
Carrying
Amount at
Amortized Cost Fair Value
<S> <C> <C>
U. S. Treasury $ 2,997 $ 3,007
U. S. Government Agencies 6,524 6,539
States and Political Subdivisions 2,086 2,118
Mortgage Backed Securities 8,447 8,524
Other Debt Securities --- ---
------- -------
Total Available-for-Sale Securities $20,054 $20,188
======= =======
</TABLE>
<TABLE>
Held-to-Maturity Securities 1994
Carrying
Amount at
Amortized Cost Fair Value
<S> <C> <C>
U. S. Treasury $ 8,071 $ 7,653
U. S. Government Agencies 5,386 5,026
States and Political Subdivisions 4,025 3,741
Mortgage Backed Securities 18,535 17,479
Other Debt Securities 508 499
------- -------
Total Available-for-Sale Securities $36,525 $34,398
======= =======
</TABLE>
<PAGE>
INVESTMENT SECURITIES YIELD BY MATURITY
The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 1996 are presented in the following
table. Weighted average yields on tax-exempt obligations have been computed on a
fully taxable equivalent basis assuming a tax rate of 34%. All average yields
were calculated on the book value of the related securities. Equity and other
securities having no stated maturity have been included in the "After 10 Years"
category.
Available-for-Sale and Held-to-Maturity Investment Securities Yield
by Maturity, at December 31, 1996
<TABLE>
AVAILABLE-FOR-SALE
AT FAIR VALUE After 1 But After 5 But
(Dollars in Thousands, Within One Year Within 5 Years Within 10 Years
Unaudited) Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ -- -- % $ 7,054 6.15 % $ -- -- %
U. S. Government Agency -- -- 2,000 6.62 8,417 6.74
Mortgage-backed Securities 37 6.50 1,763 6.65 648 6.00
State and Political
Subdivisions 904 5.71 1,522 5.30 2,796 4.74
Other Debt Securities -- -- 301 6.64 -- --
Equity Securities -- -- -- -- -- --
----- ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 941 5.74 % $12,640 6.06 % $11,861 6.23%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.64 3.79 8.06
==== ==== ====
</TABLE>
<TABLE>
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands, After 10 Years Total
Unaudited) Amount Yield Amount Yield
<S> <C> <C> <C> <C>
U. S. Treasury $ -- -- % $ 7,054 6.15 %
U. S. Government Agency 3,744 6.03 14,161 6.54
Mortgage-backed Securities 16,697 6.52 19,145 6.42
State and Political
Subdivisions 6,642 5.28 11,864 5.19
Other Debt Securities 499 7.23 800 7.01
Equity Securities 3,755 4.37 3,755 4.37
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $31,337 5.95 % $56,779 6.03 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 21.70 13.20
===== =====
</TABLE>
<TABLE>
HELD-TO-MATURITY
AT AMORTIZED COST After 1 But After 5 But
(Dollars in Thousands, Within One Year Within 5 Years Within 10 Years
Unaudited) Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ 999 6.07 % $ -- -- % $ -- -- %
U. S. Government Agency 900 4.49 2,000 6.56 6,330 7.43
Mortgage-backed Securities -- -- 130 7.70 662 5.87
State and Political
Subdivisions 55 4.40 1,475 4.80 1,236 4.97
------ ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $1,954 5.30 % $ 3,605 5.88 % $ 8,228 6.93%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.72 4.35 8.67
==== ==== ====
</TABLE>
<PAGE>
<TABLE>
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands, After 10 Years Total
Unaudited) Amount Yield Amount Yield
<S> <C> <C> <C> <C>
U. S. Treasury $ -- -- % $ 999 6.07 %
U. S. Government Agency 999 7.45 10,229 7.00
Mortgage-backed Securities 5,762 6.76 6,554 6.69
State and Political
Subdivisions 451 5.29 3,217 4.93
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 7,212 6.76 % $20,999 6.54 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 19.87 11.01
===== =====
</TABLE>
<PAGE>
LOAN PORTFOLIO BY TYPE
The loan portfolio by type is summarized in the following table for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992.
<TABLE>
Loan Portfolio by Type (Unaudited)
(Dollars in Thousands) For the Year Ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Real Estate - Residential $134,013 $122,293 $117,205 $102,481 $124,778
Real Estate - Construction 10,923 4,959 2,861 2,557 2,353
Real Estate - Commercial 39,421 35,316 35,673 36,371 30,686
Consumer/Installment 28,870 27,685 24,626 20,743 16,337
Commercial (non-Real Estate)
and Agricultural 8,715 5,403 7,503 7,168 8,515
State and Political
Subdivisions 906 1,290 288 476 744
Other 28 13 18 22 264
TOTAL GROSS LOANS 222,876 196,959 188,174 169,818 183,677
Unearned Income (2,759) (3,829) (2,959) (1,252) (445)
Total Loans 220,117 193,130 185,215 168,566 183,232
Allowance for Possible
Loan Losses (2,532) (2,443) (2,187) (1,953) (1,840)
NET LOANS $217,585 $190,687 $183,028 $166,613 $181,392
</TABLE>
At December 31, 1996 there were no categories of loans exceeding 10% of
total loans which are not otherwise disclosed as the categories of loans listed
in the above table.
<PAGE>
LOANS MATURITIES AND INTEREST SENSITIVITY
The maturity ranges of items in the loan portfolio (excluding residential
mortgages of 1 to 4 family residences and consumer loans) of the Bank and the
amount of loans with predetermined interest rates and floating interest rates
due after one year, as of December 31, 1996, are summarized in the table set
forth below. The determination of maturities included in the table are based
upon contract terms. Demand loans that do not have a defined repayment term are
reported as maturing within one year. In situations where a rollover is
appropriate, the Bank's policy in this regard is to evaluate the credit for
collectibility consistent with the normal loan evaluation process. This policy
is used primarily in evaluating ongoing customers' use of their lines of credit
with the Bank that are at floating interest rates. Management continues to
emphasize the granting of floating interest rate loans to better match the
interest sensitivity of deposits.
Loan Maturity and Interest Sensitivity
(Unaudited)
<TABLE>
As of December 31, 1996
(Dollars in Thousands) Due in Due in Due in
One Year One to Over
or Less Five Years Five Years Total
<S> <C> <C> <C> <C>
Real Estate - Construction $ 2,110 $ 1,599 $ 7,214 $10,923
Real Estate - Commercial 2,803 5,493 31,125 39,421
Commercial (Non-Real Estate)
and Agricultural 2,616 3,982 2,117 8,715
------- ------- ------- -------
TOTAL $ 7,529 $11,074 $40,456 $59,059
======= ======= ======= =======
Loan Maturity After 1 Year With:
Predetermined Interest Rate $ 1,115 $ 4,159
Floating Interest Rate 9,959 36,297
------- -------
TOTAL $11,074 $40,456
======= =======
</TABLE>
<PAGE>
The following table details the Allocation of the Allowance for Possible
Loan Losses by the various loan categories. The allocation is not necessarily
indicative of the categories in which future loan losses will occur, and the
entire allowance is available to absorb losses in any category of loans.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Unaudited)
<TABLE>
As of December 31,
1996 1995 1994 1993 1992
Loan Categories (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 663 $1,049 $1,142 $ 815 $ 754
Real Estate- Construction 7 3 69 80 59
Real Estate - Residential 198 184 143 78 82
Consumer/Installment 811 534 451 393 254
Unallocated 853 673 382 587 691
------ ------ ------ ------ ------
TOTAL $2,532 $2,443 $2,187 $1,953 $1,840
====== ====== ====== ====== ======
</TABLE>
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS
(Unaudited)
<TABLE>
As of December 31,
1996 1995 1994 1993 1992
Loan Categories (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial 22.02% 21.33% 23.11% 26.12% 20.50%
Real Estate - Construction 4.90 2.52 1.52 1.52 1.31
Real Estate - Residential 60.13 62.09 62.28 60.80 72.08
Consumer/Installment 12.95 14.06 13.09 11.56 6.11
------ ------ ------ ------ ------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
The average balances of deposits for each of the years ended December 31,
1996, 1995 and 1994 are presented in the following table.
AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION
(Unaudited)
<TABLE>
For the Year Ended December 31,
1996 1995 1994
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits
Non-Interest Bearing $ 27,826 --- % $ 23,782 --- % $ 23,347 --- %
Interest Bearing 43,206 1.55 42,955 1.84 43,636 1.72
Money Market Deposits 16,297 2.82 17,639 2.81 20,383 2.40
Savings & Club Accounts 62,783 2.49 65,452 2.67 70,442 2.66
Certificates of Deposit
under $100,000 103,221 5.50 90,925 5.47 79,650 4.55
Certificates of Deposit
of $100,000 or more 5,167 4.84 6,184 5.24 2,961 3.75
------ ---- ------ ---- ------ ----
Total Deposits $258,500 $246,937 $240,419
======== ======== ========
</TABLE>
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
(Unaudited)
<TABLE>
At December 31,
(Dollars in Thousands) 1996 1995
<S> <C> <C>
Three Months or Less $ 849 $1,800
Over Three, Through Six Months 1,542 2,312
Over Six, Through Twelve Months 1,151 1,064
Over Twelve Months 1,378 1,447
------ ------
TOTAL $4,920 $6,623
====== ======
</TABLE>
There were no brokered deposits at December 31, 1996 and 1995.
<PAGE>
Item 2. Description of Property
The principal banking office of the Bank and the executive offices of the
Bank and the Company are located at 76 South Main Street in the Borough of
Nazareth, Northampton County, Pennsylvania, which building is owned by the Bank.
In addition, the Bank owns additional properties located at 29 South Broad
Street, Nazareth, Pennsylvania (Mortgage and Installment Loan Center); 553
Nazareth Drive, Nazareth, Pennsylvania (Branch Office); 33 S. Broad Street,
Nazareth (Branch Office), 2000 Sullivan Trail, Easton, Pennsylvania (Branch
Office), 3864 Adler Place, Bethlehem Business Park, Bethlehem, Pennsylvania
(First Colonial Building, Computer and Operations Center), Rt. 209
Brodheadsville, Pennsylvania (Branch Office), and 3856 Easton-Nazareth Highway
(Route 248), Lower Nazareth Township, Easton, Pennsylvania (free-standing,
drive-up ATM location).
The Bank also leases facilities for its branch office located at 44 East
Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath
Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at
101 South Third Street, Easton, Pennsylvania; its branch office located at 1125
N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located in the
Hall Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its
branch office located within Redner's Supermarket, Airport Road, Allentown,
Pennsylvania; and its branch office located within Redner's Supermarket,
Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania.
Item 3. Legal Proceedings
Neither the Company, the Bank nor any of their properties is subject to
material legal proceedings, nor are any such proceedings known to be
contemplated by any governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.
<PAGE>
Appendix A to Part I: Executive Officers of the Registrant
The following table sets forth certain information, as of March 28, 1997,
concerning the executive officers of the Company and certain executive officers
of the Bank. All executive officers are elected by the respective Boards of
Directors of the Company and the Bank and hold office at the discretion of such
Boards.
Positions Positions
Name/Age with the Company with the Bank
John J. Schlamp 71 (a) Chairman of the Board since Chairman of the Board
January, 1987 since 1984
S. Eric Beattie 50 (b) President and Chief President since 1984;
Executive Officer since Chief Executive Officer
January, 1987 since January, 1987
Reid L. Heeren 55 (c) Treasurer since January, Senior Vice President and
1987; Vice President since Chief Financial Officer
April, 1985 since January, 1987;
Cashier since November,
1984
Gerald E. Kemmerer 65 (d) None Senior Vice President and
Senior Loan Officer since
July, 1994
Arthur Williams 51 (e) None Senior Vice President,
Administration since
November, 1988
Barbara A. Seifert 43 (f) None Vice President,
Senior Trust Officer
since December, 1985
(a) Mr. Schlamp was previously (i) President and Chief Executive Officer of
the Company from 1983 to January, 1987, (ii) President of the Bank from 1976 to
1984 and (iii) Chief Executive Officer of the Bank from 1976 to January, 1987.
<PAGE>
(b) Mr. Beattie was previously (i) Executive Vice President of the Company
from 1983 to January, 1987, (ii) Chief Operating Officer of the Bank from 1984
to January, 1987, (iii) a Senior Vice President of the Bank from 1981 to 1984
and (iv) a Senior Trust Officer of the Bank from 1979 to 1981.
(c) Mr. Heeren was previously Vice President, Finance of the Bank from
November, 1984 to January, 1987. Prior to November, 1984, Mr. Heeren was
employed by the American Bank and Trust Company, headquartered in Reading,
Pennsylvania, as Vice President for Financial Management (September, 1982 to
November, 1984) and as Vice President, Community Banking, Chester County,
Pennsylvania (March, 1982 to September, 1982).
(d) Mr. Kemmerer was previously Executive Vice President, Chief Lending
Officer of win Rivers Community Bank from June, 1990 to July, 1994. Prior to
June, 1990 Mr. Kemmerer was employed by Merchants Bank, N.A. (successor to
Easton National Bank & Trust Co.) from September, 1949, retiring in December,
1989. During those years, Mr. Kemmerer served the bank in many different
capacities and at the time of retirement was Senior Vice President, Senior
Lender at Merchants.
(e) Mr. Williams was previously Vice President of the Bank, serving as
branch administra- tor with business development and commercial lending duties,
from April 1985 to November, 1988. Prior to April 1985, Mr. Williams was a Vice
President of United Penn Bank, serving as Regional Administrator of its Northern
Region (March 1980 to March 1985).
(f) Ms. Seifert was previously Senior Trust Officer of the Bank from 1984
to December, 1985. Prior to 1984, Ms. Seifert held various officer positions in
the Trust Division of the Bank beginning in December, 1981.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market
under the trading symbol FTCG. In newspaper listings First Colonial Group, Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1996 there were 782 shareholders of record.
The declaration and payment of dividends is at the sole discretion of the
Board of Directors and their amount depends upon the earnings, financial
condition, and capital needs of the Company and the Bank and certain other
factors including restrictions arising from Federal banking laws and regulations
(see "Note S- Regulatory Matters" in the "Notes to Consolidated Financial
Statements" contained in "Item 7, Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price was $22.00 in December 1996 and
$17.14 in December 1995. Stock prices and dividends per share have been restated
to reflect the 5% stock dividend of May 1996 (see "Note T Equity Transactions"
in the "Notes to Consolidated Financial Statements" contained in "Item 7,
Financial Statements").
<TABLE>
1995 High Low Cash Dividends
Declared
<S> <C> <C> <C>
First Quarter $16.43 $15.00 0.1619
Second Quarter 16.19 13.70 0.1619
Third Quarter 17.38 15.00 0.1619
Fourth Quarter 18.10 16.43 0.1619
------
TOTAL 0.6476
1996
First Quarter $18.81 $17.14 0.1619
Second Quarter 19.05 17.14 0.1700
Third Quarter 19.00 18.00 0.1700
Fourth Quarter 23.00 18.00 0.1700
------
TOTAL 0.6719
</TABLE>
The Company did not sell any of it's equity securities during 1996 that
were not registered under the Securities Act.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Consolidated Financial Highlights
<TABLE>
(Dollars in Thousands, Percentage Change
except per share data) 1996 1995 1994 1996/95 1995/94
<S> <C> <C> <C> <C> <C>
At Year-End
Assets $322,352 $298,514 $284,553 8.0% 4.9 %
Deposits 267,668 254,102 247,532 5.3 2.7
Loans 220,117 193,130 185,215 14.0 4.3
Shareholders' Equity 26,805 24,767 22,400 8.2 10.6
Trust Assets 209,144 173,435 150,053 20.6 15.6
For the Year
Net Interest Income $ 13,557 $ 12,644 $ 11,834 7.2% 6.8 %
Net Income 2,822 1,401 2,342 101.4 (40.2)
Per Share *
Net Income $ 1.85 $ 0.93 $ 1.58 98.9% (41.1)%
Dividends Paid 0.67 0.65 0.63 3.1 3.2
Book Value 17.19 16.84 15.39 2.1 9.4
Financial Ratios
Return on average assets .92% .48% .85%
Return on average equity 11.16% 5.98% 10.51%
Average shareholders'
equity to average assets 8.24% 8.00% 8.10%
</TABLE>
* Per share data have been restated to reflect the 5% stock dividends of May
1996 and June 1994.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following financial review and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of First Colonial Group, Inc. (the "Company") with a
primary focus on the analysis of operating results for the years ended December
31, 1996, 1995 and 1994. The Company's consolidated earnings are derived
primarily from the operations of Nazareth National Bank and Trust Company (the
"Bank") and First C. G. Company, Inc. ("First C. G."). The information below
should be read in conjunction with the Company's consolidated financial
statements and accompanying notes thereto, and other detailed information
appearing elsewhere in this report. Additional financial information can be
found in the Company's Form 10-KSB report, a copy of which may be obtained upon
request. During the two most recent fiscal years,there have been no changes in
or disagreements with the Company's accountants on accounting and financial
disclosure. The information concerning share and per share data included in this
discussion has been restated to reflect the 5% stock dividends of May 1996 and
June 1994.
Forward Looking Statements
The information contained in this Annual 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 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 and other statements as to
management's 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. Certain of these risks, uncertainties and other factors are
discussed in this Annual Report or in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, a copy of which may be obtained from the
Company upon request and without charge (except for the exhibits thereto).
Financial Performance Summary
In 1996, the Company established a historical record for net income and
achieved strong growth in both deposits and loans. Net income for 1996 was
$2,822,000 or $1.85 per share, reflecting growth of 98.9% on a per share basis
when compared to $1,401,000 or $.93 per share for 1995. Net income in 1994 was
$2,342,000 or $1.58 per share.
<PAGE>
Total deposits at year-end 1996 were $267,668,000, a 5.3% increase over
year-end 1995 deposits of $254,102,000. Total deposits at the end of 1994
amounted to $247,532,000. In 1996, total loans grew by 14.0% to a year-end total
of $220,117,000 as compared to the 1995 year-end amount of $193,130,000. At
year-end 1994, total loans were $185,215,000.
Two key measures of profitability, return on average assets and return on
average equity, also improved in 1996. The return on average assets rose to .92%
in 1996 from .48% in 1995 and .85% in 1994. The return on average equity was
11.16%, 5.98% and 10.51% in 1996, 1995 and 1994, respectively.
The improvement in 1996 net income reflected a reduction in the provision
for possible loan losses, increases in net interest income and other income,
reduced in part by increases in operating expenses and Federal income taxes. The
provision for possible loan losses was $670,000 in 1996 as compared to
$1,798,000 in 1995. This is a decline of $1,128,000 or 62.7%. The higher amount
in 1995 was due to losses related to overdrafts of a customer. Net interest
income grew by $913,000 or 7.2% to $13,557,000 from the 1995 amount of
$12,644,000 (see discussion on "Net Interest Income"). This increase was
partially the result of growth in loans and deposits supported by the success of
the new branches opened in 1995 and expanded marketing activities (see
discussions on "Loan Portfolio" and "Deposits"). Total other income, including
service charges on deposits, trust services, net securities gains and losses on
the sale of mortgage loans, was $2,642,000 in 1996 as compared to $2,274,000 in
1995. This is a gain of $368,000 or 16.2%. Most of this increase is due to
higher net gains on securities available-for-sale of $308,000 in 1996 compared
to $22,000 in 1995 (see discussion on "Securities Available-for-Sale"). Total
operating expenses in 1996 grew by $367,000 or 3.3% to $11,571,000 from the 1995
amount of $11,204,000. This increase is primarily attributable to a full year's
expense of the Northampton Crossings branch opened in December 1995 and normal
increases in expenses (see discussion on "Other Expenses" and Note I of the
"Notes to Consolidated Financial Statements"). Higher net income in 1996
resulted in an increase in Federal income taxes of $621,000 to a total of
$1,136,000 as compared to $515,000 in 1995.
The 1995 earnings decline was due to a loss of $1,264,000 as a result of
overdrafts of a customer. These overdrafts resulted in an increase in the
provision for possible loan losses of $1,378,000 to $1,798,000 in 1995 from
<PAGE>
$1,798,000 in 1995 from $420,000 in 1994. Also affecting 1995 earnings was
an increase in total other expenses of $1,120,000 offset in part by a $810,000
increase in net interest income and an increase in other income of $244,000. The
increase in other expenses is attributable to the addition of new branches in
1995 and higher legal expenses related to the overdrafts. Net interest income
was $12,644,000 in 1995 as compared to $11,834,000 in 1994. This increase of
6.8% is due in part to the new branches and growth in loans and deposits. Total
other income increased in 1995 by $244,000 or 12.0% to $2,274,000 from the 1994
amount of $2,030,000. Most of this increase was in service charges on deposit
accounts. Federal income taxes decreased by $503,000 from $1,018,000 in 1994 to
$515,000 in 1995 as a result of the lower earnings.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
(Dollars in Thousands,
except per share data)
For the Year Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF INCOME:
Interest Income $ 23,135 $ 21,896 $ 18,986 $ 18,525 $ 19,649
Interest Expense 9,578 9,252 7,152 7,568 9,346
--------- --------- --------- --------- ---------
Net Interest Income 13,557 12,644 11,834 10,957 10,303
Provision for Possible
Loan Losses 670 1,798 420 765 1,119
Gains (Losses) on the
Sale of Mortgage Loans (30) 22 37 417 --
Other Income, Excluding
Securities and Loan
Sale Gains 2,364 2,230 1,896 1,705 1,554
Securities Gains, Net 308 22 97 208 216
Other Expense 11,571 11,204 10,084 9,845 10,351
--------- --------- --------- --------- ---------
Income Before Income Taxes
and Cumulative Effect of
Accounting Method Change 3,958 1,916 3,360 2,677 603
Applicable Income Taxes 1,136 515 1,018 769 22
--------- --------- --------- --------- ---------
Income Before Cumulative
Effect of Accounting
Method Change 2,822 1,401 2,342 1,908 581
Cumulative Effect of
Accounting Method Change(1) -- -- -- -- 117
--------- --------- --------- --------- ---------
Net Income $ 2,822 $ 1,401 $ 2,342 $ 1,908 $ 698
--------- --------- --------- --------- ---------
Cash Dividends Paid $ 1,015 $ 972 $ 936 $ 812 $ 720
Cash Dividends Paid Per Share 0.67 0.65 0.63 0.63 0.62
Dividends Paid to Net Income 35.97% 69.38% 39.97% 42.56% 103.15%
PER SHARE DATA:
Income Before Cumulative
Effect of Accounting
Method Change $ 1.85 $ 0.93 $ 1.58 $ 1.47 $ 0.50
Cumulative Effect of
Accounting Method Change -- -- -- -- 0.10
Net Income 1.85 0.93 1.58 1.47 0.60
Average Common Shares
Outstanding 1,527,819 1,504,391 1,481,598 1,295,220 1,168,314
CONSOLIDATED BALANCE SHEET DATA:
Total Assets $322,352 $298,514 $284,553 $268,738 $246,072
Loans (Net of
Unearned Discount) 220,117 193,130 185,215 168,566 183,232
Mortgage Loans
Held-for-Sale 721 1,006 69 15,378 --
Deposits 267,668 254,102 247,532 235,565 218,378
Securities Sold Under
Agreements to Repurchase 3,795 6,096 9,027 4,711 3,533
Debt (Short-Term
and Long-Term) 18,512 7,643 1,612 1,331 1,132
Shareholders' Equity 26,805 24,767 22,400 21,994 16,058
Book Value Per Share 17.19 16.84 15.39 15.26 14.37
SELECTED CONSOLIDATED RATIOS:
Net Income To:
Average Total Assets .92% .48% .85% .76% .29%
Average Shareholders' Equity 11.16% 5.98% 10.51% 10.43% 4.27%
Average Shareholders'
Equity to Average Assets 8.24% 8.00% 8.10% 7.24% 6.81%
</TABLE>
(1) See Notes A7 and J to the Consolidated Financial Statements.
<PAGE>
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year Ended December 31,
<TABLE>
1996 1995 1994
Int Avg Int Avg Int Avg
Avg Inc/ Yield/ Avg Inc/ Yield/ Avg Inc/ Yield/
Bal Exp Rate Bal Exp Rate Bal Exp Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INT-EARNING
ASSETS
Int-Bearing
Balances
with Banks $ 1,313 $ 78 5.96% $2,313 $ 133 5.75% $ 3,507 $ 158 4.49%
Fed Funds
Sold 16 2 5.43 139 6 4.32 1,471 57 3.86
Inv Sec
Taxable 67,241 4,386 6.42 73,712 4,477 6.07 66,967 3,439 5.13
Non-Tax(1) 12,318 935 7.59 8,408 583 6.94 7,516 527 7.02
Loans(1(2) 206,378 18,083 8.76 190,874 16,927 8.87 178,624 15,012 8.40
Allow for
Loan Losses (2,500) --- --- (2,708) --- --- (2,084) --- ---
-------- ------ -------- ------ -------- ------
Net Loans 203,878 18,083 8.87 188,166 16,927 9.00 176,540 15,012 8.50
-------- ------ -------- ------ -------- ------
Total Int-
Earn
Assets 284,766 23,484 8.25 272,738 22,126 8.11 256,001 19,193 7.50
Non-Int
Earn Assets 22,305 --- --- 20,466 --- --- 19,247 --- ---
-------- ------ -------- ------ -------- ------
TOTAL ASSETS,
INTEREST
INCOME $307,071 23,484 7.65 $293,204 22,126 7.55 $275,248 19,193 6.97
-------- ------ -------- ------ -------- ------
LIABILITIES
INTEREST-BEARING
LIABILITIES
Int-Bearing
Deposits
Demand
Deposits $ 43,206 670 1.55 $ 42,955 791 1.84 $ 43,636 752 1.72
Money
Market
Deposits 16,297 460 2.82 17,639 496 2.81 20,383 490 2.40
Savings &
Club
Deposits 62,783 1,566 2.49 65,452 1,750 2.67 70,442 1,876 2.66
CD's over
$100,000 5,167 250 4.84 6,184 324 5.24 2,961 111 3.75
All Other
Time Dep 103,221 5,675 5.50 90,925 4,970 5.47 79,650 3,624 4.55
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Deposits 230,674 8,622 3.74 223,155 8,331 3.73 217,072 6,853 3.16
Securities
Sold Under
Agreements
to Repurchase 4,740 149 3.14 9,298 346 3.72 6,428 161 2.51
Other Short-
Term
Borrowings 8,648 487 5.63 5,743 338 5.89 177 8 4.44
Long-Term Debt 4,171 320 7.67 2,207 236 10.69 1,075 13012.08
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Liabilities 248,233 9,578 3.86 240,403 9,251 3.85 224,752 7,152 3.18
NON-INTEREST
BEARING
LIABILITIES
Non-Int
Bearing
Deposits 27,826 --- --- 23,782 --- --- 23,347 --- ---
Other Liab 5,724 --- --- 5,575 --- --- 4,855 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB 281,783 9,578 3.40 269,760 9,251 3.43 252,954 7,152 2.83
SHAREHOLDERS'
EQUITY 25,288 --- --- 23,444 --- --- 22,294 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB &
SHAREHOLDERS'
EQUITY,
INTEREST
EXPENSE $307,071 9,578 3.12 $293,204 9,251 3.16 $275,248 7,152 2.60
NET INTEREST
INCOME $ 13,906 $12,875 $12,041
-------- ------- -------
Net Interest
Spread (3) 4.39 4.26 4.37
Effect of
Int-Free
Sources
Used to
Fund Earnings
Assets 0.49 0.46 0.33
NET INTEREST
MARGIN (4) 4.88% 4.72% 4.70%
-- ---- ---- ----
</TABLE>
(1) The indicated interest income and average yields are presented on a
taxable equivalent basis. The taxable equivalent adjustments included above are
$349,000, $231,000 and $207,000 for the years 1996, 1995 and 1994, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of $303,000, $101,000 and $406,000 for the years 1996, 1995
and 1994, respectively, are included in interest income. Average loan balances
include non-accruing loans and average loans held-for-sale of $2,212,000,
$682,000 and $2,462,000 for 1996, 1995 and 1994, respectively.
(3) Net interest spread is the arithmetic difference between yield on
interest-earning assets and the rate paid on interest-bearing liabilities.
(4) Net interest margin is computed by dividing net interest income by
averaging interest-earning assets.
<PAGE>
Average Balances
The "Consolidated Comparative Statement Analysis" table 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
purposes of this analysis, the computations in the "Consolidated Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
are no state or local taxes on income applicable to the Company. For further
information relating to the effective income tax rate of the Company, see Note J
of the "Notes to Consolidated Financial Statements". Interest income on loans
includes loan fees of $303,000, $101,000 and $406,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Net Interest Income
Net interest income is the difference between the interest income on loans,
investments and other interest-earning assets, and the interest paid on deposits
and other interest-bearing liabilities. Net interest income is the primary
source of earnings for the Company. Therefore, increases in this category are
considered by management to be essential to the continued growth in the overall
net income of the Company. The net interest income, on a fully taxable
equivalent basis, amounted to $13,906,000 for 1996, an increase of 8.0% or
$1,031,000 over $12,875,000 in 1995. As shown in the "Rate/Volume Analysis"
table, the increase in net interest income in 1996 was attributable to higher
net interest income from changes in volume of $292,000 and changes in rates of
$739,000. The volume-related change resulted primarily from increased average
balances for loans including mortgage loans held-for-sale; (see discussions on
"Loan Portfolio" and "Mortgage Loans Held-for-Sale") and an increase in
interest-bearing demand deposits and other time deposits, partially offset by
declines in investment securities, money market deposits, savings and club
deposits, and certificates of deposit over $100,000 (see discussion on
"Deposits"). The rate-related change was primarily the result of the increase of
interest earned on assets being greater than the increase on interest paid on
deposits and debt. Net interest income, on a fully taxable equivalent basis, in
1995 increased 6.9% or $834,000 over the 1994 figure of $12,041,000. This
increase was the result of an increase in investments and loans (including
mortgage loans held-for-sale) and an increase in certificates of deposit over
$100,000 and other time deposits, partially offset by declines in
interest-bearing demand deposits, money market deposits, and savings and club
deposits. Also affecting 1995 net interest income was the increase of interest
paid on deposits being less than the increase on interest earned on investments
and loans.
<PAGE>
The net interest margin, a measure of net interest income performance, is
determined by dividing net interest income by total interest-earning assets. The
net interest margin was 4.88% for 1996, 4.72% for 1995 and 4.70% for 1994. The
increase in 1996 was the result of interest-earning assets increasing at a
greater rate than non-interest earning assets and an increase in the net
interest spread, the difference of interest earned on assets less the interest
paid on deposits and debt. The interest spread was 4.39%, 4.26% and 4.37% for
1996, 1995 and 1994, respectively.
<PAGE>
The following table sets forth a "Rate/Volume Analysis", which segregates
in detail the major factors that contributed to the changes in net interest
income for the years ended December 31, 1996 and 1995, as compared to the
respective previous periods, 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
rates (change 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. The interest income
included in the "Rate/Volume Analysis" table has been adjusted to a fully
taxable equivalent amount using the Federal statutory tax rate of 34%.
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.
<TABLE>
RATE/VOLUME ANALYSIS
(Dollars in Thousands) (Fully Taxable Equivalent)
Increase (Decrease) in Year Ended December 31,
1996 to 1995 1995 to 1994
Change Due to: Change Due To:
TOTAL RATE VOLUME TOTAL RATE VOLUME
----- --- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Interest-Bearing Balances
With Banks $ (55) $ 3 $ (58) $ (25) $ 29 $ (54)
Federal Funds Sold (4) 1 (5) (51) --- (51)
Investment Securities 261 419 (158) 1,094 688 406
Loans 1,156 (88) 1,244 1,915 720 1,195
----- --- ----- ----- ----- -----
Total Interest Income 1,358 335 1,023 2,933 1,437 1,496
----- --- ----- ----- ----- -----
Interest Expense
Demand Deposits,
Savings & Clubs (340) (250) (90) (81) 114 (195)
Time Deposits 631 16 615 1,559 903 656
Securities Sold Under
Agreements to Repurchase (197) (27) (170) 185 113 72
Short-Term Borrowings 135 (43) 178 344 97 247
Long-Term Borrowings 98 (100) 198 92 (45) 137
----- --- ----- ----- ----- -----
Total Interest Expense 327 (404) 731 2,099 1,182 917
----- --- ----- ----- ----- -----
Increase in Net
Interest Income $1,031 $739 $ 292 $ 834 $ 255 $ 579
</TABLE>
<PAGE>
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the extent to which net interest
income would change due to changes in the level of interest rates. The objective
of interest rate sensitivity management is to reduce a company's vulnerability
to future interest rate fluctuations and to enhance consistent growth of net
interest income. The Bank's Asset/Liability Management Committee meets
semi-monthly to examine, among other subjects, interest rates for various
products and interest sensitivity.
Rate sensitivity arises from the difference between the volumes of assets
which are rate-sensitive as compared to the volumes of liabilities which are
rate-sensitive. A comparison of interest-rate-sensitive assets to interest-
rate-sensitive liabilities is monitored by the Bank on a regular basis using
several time periods. The mismatch of assets and liabilities in a specific time
frame is referred to as interest sensitivity gap. Generally, in an environment
of rising interest rates, a negative gap will decrease net interest income, and
in an environment of falling interest rates, a negative gap will increase net
interest income.
While using this analysis is a useful management tool as it considers the
quantity of assets and liabilities subject to repricing in a given time period,
it does not consider the relative sensitivity to market interest-rate changes
that are characteristic of various interest-rate-sensitive assets and
liabilities. Consequently, even though the Company currently has a negative gap
position because of the unequal sensitivity of these assets and liabilities,
management believes that this position will not materially impact earnings in a
changing rate environment. For example, changes in the prime rate on variable
commercial loans may not result in an equal change in the rate of money market
deposits or short-term certificates of deposit. A simulation model is therefore
used to estimate the impact of various changes, both upward and downward, in
market interest rates and volumes of assets and liabilities on the Bank's net
income. By using a simulation model which takes into account these factors
combined with the current negative gap position as indicated in the "Interest
Sensitivity" table, management believes there would be no significant impact on
net interest income in both rising and declining interest-rate environments.
This strategy is believed by the Bank to minimize the overall interest-rate
risk.
Assets and liabilities are allocated to a specific time period based on
their scheduled repricing date or on an historical basis. At December 31, 1996,
assets of $149,441,000 (46.4% of total assets) were subject to interest rate
changes within one year. This compares to assets subject to interest rate
changes within one year of $124,779,000 (41.8% of total assets) at the end of
<PAGE>
of 1995 and $127,565,000 (44.8% of total assets) at the end of 1994.
Liabilities subject to rate change within one year were $167,266,000,
$133,068,000 and $146,710,000 in 1996, 1995 and 1994, respectively. A negative
one-year gap position of $17,825,000 existed as of December 31, 1996. The gap
positions at December 31, 1995 and 1994 were negative $8,289,000 and negative
$19,145,000, respectively. The ratio of rate-sensitive assets to rate-sensitive
liabilities for the one-year time frame was .89 at the end of 1996, compared to
.94 at the end of 1995 and .87 at the end of 1994. The "Interest Sensitivity
Analysis" in the following table presents a sensitivity gap analysis of the
Company's assets and liabilities at December 31, 1996 for five time-intervals.
The Company's liability-sensitive position increased in 1996 as a result of an
increase in non-interest-bearing demand deposits and interest-bearing demand
deposits. This change in the deposit mix was due to marketing programs to
increase demand deposits. Also affecting an increase in the liability-sensitive
position were increases in some longer term loans. Management intends to
continue to purchase adjustable rate securities, make adjustable rate loans,
market longer-term certificates of deposit and sell fixed-rate mortgage loans to
maintain an acceptable gap position.
<PAGE>
<TABLE>
Interest Sensitivity Analysis
(Dollars in Thousands) as of December 31, 1996
0-90 91-180 181-365 1-5 Over
Days Days Days Years 5 years Total
<S> <C> <C> <C> <C> <C> <C>
Interest-Bearing
Deposits with Banks $ 186 $ 99 $ --- $ --- $ --- $ 285
Federal Funds Sold 2,200 --- --- --- --- 2,200
Inv Securities 16,101 11,266 13,944 27,813 8,654 77,778
Loans Held-for-Sale 721 --- --- --- --- 721
Loans 56,256 12,698 24,241 63,479 60,911 217,585
Other Assets 11,729 --- --- --- 12,054 23,783
------- -------- -------- ------- -------- --------
TOTAL ASSETS $87,193 $24,063 $ 38,185 $91,292 $ 81,619 $322,352
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits $31,450 $ --- $ --- $ --- $ --- $ 31,450
Int-Bearing
Deposits 81,358 20,253 24,898 48,318 61,391 236,218
Securities Sold
Under Agreements
to Repurchase 3,795 --- --- --- --- 3,795
Long-Term Debt 5,512 --- --- 13,000 --- 18,512
Other --- --- --- --- 5,572 5,572
Capital --- --- --- --- 26,805 26,805
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $122,115 $20,253 $ 24,898 $61,318 $ 93,768 $322,352
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(34,922) $ 3,810 $ 13,287 $29,974 $(12,149) $ ---
Cumulative Int
Sensitivity Gap $(34,922 $(31,112)$(17,825) $12,149 $ --- $ ---
</TABLE>
<PAGE>
Service Charges and Other Income
Service charge income amounted to $1,083,000 in 1996 compared to $1,034,000
in 1995 and $798,000 in 1994. In 1996, the service charges increased by $49,000
or 4.7% over 1995 and the 1995 increase over 1994 was $236,000 or 29.6%. The
increase in 1996 was primarily the result of increases in the number of deposit
accounts. The increase in 1995 over 1994 was due primarily to increases in
deposit volume and increase in some deposit-related fees.
In 1996 the Company had a loss on the sale of mortgage loans of $30,000 as
compared to a gain of $22,000 in 1995. The loss in 1996 was due to an increase
in interest rates in the secondary market (see discussion on "Mortgage Loans
Held-for-Sale").
Other income was $585,000 in 1996, an increase of $25,000 or 4.5% compared
to $560,000 in 1995. Other income for 1994 was $487,000. These increases are the
result of increases in miscellaneous non-deposit service fees.
Trust Department
Revenue from the Bank's Trust Department operations was $696,000 in 1996,
representing an increase of $60,000 or 9.4% over revenue of $636,000 in 1995. In
comparison, the Trust Department revenue for 1995 increased by 4.1% or $25,000
over the 1994 revenue of $611,000. Trust assets are held by the Bank for its
customers in a fiduciary or agency capacity, and thus, are not included in the
financial statements of the Company. Trust Department assets were $209,144,000
and $173,435,000 at December 31, 1996 and 1995, respectively.
Other Expenses
Salaries and employee benefits represent a significant portion of
non-interest expense. These expenses, amounting to $5,615,000, increased by
$483,000 or 9.4% in 1996 compared to $5,132,000 in 1995. These expenses in 1995
amounted to an increase of 10.6% over the $4,640,000 reported in 1994. The
increase in 1996 was primarily due to salary increases of approximately 4% and a
full year's expense for the new branches added in 1995. Salary expense in 1995
increased due to normal salary increases of approximately 4% and staff additions
related to the two new supermarket branches opened during the year.
Occupancy and equipment expenses were $2,184,000 in 1996, which was a 9.7%
or a $193,000 increase from $1,991,000 in 1995. The 1995 amount was 17.3% more
than the 1994 occupancy and equipment expense of $1,698,000. Most of the
increase in 1996 was related to a full year's expenses of the new branches
opened in 1995 and some major maintenance work on other facilities. The
<PAGE>
additional occupancy and equipment expenses in 1994 are primarily due to
the establishment of two new supermarket branches (Airport Road and Northampton
Crossings), the purchase of the Pointe North branch and concurrent closing of
the Park Plaza branch.
Other operating expenses (such as litigation costs, deposit insurance
premiums, data processing fees, legal, accounting, supplies, postage, telephone,
advertising and publicity) in 1996 were $3,772,000, compared to $4,081,000 in
1995 and $3,746,000 in 1994. The decrease in 1996 of $309,000 or 7.6% was
primarily due to a reduction in legal fees and Federal Deposit Insurance
premiums offset in part by higher data processing, business development,
auditing and supply expenses. The increase in 1995 of $335,000 or 8.9% was the
result of higher legal fees, advertising, postage and data processing expenses,
partially offset by lower Federal Deposit Insurance premiums. The Company's
advertising costs are expensed as incurred. Advertising costs were $299,000,
$294,000 and $228,000 for the years ended December 31, 1996, 1995 and 1994,
respectively (see Notes A.14 and I of the "Notes to Consolidated Financial
Statements").
Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Trading securities are measured at fair value, with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1996 and 1995. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements (see Notes A.2. and B of the "Notes to Consolidated Financial
Statements").
Held-to-maturity securities totaled $20,999,000 at December 31, 1996 and
$20,054,000 at December 31, 1995. The Company has the intent and ability to hold
these securities until maturity. The fair value of these securities was
$21,124,000 and $20,188,000 at December 31, 1996 and 1995, respectively.
The Company, at December 31, 1996 and 1995, did not hold any securities
identified as derivatives in the form of Collateralized Mortgage Obligations
(CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment
Conducts (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps,
futures or options. At December 31, 1996, the Company did hold $1,000,000 in
<PAGE>
various U. S. Agency Step-up or Multi Step-up securities. At December 31,
1995, the Company held $7,500,000 of Step-up securities ($5,000,000 in
available-for-sale and $2,500,000 in held-to-maturity). These Step-up securities
are direct obligations of U. S. Government Agencies that have a fixed coupon for
an established time period with a call option at the end of that time period.
The initial yield is higher than another security with the same end maturity but
without the call/step-up feature. If the security is not called, it will step-up
to a higher pre-determined coupon that may be below the current market yield at
the time of the step-up. Management understands the characteristics of these
securities and monitors their performance in comparison to U. S. Treasury
securities. The Company held adjustable rate mortgage-backed securities issued
by U. S. Government Agencies totaling $19,395,000 at December 31, 1996
($15,554,000 in available-for-sale and $3,841,000 in held-to-maturity) and
$23,213,000 at December 31, 1995 ($18,152,000 in available-for-sale and
$5,061,000 in held-to-maturity). The interest rates on most of these securities
are tied to various indexes, are subject to various caps, and adjust annually.
The Company also held fixed rate mortgage-backed securities issued by U. S.
Government Agencies totaling $7,290,000 at December 31, 1996 ($4,578,000 in
available-for-sale and $2,712,000 in held-to-maturity) and $9,762,000 at
December 31, 1995 ($6,375,000 in available-for-sale and $3,387,000 in
held-to-maturity).
Securities Available-for-Sale
The Company had $56,779,000 of securities available-for-sale at December
31, 1996, as compared to $59,049,000 at December 31, 1995. At December 31, 1996,
the net unrealized gain on these securities was $347,000, net of the tax effect
of $179,000. There was a net unrealized gain of $520,000, net of the tax effect
of $267,000 on the available-for-sale securities at December 31, 1995. The net
unrealized gain or loss is included in shareholders' equity (see Notes A.2. and
B of the "Notes to Consolidated Financial Statements").
These securities are being held to meet the liquidity needs of the Company
and to provide flexibility to support earnings in changing interest rate
environments. The tax-free municipal securities in the available-for-sale
category will also be used to assist in managing the Company's Federal Tax
position. While management has the intent to hold available-for-sale securities
on a long-term basis or to maturity, they may sell these securities under
certain circumstances. Such occurrences could include, but are not limited to,
meeting current liquidity needs, adjusting maturities or repricing periods to
reduce interest rate risk, reducing Federal Income Tax liability, improving
current or future interest income, adjusting risk-based capital position,
<PAGE>
changing portfolio concentrations, and providing funds for increased loan
demand or deposit withdrawals. Upon the sale of an available-for-sale security,
the actual gain or loss is included in income.
During 1996, $19,842,000 of securities available-for-sale were sold,
resulting in a total net gain of $308,000, which was recorded in income and
includes net gains on equity securities held by First C. G. of $293,000. The
securities sold were primarily U. S. Treasury, U. S. Agency, mortgage-backed and
municipal bonds held by the Bank and equity securities held by First C. G. The
sales by the Bank were executed to provide liquidity and improve future interest
income. The sales of equity securities by First C. G. were made to diversify the
equity portfolio. Securities purchased by the Company in 1996 totaled
$39,591,000. Included in these purchases were $18,400,000 in U. S. Agency
fixed-rate bonds, $6,000,000 in U. S. Treasury bonds, $7,700,000 in municipal
securities, $6,591,000 in U. S. Agency mortgage-backed bonds and other
securities, and $900,000 in equity securities. The securities sold in 1995
totaling $11,177,000 were primarily U. S. Treasury bonds and equity securities
held by First C. G. The 1995 sales resulted in net gains of $22,000 and were
made to provide liquidity and to improve future interest income. Security
purchases in 1995 amounted to $22,142,000 which were primarily U. S. Agency
fixed-rate, U. S. Treasury bonds, municipal securities and U. S. Agency
mortgage-backed bonds. In 1994, a net gain on security transactions of $97,000
was recorded on sales of $4,790,000.
Loan Portfolio
At December 31, 1996, total loans (net of unearned discounts of $2,759,000
in 1996 and $3,829,000 in 1995) of $220,117,000 were $26,987,000, or 14% higher
than the 1995 amount of $193,130,000. The growth in loans in 1996 was primarily
the result of an increase of $11,720,000 or 9.6% in residential real estate
loans, an increase of $1,185,000 or 4.3% in consumer loans and an increase of
$5,964,000 or 120.3% in real estate construction loans. Total residential real
estate loans were $134,013,000 at December 31, 1996 compared to $122,293,000 at
December 31, 1995. Consumer loans totaled $28,870,000 and $27,685,000 at
December 31, 1996 and 1995, respectively. At December 31, real estate
construction loans were $10,923,000 in 1996 versus $4,959,000 in 1995. Also
contributing to the growth in loans during 1996 were increases in commercial
real estate loans of $4,105,000 or 11.6% to a total at December 31, 1996 of
$39,421,000 as compared to the December 31, 1995 total of $35,316,000 and other
commercial loans of $3,312,000 or 61.3% to $8,715,000 at December 31, 1996, as
<PAGE>
compared to $5,403,000 at December 31, 1995. These increases were partially
offset by a decrease in municipal loans of $384,000 or 29.8%. The Company's
primary geographic area for its lending activities includes Monroe, Northampton
and Lehigh counties, Pennsylvania.
Making loans to businesses and individuals entails risks to the Company,
including ascertaining cash flows, evaluating the credit history, assets and
liabilities of a potential borrower, and determining the value of the various
types of collateral pledged as security. Lending involves determining risks,
managing those risks and charging an appropriate interest rate to compensate for
taking such risks, and to cover the cost of funds.
The loan to deposit ratio was 82.2% at December 31, 1996, and 76.0% at
December 31, 1995. Funds used by the increase in loans were provided primarily
by the increase in deposits and borrowings. Additional information concerning
loans is shown in Note C of the "Notes to Consolidated Financial Statements".
Mortgage Loans Held-for-Sale
In 1996, management continued a program of selling most of its newly
originated residential real estate loans in the secondary market. The purpose of
this plan is to reduce the Company's interest rate risk and to provide funds to
support a higher level of loan originations.
The sales of residential real estate loans in the secondary market for 1996
amounted to $19,510,000. The amount of these loans originated in 1996 was
$18,504,000, with the remaining $1,006,000 being originated in prior years and
identified as held-for-sale at December 31, 1995. A net loss of $30,000 was
recorded on these sales. In addition, $721,000 of residential real estate loans
was identified as held-for-sale at December 31, 1996. All of these loans were
originated during 1996. An unrealized loss of $10,000 on these loans is included
in other operating expenses for 1996.
In 1995, the Company originated $6,267,000 of residential real estate loans
which were sold in the secondary market. In addition, during 1995, $69,000 of
these loans that were originated in prior years were sold. Net gains of $22,000
were recognized on these sales in 1995. At December 31, 1995, $1,006,000 of
residential real estate loans were identified as held-for-sale. Included in
other operating expenses in 1995 is an unrealized loss of $4,000 on these loans.
During 1994, the Company had net gains of $37,000 on the sale of $19,926,000 of
residential real estate loans. The other operating expenses for 1994 include an
unrealized loss of $1,000 on mortgage loans held-for-sale of $69,000 at year-end
1994.
<PAGE>
The Company intends to continue to originate residential real estate loans
in 1997 and to sell most of the fixed-rate loans in the secondary market. The
Company services all of its sold residential mortgage loans and plans to
continue this practice.
On January 1, 1996, the Company adopted the Financial Accounting Standards
Board standard, SFAS No. 122, "Accounting for Mortgage Servicing Rights", which
requires that a mortgage banking enterprise recognize as a separate asset rights
to service mortgage loans for others, however those servicing rights are
acquired. In circumstances where mortgage loans are originated, separate asset
rights to service mortgage loans are only recorded when the enterprise intends
to sell such loans. The adoption of SFAS No. 122 did not have a material effect
on the Company's consolidated financial position or results of operation.
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 efforts, 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 table "Non-Accrual Loans" on page 14 shows the balance
and the effect on interest income of non-accrual loans for each of the periods
indicated. There were $1,440,000 of loans on a non-accrual status at December
31, 1996. The decrease in non-accrual loans during 1996 of $741,000 resulted
from the completion of collection efforts on certain loans and an improvement in
the quality of commercial loans.
The Company does not have any significant loans that qualify as "Troubled
Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and
Creditors for Troubled Debt Restructuring", at December 31, 1996 and 1995.
<PAGE>
<TABLE>
Non-Accrual Loans
(Dollars in Thousands)
at December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non-accrual loans on
a cash basis $1,440 $2,181 $1,724 $1,569 $1,395
------ ------ ------ ------ ------
Non-accrual loans as a
percentage of total loans .65% 1.13% .93% .93% .76%
------ ------ ------ ------ ------
Interest which would have
been recorded at
original rate $ 210 $ 214 $ 168 $ 134 $ 87
Interest that was reflected
in income 40 44 --- --- ---
------ ------ ------ ------ ------
Net impact on int income $ (170) $ (170) $ (168) $(134) $ (87)
</TABLE>
Set forth below are the amounts of loans outstanding as of the end of each
of the periods indicated that are 90 days and over past due and are on an
accrual basis and are not included in the table above. Management continues to
accrue interest on these loans since they are secured and in the process of
collection and are expected to be eventually paid in full.
<TABLE>
Accruing Loans Past Due 90 Days or More
(Dollars in Thousands)
at December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Accruing loans past due
90 days or more $986 $1,115 $1,069 $672 $1,563
Accruing loans past due
90 days or more as a
percentage of total loans .45% .58% .58% .40% .85%
</TABLE>
<PAGE>
The Company measures impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, impairment may be measured based on a
loan's observable market price, or the fair value of the collateral if the loan
is collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Company has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued in such loans and
no income is recognized until all recorded amounts of interest and principal are
recovered in full.
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit loses related to loan impairment at December 31, 1996 and 1995 are as
follows:
<TABLE>
(Dollars in Thousands)
at December 31, 1996 1995
<S> <C> <C>
Principal amount of impaired loans $1,149 $2,035
Accrued interest --- ---
Deferred loan costs 7 4
------ ------
1,156 2,039
Less valuation allowance
at December 31, (128) (238)
------ ------
$1,028 $1,801
</TABLE>
The activity in the allowance account for credit losses related to impaired
loans is as follows:
<TABLE>
(Dollars in Thousands)
for the year ended 1996 1995
<S> <C> <C>
Valuation allowance at January 1, $238 $160
Provision for loan impairment 206 187
Direct charge-offs (325) (126)
Recoveries 9 16
---- ----
Valuation allowance at December 31, $128 $238
</TABLE>
Total cash collected on impaired loans during 1996 was $1,486,000, of which
$1,446,000 was credited to the principal balance outstanding on such loans, and
$40,000 was recognized as interest income.
Total cash collected on impaired loans during 1995 was $182,000, of which
$138,000 was credited to the principal balance outstanding on such loans and
$44,000 was recognized as interest income. Interest that would have been accrued
on impaired loans was $210,000 and $214,000 in 1996 and 1995, respectively. The
valuation allowance for impaired loans of $128,000 at December 31, 1996 and
$238,000 at December 31, 1995 is included in the "Allowance for Possible Loan
Losses" which amounts to $2,532,000 and $2,443,000 at December 31, 1996 and
1995, respectively.
<PAGE>
Shown in the following table is the amount of "Other Real Estate Owned" as
of the end of each of the periods indicated recorded as an asset on the
Company's books as the result of the foreclosure of certain non-performing real
estate loans.
OTHER REAL ESTATE OWNED
<TABLE>
(Dollars in Thousands)
at December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Other Real Estate Owned $ 595 $ 364 $ 373 $ 738 $ 124
</TABLE>
Allowance and Provision
for Possible Loan Losses
The allowance for possible loan losses constitutes the amount available to
absorb estimated losses within the loan portfolio. As of December 31, 1996, the
allowance for possible loan losses was $2,532,000 as compared to the December
31, 1995 amount of $2,443,000 and the December 31, 1994 amount of $2,187,000.
The allowance for possible loan losses as a percentage of total loans
outstanding as of December 31, 1996 was 1.15%. This compares to 1.26% at the end
of 1995 and 1.18% at the end of 1994. The increase in the allowance for possible
loan losses of $89,000 was the result of management's review of loans
outstanding (see discussion on "Loan Portfolio") and non-performing loans (the
sum of non-accrual loans and accruing loans past due 90 days or more) of
$2,426,000 as of December 31, 1996 as compared to $3,296,000 as of December 31,
1995 (see tables on "Non-Accrual Loans" and "Accruing Loans Past Due 90 Days or
More"). Net charge-offs as detailed in the table "Allowance for Possible Loan
Losses" were $581,000 in 1996 or $961,000 less than the 1995 amount of
$1,542,000. Net loans charged-off in 1994 were $186,000. Net charge-offs
returned to a historical level in 1996. These charge-offs were the result of
losses on commercial and consumer loans. The increase in charge-offs in 1995 was
primarily the result of a net loss of $1,264,000 (net of recoveries) due to the
overdrafts of a customer and higher consumer loan losses. The ratio of net loan
charge-offs to average loans outstanding was .28%, .81% and .10% in 1996, 1995
and 1994, respectively.
The provision for loan losses for the year ended December 31, 1996 was
$670,000 as compared to $1,798,000 for the year ended December 31, 1995, and
$420,000 for the year ended December 31, 1994. The decrease in 1996 from 1995
was $1,128,000. The higher level in 1995 was principally the result of the
increase in net charge-offs due to the overdraft loss. In 1995, the increase in
the provision was $1,378,000 over 1994.
The allowance for possible loan losses is established through a provision
for possible loan losses charged to expenses. Loans are charged against the
<PAGE>
allowance for possible loan losses when management believes that the
collectibility of the principal is unlikely. The risk characteristics of the
loan portfolio are managed through various control processes, including credit
evaluations of individual borrowers, periodic reviews, diversification by
industry, and the establishment of lending targets to various segments of the
portfolio. Risk is further mitigated through the application of lending
procedures such as the holding of adequate collateral and the establishment of
contractual guarantees. Management believes that these procedures provide
adequate assurances against the adverse impact from any event or set of
conditions, and that the level of the allowance for possible loan losses is
sufficient to meet the present and potential risk characteristics of the loan
portfolio, including the current level of non-performing and past-due loans.
Management ranks loans or portions thereof which present unfavorable
factors according to the degree of collectibility. Such analysis and
examinations form the principal foundation on which management makes an ongoing
evaluation as to the adequacy of the allowance for possible loan losses.
<PAGE>
<TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in Thousands)
For the Year Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses
at Beginning of Year $ 2,443 $ 2,187 $ 1,953 $ 1,840 $ 1,702
-------- -------- -------- -------- -------
Loans Charged-Off by Category:
Commercial 365 161 259 392 600
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 31 -- 35 3 72
Consumer/Installment 271 319 144 348 337
Other -- 1,278 -- -- --
-------- -------- -------- -------- -------
667 1,758 438 743 1,009
-------- -------- -------- -------- -------
Loans Recovered by Category:
Commercial 39 105 170 57 22
Real Estate - Construction -- -- -- -- --
Real Estate - Residential -- -- -- -- --
Consumer/Installment 47 97 82 34 6
Other -- 14 -- -- --
-------- -------- -------- -------- -------
86 216 252 91 28
-------- -------- -------- -------- -------
Net Loans Charged-Off 581 1,542 186 652 981
-------- -------- -------- -------- -------
Provision Charged to Expense 670 1,798 420 765 1,119
-------- -------- -------- -------- -------
Allowance for Loan Losses
at End of Period $ 2,532 $ 2,443 $ 2,187 $ 1,953 $ 1,840
======== ======== ======== ======== ========
Total Loans
Average $206,378 $190,874 $178,624 $180,850 $177,842
Year-End $220,117 $193,130 $185,215 $168,566 $183,232
Net Loans Charged Off to:
Average Loans .28% .81% .10% .36% .55%
Loans at Year-End .26% .80% .10% .39% .54%
Allowance for Possible
Loan Losses at Year-End 22.95% 63.12% 8.50% 33.38% 53.32%
Provision for Possible
Loan Losses 86.72% 85.76% 44.29% 85.23% 87.67%
Allowance for Possible
Loan Losses at Year-End to:
Average Loans 1.23% 1.28% 1.22% 1.08% 1.03%
Loans at Year-End 1.15% 1.26% 1.18% 1.16% 1.00%
</TABLE>
<PAGE>
Deposits
Deposits are the primary source of the Company's funds. During 1996,
deposits increased by $13,566,000 or 5.3% to a total of $267,668,000 at December
31, 1996, from a total of $254,102,000 at December 31, 1995. Average deposits
for 1996 were $258,500,000, an increase of $11,563,000 or 4.7% over the average
total deposits for 1995 of $246,937,000. Contributing to the increase in
deposits was the strong growth of certificates of deposit as consumers responded
to some special higher interest rates offered by the Bank and growth in
non-interest bearing and interest-bearing checking deposits as a result of the
introduction by the Bank in 1996 of Quality Checking(R) and Quality Checking
Gold(R). Quality Checking(R) is a non-interest bearing account that provides a
package of services, including common-carrier accidental death insurance, credit
card protection and a discount travel book. Quality Checking Gold(R) is an
interest-bearing account that provides all the benefits of Quality Checking(R)
plus Travelers Advantage(R) and Shoppers Advantage(R) for a monthly fee of
$6.00. The deposit growth in certificates of deposit and checking deposits was
partially offset by declines in savings accounts, money market accounts and
certificates of deposit over $100,000. The growth of deposits achieved by the
Company and the banking industry in general is adversely affected by the flow of
funds into mutual funds and other investment options.
The Bank's time deposits, excluding certificates of deposit under $100,000,
increased in 1996 with average balances of $103,221,000, which is $12,296,000 or
13.5% higher than the 1995 average balance of $90,925,000. Average certificates
of deposit over $100,000 were $5,167,000 in 1996 as compared to $6,184,000 in
1995, a decline of $1,017,000 or 16.4%. The new Quality Checking(R) product
accounted for most of the growth in non-interest bearing deposits in 1996.
Non-interest bearing deposits averaged $27,826,000 in 1996 as compared to
$23,782,000 in 1995, an increase of $4,044,000 or 17.0%. In addition, there was
an increase in average interest-bearing demand deposits of $251,000 or 0.6% to
$43,206,000 in 1996 from $42,955,000 in 1995. Offsetting some of this growth
were declines in average savings and club deposits of $2,669,000 or 4.1% from an
average balance of $65,452,000 in 1995 to an average balance of $62,783,000 in
1996, and declines in average money market deposits which averaged $16,297,000
in 1996 as compared to $17,639,000 in 1995, a decrease of $1,342,000 or 7.6%.
<PAGE>
Short-Term Borrowings
The Bank had securities sold under agreements to repurchase totaling
$3,795,000 at December 31, 1996 and $6,096,000 at December 31, 1995. There were
no other short-term borrowings at December 31, 1996. The Bank had short-term
borrowings in the form of Federal Home Loan Bank borrowings of $7,000,000 at
December 31, 1995. At December 31, 1996 and 1995, there were no borrowings in
the form of Federal Funds purchased or Federal Reserve Bank discount borrowings.
Additional information relating to short-term borrowings can be found in Note G
of the "Notes to Consolidated Financial Statements".
Liquidity and Capital Resources
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 asset liquidity are money market investments,
short-term investment securities, and funds received from the repayment of loans
and short-term borrowings. At year-end 1996, cash, due from banks, Federal funds
sold and interest-bearing deposits with banks totaled $14,214,000, and
securities maturing within one year totaled $2,858,000. At year-end 1995, cash
and due from banks, Federal funds sold, and interest-bearing deposits with banks
totaled $16,384,000, and securities maturing within one year were $4,955,000.
The Bank is a member of the Federal Home Loan Bank of Pittsburgh,
Pennsylvania. The Bank had interest-bearing deposits at the Federal Home Loan
Bank of Pittsburgh in the amount of $81,000 at December 31, 1996, and $538,000
at December 31, 1995. These deposits are included in interest-bearing deposits
with banks on the Company's financial statements. As a result of this
relationship, the Bank places most of its short-term funds at the Federal Home
Loan Bank of Pittsburgh in place of other banks. The Federal Home Loan Bank of
Pittsburgh provides the Bank with a line of credit in the amount of $12,148,000,
all of which was available at December 31, 1996.
The Bank had three long-term loans from the Federal Home Loan Bank of
Pittsburgh totaling $18,000,000 at December 31, 1996. All of these loans were
originated in 1996 with the proceeds used to fund the growth in residential real
estate loans. The loans are for $5,000,000 due November, 1998, at a fixed rate
of 5.96%, $8,000,000 due August, 2000, at a fixed rate of 5.89% until August,
1998, at which time the rate may be converted at the option of the lender to a
<PAGE>
variable rate at LIBOR plus 6 basis points; and $5,000,000 due December,
2001, at a fixed rate of 4.97% until March, 1997, at which time the rate may be
converted at the option of the lender to a variable rate at LIBOR plus 8 basis
points. If the lender elects to convert the loans to a variable rate, the Bank
may prepay the loan in full at the time of conversion without a penalty. The
Bank had no long-term loans from the Federal Home Loan Bank at December 31, 1995
(see Note H of the "Notes to Consolidated Financial Statements").
Cash flows for the year ended December 31, 1996 consisted of Cash Used In
Operating Activities of $1,746,000 and Cash Used In Investing Activities of
$21,377,000, offset in part by Cash Provided by Financing Activities of
$21,503,000; resulting in a net decrease in cash and cash equivalents of
$1,620,000. The Cash Used In Operating Activities was comprised principally of
mortgage loans originated for sale of $24,690,000 and net securities gains of
$308,000, reduced by net income of $2,822,000, proceeds from the sale of
mortgage loans of $19,509,000, a provision for possible loan losses of $670,000
and depreciation and amortization of $748,000. The Cash Used in Investing
Activities was primarily for the purchase of $32,686,000 of available-for-sale
securities, and $6,905,000 of held-to-maturity securities, a net increase in
loans to customers of $22,614,000 and the purchase of $997,000 of premises and
equipment. The Cash Provided by Financing Activities was comprised of additional
long-term debt of $18,000,000 from the Federal Home Loan Bank (see discussion
above), a net increase in certificates of deposit of $10,423,000 and a net
increase in interest and non-interest bearing demand deposits of $3,143,000. The
sale of common shares and treasury shares pursuant to the Dividend Reinvestment
Plan resulted in proceeds of $354,000. Partially offsetting these increases were
decreases in short-term borrowings of $7,000,000 and repurchase agreements of
$2,301,000 and cash dividends paid of $1,011,000.
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 December 31, 1996 was $26,805,000
as compared to $24,767,000 at December 31, 1995, an increase of $2,038,000 or
8.2%. This increase was primarily attributable to retained earnings and the sale
of common shares pursuant to the Dividend Reinvestment Plan. At December 31,
1996, unrealized gains on securities available-for-sale, which are included in
shareholders' equity, amounted to $347,000 (net of tax effect of $179,000).
Included in shareholders' equity at December 31, 1995 was $520,000 (net of tax
effect of $267,000) of unrealized losses on securities available-for-sale (see
discussion on "Securities Available-for-Sale").
<PAGE>
On June 19, 1996, the Company paid a 5% stock dividend on its common stock
from authorized but unissued shares to all shareholders of record at the close
of business on May 31, 1996. Fractional shares were paid in cash based on a per
share price of $18.50. The Company also paid a 5% stock dividend on June 28,
1994 to shareholders of record June 6, 1994. The number of average shares and
per share information in this report has been restated to reflect these 5% stock
dividends.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. In
1996, 13,761 common shares were purchased pursuant to this Plan at an average
price of $18.06 for total proceeds of $248,000. The shares purchased in 1996
were comprised of 10,191 new common shares at an average price of $18.10 for
proceeds of $184,000 and 3,570 common shares from Treasury shares at an average
price of $17.94 for proceeds of $64,000. In 1995, 16,352 new common shares were
purchased from authorized and unissued shares at an average price of $15.23 per
share for proceeds of $249,000.
A Non-Employee Director Stock Option Plan was adopted by the Company in
1994. This plan provides for the awarding of stock options to the Company's
non-employee directors. Pursuant to this plan, in 1996, options to purchase
1,102 shares of the Company's common stock at a price of $18.50 per share were
granted to a certain non-employee director. Options totaling 2,204 shares were
granted to non-employee directors under this plan in 1995 at a price of $15.00
per share. During 1996, options for 275 shares of the Company's common stock
were exercised by a non-employee director at a price of $15.42 per share. There
were no options exercised in 1995.
The Company also has a Stock Option Plan that was originally adopted in
1986 and a 1996 Stock Option Plan that was adopted in 1996 which provide for the
granting of options to acquire the Company's common stock to officers and key
employees. There were no options granted under these Plans in 1996 and 1995.
During 1996, options for 5,469 shares of the Company's common stock issued
pursuant to the 1986 Plan were exercised at an average price of $18.64 per
share. There were no options exercised in 1995.
On January 1, 1996, the Company adopted the Financial Accounting Standards
Board standard SFAS No. 123, "Accounting for Stock-Based Compensation", which
allows an entity to use 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
<PAGE>
period, which is usually the vesting period. Alternatively, the Standard
permits entities to continue accounting for employee stock options and similar
instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and its related interpretations. 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 employee stock option plan is accounted for under APB Opinion No.
25. The adoption of SFAS No. 123 had no material effect on the Company's
consolidated financial position or results of operations. Additional information
relating to the Company's Stock Option Plans can be found in Notes A.8. and N of
the "Notes to Consolidated Financial Statements".
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. Additional
information relating to the Company's and Bank's capital requirements and
capital ratios can be found in Note S of the "Notes to Consolidated Financial
Statement".
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate
equity-to-assets ratio. Another significant effect of inflation is on other
expenses, which tend to rise during periods of general inflation.
Management believes the most significant impact on financial results is the
Company's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain an essentially balanced
position between interest-sensitive assets and liabilities in order to protect
against wide interest-rate fluctuations.
Accounting for the Impairment
of Long-Lived Assets
On January 1, 1996, the Company adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
<PAGE>
Of", which provides guidance on when to recognize and how to measure
impairment losses of long-lived assets and certain intangibles and how to value
long-lived assets to be disposed of. The adoption of SFAS No. 121 had no
material effect on the Company's consolidated financial position or results of
operations.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Financial Accounting Standards Board issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", as amended by SFAS No. 127, which provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. This statement is effective for transfers of financial assets,
servicing of financial assets, and extinguishments of liabilitites occurring
after December 31, 1996. Adoption of this new statement is not expected to have
a material impact on the Company's consolidated financial position or results of
operations.
Quarterly Financial Data (Unaudited)
The following represents summarized quarterly financial data of the
Company, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation.
Net income per share of common stock has been restated to reflect retroactively
the 5% stock dividend of May 1996.
<PAGE>
<TABLE>
QUARTERLY FINANCIAL DATA (Unaudited)
Dollars in Thousands,
except per share data Three Months Ended
1996 Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C>
Interest income $6,000 $5,904 $5,652 $5,579
Net interest income 3,522 3,478 3,322 3,235
Provision for possible
loan losses 155 105 305 105
Net gain (loss) on sale
of securities and mortgages (17) 18 145 132
Income before income taxes 1,151 980 970 857
Net income $ 815 $ 702 $ 690 $ 615
====== ====== ====== ======
Net income per share of
common stock $ 0.53 $ 0.46 $ 0.45 $ 0.41
====== ====== ====== ======
1995 Dec. 31 Sept. 30 June 30 March 31
Interest income $5,602 $5,620 $5,433 $5,241
Net interest income 3,160 3,200 3,110 3,174
Provision (credit) for
possible loan losses 100 100 (172) 1,770
Net gain (loss) on sale of
securities and mortgages 20 25 18 (19)
Income before income taxes 908 949 1,116 (1,057)
Net income $ 634 $ 659 $ 771 $ (663)
======= ====== ====== =======
Net income per share of
common stock $ 0.42 $ 0.44 $ 0.51 $ (0.44)
======= ====== ====== =======
</TABLE>
<PAGE>
Item 7. Financial Statements
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Dollars in Thousands) At December 31, 1996 1995
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 11,729 $ 11,949
Federal Funds Sold 2,200 3,600
--------- ---------
Total Cash and Cash Equivalents 13,929 15,549
Interest-Bearing Deposits With Banks 285 835
Investment Securities
(Fair Value: 1996 - $21,124;
1995- $20,188) 20,999 20,054
Securities Available-for-Sale at Fair Value 56,779 59,049
Mortgage Loans Held-for-Sale 721 1,006
Total Loans, Net of Unearned Discount 220,117 193,130
Less: Allowance for Possible Loan Losses (2,532) (2,443)
--------- ---------
Net Loans 217,585 190,687
Premises and Equipment 7,030 6,763
Accrued Interest Income 2,020 1,878
Other Real Estate Owned 595 364
Other Assets 2,409 2,329
--------- ---------
TOTAL ASSETS $ 322,352 $ 298,514
========= ========
LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 31,450 $ 26,690
Interest-Bearing Deposits
(Includes Certificates of Deposit
in Excess of $100: 1996 - $4,920;
1995 - $6,623) 236,218 227,412
--------- ---------
Total Deposits 267,668 254,102
Securities Sold Under Agreements
to Repurchase 3,795 6,096
Short-Term Borrowings -- 7,000
Long-Term Debt 18,512 643
Accrued Interest Payable 3,205 3,425
Other Liabilities 2,367 2,481
--------- ---------
TOTAL LIABILITIES 295,547 273,747
--------- ---------
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: 1,560,634 shares in 1996
and 1,471,000 shares in 1995 7,803 7,355
Additional Paid-in Capital 9,212 7,968
Retained Earnings 9,975 9,567
Less Treasury Stock at Cost: 861 shares
in 1996 and none in 1995 (20) --
Employee Stock Ownership Plan Debt (512) (643)
Net Unrealized Gain on Securities
Available-for-Sale 347 520
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 26,805 24,767
--------- ---------
TOTAL LIAB AND SHAREHOLDERS' EQUITY $ 322,352 $298,514
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
(Dollars in Thousands,
except per share data)
For the Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 18,052 $ 16,896 $ 14,984
Interest on Investment Securities
Taxable 4,386 4,477 3,439
Tax-Exempt 617 384 348
Interest on Other Investments
Deposits with Banks 78 133 158
Federal Funds Sold 2 6 57
------ ------ ------
Total Interest Income 23,135 21,896 18,986
------ ------ ------
INTEREST EXPENSE
Interest on Deposits 8,622 8,332 6,853
Interest on Short-Term Borrowings 636 684 169
Interest on Long-Term Debt 320 236 130
------ ------ ------
Total Interest Expense 9,578 9,252 7,152
------ ------ ------
NET INTEREST INCOME 13,557 12,644 11,834
Provision for Possible Loan Losses 670 1,798 420
------ ------ ------
Net Interest Income After Provision
for Possible Loan Losses 12,887 10,846 11,414
------ ------ ------
OTHER INCOME
Trust Revenue 696 636 611
Service Charges on Deposit Accounts 1,083 1,034 798
Investment Securities Gains, Net 308 22 97
Gains (Loss) on Sale of Mortgage Loans (30) 22 37
Other Operating Income 585 560 487
------ ------ ------
Total Other Income 2,642 2,274 2,030
------ ------ ------
OTHER EXPENSES
Salaries and Employee Benefits 5,615 5,132 4,640
Net Occupancy and Equipment Expense 2,184 1,991 1,698
Other Operating Expenses 3,772 4,081 3,746
------ ------ ------
Total Other Expenses 11,571 11,204 10,084
------ ------ ------
Income Before Income Taxes 3,958 1,916 3,360
Applicable Income Taxes 1,136 515 1,018
------ ------ ------
NET INCOME $ 2,822 $ 1,401 $ 2,342
======== ======== ========
PER SHARE DATA
Net Income $ 1.85 $ 0.93 $ 1.58
Cash Dividends 0.67 0.65 0.63
Average Shares Outstanding 1,527,819 1,504,391 1,481,598
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
(Dollars in Thousands)
Unreal.
Net Gain
Add. (Loss) on
Common Paid-In Retained Treas. ESOP Sec. Avail
Stock Capital Earnings Stock Debt for Sale Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan 1, 1994 $ 6,861 $ 6,708 $ 8,991 $ $ (906) $ 340 $21,994
1994
Net Income 2,342 2,342
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(14,401
shares) 72 171 243
Cash
Dividends
Paid (936) (936)
Stock
Dividend
of 5%
(68,793
shares) 344 912 (1,256) ---
Cash in
Lieu of
Fractional
Shares (3) (3)
ESOP Loan
Pmnt 131 131
Unall ESOP
Shares
Committed
to
Employees
(4,724
shares) 3 3
Unreal Net
Loss on
Sec Avail-
for-Sale (1,374) (1,374)
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1994 7,277 7,794 9,138 --- (775) (1,034) 22,400
1995
Net Income 1,401 1,401
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(15,573
shares) 78 171 249
Cash Div Paid (972) (972)
ESOP Loan
Pmnt 132 132
Unall ESOP
Shares
Committed
to
Employees
(4,724
shares) 3 3
Unreal Net
Gain on
Sec Avail-
for-Sale 1,554 1,554
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1995 7,355 7,968 9,567 --- (643) 520 24,767
1996
Net Income 2,822 2,822
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(10,191
shares) 51 133 184
Sale of
Common
Stock
under
Stock
Option
Plan (5,731
shares) 28 78 106
Purchase of
Treasury
Stock
(4,431)
shares) (102) (102)
Sale of
Treas Stock
under
Dividend
Reinv Plan
(3,570
shares) (18) 82 64
Cash
Dividends
Paid (1,011) (1,011)
Stock
Dividend
of 5%
(73,712
shares) 369 1,032 (1,401) ---
Cash in
Lieu of
Fractional
Shares (2) (2)
ESOP Loan
Pmnt 131 131
Unall ESOP
Shares
Committed
to
Employees
(5,636
shares) 19 19
Unreal Net
Gain on
Sec Avail-
for-Sale (173) (173)
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1996 $ 7,803 $ 9,212 $ 9,975 $ (20)$ (512) $ 347 $26,805
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
(Dollars in Thousands) For the Year Ended Dec 31, 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,822 $ 1,401 $ 2,342
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in)
Operating Activities:
Provision for Possible Loan Losses 670 1,798 420
Depreciation and Amortization 748 624 458
Amortization of Security Discounts (130) (152) (98)
Amortization of Security Premiums 179 186 261
Deferred Taxes (99) (156) 3
Amortization of Deferred Fees on Loans (110) 48 (238)
Investment Securities Gains, Net (308) (22) (97)
Loss (Gain) on Sale of Mortgage Loans 30 (22) (37)
Mortgage Loans Originated for Sale (24,690) (7,273) (4,548)
Mortgage Loan Sales 19,509 6,336 19,926
Release of ESOP Shares 20 3 ---
Changes in Assets and Liabilities:
Increase in Accrued Interest Income (142) (130) (354)
Increase (Decrease) in Accrued
Interest Payable (220) 743 (292)
Decrease (Increase) in Other Assets 1 75 (154)
Increase (Decrease) in Other
Liabilities (26) 381 (156)
-------- -------- -------
Net Cash Provided by (Used in)
Operating Activities (1,746) 3,840 17,436
-------- -------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities
Available-for-Sale 15,401 11,055 8,453
Proceeds from Maturities of Securities
Held-to-Maturity 5,671 3,284 4,760
Proceeds from Sales of Securities
Available-for-Sale 19,842 11,177 4,790
Purchase of Securities Available-for-Sale (32,686) (19,306) (23,963)
Purchase of Securities Held-to-Maturity (6,905) (2,836) (14,396)
Net (Increase) Decrease in Interest
Bearing Deposits With Banks 550 (434) 245
Net Increase in Loans (22,614) (9,937) (17,235)
Purchase of Premises and Equipment (997) (1,508) (1,446)
Proceeds from Sale of Other
Real Estate Owned 361 463 1,092
-------- -------- -------
Net Cash Used in Investing Activities (21,377) (8,042) (37,700)
-------- -------- -------
FINANCING ACTIVITIES
Net (Decrease) Increase in Interest
and Non-Interest Bearing Demand Deposits
and Savings Accounts 3,143 (12,555) 8,538
Net Increase in Certificates of Deposit 10,423 19,125 3,429
Net Increase (Decrease) in Long-Term Debt 18,000 (87) (338)
Net Increase (Decrease) in
Repurchase Agreements (2,301) (2,931) 4,316
Net Increase (Decrease) in
Short-Term Borrowings (7,000) 6,250 750
Proceeds from Issuance of Common Stock 290 252 246
Purchase of Treasury Stock (102) --- ---
Proceeds from Sale of Treasury Stock 64 --- ---
Cash Dividends Paid (1,011) (972) (936)
Cash in Lieu of Fractional Shares (3) --- (3)
-------- -------- -------
Net Cash Provided by Financing Activities 21,503 9,082 16,002
-------- -------- -------
Increase (Decrease) in Cash and
Cash Equivalents (1,620) 4,880 (4,262)
Cash and Cash Equivalents, January 1, 15,549 10,669 14,931
-------- -------- -------
Cash and Cash Equivalents, December 31, $ 13,929 $ 15,549 $10,669
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
December 31, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
First Colonial Group, Inc. (the Company) is a one bank holding company of
Nazareth National Bank and Trust Company (the Bank). The Bank is an independent
community bank providing retail and commercial banking services through its
twelve offices in Northampton, Lehigh, and Monroe counties in northeastern
Pennsylvania.
The Bank competes with other banking and financial institutions in its primary
market communities, including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings and
loan associations, credit unions and money market funds actively compete for
savings and time deposits and for various types of loans. Such institutions, as
well as consumer finance and insurance companies, may be considered competitors
of the Bank with respect to one or more of the services it renders.
The Company and the Bank are subject to regulations of certain state and federal
agencies, and accordingly, they are periodically examined by those regulatory
agencies. As a consequence of the extensive regulation of commercial banking
activities, the Bank's business is particularly susceptible to being affected by
state and federal legislation and regulation which may have the effect of
increasing the cost of doing business.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Bank and First C. G. Company, Inc. All
significant inter-company balances and transactions have been eliminated. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenditures
for the periods. Therefore, actual results could differ significantly from those
estimates.
2. Investment Securities
As required by Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the Company
classifies debt and marketable equity securities in three categories: trading,
available-for-sale and held-to-maturity. Trading securities are measured at
<PAGE>
fair value, with unrealized holding gains and losses included in income.
The Company does not have any securities classified as trading securities.
Available-for-sale securities are measured at fair value, with unrealized gains
and losses, net of tax effect, reported in equity. Held-to-maturity securities
are carried at amortized cost, and the Company has the positive intent and
ability to hold such securities until maturity. The Company's classification of
its investment securities into these categories is detailed in "Note B
Investment Securities".
Investment securities held-to-maturity are principally debt securities and
are carried at cost, net of unamortized premiums and discounts, which are
recognized in interest income using the interest method over the period to
maturity.
Gains or losses on disposition are based on the net proceeds and the
adjusted carrying amount of the securities sold, using the specific
identification method.
3. Mortgages Held-for-Sale
Mortgage loans held-for-sale are carried at the lower of aggregate cost or
fair value. Unrealized losses are included in other operating expenses. Realized
gains and losses from mortgage loan sales are included in total other income.
Interest and fee income earned during the holding period are included in
interest and fees on loans. On January 1, 1996, the Company adopted the
Financial Accounting Standards Board standard, (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights", which requires that a mortgage banking enterprise
recognize as a separate asset rights to service mortgage loans for others,
however those servicing rights are acquired. In circumstances where mortgage
loans are originated, separate asset rights to service mortgage loans are only
recorded when the enterprise intends to sell such loans. The adoption of SFAS
No. 122 did not have a material effect on the Company's consolidated financial
position or results of operations.
4. Loans and Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for possible loan losses. Interest income on loans is
accrued using various methods which approximate a constant yield.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. Upon such discontinuance, all unpaid accrued interest is reversed.
<PAGE>
The allowance for possible loan losses is established through a provision
for loan losses charged to expenses. Loans are charged against the allowance for
possible loan losses when management believes that the collectibility of
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb possible loan losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay.
As required by SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" . The Company measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that, as a practical expedient,
impairment may be measured based on the observable market price of a loan, or
the fair value of the collateral if the loan is collateral dependent. The
Company measures impairment based on the fair value of the collateral when it
determines that foreclosure is probable (see Note E).
5. Loan Fees and Related Costs
Certain origination and commitment fees, and certain direct loan
origination costs are deferred and amortized over the contractual life of the
related loans. This results in an adjustment of the yield on the related loan.
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of buildings and land improvements is computed
principally on the straight-line method, and for equipment, principally on an
accelerated method, over the estimated useful lives of the assets.
7. Income Taxes
The Company, in accordance with SFAS No. 109, "Accounting for Income
Taxes", computes the tax expense using the liability method where deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these
<PAGE>
differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. The principal types of differences between
assets and liabilities for financial statement and tax return purposes are
accumulated depreciation, loan origination fees, provision for possible loan
losses, unrealized gains and deferred expenses.
8. Stock Option Plans
Under Stock Option Plans, options to acquire shares of common stock are
granted to certain officers and directors.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows an entity to use 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 Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and its related
interpretations. 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 Employee Stock Option Plans are
accounted for under APB Opinion No. 25. The adoption of SFAS No. 123 had no
material effect on the Company's consolidated financial position or results of
operations (see Note N).
9. Employee Benefit Plans
The Company has established an Employee Stock Ownership Plan (ESOP)
covering eligible employees with one year of service as defined by the ESOP.
Effective January 1, 1994, the Company adopted new accounting for its ESOP in
accordance with Statement of Position (SOP) 93-6, "Employer's Accounting for
Employee Stock Ownership Plans", issued by the Accounting Standards Division of
the American Institute of Certified Public Accountants (AICPA) in November 1993.
The adoption of SOP 93-6 was applied to shares acquired by the ESOP after
December 31, 1992, which did not have a material effect on the Company's
financial statements. For issuances of stock to the ESOP after December 15,
1989, but prior to December 31, 1992, the shares allocated method is used to
recognize expense in the Company's financial statements. For issuances of stock
prior to December 15, 1989, the Company will continue the cash contribution
method of recognizing expense to the extent that it exceeds the cumulative
expense that would be recognized under the shares allocated method (see Note K).
<PAGE>
Employees who qualify may elect to participate in a deferred salary savings
401(k) plan. The Company contributes $.50 for each $1.00 up to the first 5% that
each employee contributes. The Company also has an executive compensation plan
which provides additional death, medical and retirement benefits to certain
officers (see Note L).
The Company has a deferred compensation plan involving the Directors of the
Company. This plan provides defined annual payments for 15 years beginning at
age 65 or death in exchange for the Directors deferring the payment of a portion
of their fees (see Note L).
The Company records the cost of post-retirement medical benefits on the
accrual basis as employees render service to earn the benefits and records a
liability for the unfunded accumulated post-retirement benefit obligation. The
transition obligation, representing the unfunded and unrecognized accumulated
past-service benefit obligation for all plan participants, will be amortized on
a straight-line basis over a 20-year period (see Note M).
10. Trust Assets and Revenue
Assets held by the Trust Department of the Bank in fiduciary or agency
capacities for its customers are not included in the accompanying consolidated
balance sheets since such assets are not assets of the Company. Operating
revenue and expenses of the Trust Department are included under their respective
captions in the accompanying consolidated statements of income and are recorded
on the accrual basis.
11. Per Share Information
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. Average common shares outstanding
in 1996, 1995 and 1994 include issued shares less 26,688, 30,587 and 36,558,
respectively, of average weighted unallocated shares held by the ESOP. The
exclusion of these unallocated shares held by the ESOP in 1994 is due to the
Company's adoption of SOP 93-6 (see Note A.8.). Prior to 1994, unallocated
shares held by the ESOP were included in weighted average number of common
shares.
The potential dilutive effect from the exercise of stock options is not
material.
<PAGE>
Share and per share information have been restated to reflect the 5% stock
dividends of May 1996 and June 1994.
12. Statement of Cash Flows
The Company considers cash, due from banks and Federal funds sold as cash
equivalents for the purposes of the Consolidated Statements of Cash Flows.
Cash paid for interest was $9,798,000, $8,509,000 and $7,444,000, for the
years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for taxes
was $1,353,000 in 1996, $440,000 in 1995, $845,000 in 1994.
13. Financial Instruments
The estimated fair value as of December 31, 1996 and 1995 of the Company's
assets and liabilities considered to be financial instruments, which consist
primarily of securities, loans and deposits as required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", are provided in Note U.
14. Contributions
In 1996, the Company adopted SFAS No. 116, "Accounting for Contributions
Received and Made". This statement requires that unconditional promises to make
contributions be recognized as expenses in the period the promise is made. The
present value of contribution commitments was $18,000 and $38,000 at December
31, 1996 and 1995, respectively. These amounts were included in the Company's
total contribution expense of $51,000 and $142,000 for 1996 and 1995,
respectively.
15. Advertising Costs
The AICPA's Accounting Standards Executive Committee issued Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs", which requires
disclosures regarding an entity's advertising activities. The Company's
advertising costs are expensed as incurred. Advertising costs were $299,000,
$294,000 and $228,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
16. Intangibles
On January 1, 1996, the Company adopted the Financial Accounting Standards
Board (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", which provides guidance on when to
recognize and how to measure impairment losses on long-lived assets and certain
intangibles and how to value long-lived assets to be disposed of. The adoption
of SFAS No. 121 had no material effect on the Company's consolidated financial
position or results of operations.
<PAGE>
17. Transfer and Servicing of Assets and Extinguishments of Liabilities
The Financial Accounting Standards Board (FASB) issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", as amended by SFAS No. 127, which provides accounting guidance
on transfers of financial assets, servicing of financial assets, and extinguish
ments of liabilities. This statement is effective for transfers of financial
assets, servicing of financial assets, and extinguishments of liabilities
occurring after December 31, 1996. Adoption of this new statement is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
18. Stock Dividends
The Company reduced retained earnings and increased additional
paid-in-capital for the year ended December 31, 1994 to charge retained earnings
for the stock dividends paid at the fair value of additional shares issued which
were previously recorded at par value.
19. Reclassifications
Certain reclassifications have been made to conform to the 1996
presentation.
<PAGE>
NOTE B - INVESTMENT SECURITIES
The Company classifies debt and marketable equity securities in three
categories: trading, available-for-sale and held-to-maturity as required by
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Trading securities are
measured at fair value, with unrealized holding gains and losses included in
income. The Company had no trading securities in 1996, 1995 and 1994.
Available-for-sale securities are measured at fair value, with net unrealized
gains and losses reported, net of tax, as a component in equity.
Held-to-maturity securities are carried at amortized cost.
In 1995, the Financial Accounting Standards Board (FASB) issued a special
report "A Guide to Implementation of SFAS No. 115". In this guide, the FASB
stated it was permitting a one-time opportunity to reassess the appropriateness
of the designation of securities. The guide provided that any resulting
reclassification must occur between November 15, 1995 and December 31, 1995. The
Company completed this reassessment and reclassified $15,134,000 of securities
from held-to-maturity to available-for-sale effective December 19, 1995.
Available-for-sale securities had unrealized holding gains of $347,000 (net
of the tax effect of $179,000) in 1996 and unrealized holding gains of $520,000
(net of the tax effect of $267,000) in 1995. At December 31, the equity
securities in the available-for-sale category include Federal Reserve Bank stock
in the amount of $239,000 in 1996 and $220,000 in 1995, and Federal Home Loan
Bank stock in the amount of $1,659,000 in 1996 and $1,660,000 in 1995 which are
carried at cost.
The amortized cost, unrealized gains and losses, and fair value of the
Company's available-for-sale and held-to-maturity securities at December 31,
1996 and 1995 are summarized as follows:
<PAGE>
<TABLE>
1996
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ 7,020 $ 37 $ 3 $ 7,054
U. S. Government Agency 14,272 16 127 14,161
State and Political Subdivisions 11,808 121 65 11,864
Mortgage-Backed Securities 19,131 155 141 19,145
Other Debt Securities 796 4 -- 800
Equity Securities 3,226 529 -- 3,755
------- ------- ------- -------
Total $56,253 $ 862 $ 336 $56,779
</TABLE>
<TABLE>
1995
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ 7,002 $ 69 $ 21 $ 7,050
U. S. Government Agency 17,066 129 36 17,159
State and Political Subdivisions 6,638 66 15 6,689
Mortgage-Backed Securities 24,529 270 110 24,689
Other Debt Securities 300 7 -- 307
Equity Securities 2,727 429 1 3,155
------- ------- ------- -------
Total $58,262 $ 970 $ 183 $59,049
</TABLE>
<TABLE>
1996
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ 999 $ 4 $ -- $ 1,003
U. S. Government Agency 10,229 38 24 10,243
State and Political Subdivisions 3,217 46 2 3,261
Mortgage-Backed Securities 6,554 85 22 6,617
------- ------- ------- -------
Total $20,999 $ 173 $ 48 $21,124
</TABLE>
<TABLE>
1995
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ 2,997 14 $ 4 $ 3,007
U. S. Government Agency 6,524 44 29 6,539
State and Political Subdivisions 2,086 36 4 2,118
Mortgage-Backed Securities 8,447 98 21 8,524
------- ------- ------- -------
Total $20,054 $ 192 $ 58 $20,188
</TABLE>
<PAGE>
The following table lists the maturities of debt securities at December 31,
1996 and 1995, classified as available-for-sale and held-to-maturity. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Maturities of Debt Securities 1996
<TABLE>
Available- Held-to-Maturity
for-Sale Carrying
Fair Value Value
<S> <C> <C>
Debt Securities
Due in one year or less $ 904 $ 1,954
Due after one year
through five years 10,878 3,475
Due after five years
through ten years 11,213 7,566
Due after ten years 10,884 1,450
-------- ---------
33,879 14,445
Mortgage-backed securities 19,145 6,554
Equity securities 3,755 ---
-------- ---------
Total investments $ 56,779 $ 20,999
</TABLE>
Maturities of Debt Securities 1995
<TABLE>
Available- Held-to-Maturity
for-Sale Carrying
Fair Value Value
<S> <C> <C>
Debt Securities
Due in one year or less $ 2,874 $ 1,999
Due after one year
through five years 15,974 4,201
Due after five years
through ten years 7,170 4,947
Due after ten years 5,187 460
-------- ---------
31,205 11,607
Mortgage-backed securities 24,689 8,447
Equity securities 3,155 ---
-------- ---------
Total investments $ 59,049 $ 20,054
</TABLE>
Investment securities with a carrying amount of $7,994,000 and $14,043,000
at December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, to qualify for fiduciary powers and for other purposes required or
permitted by law. There were no securities held other than U. S. Treasury or U.
S. Agencies from a single issuer which represented more than 10% of
shareholders' equity. Proceeds from sales of investments in debt and equity
securities during 1996, 1995 and 1994 were $19,842,000, $11,177,000 and
$4,790,000, respectively. Gross gains of $418,000 and gross losses of $110,000
were realized on those sales in 1996. Gross gains of $93,000 and gross losses of
$71,000 were realized on the sales in 1995. In 1994, gross realized gains were
$108,000 and gross realized losses were $11,000.
<PAGE>
NOTE C - LOANS
Major classifications of loans at December 31, 1996 and 1995 are as
follows:
<TABLE>
1996 1995
<S> <C> <C>
Real Estate/Residential $ 134,013 $ 122,293
Real Estate/Construction 10,923 4,959
Real Estate/Commercial 39,421 35,316
Consumer/Installment 28,870 27,685
Commercial (Non-Real Estate)
and Agricultural 8,715 5,403
State and Political Subdivisions 906 1,290
Other 28 13
--------- ---------
Total Gross Loans 222,876 196,959
Less Unearned Discount (2,759) (3,829)
--------- ---------
Total Loans $ 220,117 $ 193,130
</TABLE>
Included in total gross loans are unamortized loan fees totaling $395,000
at December 31, 1996 and $229,000 at December 31, 1995. There were loans
totaling $1,440,000 on which the accrual of interest has been discontinued or
reduced at December 31, 1996. During 1996, an average of $1,979,000 of loans
were on non-accrual status. Non-accrual loans at December 31, 1995 amounted to
$2,181,000 and averaged $1,893,000 during 1995. Loans 90 days and over past due
and still accruing totaled $1,283,000 at December 31, 1996 and $1,115,000 at
December 31, 1995.
<PAGE>
NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Beginning Balance $ 2,443 $ 2,187 $ 1,953
Additions
Provisions for loan losses
charged to operating expenses 670 1,798 420
Recoveries of loans 86 216 252
------- ------- -------
Total Additions 3,199 2,014 672
Deductions
Loans charged-off (667) (1,758) (438)
------- ------- -------
Ending Balance $ 2,532 $ 2,443 $ 2,187
</TABLE>
NOTE E - IMPAIRED LOANS
The recorded investment in impaired loans and the valuation for credit
losses related to loan impairment are as follows:
<TABLE>
At December 31, 1996 1995
<S> <C> <C>
Principal amount of impaired loans $ 1,149 $ 2,035
Deferred loan costs 7 4
------- -------
1,156 2,039
Less valuation allowance (128) (238)
------- -------
$ 1,028 $ 1,801
</TABLE>
<PAGE>
On January 1, 1995, a valuation for credit losses related to impaired loans
was established as a part of the allowance for possible loan losses. The
activity in this allowance account is as follows:
<TABLE>
Year ended December 31, 1996 1995
<S> <C> <C>
Valuation allowance at January 1, $ 238 $ 160
Provision for loan impairment 206 187
Direct charge-offs (325) (125)
Recoveries 9 16
----- -----
Valuation allowance at December 31, $ 128 $ 238
</TABLE>
During 1996, total cash collected on impaired loans was $1,486,000, of
which $1,446,000 was credited to the principal balance outstanding and $40,000
was recognized as interest income.
Total cash collected on impaired loans during 1995 was $182,000, of which
$138,000 was credited to the principal balance outstanding on such loans and
$44,000 was recognized as interest income. Interest that would have been accrued
on impaired loans during 1996 and 1995 was $210,000 and $214,000, respectively.
The valuation allowance for impaired loans at December 31, 1996 and 1995 is
included in the "Allowance for Possible Loan Losses" which amounts to $2,532,000
and $2,443,000 at December 31, 1996 and 1995, respectively.
NOTE F - PREMISES AND EQUIPMENT
Major classifications of these assets at December 31, 1996 and 1995 are
summarized as follows:
<TABLE>
1996 1995
<S> <C> <C>
Land $ 939 $ 939
Premises 6,855 6,512
Equipment 4,337 3,707
-------- --------
12,131 11,158
Accumulated depreciation
and amortization (5,101) (4,395)
-------- --------
Total Premises and Equipment $ 7,030 $ 6,763
</TABLE>
Depreciation and amortization expense amounted to $748,000, $624,000 and
$458,000 in 1996, 1995 and 1994, respectively.
<PAGE>
NOTE G - SHORT-TERM BORROWINGS
FEDERAL RESERVE DISCOUNT BORROWINGS
<TABLE>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Balance outstanding at December 31, $ -- $ -- $ --
Maximum amount outstanding at
any month-end during the year $ -- $ -- $ --
Average amount outstanding
during the year $ 10 $ -- $ 59
Average interest rate during
the year 5.12% --% 3.19%
</TABLE>
<TABLE>
FEDERAL HOME LOAN BANK BORROWINGS
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Balance outstanding at December 31, $ -- $ 7,000 $ 750
Maximum amount outstanding at any
month-end during the year $ 10,000 $ 11,000 $ 750
Average amount outstanding
during the year $ 3,400 $ 6,109 $ 118
Average interest rate during
the year 5.51% 6.34% 5.19%
</TABLE>
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of
credit in the amount of $12,148,000, all of which was available at December 31,
1996
There were no short-term borrowings in the form of Federal Funds purchased
at December 31, 1996, 1995 and 1994
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Balance outstanding at December 31, $ 3,795 $ 6,096 $ 9,027
Maximum amount outstanding at any
month-end during the year $ 7,087 $ 12,332 $ 12,347
Average amount outstanding
during the year $ 4,740 $ 9,298 $ 6,428
Average interest rate during
the year 3.14% 3.72% 2.51%
</TABLE>
<PAGE>
NOTE H - LONG-TERM DEBT
The Company had long-term borrowings from the Federal Home Loan Bank of
Pittsburgh totaling $18,000,000 at December 31, 1996. These loans will mature in
two to six years. The weighted average interest rate on these loans was 5.65% at
December 31, 1996. The Company also has an obligation as a party to the Employee
Stock Ownership Plan debt, which is discussed in Note K. The principal payments
due on the Company's debt at December 31, 1996 are as follows:
<TABLE>
ESOP Debt FHLB Debt Total Debt
<S> <C> <C> <C>
1997 $ 121 $ -- $ 121
1998 65 5,000 5,065
1999 65 -- 65
2000 65 8,000 8,065
2001 65 5,000 5,065
2002 and beyond 131 -- 131
------- -------- --------
Total $ 512 $ 18,000 $ 18,512
</TABLE>
NOTE I - OTHER OPERATING EXPENSES
The following items which are greater than 1% of the aggregate of "Total
Interest Income" and "Total Other Income" are included in "Other Operating
Expenses" for the respective years indicated
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Data Processing Services $ 594 $ 515 $ 361
Litigation Costs and Consulting and Legal Fees $ 416 $ 681 $ 470
Printing, Stationery and Supplies $ 343 $ 299 $ 303
Advertising $ 299 $ 294 $ 228
Postage $ 247 $ 258 $ 226
Loan Collection $ 223 $ 201 $ 258
Federal Deposit Insurance Premium $ 2 $ 288 $ 536
</TABLE>
<PAGE>
NOTE J - INCOME TAXES
The Company uses the liability method of accounting for income taxes
Applicable income tax expense (benefit) in the consolidated statements of
income is as follows:
<TABLE>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Federal
Current $ 1,235 $ 671 $ 1,015
Deferred (benefit) 99 (156) 3
------- ------- -------
Total $ 1,136 $ 515 $ 1,018
</TABLE>
The income tax provision reconciled to the tax computed statutory federal
rate is as follows:
<TABLE>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Federal tax expense
at statutory rate $ 1,346 $ 651 $ 1,142
Increase (decrease)
in taxes resulting from:
Tax-exempt investment
securities income (195) (124) (112)
Tax-exempt interest
on loans (18) (19) (17)
Other, net 3 7 5
------- ------- -------
Applicable Income Taxes $ 1,136 $ 515 $ 1,018
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
At December 31, 1996 1995
<S> <C> <C>
Deferred Tax Assets:
Loan Loss Reserve $ 561 $ 540
Deferred Compensation 433 502
Post-Retirement Benefits 51 --
Deferred Loan Fees 84 81
Depreciation 21 --
Other 40 --
------- -------
Total 1,190 1,123
Deferred Tax Liability:
Depreciation of Property
and Equipment -- 19
Unrealized Securities Gains 28 302
Other 6 13
------- -------
Total 34 334
======= =======
Net $ 976 $ 789
</TABLE>
Based on management's evaluation of the likelihood of realization, no
valuation allowance has been provided
<PAGE>
NOTE K- EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan (ESOP) for the
benefit of eligible employees.
In 1985, the ESOP borrowed $350,000 from a bank payable over twelve years.
The interest rate on this loan is 87.5% of that bank's prime rate plus 1/4% (for
an interest rate of 7.47% at December 31, 1996 and 7.69% at December 31, 1995).
In 1987, the ESOP borrowed $385,000 from a commercial bank. The loan is payable
over ten years, with interest and principal due quarterly. The loan bears
interest at a current interest rate of 92% of prime (for an interest rate of
7.59% at December 31, 1996 and 7.82% at December 31, 1995). The ESOP borrowed an
additional $650,000 in August 1993 from a commercial bank. This loan is payable
over ten years, with interest and principal due quarterly. The loan bears
interest at a current interest rate of prime plus 1.25% (for an interest rate of
9.50% at December 31, 1996 and 9.75% at December 31, 1995). The ESOP's total
outstanding debt at December 31, 1996 and 1995 was $512,000 and $643,000,
respectively. These obligations have been recorded as a liability on the books
of the Company and are collateralized by stock of the Bank.
Interest expense represents the actual interest paid by the ESOP. The
interest incurred on ESOP debt was $52,000, $67,000 and $69,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Compensation expense related to the ESOP amounted to $229,000, $178,000 and
$153,000 for the years ended December 31, 1996, 1995 and 1994, respectively. As
provided by SOP 93-6 (see Note A.8.), the ESOP compensation expense includes
$18,000 in 1996 and $3,000 in 1995 and 1994, which is the fair market value of
the shares related to the August 1993 loan that were allocated to the employees
during these years. The number of shares released was 5,637 in 1996, 4,724 in
1995 and 4,724 in 1994.
Dividends on unallocated shares used for debt service were $38,000, $37,000
and $42,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The total shares held by the ESOP were 203,282 and 205,255 at December 31,
1996 and 1995, respectively. ESOP shares have been restated to reflect the 5%
stock dividend of May 1996.
<PAGE>
NOTE L - OTHER BENEFIT PLANS
Employees who qualify may elect to participate in a deferred salary savings
401(k) plan. A participating employee may contribute a maximum of 8% of his or
her compensation. The Company will contribute $.50 for each $1.00 up to the
first 5% that each employee contributes. Company payments are charged to current
operating expenses. These contributions were $71,000, $55,000 and $57,000 in
1996, 1995 and 1994, respectively.
The Company also has an executive compensation plan (the "Officers'
Supplemental Retirement Plan") which provides additional death, medical and
retirement benefits to certain officers.
The Company has a deferred compensation plan (the "Deferred Directors'
Plan") involving Directors of the Company. The plan requires defined annual
payments for 15 years beginning at age 65 or death. The annual benefit is based
upon the amount deferred plus interest. The Company has recorded the deferred
compensation liabilities using the present value method.
<PAGE>
The following table sets forth the funded status of the Officers'
Supplemental Retirement Plan and the Deferred Directors' Plan and the amounts
recognized in the Company's balance sheets at December 31, 1996 and 1995
Actuarial present value of benefit obligations is as follows:
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
<TABLE>
at December 31, 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Accumulated benefit obligation, all of
which is vested $ 47 $ 64 $ 495 $ 498
Projected benefit obligation
for service rendered to date $(200) $(221) $(495) $(498)
Plan assets at fair value -- -- -- --
----- ----- ----- -----
Projected benefit obligation
in excess of plan assets (200) (221) (495) (498)
Unrecognized net (gain) loss from past
experience different from that
assumed and effects of changes
in assumptions (207) (165) 6 6
Prior service cost not yet recognized
in net periodic pension cost -- -- -- --
Unrecognized net assets at December 31,
being recognized over 15 years (5) (6) -- --
Adjustment to recognize
additional minimum liability -- -- (6) (6)
----- ----- ----- -----
Accrued Pension Cost $(412) $(392) $(495) $(498)
</TABLE>
The weighted average assumed discount rate and weighted average rate of
increase in future compensation levels used in determining the actuarial present
value of the projected benefit obligation were 7.0% and 6.0%, respectively, in
1996; 7.0% and 6.0%, respectively, in 1995; and 7.75% and 6.0%, respectively, in
1994. The weighted average expected long-term rate of return on assets was 8%
for 1996, 1995 and 1994 for the Officers' Supplemental Retirement Plan and 9.0%
in each of those years for the Deferred Directors' Plan
<PAGE>
Net pension cost included the following components:
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
<TABLE>
at December 31, 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits
earned during the period $ 15 $ 14 $ 33 $ -- $ -- $ --
Interest cost on projected
benefit obligation 15 15 20 36 36 35
Net amortization and deferral (10) (11) (1) -- -- --
---- ---- ---- ---- ---- ----
Net Periodic Pension Cost $ 20 $ 18 $ 52 $ 36 $ 36 $ 35
</TABLE>
NOTE M - POST-RETIREMENT BENEFIT
The Company sponsors a post-retirement plan that covers a certain number of
retired employees and a limited group of current employees. This plan provides
medical insurance benefits to a group of previously qualified retirees and
spouses and to current full-time employees who were 60 years of age or older on
January 1, 1992 and who retire from the Company after attaining age 65 and are
fully vested in the ESOP at the time of retirement. This plan is currently
unfunded
As permitted by SFAS No. 106, the Company elected to delay the recognition
of the transition obligation by aggregating $308,000, which arose from adopting
SFAS No. 106, and amortize this amount on a straight-line basis over 20 years.
This election is recorded in the financial statements as a component of net
periodic post-retirement benefit cost
The Company has determined the actuarially computed expense associated with
this benefit for 1996, 1995 and 1994. The components of the net periodic
post-retirement benefit cost for the years ended December 31 were as follows:
<PAGE>
<TABLE>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Service cost - benefits earned during the period $ -- $ 5 $ 5
Interest cost on accumulated benefit obligation 15 25 21
Amortization of transition obligation 8 15 15
----- ----- -----
Net periodic post-retirement benefit cost $ 23 $ 45 $ 41
</TABLE>
The assumptions used to develop the net periodic post-retirement benefit
cost and the accrued post-retirement benefit cost were as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Discount rate 7.00% 7.00% 7.75%
Medical care cost trend rate 11.00% 12.00% 13.00%
</TABLE>
The medical care cost trend rate used in the actuarial computation
ultimately is reduced to 7.0% in the year 2000 and subsequent years. This was
accomplished using 1.0% decrements for the years 1993 through 2000.
<PAGE>
The table of actuarially computed plan assets and benefit obligations
for the Company is presented below:
<TABLE>
At December 31, 1996 1995
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $ 181 $ 303
Active, eligible employees 36 --
Active, not-yet-eligible employees -- 53
------ ------
Accumulated post-retirement benefit obligation 217 356
Plan assets at fair value -- --
Accumulated benefit obligation in excess of
plan assets 217 356
Unrecognized transition obligation (247) (262)
Unrecognized net gain (loss) 92 (37
------ ------
Accrued post-retirement benefit cost $ 62 $ 57
</TABLE>
At December 31, 1996, $151,000 of the accrued post-retirement benefit cost
is included in "Total Other Liabilities". The effect of a one percentage point
increase in each future year's assumed medical care cost trend rate, holding all
other assumptions constant, would have been to increase the net periodic
post-retirement benefit cost by $18,000 and the accrued post-retirement benefit
cost by $1,000
Health care benefits are provided to certain retired employees The cost of
providing these benefits was approximately $22,000, $28,000 and $25,000 in 1996,
1995 and 1994, respectively. The cost is accrued over the service periods of
employees expected to receive benefits. Past-service costs are being amortized
principally over 30 years
NOTE N - STOCK OPTIONS
The Company adopted a Stock Option Plan in 1996 that was similar to the
Stock Option Plan established in 1986. Under the Stock Option Plans, options to
acquire shares of common stock may be granted to the officers and key employees
The Stock Option Plans provide for the granting of options at the fair market
value of the Company's common stock at the time the options are granted. Each
option granted under the Stock Option Plans may be exercised within a period of
ten years from the date of grant. However, no option may be exercised within one
year from date of grant. No options were granted under these Plan in 1996. The
aggregate number of shares which may be issued under these plans are 274,006
shares of common stock
<PAGE>
In 1994, a Non-Employee Directors Stock Option Plan was adopted. This Plan
provides for the awarding of stock options to the Company's Directors Pursuant
to this Plan, on May 1, 1994, each non-employee director of the Company was
automatically granted an option to purchase 1,102 shares of the Company's common
stock at the fair market value of the Company's common stock of $15.42 per
share. The Pan additionally provides that any non-employee director who is first
elected by the shareholders as a director of the Company or any subsidiary after
May 1, 1994, shall, as of that date of such election, automatically be granted
an option to purchase 1,102 shares of the Company's common stock. In addition,
on the fifth anniversary of the initial option grant, persons who continue to be
non-officer directors shall each be granted additional options to purchase 1,102
shares of the Company's common stock. The aggregate number of shares which may
be issued under the Non-Employee Director Stock Option Plan is 22,050 shares of
common stock
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
Year Ended December 31, 1996 1995
Net Income As reported $ 2,822 $ 1,401
Pro forma $ 2,814 $ 1,385
Primary earnings per share As reported $ 1.85 $ 0.93
Pro forma $ 1.85 $ 0.92
Fully diluted earnings per share As reported $ 1.85 $ 0.93
Pro forma $ 1.84 $ 0.92
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 1996 and 1995, respectively: dividend yield of
3.1% and 3.8%; expected volatility of 39.5% and 54.3%; risk-free interest rates
of 7.0% and 7.2% for 1996 and 1995, respectively; and expected lives of 10
years.
A summary of the status of the Company's Employee Stock Option Plans as of
December 31, 1996 and 1995, and changes during the years ending on those dates
is presented below. The number of shares and price per share has been restated
to reflect the 5% stock dividend of May 1996
<PAGE>
EMPLOYEE STOCK OPTION PLAN
<TABLE>
Year Ended December 31, 1996 1995
Weighted Weighted
Average Average
Excercise Excercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 16,975 $ 17.25 16,975 $ 17.25
Granted None --- None ---
Exercised 5,469 18.64 None ---
------ -------- ------ -------
Outstanding at end of year 11,506 $ 16.58 16,975 $ 17.25
Options exercisable at year-end 8,489 14,973
Weighted average fair value of
options granted during the year N/A N/A
</TABLE>
The following information applies to options outstanding at December 31, 1996:
EMPLOYEE STOCK OPTION PLAN
Number outstanding 11,506
Range of exercise prices $15.95 to $17.28
Weighted-average exercise price $16.58
Weighted-average remaining contractual life 4.67 years
A summary of the status of the Company's Non-Employee Director Stock Option Plan
as of December 31, 1996 and 1995, and changes during the years ending on those
dates is presented below. The number of shares and price per share has been
restated to reflect the 5% stock dividend of May 1996.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<TABLE>
Year Ended December 31, 1996 1995
Weighted Weighted
Average Average
Excercise Excercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 9,922 $ 15.33 8,820 $ 15.42
Granted 1,102 18.50 2,204 15.00
Exercised 275 15.42 None ---
Expired 827 15.42 1,102 15.42
----- -------- ----- -------
Outstanding at end of year 9,922 $ 15.67 9,922 $ 15.33
Options exercisable at year-end 3,858 1,929
Weighted average fair value of
options granted during the year $ 18.50 $ 15.00
</TABLE>
<PAGE>
The following information applies to options outstanding at December 31, 1996:
NON EMPLOYEE DIRECTOR STOCK OPTION PLAN
Number outstanding 9,922
Range of exercise prices $15.00 to $18.50
Weighted-average exercise price $15.67
Weighted-average remaining contractual life 7.44 years
NOTE O - COMMITMENTS AND CONTINGENCIES
The Company has non-cancellable operating lease agreements in excess of one
year with respect to various buildings and equipment. The minimum annual rental
commitments at December 31, 1996 are payable as follows:
<TABLE>
Operating Leases
<S> <C> <C>
1997 $ 411
1998 372
1999 364
2000 378
2001 397
2002 and beyond 2,316
------
Total $4,238
</TABLE>
The total rental expense was $530,000, $594,000 and $543,000 in 1996, 1995
and 1994, respectively
<PAGE>
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
The contract or notional amounts as of December 31, 1996 are as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $15,744
Standby letters of credit $ 4,899
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support contracts entered into by customers. Most guarantees
extend for one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
When deemed necessary, collateral held by the Bank for financial
instruments varies, but may include personal or commercial real estate, accounts
receivable, inventory, equipment, certificates of deposit or marketable
securities. The extent of collateral held for any one financial instrument
ranges up to 100%. The average collateral held on financial instruments was
84.4% as of December 31, 1996.
<PAGE>
NOTE Q - CONCENTRATIONS OF CREDIT RISK
The Bank grants commercial, real estate and installment loans to customers
primarily in Northampton, Monroe and Lehigh Counties, Pennsylvania Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the economy of Northampton,
Monroe and Lehigh Counties
At December 31, 1996, the Bank had residential real estate loans
outstanding totaling $134,013,000, which is 60.9% of total loans. The Bank also
had loans outstanding at December 31, 1996 to various residential apartment
building owners totaling $8,368,000, which is 21.2% of the Bank's total real
estate commercial loans
NOTE R - RELATED PARTY TRANSACTIONS
The amount of loans by the Company to its directors and executive officers
was approximately $3,087,000 and $2,788,000 at December 31, 1996 and 1995,
respectively. These loans were made in the ordinary course of business at
substantially the same terms and conditions as those with other borrowers
An analysis of the 1996 activity of these loans follows:
<TABLE>
<S> <C>
Balance, January 1, 1996 $ 2,788
New loans 558
Repayments (259)
-------
Balance, December 31, 1996 $ 3,087
</TABLE>
<PAGE>
NOTE S - REGULATORY MATTERS
The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings (as defined) plus
the retained earnings (as defined) from the prior two years. The dividends, as
of December 31, 1996, that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $2,071,000.
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 December 31, 1996, the Company and the Bank met
all capital adequacy requirements to which they were subject.
The following tables provide a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated.
<PAGE>
CAPITAL RATIOS
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $28,596 15.20% $15,046 8.00% N/A
Bank $25,591 13.59% $15,065 8.00% $18,831 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $26,243 13.95% $ 7,522 4.00 N/A
Bank $22,435 11.91% $ 7,532 4.00% $11,299 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $26,243 8.35% $12,578 4.00% N/A
Bank $22,435 7.20% $12,456 4.00% $15,570 5.00%
</TABLE>
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Action
(Dollars in Thousands)
At December 31, 1995 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $26,060 15.86% $13,142 8.00% N/A
Bank $22,308 13.66% $13,061 8.00% $16,327 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $24,014 14.62% $ 6,571 4.00% N/A
Bank $20,262 12.41% $ 6,531 4.00% $ 9,796 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $24,014 8.20% $11,719 4.00% N/A
Bank $20,262 6.80% $11,915 4.00% $14,895 5.00%
</TABLE>
<PAGE>
The Company is not aware of any known trends, events or uncertainties that
will have a material effect on the Company's liquidity, capital resources or
operations. 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 effect on
liquidity, capital, resources, or the operations of the Company.
Restrictions on cash and due from bank accounts are placed upon the banking
subsidiary by the Federal Reserve Bank. Certain amounts of reserve balances are
required to be on hand or on deposit at the Federal Reserve Bank based upon
deposit levels and other factors. The average and year-end amount of the reserve
balance for 1996 was approximately $3,585,000 and $3,857,000, respectively. For
1995, the average reserve balance was $2,990,000 and the year-end amount was
$3,285,000.
NOTE T - EQUITY TRANSACTIONS
On June 19, 1996, the Company paid a 5% stock dividend on its common stock
from authorized but unissued shares to all shareholders of record at the close
of business on May 31, 1996. The number of shares and earnings per share as
stated in the following discussion of the shares issued under the Dividend
Reinvestment and Stock Purchase Plan have been restated to reflect this 5% stock
dividend.
A Dividend Reinvestment and Stock Purchase Plan was established in 1988.
The Plan provides the holders of common stock with a method to invest their cash
dividends and voluntary cash payments of not less than $100 or more than $1,000
per quarter in additional shares of the Company's common stock. Under this plan,
shares are sold, in general, at a discounted price of 5% below the average of
the high bid and asked price for the Company's common stock on the trading day
immediately preceding the investment date. In 1996, 13,761 common shares were
purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an
average cost of $18.06 per share for total proceeds of $248,000. The shares
purchased in 1996 were comprised of 10,191 new common shares at an average price
of $18.10 for proceeds of $184,000 and 3,510 shares from Treasury shares at an
average price of $17.94 for proceeds of $64,000. In 1995, 16,352 common shares
were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at
an average cost of $15.23 for proceeds of $249,000.
<PAGE>
NOTE U - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. For the Company, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many such
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. Also, it is the
Company's general practice and intent to hold its financial instruments (other
than available-for-sale) to maturity and to not engage in trading or sales
activities. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available, as generally provided in the Company's FRY-9C Regulatory
Reports, and estimation methodologies deemed suitable for the pertinent category
of financial instrument. The estimation methodologies and resulting fair values,
and recorded carrying amounts at December 31, 1996 and 1995 were as follows:
<PAGE>
Fair value of loans and deposits with floating interest rates is generally
presumed to approximate the recorded carrying amounts. Fair value of financial
instruments actively traded in a secondary market has been estimated using
quoted market prices
<TABLE>
1996 1995
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,929 $ 13,929 $ 15,549 $ 15,549
Investment securities 21,124 20,999 20,188 20,054
Securities available-for-sale 56,779 56,779 59,049 59,049
Mortgage loans held-for-sale 721 721 1,006 1,006
</TABLE>
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities
<TABLE>
1996 1995
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Assets:
Interest-bearing deposits
with banks $ 285 $ 285 $ 835 $ 835
Liabilities:
Deposits with stated
maturities 117,400 117,485 106,532 106,939
Securities sold under
agreements to repurchase 3,795 3,795 6,096 6,096
Short-term borrowings -- -- 6,992 7,000
Long-term debt 17,994 18,512 643 643
</TABLE>
Fair value of financial instrument liabilities with no stated maturities
have been estimated to equal the carrying amount (the amount payable on demand)
<TABLE>
1996 1995
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Deposits with no
stated maturities $ 150,268 $ 150,268 $ 147,163 $147,163
</TABLE>
The fair value of the net loan portfolio has been estimated using present
value cash flow, discounted at the approximate current market rates adjusted for
non-interest operating costs and giving consideration to estimated prepayment
risk and credit loss factors
<TABLE>
1996 1995
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Total loans $219,180 $220,117 $195,162 $193,130
</TABLE>
There is no material difference between the carrying amount and the
estimated fair value of off-balance-sheet items totaling $20,643,000 at December
31, 1996 and $12,627,000 at December 31, 1995 which are primarily comprised of
unfunded loan commitments which are generally priced at market at the time of
funding
The Company's remaining assets and liabilities are not considered financial
instruments. No disclosure of the relationship value of the Company's deposits
is required by SFAS No. 107
<PAGE>
NOTE V - FIRST COLONIAL GROUP, INC. (PARENT COMPANY ONLY)
<TABLE>
Condensed Balance Sheets
December 31, 1996 1995
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 16 $ 56
Interest-Bearing Deposits
with Banks 656 290
Loan to Banking Subsidiary 1,000 1,600
Investment in Banking Subsidiary 22,633 20,717
Investment in Other Subsidiary 3,073 2,811
Other Assets 12 2
------- -------
TOTAL ASSETS $27,390 $25,476
LIABILITIES
Long-Term Debt $ 512 $ 643
Other Liabilities 73 66
------- -------
TOTAL LIABILITIES 585 709
SHAREHOLDERS' EQUITY 26,805 24,767
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $27,390 $25,476
</TABLE>
<PAGE>
<TABLE>
Condensed Statement of Income
For the Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
INCOME
Dividends from Subsidiaries $ 1,111 $ 829 $ 990
Interest on Loan to Subsidiary 114 149 122
Interest on Deposits with Banks 12 5 6
------- ------- -------
Total Income 1,237 983 1,118
------- ------- -------
EXPENSES
Interest on Long-Term Debt 52 67 83
Other Expenses 105 77 90
------- ------- -------
Total Expenses 157 144 173
------- ------- -------
Income Before Taxes and
Equity in Undistributed Net
Earnings of Subsidiaries 1,080 839 945
Federal Income Tax (Credit) (11) 3 (13)
------- ------- -------
Income Before Equity in Undistributed
Net Earnings of Subsidiaries 1,091 836 958
Equity in Undistributed Net Earnings
of Subsidiaries 1,731 565 1,384
------- ------- -------
NET INCOME $ 2,822 $ 1,401 $ 2,342
</TABLE>
<PAGE>
<TABLE>
Condensed Statement of Cash Flows
For The Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,822 $ 1,401 $ 2,342
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Distribution in Excess of Undistributed
Net Earnings of Subsidiaries (1,731) (565) (1,384)
Changes in Assets and Liabilities:
(Increase) Decrease in Interest-Bearing
Deposits with Banks (366) (94) 26
(Increase) Decrease in Other Assets (10) 40 (18)
Increase (Decrease) in Other Liabilities 7 (7) (17)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 722 775 949
------- ------- -------
INVESTING ACTIVITIES
Repayment of Note from Bank Subsidiary 1,600 -- --
Issuance of Note Receivable to Bank Subsidiary (1,000) -- --
Capital contribution to Bank Subsidiary (600) -- --
------- ------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES -- -- --
------- ------- -------
FINANCING ACTIVITIES
Repayment of Long-Term Debt -- (87) (338)
Purchase of Treasury Stock (102) -- --
Proceeds from the Sale of Treasury Stock 64 -- --
Proceeds from Issuance of Common Stock 290 252 246
Cash Dividends Paid (1,011) (972) (936)
Cash in Lieu of Fractional Shares (3) -- (3)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (762) (807) (1,031)
------- ------- -------
Decrease in Cash and Cash Equivalents (40) (32) (82)
Cash and Cash Equivalents, January 1, 56 88 170
------- ------- -------
Cash and Cash Equivalents, December 31, $ 16 $ 56 $ 88
------- ------- -------
</TABLE>
<PAGE>
INVESTOR INFORMATION
First Colonial Group, Inc.
76 South Main Street
Nazareth, PA 18064
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders' meeting will be held on Thursday, May 1, 1997 at 9
a.m. at the Bethlehem Holiday Inn, Routes 22 and 512, Bethlehem, Pennsylvania
18017.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent is Nazareth National Bank and Trust Company.
Shareholders seeking assistance with stock registration, lost stock certificates
or dividend information should contact Maria A. Keller at the following address
or by telephone at (610) 746-7317.
Nazareth National Bank
Trust Department
76 S. Main Street
Nazareth, PA 18064
STOCK INFORMATION
First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market under
the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1996, there were 782 shareholders of record.
The declaration and payment of dividends is at the sole discretion of the Board
of Directors, and their amount depends upon the earnings, financial condition,
and capital needs of the Company and the Bank and certain other factors
including restrictions arising from Federal banking laws and regulations (see
"Note S- Regulatory Matters" in the "Notes to Consolidated Financial
Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price in December 1996 was $22.00 and
in December 1995 was $17.14. Stock prices and dividends per share have been
restated to reflect the 5% stock dividend of May 1996 (see "Note T Equity
Transactions" in the "Notes to Consolidated Financial Statements").
<PAGE>
<TABLE>
1995 High Low Cash Dividends
Declared
<S> <C> <C> <C>
First Quarter $16.43 $15.00 $ 0.1619
Second Quarter 16.19 13.70 0.1619
Third Quarter 17.38 15.00 0.1619
Fourth Quarter 18.10 16.43 0.1619
--------
TOTAL $ 0.6476
</TABLE>
<TABLE>
1996
<S> <C> <C> <C>
First Quarter $18.81 $17.14 $ 0.1619
Second Quarter 19.05 17.14 0.1700
Third Quarter 19.00 18.00 0.1700
Fourth Quarter 23.00 18.00 0.1700
--------
TOTAL $ 0.6719
</TABLE>
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Shareholders may participate in the Dividend Reinvestment and Stock Purchase
Plan. The plan provides that additional shares of common stock may be purchased
with reinvested cash dividends and with voluntary cash payments at a 5% discount
from market. A description of the plan and additional information may be
obtained by writing to:
Nazareth National Bank
Trust Department
76 S. Main Street
Nazareth, PA 18064
INVESTMENT CONSIDERATIONS
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the information contained in
this Annual Report and certain investment considerations and other information
described in the Company's Form 10-KSB for the year ended December 31, 1996.
FORM 10-KSB
Shareholders, analysts and others seeking a copy of Form 10-KSB without charge
(except for exhibits) or additional financial information about First Colonial
Group, Inc. should send a written request to:
Reid L. Heeren, Vice President
First Colonial Group, Inc.
76 S. Main Street
Nazareth, PA 18064
MARKET MAKERS
The following investment brokerage houses currently make a market in First
Colonial Group, Inc. common stock: F. J. Morrissey & Co., Inc.; Gruntal & Co.,
Inc.; Hopper, Soliday & Co., Inc.; Ryan, Beck & Co.; and Wheat First Securities,
Inc.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16 (a) of the Exchange Act
The information contained under the captions "Election Of Directors" and
"Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in the
Company's 1997 Proxy Statement and "Executive Officers of the Registrant" in
Appendix A to Part I of this Form 10-KSB is incorporated herein by reference
therefrom.
Item 10.Executive Compensation
The information contained under the caption "Executive Compensation" in the
Company's 1997 Proxy Statement is incorporated herein by reference therefrom.
Item 11.Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "Voting Securities and
Principal Holders Thereof" in the Company's 1997 Proxy Statement is incorporated
herein by reference therefrom.
Item 12.Certain Relationships and Related Transactions
The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's 1997 Proxy Statement is incorporated
herein by reference therefrom.
<PAGE>
PART IV
Item 13.Exhibits and Reports on Form 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements: The Consolidated Financial Statements of the
Company and the Report of Independent Certified Public Accountants
thereon, as listed below, have been filed under "Item 7, Financial
Statements".
Report of Independent Certified Public Accountants
Consolidated Balance Sheets for the Years Ended
12/31/96 and 12/31/95
Consolidated Statements of Income for the Years Ended
12/31/96, 12/31/95 and 12/31/94
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended 12/31/96, 12/31/95 and 12/31/94
Consolidated Statements of Cash Flows for the Years Ended
12/31/96, 12/31/95 and 12/31/94
Notes to Consolidated Financial Statements
<PAGE>
2. Exhibits:
Number Title Page No.
3.1 (7) Restated Articles of Incorporation of the Company, as
amended.
3.2 (7) Bylaws of the Company, as amended.
4.1 (1) Specimen Common Stock Certificate of the Company.
*10.1 (1) Deferred Compensation Plan for Directors.
10.2 Intentionally omitted.
*10.3 (1) Form of Executive Benefit Program Agreement.
*10.4 (6) Employee Stock Ownership Plan.
10.5 (1) Loan Agreement (including Exhibits thereto), dated
October 5, 1984, by and between the Company and
Commonwealth Bank and Trust Company, N.A.
*10.6 (3) First Colonial Group, Inc. Stock Option Plan.
10.7 (2) Loan Agreement, dated July 17, 1987, by and
between the Company and Commonwealth Bank and Trust Company, N.A.
*10.8 (8) Restated Optional Deferred Salary Plan (401(k)).
*10.9(10) 1994 Stock Option Plan for Non-Employee Directors, as amended
*10.10(9) Severance areeement dated July 19, 1994 by and
between the Bank and S. Eric Beattie
*10.11(9) Severance agreement dated July 19, 1994 by and
between the Bank and Reid L. Heeren
<PAGE>
Number Title Page No.
*10.12(9) Severance agreement dated July 19, 1994 by and
between the Bank and Arthur Williams
*10.13(9) Severance dated July 19, 1994 by and between the
Bank and Gerald E. Kemmerer
*10.14(10) Amendment No. 1 dated September 27, 1994 to the
Bank's Employee Stock Ownership Plan
*10.15(10) Amendment No. 1 dated September 22, 1994 to the
Optional Deferred Salary Plan (401K)
*10.16(11) Amendment Number 1 to the 1994 Stock Option
Plan for Non-Employee Directors
*10.1(11) 1996 Employee Stock Option Plan
11.1 Computation of Earnings per Share
21.1 (3) Subsidiaries of the Company.
23.1 Consent of Accountants.
27.1 Financial Data Schedule
* Represents a Management Contract or Compensatory Plan, Contract or
Arrangement.
<PAGE>
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 33-4908), as filed on April 16, 1986.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 33-20319), as filed on February 25, 1988.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1986.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1988.
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated June 20, 1989 (File No. 0-11526).
(6) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1991.
(7) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 33-64816), as filed on June 22, 1993.
(8) Incorporated by reference from the Company's Annual Report on Form
10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1993.
(9) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB (File No. 0-11526) for the quarter ended June 30, 1994.
(10) Incorporated by reference from the Company's Annual Report on Form
10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1994.
(11) Incorporated by reference from the Company's Annual Report on Form
10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of the year ended
December 31, 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST COLONIAL GROUP, INC.
Dated: March 20, 1997 By: /s/ S. Eric Beattie
S. ERIC BEATTIE, President
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ John J. Schlamp
JOHN J. SCHLAMP
Chairman of the Board
and Director
March 20, 1997
By: /s/ S. Eric Beattie
S. ERIC BEATTIE
President, Chief Executive Officer
and Director (Principal Executive Officer)
March 20, 1997
By: /s/ Reid L. Heeren
REID L. HEEREN
Senior Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
March 20, 1997
By: /s/ Robert J. Bergren
ROBERT J. BERGREN
Director
March 20, 1997
<PAGE>
By: /s/ Paul A. Lentz
PAUL A. LENTZ
Director
March 20, 1997
By: /s/ Gordon Mowrer
GORDON MOWRER
Director
March 20, 1997
By: /s/ Daniel B. Mulholland
DANIEL B. MULHOLLAND
Director
March 20, 1997
By: /s/ Robert C. Nagel
ROBERT C. NAGEL
Director
March 20, 1997
By: /s/ Charles J. Peischl
CHARLES J. PEISCHL, ESQUIRE
Director
March 20, 1997
By: /s/ Richard Stevens
RICHARD STEVENS
Director
March 20, 1997
By: /s/ Maria Zumas Thulin
MARIA ZUMAS THULIN
Director
March 20, 1997
Exhibit 11.1
First Colonial Group, Inc. and Subsidiaries
COMPUTATION OF EARNINGS PER COMMON SHARE*
<TABLE>
Year Ended December 31,
1996 1995 1994
Primary
<S> <C> <C> <C>
Net Income (in Thousands) $ 2,822 $ 1,401 $ 2,342
========= ========= =========
Shares**
Weighted average number of
common shares outstanding 1,524,651 1,504,092 1,481,598
Assuming exercise of option
reduced by the number of
shares which could have been
purchased with the proceeds
from exercise of such options 3,168 299 ***
--------- --------- ---------
Weighted average number of common
shares outstanding as adjusted** 1,527,819 1,504,391 1,481,598
Primary earnings per common share $ 1.85 $ 0.93 $ 1.58
========= ========= =========
Assuming full dilution
Net Income (in Thousands) $ 2,822 $ 1,401 $ 2,342
========= ========= =========
Shares**
Weighted average number of
common shares outstanding 1,524,651 1,504,092 1,481,598
Assuming exercise of option
reduced by the number of
shares which could have been
purchased with the proceeds
from exercise of such options 3,168 299 ***
--------- --------- ---------
Weighted average number of common
shares outstanding as adjusted ** 1,527,819 1,504,391 1,481,598
========= ========= =========
Earnings per common share assuming
full dilution $ 1.85 $ 0.93 $ 1.58
========= ========= =========
</TABLE>
* See Note A11 of the "Notes to Consolidated Financial Statements"
** Restated to reflect the 5% stock dividend of May 1996.
*** The stock options are not included since the option price on the
stock options outstanding was greater than the average market price
and the year-end market price
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 17, 1997 accompanying the
consolidated financial statements included in the 1996 Annual Report to
Shareholders which is incorporated by reference in the Annual Report of First
Colonial Group, Inc. and Subsidiaries on Form 10-KSB for the year ended December
31,1996. We hereby consent to the incorporation by reference of said report in
the Registration Statement of First Colonial Group, Inc. and Subsidiaries on
Form S-3 (File No. 33-21126, effective July 6, 1989) and on Form S-8 (File No.
33-84400, effective September 27, 1994).
Philadelphia, Pennsylvania
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714719
<NAME> FIRST COLONIAL GROUP
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