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, 1997.
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.
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(Name of Small Business Issuer in its charter)
Pennsylvania 23-2228154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
76 South Main Street, Nazareth, Pennsylvania 18064
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(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
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.
<PAGE>
The Issuer's revenues for the fiscal year ended December 31, 1997 were
$29,267,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant is $50,204,160. (1)
The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of March 18, 1998 was 1,655,101.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of the 1997 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, 1998. Includes an
aggregate of 174,612 shares, with an aggregate market value of $6,286,032, 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 1
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, 1997 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 $14,607,000,
representing a negative cumulative one year gap of 91.2%. 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.
<PAGE>
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".
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.
Year 2000 Compliance. The Company has conducted a comprehensive review of
its computer systems and operations to identify the areas that could be affected
by the Year 2000 issue. The issue with respect to Year 2000 is whether systems
will properly recognize date sensitive information when the year changes to
2000. Systems that do not properly recognize such information could generate
erroneous data or cause complete system failures. The Company's estimates of the
cost to be incurred to prepare for Year 2000 compliance range from $100,000 to
$300,000; however, there can be no assurance that the 2000 year problem will not
have an adverse effect on the financial condition and results of operations of
the Company. See "Management Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" in "Item 6. Management's Discussion and
Analysis or Plan of Operation".
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".
<PAGE>
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.
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, one
branch in East Stroudsburg, Pennsylvania and one branch in Allentown,
Pennsylvania. The Bank has eighteen automated teller machines (ATMs), one at
each branch office (except the Main Street Nazareth branch), 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.
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.
<PAGE>
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, 1997 the Company, on a consolidated basis, had total
assets of $346,738,000, total deposits of $282,255,000, and total shareholders'
equity of $30,357,000.
<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, 1997, the Bank had total assets of $342,068,000, total
deposits of $283,287,000 and total shareholders' equity of $24,760,000. 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 thirteen full service banks, which includes drive-in
facilities at most locations, ATMs at each branch office (except the Main Street
Nazareth branch) and bank-by-mail services. Nine of the Bank's full service
offices are located in Northampton County, Pennsylvania. Three 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.
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(R) and the Christmas Club. The Bank offers
Mastercard(R) and VISA(R), 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(R) and Quality Checking(R) (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, 1997, First C. G. Company, Inc.
had total assets of $4,787,000, of which $1,023,000 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, 1997 was $4,113,000.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The regulatory framework is intended primarily for the
protection of depositors, other customers and the Federal Deposit Insured Funds
and not for the protection of shareholders. 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"). The Company is also regulated by the Pennsylvania
Department of Banking.
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 "Interstate Banking".
<PAGE>
The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or 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
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 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.
Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions. The
Bank currently is rated "satisfactory" under the Community Reinvestment 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.
<PAGE>
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.
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.
The Bank is subject to certain limitations on the amount of cash dividends
it can pay. See "Note S Regulatory Matters" in the Notes to Consolidated
Financial Statements which appears elsewhere herein.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Company and the Company's non-bank subsidiary.
Substantially all of the deposits of the Bank are insured up to applicable
limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit
insurance assessments to maintain the BIF. The insurance assessments are based
upon a matrix that takes into account a bank's capital level and supervisory
rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it
charged on bank deposits insured by the BIF to the statutory minimum of $2,000
annually for "well-capitalized" banks. On September 30, 1996, the Deposit
Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA
reduced the amount of FDIC insurance premiums for savings association deposits
acquired by banks to the same levels assessed for deposits insured by BIF. DIFA
further provides for assessments to be imposed on all insured depository
institutions with respect to deposits to pay for the cost of Financing
Corporation bonds; however, banks are assessed for this purpose at only
one-fifth the rate of the assessment on savings associations until December 31,
1999. As a result of these changes, the deposit insurance assessment for banks
and for thrifts has been nearly equalized and will be identical for comparably
rated institutions after January 1, 2000, at which time banks will share equally
in the FICO assessment and the BIF and SAIF funds will be merged.
<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 condition and results of
operation. 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, 1997 that the Company and the Bank meet all capital adequacy
requirements to which they are 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, 1997 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,271 16.03% $15,609 8.00% --- ---
Bank $27,200 13.97% $15,576 8.00% $19,470 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $28,829 14.78% $ 7,804 4.00 --- ---
Bank $24,163 12.41% $ 7,788 4.00% $11,682 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $28,829 8.33% $13,551 4.00% --- ---
Bank $24,163 7.06% $13,416 4.00% $16,770 5.00%
</TABLE>
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Action
(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% --- ---
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% --- ---
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% --- ---
Bank $22,435 7.20% $12,456 4.00% $15,570 5.00%
</TABLE>
<PAGE>
Interstate Banking
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 after September 24, 1995. 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.
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.
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.
<PAGE>
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, 1997 and 1996 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 1997 and 1996. 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".
Employees
As of December 31, 1997 the Company had approximately 196 employees, of
whom 46 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 17 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>
<TABLE>
1997
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 9,008 $ 9,066
U. S. Government Agency 14,512 14,556
State and Political Subdivisions 16,865 17,330
Mortgage-Backed Securities 26,791 26,812
Other Debt Securities --- ---
Equity Securities 3,878 5,260
------- -------
Total $71,054 $73,024
</TABLE>
<TABLE>
1996
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 7,020 $ 7,054
U. S. Government Agency 14,272 14,161
State 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 $56,253 $56,779
</TABLE>
<TABLE>
1995
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 7,002 $ 7,050
U. S. Government Agency 17,066 17,159
State 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 $58,262 $59,049
</TABLE>
<TABLE>
1997
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ --- $ ---
U. S. Government Agency 6,008 6,051
State and Political Subdivisions 3,169 3,233
Mortgage-Backed Securities 8,579 8,662
------- -------
Total $17,756 $17,946
</TABLE>
<TABLE>
1996
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 999 $ 1,003
U. S. Government Agency 10,229 10,243
State and Political Subdivisions 3,217 3,261
Mortgage-Backed Securities 6,554 6,617
------- -------
Total $20,999 $21,124
</TABLE>
<PAGE>
<TABLE>
1995
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 2,997 $ 3,007
U. S. Government Agency 6,524 6,539
State and Political Subdivisions 2,086 2,118
Mortgage-Backed Securities 8,447 8,524
------- -------
Total $20,054 $20,188
</TABLE>
<PAGE>
INVESTMENT SECURITIES YIELD BY MATURITY
The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 1997 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, 1997
<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 $ 2,994 6.05 % $ 6,072 6.12 % $ -- -- %
U. S. Government Agency -- -- -- -- 11,515 6.88
Mortgage-backed Securities -- -- 1,468 5.67 1,610 6.38
State and Political
Subdivisions 480 9.12 1,347 7.48 4,024 7.18
Equity Securities -- -- -- -- -- --
----- ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 3,474 6.47 % $ 8,887 6.25 % $17,149 6.90%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.78 2.98 7.74
==== ==== ====
</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 $ -- -- % $ 9,066 6.10 %
U. S. Government Agency 3,041 7.44 14,556 7.00
Mortgage-backed Securities 23,734 6.59 26,812 6.53
State and Political
Subdivisions 11,479 7.92 17,330 7.75
Equity Securities 5,260 4.06 5,260 4.06
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $43,514 6.70 % $73,024 6.68 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 21.80 13.88
===== =====
</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. Government Agency $ -- -- % $ -- -- % $ 6,008 6.79 %
Mortgage-backed Securities 2 9.71 961 6.61 1,465 6.40
State and Political
Subdivisions 387 8.77 1,213 6.80 1,258 7.53
------ ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 389 8.73 % $ 2,174 6.72 % $ 8,731 6.83%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.17 3.94 8.47
==== ==== ====
</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. Government Agency $ -- -- % $ 6,008 6.79 %
Mortgage-backed Securities 6,151 7.03 8,579 6.88
State and Political
Subdivisions 311 7.80 3,169 7.43
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 6,462 7.07 % $17,756 6.94 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 25.54 13.96
===== =====
</TABLE>
<PAGE>
LOAN PORTFOLIO BY TYPE
The loan portfolio by type is summarized in the following table for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993.
<TABLE>
Loan Portfolio by Type (Unaudited)
(Dollars in Thousands) For the Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Real Estate - Residential $138,539 $134,013 $122,293 $117,205 $102,481
Real Estate - Construction 12,361 10,923 4,959 2,861 2,557
Real Estate - Commercial 34,579 39,421 35,316 35,673 36,371
Consumer/Installment 35,914 28,870 27,685 24,626 20,743
Commercial (non-Real Estate)
and Agricultural 9,086 8,715 5,403 7,503 7,168
State and Political
Subdivisions 944 906 1,290 288 476
Other 20 28 13 18 22
-------- -------- -------- -------- --------
TOTAL GROSS LOANS 231,443 222,876 196,959 188,174 169,818
Unearned Income (1,856) (2,759) (3,829) (2,959) (1,252)
-------- -------- -------- -------- --------
Total Loans 229,587 220,117 193,130 185,215 168,566
Allowance for Possible
Loan Losses (2,664) (2,532) (2,443) (2,187) (1,953)
-------- -------- -------- -------- --------
NET LOANS $226,923 $217,585 $190,687 $183,028 $166,613
======== ======== ======== ======== ========
</TABLE>
At December 31, 1997 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, 1997, 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, 1997
(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 $ 2,518 $ 1,204 $ 8,639 $12,361
Real Estate - Commercial 1,302 5,771 27,506 34,579
Commercial (Non-Real Estate)
and Agricultural 800 3,681 4,605 9,086
------- ------- ------- -------
TOTAL $ 4,620 $10,656 $40,750 $56,026
======= ======= ======= =======
Loan Maturity After 1 Year With:
Predetermined Interest Rate $ 1,253 $ 4,764
Floating Interest Rate 9,403 35,986
------- -------
TOTAL $10,656 $40,750
======= =======
</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,
1997 1996 1995 1994 1993
Loan Categories (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial $1,183 $ 663 $1,049 $1,142 $ 815
Real Estate- Construction 6 7 3 69 80
Real Estate - Residential 191 198 184 143 78
Consumer/Installment 785 811 534 451 393
Unallocated 499 853 673 382 587
------ ------ ------ ------ ------
TOTAL $2,664 $2,532 $2,443 $2,187 $1,953
====== ====== ====== ====== ======
</TABLE>
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS
(Unaudited)
<TABLE>
As of December 31,
1997 1996 1995 1994 1993
Loan Categories (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial 19.28% 22.02% 21.33% 23.11% 26.12%
Real Estate - Construction 5.34 4.90 2.52 1.52 1.52
Real Estate - Residential 59.86 60.13 62.09 62.28 60.80
Consumer/Installment 15.52 12.95 14.06 13.09 11.56
------ ------ ------ ------ ------
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,
1997, 1996 and 1995 are presented in the following table.
AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION
(Unaudited)
<TABLE>
For the Year Ended December 31,
1997 1996 1995
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits
Non-Interest Bearing $ 31,074 --- % $ 27,826 --- % $ 23,782 --- %
Interest Bearing 45,338 1.17 43,206 1.55 42,955 1.84
Money Market Deposits 14,380 2.81 16,297 2.82 17,639 2.81
Savings & Club Accounts 62,746 2.44 62,783 2.49 65,452 2.67
Certificates of Deposit
under $100,000 118,846 5.58 103,221 5.50 90,925 5.47
Certificates of Deposit
of $100,000 or more 5,014 4.19 5,167 4.84 6,184 5.24
------ ---- ------ ---- ------ ----
Total Deposits $246,324 $258,500 $246,937
======== ======== ========
</TABLE>
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
(Unaudited)
<TABLE>
At December 31,
(Dollars in Thousands) 1997 1996
<S> <C> <C>
Three Months or Less $ 428 $ 849
Over Three, Through Six Months 1,454 1,542
Over Six, Through Twelve Months 977 1,151
Over Twelve Months 1,499 1,378
------ ------
TOTAL $4,358 $4,920
====== ======
</TABLE>
There were no brokered deposits at December 31, 1997 and 1996.
<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;
and its branch office located within Wal-Mart's at 355 Lincoln Avenue, East
Stroudsburg, 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, 1998,
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 72(a) Chairman of the Board since Chairman of the Board
January, 1987 since 1984
S. Eric Beattie 51(b) President and Chief President since 1984;
Executive Officer since Chief Executive Officer
January, 1987 since January, 1987
Reid L. Heeren 56 (c) Treasurer since January, Executive Vice President
1987; Vice President since and Chief Financial
April, 1985 Officer since August, 1997
Senior Vice President and
Chief Financial Officer
since January, 1987;
Cashier since
November, 1984
Thomas J. Bamberger 56 (d) None Executive Vice President
and Senior Loan Officer
since September, 1997
Arthur Williams 52 (e) None Executive Vice President,
Administration since
August, 1997;Senior Vice
President, Administration
since November, 1988.
Barbara A. Seifert 44 (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 Senior Vice President, Chief Financial Officer
and Cashier of the Bank from January 1987 to August 1997 and 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 was Vice
President, Community Banking, Chester County, Pennsylvania (March, 1982 to
September, 1982).
(d) Mr. Bamberger was previously Executive Vice President and Senior Loan
Officer of First Valley Bank/Summit Bank (PA) from February 1984 to
September 1997. Prior to that, he was Senior Vice President and Senior Loan
Officer of the First National Bank of Allentown from March 1982 to February
1984. Mr. Bamberger started his banking career in October 1967 at Girard
Bank in Philadelphia. He was a Vice President and Divisional Manager in
commercial lending when he left in February 1982.
(e) Mr. Williams was previously Senior Vice President, Administration of the
Bank from November, 1988 to August, 1997 and Vice President of the Bank,
serving as branch administrator 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, 1997, there were 760 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 was $35.50 in December 1997 and
$20.95 in December 1996. Stock prices and dividends per share have been restated
to reflect the 5% stock dividends of May 1996 and May 1997 (see "Note T - Equity
Transactions" in the "Notes to Consolidated Financial Statements" contained in
"Item 7, Financial Statements").
<TABLE>
1996 High Low Cash Dividends
Declared
<S> <C> <C> <C>
First Quarter $17.91 $16.32 0.1542
Second Quarter 18.14 16.32 0.1619
Third Quarter 18.10 17.14 0.1619
Fourth Quarter 21.90 17.14 0.1619
------
TOTAL 0.6399
1997
First Quarter $23.57 $21.19 0.1714
Second Quarter 24.50 22.38 0.1700
Third Quarter 34.25 23.50 0.1800
Fourth Quarter 35.50 34.69 0.1800
------
TOTAL 0.7014
</TABLE>
The Company did not sell any of its equity securities during 1997 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) 1997 1996 1995 1997/96 1996/95
<S> <C> <C> <C> <C> <C>
At Year-End
Assets $346,738 $322,352 $298,514 7.6% 8.0 %
Deposits 282,255 267,668 254,102 5.5 5.3
Loans 229,587 220,117 193,130 4.3 14.0
Shareholders' Equity 30,357 26,805 24,767 13.3 8.2
Trust Assets 245,293 209,144 173,435 17.3 20.6
For the Year
Net Interest Income $ 14,613 $ 13,557 $ 12,644 7.8% 7.2 %
Net Income 3,283 2,822 1,401 16.3 101.4
Per Share *
Basic and Diluted
Net Income $ 2.02 $ 1.76 $ 0.89 14.8% 97.8 %
Dividends Paid 0.70 0.64 0.62 9.4 3.2
Book Value 18.37 17.19 16.84 6.9 2.1
Financial Ratios
Return on average assets .97% .92% .48%
Return on average equity 11.67% 11.16% 5.98%
Average shareholders'
equity to average assets 8.30% 8.24% 8.00%
</TABLE>
* Per share data have been restated to reflect the 5% stock dividends of May
1997 and May 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANLAYSIS 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, 1997, 1996 and 1995. 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, 1997 and
May, 1996.
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, statements or estimates
concerning the effect of the "Year 2000" issues on the Company's systems and
software and the Company's plans with regard to "Year 2000" issues 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, 1997, a copy of which may
be obtained from the Company upon request and without charge (except for the
exhibits thereto).
Financial Performance Summary
First Colonial Group celebrated 100 years of service in 1997 and recorded
record net income of $3,283,000. The 1997 net income is 16.3% or $461,000 higher
than 1996 net income of $2,822,000. Net income in 1995 was $1,401,000. The basic
and diluted earnings per share were $2.02, $1.76 and $0.89 in 1997, 1996 and
1995, respectively. The Company has adopted the Financial Accounting Standards
<PAGE>
Board Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings
Per Share" which requires the Company to present both basic and diluted earnings
per share. Diluted earnings per share include the effect of common stock
equivalents such as options. The Company's basic and diluted earnings per share
numbers were substantially the same for the years ended 1997, 1996 and 1995 (see
Note A.11 of the "Notes to Consolidated Financial Statements").
The Company continued to achieve improvement on return on average assets
and return on average equity in 1997. The return on average assets rose to .97%
in 1997 from .92% in 1996 and .48% in 1995. The return on average equity was
11.67%, 11.16% and 5.98% in 1997, 1996 and 1995, respectively.
The Company continued to achieve growth in total assets, loans and
deposits. Total assets at December 31, 1997 were $346,738,000 as compared to
$322,352,000 at year end 1996. This is an increase of $24,386,000 or 7.6%.
During 1997 total deposits grew by 5.5% or $14,587,000 to a year-end total of
$282,255,000. Total deposits at December 31, 1996 were $267,668,000. Total loans
amounted to $229,587,000 and $220,117,000 at December 31, 1997 and 1996,
respectively. The loan increase in 1997 was $9,470,000 or 4.3%.
The principal factors contributing to higher earnings in 1997 were a
$1,056,000 increase in net interest income, an increase in other income,
including service charges, Trust revenues and net gains on the sales of
securities and mortgages, of $1,181,000 and a $65,000 decrease in the provision
for possible loan losses offset in part by a $1,681,000 increase in other
operating expenses and higher Federal income taxes of $160,000. These changes
were the result of the Company's continued growth in all areas, including the
addition of a new supermarket branch in East Stroudsburg.
The 1996 earnings increase was the result of a $1,128,000 reduction in the
provision for possible loan losses, a $913,000 increase in net interest income
and an increase in other income of $368,000. Partially reducing earnings were an
increase in operating expenses of $367,000 and an increase in Federal income
taxes of $1,421,000.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
(Dollars in Thousands,
except per share data)
For the Year Ended December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF INCOME:
Interest Income $ 25,444 $ 23,135 $ 21,896 $ 18,986 $ 18,525
Interest Expense 10,831 9,578 9,252 7,152 7,568
--------- --------- --------- --------- ---------
Net Interest Income 14,613 13,557 12,644 11,834 10,957
Provision for Possible
Loan Losses 605 670 1,798 420 765
Gains (Losses) on the
Sale of Mortgage Loans 178 (30) 22 37 417
Other Income, Excluding
Securities and Loan
Sale Gains 3,044 2,364 2,230 1,896 1,705
Securities Gains, Net 601 308 22 97 208
Other Expense 13,252 11,571 11,204 10,084 9,845
--------- --------- --------- --------- ---------
Income Before Income Taxes
and Cumulative Effect of
Accounting Method Change 4,579 3,958 1,916 3,360 2,677
Applicable Income Taxes 1,296 1,136 515 1,018 769
--------- --------- --------- --------- ---------
Net Income $ 3,283 $ 2,822 $ 1,401 $ 2,342 $1,908
--------- --------- --------- --------- ---------
Cash Dividends Paid $ 1,139 $ 1,011 $ 972 $ 936 $ 812
Cash Dividends Paid Per Share 0.70 0.64 0.62 0.60 0.60
Dividends Paid to Net Income 34.69% 35.82% 69.38% 39.97% 42.56%
PER SHARE DATA:
Basic Income $ 2.02 $ 1.76 $ 0.89 $ 1.51 $ 1.40
Diluted Net Income 2.02 1.76 0.89 1.51 1.40
Basic Average Common
Shares Outstanding 1,620,627 1,600,883 1,579,428 1,555,678 1,359,981
Dilutive Average Common
Shares Outstanding 1,625,456 1,603,590 1,579,802 1,555,678 1,359,981
CONSOLIDATED BALANCE SHEET DATA:
Total Assets $346,738 $322,352 $298,514 $284,553 $268,738
Loans (Net of
Unearned Discount) 229,587 220,117 193,130 185,215 168,566
Mortgage Loans
Held-for-Sale 759 721 1,006 69 15,378
Deposits 282,255 267,668 254,102 247,532 235,565
Securities Sold Under
Agreements to Repurchase 8,804 3,795 6,096 9,027 4,711
Debt (Short-Term
and Long-Term) 18,390 18,512 7,643 1,612 1,331
Shareholders' Equity 30,357 26,805 24,767 22,400 21,994
Book Value Per Share 18.37 17.19 16.84 15.39 15.26
SELECTED CONSOLIDATED RATIOS:
Net Income To:
Average Total Assets .97% .92% .48% .85% .76%
Average Shareholders' Equity 11.67% 11.16% 5.98% 10.51% 10.43%
Average Shareholders'
Equity to Average Assets 8.30% 8.24% 8.00% 8.10% 7.24%
</TABLE>
<PAGE>
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year Ended December 31,
<TABLE>
1997 1996 1995
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 $ 1,252 $ 71 5.67% $1,313 $ 78 5.96% $ 2,313 $ 133 5.75%
Fed Funds
Sold 18 1 5.56 16 2 5.43 139 6 4.32
Inv Sec
Taxable 69,876 4,592 6.57 67,241 4,386 6.42 73,712 4,477 6.07
Non-Tax(1) 16,653 1,268 7.62 12,318 935 7.59 8,408 583 6.94
Loans(1(2) 229,205 19,972 8.71 206,378 18,083 8.76 190,874 16,927 8.87
Allow for
Loan Losses (2,614) --- --- (2,500) --- --- (2,708) --- ---
-------- ------ -------- ------ -------- ------
Net Loans 226,591 19,972 8.81 203,878 18,083 8.87 188,166 16,927 9.00
-------- ------ -------- ------ -------- ------
Total Int-
Earn
Assets 314,390 25,904 8.24 284,766 23,484 8.25 272,738 22,126 8.11
Non-Int
Earn Assets 24,391 --- --- 22,305 --- --- 24,466 --- ---
-------- ------ -------- ------ -------- ------
TOTAL ASSETS,
INTEREST
INCOME $338,781 25,904 7.65 $307,071 23,484 7.65 $293,204 22,126 7.55
-------- ------ -------- ------ -------- ------
LIABILITIES
INTEREST-BEARING
LIABILITIES
Int-Bearing
Deposits
Demand
Deposits $ 45,338 532 1.17 $ 43,206 670 1.55 $ 42,955 791 1.84
Money
Market
Deposits 14,380 404 2.81 16,297 460 2.82 17,639 496 2.81
Savings &
Club
Deposits 62,746 1,530 2.44 62,783 1,566 2.49 65,452 1,750 2.67
CD's over
$100,000 5,014 210 4.19 5,167 250 4.84 6,184 324 5.24
All Other
Time Dep 118,846 6,636 5.58 103,221 5,675 5.50 90,925 4,970 5.47
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Deposits 246,324 9,312 3.78 230,674 8,622 3.74 223,155 8,331 3.73
Securities
Sold Under
Agreements
to Repurchase 6,459 240 3.72 4,740 149 3.14 9,298 346 3.72
Other Short-
Term
Borrowings 2,792 181 6.48 8,648 487 5.63 5,743 338 5.89
Long-Term Debt17,955 1,098 6.12 4,171 320 7.67 2,207 236 10.69
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Liabilities 273,530 10,831 3.96 248,233 9,578 3.86 240,403 9,251 3.85
<PAGE>
NON-INTEREST
BEARING
LIABILITIES
Non-Int-
Bearing
Deposits 31,074 --- --- 27,826 --- --- 23,782 --- ---
Other Liab 6,054 --- --- 5,724 --- --- 5,575 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB 310,658 10,831 3.49 281,783 9,578 3.40 269,760 9,251 3.43
SHAREHOLDERS'
EQUITY 28,123 --- --- 25,288 --- --- 23,444 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB &
SHAREHOLDERS'
EQUITY,
INTEREST
EXPENSE $338,781 10,831 3.20 $307,071 9,578 3.12 $293,204 9,251 3.16
NET INTEREST
INCOME $ 15,073 $13,906 $12,875
-------- ------- -------
Net Interest
Spread (3) 4.28 4.39 4.26
Effect of
Int-Free
Sources
Used to
Fund Earnings
Assets 0.51 0.49 0.46
NET INTEREST
MARGIN (4) 4.79% 4.88% 4.72%
-- ---- ---- ----
</TABLE>
<PAGE>
(1) The indicated interest income and average yields are presented on a
taxable equivalent basis. The taxable equivalent adjustments included above are
$460,000, $349,000 and $231,000 for the years 1997, 1996 and 1995, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of $377,000, $303,000 and $101,000 for the years 1997, 1996
and 1995, respectively, are included in interest income. Average loan balances
include non-accruing loans and average loans held-for-sale of $1,781,000,
$2,212,000 and $682,000 for 1997, 1996 and 1995, 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 $377,000, $303,000 and $101,000 for the years ended
December 31, 1997, 1996 and 1995, 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 $15,073,000 for 1997, an increase of 8.4% or
$1,167,000 over $13,906,000 in 1996. As shown in the "Rate/Volume Analysis"
table, the increase in net interest income in 1997 was attributable to higher
net interest income from changes in volume of $860,000 and changes in rates of
$307,000. 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
long-term debt and other time deposits, partially offset by a decline in
short-term borrowings. The rate-related change was primarily the result of the
decrease of interest expense being greater than the decrease on interest earned
on assets.
Net interest income, on a fully taxable equivalent basis, in 1996 increased
8.0% or $1,031,000 over the 1995 figure of $12,875,000. This increase was the
result of the increase in interest rates earned on assets exceeding the increase
of rates paid on deposits and debt. Also affecting 1996 net interest income was
the growth in loans and non-interest- bearing deposits.
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 4.79% for 1997, 4.88% for 1996 and 4.72% for 1995. The
decrease in 1997 was the result of an increase in the average rate paid for
interest-bearing deposits and debt. Also, there was a small decline in the
average rate earned on interest-earning assets. The result was a decline in the
interest spread, the difference of interest earned on assets less the interest
paid on deposits and debt. The interest spread was 4.28%, 4.39% and 4.26% for
1997, 1996 and 1995, 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, 1997 and 1996, 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,
1997 to 1996 1996 to 1995
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 $ (7) $ (3) $ (4) $ (55) $ 3 $ (58)
Federal Funds Sold (1) (1) --- (4) 1 (5)
Investment Securities 539 73 466 261 419 (158)
Loans 1,889 (140) 2,029 1,156 (88) 1,244
----- --- ----- ----- ----- -----
Total Interest Income 2,420 (71) 2,491 1,358 335 1,023
----- --- ----- ----- ----- -----
Interest Expense
Demand Deposits,
Savings & Clubs (231) (235) 4 (340) (250) (90)
Time Deposits 921 75 846 631 16 615
Securities Sold Under
Agreements to Repurchase 91 37 54 (197) (27) (170)
Short-Term Borrowings (306) 24 (330) 135 (43) 178
Long-Term Borrowings 778 (279) 1,057 98 (100) 198
----- --- ----- ----- ----- -----
Total Interest Expense 1,253 (378) 1,631 327 (404) 731
----- --- ----- ----- ----- -----
Increase in Net
Interest Income $1,167 $307 $ 860 $1,031 $ 739 $ 292
</TABLE>
<PAGE>
Market Risk
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest earning
assets, other than those which possess a short term to maturity. Since most of
the Company's interest-bearing assets and liabilities are located at the Bank,
the majority of the Company's interest rate risk is at the Bank level. As a
result, most interest rate risk management procedures are performed at the Bank
level (see discussion on "Interest Rate Sensitivity").
The Company and the Bank operate as a community banking institution
primarily in the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a
result of its location and nature of operations, the Company is not subject to
foreign currency exchange or commodity price risk. The Bank makes real estate
loans primarily in the counties adjacent to its operations and thus is subject
to risks associated with those local economies. The Bank holds a concentration
of residential real estate loans (60.3% of total loans) and commercial loans
supported by real estate (15.1% of total loans) in its loan portfolio (see Note
Q of the "Notes to Consolidated Financial Statements"). These loans are subject
to interest and economic risks. The Bank also originates residential real estate
loans for sale in the secondary market. Such loans are identified as "Mortgage
Loans Held-for-Sale" on the Company's Balance Sheet and are subject to interest
rate risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does
not own any trading assets and does not have any hedging transactions in place
such as interest rate swaps (see discussions on "Investment Securities" and
"Securities Available-for-Sale").
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
<PAGE>
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.
Assets and liabilities are allocated to a specific time period based on
their scheduled repricing date or on an historical basis. At December 31, 1997,
assets of $151,613,000 (44% 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 $149,441,000 (46.4% of total assets) at the end of
1996 and $124,779,000 (41.8% of total assets) at the end of 1995. Liabilities
subject to rate change within one year were $166,220,000, $167,266,000 and
$133,068,000 in 1997, 1996 and 1995, respectively. A negative one-year gap
position of $14,607,000 existed as of December 31, 1997. The gap positions at
December 31, 1996 and 1995 were negative $17,825,000 and negative $8,289,000,
respectively. The ratio of rate-sensitive assets to rate-sensitive liabilities
for the one-year time frame was .91 at the end of 1997, compared to .89 at the
end of 1996 and .94 at the end of 1995. The "Interest Sensitivity Analysis" in
the following table presents a sensitivity gap analysis of the Company's assets
and liabilities at December 31, 1997 for five time-intervals. The Company's
liability-sensitive position decreased in 1997 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, 1997
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 $ 395 $ --- $ --- $ --- $ --- $ 395
Federal Funds Sold 2,200 --- --- --- --- 2,200
Inv Securities 17,236 8,108 19,812 31,969 13,655 90,780
Loans Held-for-Sale 759 --- --- --- --- 759
Loans 47,400 13,218 29,856 74,853 61,596 226,923
Other Assets 12,629 --- --- --- 13,052 25,681
------- -------- -------- ------- -------- --------
TOTAL ASSETS $80,619 $21,326 $ 49,668 $106,822 $ 88,303 $346,738
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 32,800 $ 32,800
Int-Bearing
Deposits 83,282 22,887 32,857 49,005 61,424 249,455
Securities Sold
Under Agreements
to Repurchase 8,804 --- --- --- --- 8,804
Short-Term Borrowings --- 5,000 --- --- --- 5,000
Long-Term Debt 390 --- 13,000 --- --- 13,390
Other --- --- --- --- 6,932 6,932
Capital --- --- --- --- 30,357 30,357
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $ 92,476 $27,887 $ 45,857 $49,005 $131,513 $346,738
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(11,857) $(6,561)$ 3,811 $57,817 $(43,210) $ ---
Cumulative Int
Sensitivity Gap $(11,857)$(18,418)$(14,607) $43,210 $ --- $ ---
Cumulative Gap
RSA/RSL 87.2% 84.7% 91.2% 120.1% 100.0%
</TABLE>
(1) Historically, non-interest-bearing deposits reflect insignificant
change in deposit trends and, therefore, the Company classifies these deposits
over five years.
<PAGE>
While using the interest sensitivity gap 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. This model produces an interest rate exposure report that
forecasts changes in the market value of portfolio equity under alternative
interest rate environments. The market value of portfolio equity is defined as
the present value of the Company's existing assets, liabilities and off-balance
sheet instruments. The calculated estimates of changes in the market value of
portfolio value at December 31, 1997 are as follows:
<PAGE>
<TABLE>
Dollars in Thousands at December 31, 1997
Market Value of Percent of
Changes in Rate Portfolio Equity Change
<S> <C> <C>
+ 400 basis points 22,176 (17.4)%
+ 300 basis points 23,417 (12.8)
+ 200 basis points 24,774 (7.7)
+ 100 basis points 26,275 (2.1)
Flat Rate 26,840 ---
- 100 basis points 28,438 5.9
- 200 basis points 33,184 23.6
- 300 basis points 40,913 52.4
- 400 basis points 49,456 84.3
</TABLE>
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest rate sensitivity of the Company's assets and
liabilities as well as the estimated effect of changes in interest rates on the
market value of portfolio equity could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
<PAGE>
Service Charges and Other Income
Service charge income on deposit accounts amounted to $1,134,000 in 1997
compared to $1,083,000 in 1996 and $1,034,000 in 1995. In 1997, the service
charges increased by $51,000 or 4.7% over 1996 and the 1996 increase over 1995
was $49,000 or 4.7%. The increases in 1997 and 1996 were primarily the result of
increases in the number of deposit accounts and increases in some
deposit-related fees.
In 1997, the Company had a gain on the sale of mortgage loans of $178,000
as compared to a loss of $30,000 in 1996. In 1995, there was a gain of $22,000
(see discussion on "Mortgage Loans Held-for-Sale").
Other operating income was $860,000 in 1997, an increase of $275,000 or
47.0% compared to $585,000 in 1996. Other operating income for 1995 was
$560,000. The increase in 1997 was primarily from transaction fees earned from a
new debit card that was offered to customers in July 1997, transaction charges
assessed to non-customers using the Bank's automated teller machines and certain
new loan fees.
Investment Management and Trust Division
Revenue from the Bank's Investment Management and Trust Division operations
was $1,050,000 in 1997, representing an increase of $354,000 or 50.9% over
revenue of $696,000 in 1996. In comparison, the Investment Management and Trust
Division revenue for 1996 increased by 9.4% or $60,000 over the 1995 revenue of
$636,000. 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 assets were $245,293,000 and $209,144,000 at December 31, 1997
and 1996, respectively, an increase of 17.3%. The market value of Trust assets
increased by 22.8% from $252,990,000 in 1996 to $310,773,000 in 1997. The
increase in 1997 Trust revenue was the result of the addition of new accounts
and increased market values.
Other Expenses
Salaries and employee benefits represent a significant portion of
non-interest expense. These expenses, amounting to $6,033,000, increased by
$418,000 or 7.4% in 1997 compared to $5,615,000 in 1996. These expenses in 1996
amounted to an increase of 9.4% over the $5,132,000 reported in 1995. The
increase in 1997 was primarily due to salary increases of approximately 4% and
the addition of staff for the new East Stroudsburg branch opened in January,
1997. Salary expense in 1996 increased due to normal salary increases of
approximately 4% and a full year's expense for the new branches added in 1995.
<PAGE>
Occupancy and equipment expenses were $2,178,000 in 1997, which was $6,000
less than the 1996 amount of $2,184,000. The 1996 amount was 9.7% more than the
1995 occupancy and equipment expense of $1,991,000. The decrease in 1997 was
achieved through the implementation of expense control measures which offset the
added expenses of the new East Stroudsburg branch and the installation of check
image equipment. Most of the increase in 1996 was related to a full year's
expense of two new branches opened in 1995 and some major maintenance work on
other facilities.
Other operating expenses (such as advertising, publicity, litigation costs,
deposit insurance premiums, data processing fees, legal, accounting, supplies,
postage and telephone) in 1997 were $5,041,000, compared to $3,772,000 in 1996
and $4,081,000 in 1995. The increase in 1997 of $1,269,000 or 33.6% was
primarily due to higher legal and professional fees and advertising expenses as
a result of the implementation of a new marketing program. The decrease in 1996
of $309,000 or 7.6% was the result of a reduction in Federal Deposit Insurance
premiums and legal fees offset in part by higher data processing, business
development, auditing and supply expenses. The Company's advertising costs are
expensed as incurred. Advertising costs were $524,000, $299,000 and $294,000 for
the years ended December 31, 1997, 1996 and 1995, respectively (see Notes A.15
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 1997 and 1996. 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").
<PAGE>
Held-to-maturity securities totaled $17,756,000 at December 31, 1997 and
$20,999,000 at December 31, 1996. The Company has the intent and ability to hold
these securities until maturity. The fair value of these securities was
$17,946,000 and $21,124,000 at December 31, 1997 and 1996, respectively.
The Company, at December 31, 1997 and 1996, 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, 1997 and 1996, the Company held $1,000,000
in various U. S. Agency Step-up or Multi Step-up securities. 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 predetermined 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 $27,426,000 at December
31, 1997 ($21,723,000 in available-for-sale and $5,703,000 in held-to-maturity)
and $19,395,000 at December 31, 1996 ($15,554,000 in available-for-sale and
$3,841,000 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 $7,943,000 at December 31, 1997 ($5,067,000 in
available-for-sale and $2,876,000 in held-to-maturity) and $7,290,000 at
December 31, 1996 ($4,578,000 in available-for-sale and $2,712,000 in
held-to-maturity).
Securities Available-for-Sale
The Company had $73,024,000 of securities available-for-sale at December
31, 1997, as compared to $56,779,000 at December 31, 1996. At December 31, 1997,
the net unrealized gain on these securities was $1,300,000, net of the tax
effect of $670,000. There was a net unrealized gain of $347,000, net of the tax
effect of $179,000 on the available-for-sale securities at December 31, 1996.
The net unrealized gain or loss is included in shareholders' equity (see Notes
A.2. and B of the "Notes to Consolidated Financial Statements").
<PAGE>
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,
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 1997, $13,279,000 of securities available-for-sale were sold,
resulting in a total net gain of $601,000, which was recorded in income and
includes net gains on equity securities held by First C. G. of $560,000. 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 recognize
certain gains and reposition the equity portfolio. Securities purchased by the
Company in 1997 totaled $46,283,000. Included in these purchases were
$20,374,000 in U. S. Agency mortgage-backed bonds, $16,023,000 in U. S. Agency
fixed rate bonds, $6,629,000 in municipal securities, $1,989,000 in U. S.
Treasury bonds, and $1,268,000 in equity securities. The securities sold in 1996
totaling $19,842,000 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 1996 sales resulted in net gains of $308,000. These gains
include net gains of $293,000 on equity securities held by First C. G. The sales
were made to provide liquidity, improve future income and diversify the equity
portfolio. Security purchases in 1996 amounted to $39,591,000 which were
primarily U. S. Agency fixed-rate, U. S. Treasury bonds, municipal securities
and U. S. Agency mortgage-backed bonds. In 1995, a net gain on security
transactions of $22,000 was recorded on sales of $11,177,000.
<PAGE>
Loan Portfolio
At December 31, 1997, total loans (net of unearned discounts of $1,856,000
in 1997 and $2,759,000 in 1996) of $229,587,000 were $9,470,000, or 4.3% higher
than the 1996 amount of $220,117,000. The growth in loans in 1997 was primarily
the result of an increase of $7,044,000 or 24.4% in consumer loans, an increase
of $4,526,000 or 3.4% in residential real estate loans and an increase of
$1,438,000 or 13.2% in real estate construction loans partially reduced by a
$4,842,000 or 12.3% decline in real estate commercial loans. Total residential
real estate loans were $138,539,000 at December 31, 1997 compared to
$134,013,000 at December 31, 1996. Consumer loans totaled $35,914,000 and
$28,870,000 at December 31, 1997 and 1996, respectively. At December 31, real
estate construction loans were $12,361,000 in 1997 versus $10,923,000 in 1996.
Commercial real estate loans were $34,579,000 at December 31, 1997 as compared
to the December 31, 1996 total of $39,421,000. Other commercial loans also
increased by $371,000 or 4.3% to $9,086,000 at December 31, 1997, as compared to
$8,715,000 at December 31, 1996. Municipal loans were $944,000 and $906,000 at
December 31, 1997 and 1996, respectively. This was an increase of $38,000 or
4.2%. 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 (see previous discussion on
"Market Risk").
The loan to deposit ratio was 81.3% at December 31, 1997, and 82.2% at
December 31, 1996. Funds used by the increase in loans were provided primarily
by the increase in deposits. Additional information concerning loans is shown in
Note C of the "Notes to Consolidated Financial Statements".
Mortgage Loans Held-for-Sale
In 1997, management continued a program of selling most of its newly
originated residential real estate loans in the secondary market. The 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.
<PAGE>
The sales of residential real estate loans in the secondary market for 1997
amounted to $27,145,000. The amount of these loans originated in 1997 was
$10,754,000, with the remaining $16,391,000 being originated in prior years of
which $721,000 was identified as held-for-sale at December 31, 1996. A net gain
of $178,000 was recorded on these sales. In addition, $759,000 of residential
real estate loans was identified as held-for-sale at December 31, 1997. All of
these loans were originated during 1997. An unrealized loss of $13,000 on these
loans is included in other operating expenses for 1997.
In 1996, the Company originated $18,504,000 of residential real estate
loans which were sold in the secondary market. In addition, during 1996,
$1,006,000 of these loans that were originated in prior years were sold. A net
loss of $30,000 was recognized on these sales in 1996. At December 31, 1996,
$721,000 of residential real estate loans were identified as held-for-sale.
Included in other operating expenses in 1996 is an unrealized loss of $10,000 on
these loans. During 1995, the Company had net gains of $22,000 on the sale of
$6,336,000 of residential real estate loans. The other operating expenses for
1995 include an unrealized loss of $4,000 on mortgage loans held-for-sale of
$1,006,000 at year-end 1995.
The Company intends to continue to originate residential real estate loans
in 1998 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.
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 23 shows the balance
and the effect on interest income of non-accrual loans for each of the periods
indicated. There were $813,000 of loans on a non-accrual status at December 31,
1997. The decrease in non-accrual loans during 1997 of $627,000 resulted from
the completion of collection efforts on certain loans and a general improvement
in economic conditions.
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, 1997 and 1996.
<PAGE>
<TABLE>
Non-Accrual Loans
(Dollars in Thousands)
at December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual loans on
a cash basis $ 813 $1,440 $2,181 $1,724 $1,569
------ ------ ------ ------ ------
Non-accrual loans as a
percentage of total loans .35% .65% 1.13% .93% .93%
------ ------ ------ ------ ------
Interest which would have
been recorded at
original rate $ 64 $ 210 $ 214 $ 168 $ 134
Interest that was reflected
in income 111 40 44 --- ---
------ ------ ------ ------ ------
Net impact on int income $ 47 $ (170) $ (170) $(168) $ (134)
</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, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Accruing loans past due
90 days or more $802 $ 986 $1,115 $1,069 $ 672
Accruing loans past due
90 days or more as a
percentage of total loans .35% .45% .58% .58% .40%
</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, 1997 and 1996 are as
follows:
<TABLE>
(Dollars in Thousands)
at December 31, 1997 1996
<S> <C> <C>
Principal amount of impaired loans $ 523 $ 1,149
Accrued interest --- ---
Deferred loan costs 1 7
--- -----
524 1,156
Less valuation allowance
at December 31, (138) (128)
--- -----
$ 386 $ 1,028
</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 1997 1996
<S> <C> <C>
Valuation allowance at January 1, $128 $238
Provision for loan impairment 158 206
Direct charge-offs (148) (325)
Recoveries --- 9
---- ----
Valuation allowance at December 31, $138 $128
</TABLE>
Total cash collected on impaired loans during 1997 was $768,000, of which
$657,000 was credited to the principal balance outstanding on such loans, and
$111,000 was recognized as interest income.
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. Interest that would have been accrued
on impaired loans was $64,000 and $210,000 in 1997 and 1996, respectively. The
valuation allowance for impaired loans of $138,000 at December 31, 1997 and
$128,000 at December 31, 1996 is included in the "Allowance for Possible Loan
Losses" which amounts to $2,664,000 and $2,532,000 at December 31, 1997 and
1996, 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.
<TABLE>
OTHER REAL ESTATE OWNED
(Dollars in 1997 1996 1995 1994 1993
Thousands)
at December 31,
<S> <C> <C> <C> <C> <C>
Other Real Estate $ 284 $ 595 $ 364 $ 373 $ 738
Owned
</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, 1997, the
allowance for possible loan losses was $2,664,000 as compared to the December
31, 1996 amount of $2,532,000 and the December 31, 1995 amount of $2,443,000.
The allowance for possible loan losses as a percentage of total loans
outstanding as of December 31, 1997 was 1.16%. This compares to 1.15% at the end
of 1996 and 1.26% at the end of 1995. The increase in the allowance for possible
loan losses of $132,000 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
$1,615,000 as of December 31, 1997 as compared to $2,426,000 as of December 31,
1996 (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 $473,000 in 1997 or $108,000 less than the 1996 amount of $581,000.
The 1997 charge-offs were the result of losses on commercial, consumer and
residential real estate loans. The net charge-offs in 1996 were primarily the
result of losses on commercial and consumer loans. Net loans charged-off in 1995
were $1,542,000. The ratio of net loan charge-offs to average loans outstanding
was .21%, .28% and .81% in 1997, 1996 and 1995, respectively.
The provision for loan losses for the year ended December 31, 1997 was
$605,000 as compared to $670,000 for the year ended December 31, 1996, and
$1,798,000 for the year ended December 31, 1995. The decrease in 1997 from 1996
was $65,000. In 1996, the decrease in the provision was $1,128,000 from 1995.
The higher level in 1995 was principally the result of the increase in net
charge-offs due to an overdraft loss.
The allowance for possible loan losses is established through a provision
for possible loan losses charged to expenses. Loans are charged against the
allowance for possible loan losses when management believes that the
<PAGE>
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>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in Thousands)
For the Year Ended December 31,
<TABLE>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses
at Beginning of Year $ 2,532 $ 2,443 $ 2,187 $ 1,953 $ 1,840
-------- -------- -------- -------- -------
Loans Charged-Off by Category:
Commercial 249 365 161 259 392
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 20 31 -- 35 3
Consumer/Installment 301 271 319 144 348
Other -- -- 1,278 -- --
-------- -------- -------- -------- -------
570 667 1,758 438 743
-------- -------- -------- -------- -------
Loans Recovered by Category:
Commercial 19 39 105 170 57
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 1 -- -- -- --
Consumer/Installment 77 47 97 82 34
Other -- -- 14 -- --
-------- -------- -------- -------- -------
97 86 216 252 91
-------- -------- -------- -------- -------
Net Loans Charged-Off 473 581 1,542 186 652
-------- -------- -------- -------- -------
Provision Charged to Expense 605 670 1,798 420 765
-------- -------- -------- -------- -------
Allowance for Loan Losses
at End of Period $ 2,664 $ 2,532 $ 2,443 $ 2,187 $ 1,953
======== ======== ======== ======== ========
Total Loans
Average $228,245 $206,378 $190,874 $178,624 $180,850
Year-End $229,587 $220,117 $193,130 $185,215 $168,566
Net Loans Charged Off to:
Average Loans .21% .28% .81% .10% .36%
Loans at Year-End .21% .26% .80% .10% .39%
Allowance for Possible
Loan Losses at Year-End 17.76% 22.95% 63.12% 8.50% 33.38%
Provision for Possible
Loan Losses 78.18% 86.72% 85.76% 44.29% 85.23%
Allowance for Possible
Loan Losses at Year-End to:
Average Loans 1.17% 1.23% 1.28% 1.22% 1.08%
Loans at Year-End 1.16% 1.15% 1.26% 1.18% 1.16%
</TABLE>
<PAGE>
Deposits
Deposits are the primary source of the Company's funds. During 1997,
deposits increased by $14,587,000 or 5.5% to a total of $282,255,000 at December
31, 1997, from a total of $267,668,000 at December 31, 1996. Average deposits
for 1997 were $277,398,000, an increase of $18,898,000 or 7.3% over the average
total deposits for 1996 of $258,500,000. 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 continued growth
in non-interest bearing and interest-bearing checking deposits as a result of
the Bank's marketing programs for 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 continued growth of deposits by the
Company and the banking industry in general could be 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 1997 with average balances of $118,846,000, which was $15,625,000
or 15.1% higher than the 1996 average balance of $103,221,000. Non-interest
bearing deposits averaged $31,074,000 in 1997 as compared to $27,826,000 in
1996, an increase of $3,248,000 or 11.7%. In addition, there was an increase in
average interest-bearing demand deposits of $2,132,000 or 4.9% to $45,338,000 in
1997 from $43,206,000 in 1996. Offsetting some of this growth were declines in
average savings and club deposits of $37,000 or 0.6% from an average balance of
$62,783,000 in 1996 to an average balance of $62,746,000 in 1997, and declines
in average money market deposits which averaged $14,380,000 in 1997 as compared
to $16,297,000 in 1996, a decrease of $1,917,000 or 11.8%. Average certificates
of deposit over $100,000 were $5,014,000 in 1997 as compared to $5,167,000 in
1996, a decline of $153,000 or 3.0%.
<PAGE>
Short-Term Borrowings
The Bank had securities sold under agreements to repurchase totaling
$8,804,000 at December 31, 1997 and $3,795,000 at December 31, 1996. At December
31, 1997 and 1996, there were no short-term borrowings in the form of Federal
funds purchased, Federal Reserve Bank discount borrowings or Federal Home Loan
Bank 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 1997, cash, due from banks, Federal funds
sold and interest-bearing deposits with banks totaled $15,224,000, and
securities maturing within one year totaled $3,861,000. 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 were $2,858,000.
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 $110,000 at December 31, 1997, and $81,000
at December 31, 1996. 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 $12,895,000,
all of which was available at December 31, 1997.
The Bank had three long-term loans from the Federal Home Loan Bank of
Pittsburgh totaling $18,000,000 at December 31, 1997. 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
variable rate at LIBOR plus 6 basis points; and $5,000,000 due December, 2001,
at a variable rate of 5.86%. This rate changes quarterly in January, April,
<PAGE>
July and October at LIBOR plus 8 basis points. If the lender elects to
convert the fixed rate loan to a variable rate, the Bank may prepay the loan in
full at the time of conversion without a penalty. The Bank had the same three
long-term loans totaling $18,000,000 from the Federal Home Loan Bank at December
31, 1996 (see Note H of the "Notes to Consolidated Financial Statements").
Cash flows for the year ended December 31, 1997 consisted of Cash Provided
by Operating Activities of $3,691,000 and Cash Provided by Financing Activities
of $18,740,000, offset in part by Cash Used In Investing Activities of
$21,531,000; resulting in a net increase in cash and cash equivalents of
$900,000. The Cash Provided by Operating Activities was comprised principally of
proceeds from mortgage loan sales of $27,145,000, net income of $3,283,000,
depreciation and amortization of $884,000 and a provision for possible loan
losses of $605,000 reduced in part by mortgage loans originated for sale of
$27,183,000 and amortization of deferred fees on loans of $601,000. The Cash
Used in Investing Activities was primarily for the purchase of $40,485,000 of
available-for-sale securities, and $5,838,000 of held-to-maturity securities, a
net increase in loans to customers of $10,130,000 and the purchase of $1,126,000
of premises and equipment. These cash uses were partially offset by the proceeds
from the sale of securities available-for-sale of $13,279,000, proceeds from the
maturities of securities available-for-sale of $13,961,000 and proceeds from the
maturities of securities held-to-maturity of $8,047,000. The Cash Provided by
Financing Activities was comprised of a net increase in certificates of deposit
of $10,783,000, a net increase in interest and non-interest bearing demand
deposits of $3,804,000 and a net increase in repurchase agreements of
$5,009,000. The sale of common shares and treasury shares pursuant to the
Dividend Reinvestment Plan resulted in proceeds of $394,000. Partially
offsetting these increases were cash dividends paid of $1,139,000 and the
purchase of treasury stock of $107,000.
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, 1997 was $30,357,000
as compared to $26,805,000 at December 31, 1996, an increase of $3,552,000 or
13.3%. This increase was primarily attributable to retained earnings and the
sale of common shares pursuant to the Dividend Reinvestment Plan. At December
31, 1997, unrealized gains on securities available-for-sale, which are included
in shareholders' equity, amounted to $1,300,000 (net of tax effect of $670,000).
<PAGE>
Included in shareholders' equity at December 31, 1996 was $347,000 (net of
tax effect of $179,000) of unrealized losses on securities available-for-sale
(see discussion on "Securities Available-for-Sale").
On June 19, 1997, 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 30, 1997. Fractional share9s were paid in cash based on a per
share price of $23.625. The Company also paid a 5% stock dividend on June 19,
1996 to shareholders of record on May 31, 1996. 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
1997, 11,696 common shares were purchased pursuant to this Plan at an average
price of $24.51 for total proceeds of $287,000. The shares purchased in 1997
were comprised of 10,292 new common shares at an average price of $24.73 for
proceeds of $254,000 and 1,404 common shares from Treasury shares at an average
price of $22.86 for proceeds of $33,000. In 1996, 14,449 common shares were
purchased pursuant to the Plan at an average price of $17.16 per share. The
total proceeds were $248,000. New common shares purchased in 1996 totaled 10,701
at an average price of $17.24 for proceeds of $184,000. The remaining purchase
of 3,749 shares were from Treasury shares at an average price of $17.09 for
proceeds of $64,000.
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. No options were issued under this Plan in 1997. Pursuant
to this plan, in 1996, options to purchase 1,157 shares of the Company's common
stock at a price of $17.62 per share were granted to a certain non-employee
director. A non-employee director exercised options for 868 shares in 1997 at a
price of $14.69 per share. During 1996, options for 289 shares of the Company's
common stock were exercised by a non-employee director at a price of $14.69 per
share.
The Company also has a "Stock Option Plan" that was originally adopted in
1986 and the "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. In 1997, options to purchase 19,000 shares of the Company's
common stock at a price of $23.50 per share were granted to certain officers.
There were no options granted under these Plans in 1996. In 1997, options for
5,742 shares of the Company's common stock issued under the 1986 Plan were
exercised at an average price of $16.46 per share. During 1996, options for
<PAGE>
5,742 shares of the Company's common stock issued pursuant to the 1986 Plan
were exercised at an average price of $17.75 per share. In January 1998, options
to purchase 29,500 shares of the Company's common stock at a price of $37.00 per
share were granted to certain officers.
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
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 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. 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
Statements".
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.
<PAGE>
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.
Year 2000
During 1997, the Company conducted a comprehensive review of its computer
systems and operations to identify the areas that could be affected by the "Year
2000" issue. The Company is in the process of implementing a plan to address all
"Year 2000" issues. To date, confirmations have been received from the Company's
primary computer software and processing vendors that they are addressing the
"Year 2000" issue. Current estimates of the cost to be incurred to prepare for
the "Year 2000" range from $100,000 to $300,000.
The Bank has contacted its major customers to advise them to review their
own systems for possible "Year 2000" problems. In making credit decisions for
major borrowers, the Bank will consider the impact of "Year 2000" issues.
The "Year 2000" potential problems create risk for the Company from
unforeseen problems in its own computer systems and from third parties; such as
other financial institutions, the Federal government, Federal agencies, vendors
and customers. Failures of the Company's or third parties' computer systems
could have a material effect on the Company's abilities to conduct business and
especially to process and account for the transfer of funds electronically.
Earnings Per Common Share
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share (SFAS 128)". SFAS 128
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Prior periods'
earnings per share calculations have been restated to reflect the adoption of
SFAS No. 128.
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
<PAGE>
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 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 Company has adopted 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 liabilities occurring after December 31, 1996. Adoption of this statement had
no material impact on the Company's consolidated financial position or results
of operations
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which is effective for years beginning after December 15,
1997. SFAS No. 130 requires entities presenting a complete set of financial
statements to include details of comprehensive income. Comprehensive income
consists of net income or loss for the current period and income, expenses,
gains and losses that bypass the income statement and are reported directly in a
separate component of equity. The effect of adopting SFAS No. 130 is not
expected to be material.
Disclosures About Segments of an Enterprise and
Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which is
effective for all periods beginning after December 15, 1997. SFAS No. 131
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. Management is currently evaluating the disclosure
impact of SFAS No. 131 on its financial statements.
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 dividends of May, 1997 and May, 1996.
<PAGE>
QUARTERLY FINANCIAL DATA (Unaudited)
Dollars in Thousands,
except per share data
<TABLE>
Three Months Ended
1997 Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C>
Interest income $6,471 $6,631 $6,312 $6,030
Net interest income 3,673 3,833 3,634 3,473
Provision for possible
loan losses 162 143 187 113
Net gain (loss) on sale
of securities and mortgages 424 72 144 139
Income before income taxes 1,289 1,191 1,132 967
Net income $ 912 $ 855 $ 812 $ 704
====== ====== ====== ======
Net income per share of
common stock $ 0.56 $ 0.52 $ 0.50 $ 0.44
====== ====== ====== ======
1996 Dec. 31 Sept. 30 June 30 March 31
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 $ 0.50 $ 0.44 $ 0.43 $ 0.39
======= ====== ====== =======
</TABLE>
Report of Independent Certified Public Accountants
Board of Directors
First Colonial Group, Inc.
We have audited the accompanying consolidated balance sheets of First
Colonial Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion of these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Colonial
Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 9, 1998
<PAGE>
Item 7. Financial Statements
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Dollars in Thousands) At December 31, 1997 1996
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 12,629 $ 11,729
Federal Funds Sold 2,200 2,200
--------- ---------
Total Cash and Cash Equivalents 14,829 13,929
Interest-Bearing Deposits With Banks 395 285
Investment Securities
(Fair Value: 1997 - $17,946;
1996- $21,124) 17,756 20,999
Securities Available-for-Sale at Fair Value 73,024 56,779
Mortgage Loans Held-for-Sale 759 721
Total Loans, Net of Unearned Discount 229,587 220,117
Less: Allowance for Possible Loan Losses (2,664) (2,532)
--------- ---------
Net Loans 226,923 217,585
Premises and Equipment, Net 7,299 7,030
Accrued Interest Income 2,232 2,020
Other Real Estate Owned 284 595
Other Assets 3,237 2,409
--------- ---------
TOTAL ASSETS $ 346,738 $ 322,352
========= ========
LIABILITIES
Deposits
Non-Interest-Bearing Deposits $ 32,800 $ 31,450
Interest-Bearing Deposits
(Includes Certificates of Deposit
in Excess of $100: 1997 - $4,358;
1996 - $4,920) 249,455 236,218
--------- ---------
Total Deposits 282,255 267,668
Securities Sold Under Agreements
to Repurchase 8,804 3,795
Long-Term Debt 18,390 18,512
Accrued Interest Payable 3,466 3,205
Other Liabilities 3,466 2,367
--------- ---------
TOTAL LIABILITIES 316,381 295,547
--------- ---------
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: 1,655,413 shares in 1997
and 1,560,634 shares in 1996 8,277 7,803
Additional Paid-in Capital 11,014 9,212
Retained Earnings 10,250 9,975
Less: Treasury Stock at Cost: 2,779 shares
in 1997 and 861 in 1996 (94) (20)
Employee Stock Ownership Plan Debt (390) (512)
Net Unrealized Gain on Securities
Available-for-Sale 1,300 347
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 30,357 26,805
--------- ---------
TOTAL LIAB AND SHAREHOLDERS' EQUITY $ 346,738 $322,352
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands,
except per share data)
For the Year Ended December 31,
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 19,943 $ 18,052 $ 16,896
Interest on Investment Securities
Taxable 4,592 4,386 4,477
Tax-Exempt 837 617 384
Interest on Deposits with Banks and
Federal Funds Sold 72 80 139
------ ------ ------
Total Interest Income 25,444 23,135 21,896
------ ------ ------
INTEREST EXPENSE
Interest on Deposits 9,312 8,622 8,332
Interest on Short-Term Borrowings 421 636 684
Interest on Long-Term Debt 1,098 320 236
------ ------ ------
Total Interest Expense 10,831 9,578 9,252
------ ------ ------
NET INTEREST INCOME 14,613 13,557 12,644
Provision for Possible Loan Losses 605 670 1,798
------ ------ ------
Net Interest Income After Provision
for Possible Loan Losses 14,008 12,887 10,846
------ ------ ------
OTHER INCOME
Trust Revenue 1,050 696 636
Service Charges on Deposit Accounts 1,134 1,083 1,034
Investment Securities Gains, Net 601 308 22
Gains (Loss) on Sale of Mortgage Loans 178 (30) 22
Other Operating Income 860 585 560
------ ------ ------
Total Other Income 3,823 2,642 2,274
------ ------ ------
OTHER EXPENSES
Salaries and Employee Benefits 6,033 5,615 5,132
Net Occupancy and Equipment Expense 2,178 2,184 1,991
Other Operating Expenses 5,041 3,772 4,081
------ ------ ------
Total Other Expenses 13,252 11,571 11,204
------ ------ ------
Income Before Income Taxes 4,579 3,958 1,916
Applicable Income Taxes 1,296 1,136 515
------ ------ ------
NET INCOME $ 3,283 $ 2,822 $ 1,401
======== ======== ========
PER SHARE DATA
Basic and Diluted Net Income $ 2.02 $ 1.76 $ 0.89
Cash Dividends $ 0.70 $ 0.64 $ 0.62
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
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, 1995 $ 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
Dividends
Paid (972) (972)
ESOP Loan
Pymt 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 shs) 28 78 106
Purchase of
Treasury Stock
(4,431 shs) (102) (102)
Sale of
Treasury Stock
under Div
Reinv Plan
(3,570) (18) 82 64
Cash Div Paid (1,011) (1,011)
Stock Div
Paid of 5%
(73,712 shs) 369 1,032 (1,401) ---
Cash in Lieu
of Fractional
Shares (2) (2)
ESOP Loan
Pymt 131 131
Unall ESOP
Shares
Committed
to
Employees
(5,636 shs) 19 19
<PAGE>
Unreal Net
Loss on
Sec Avail-
for-Sale (173) (173)
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1996 7,803 9,212 9,975 (20) (512) 347 26,805
1997
Net Income 3,283 3,283
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(10,036
shares) 50 204 254
Sale of
Common
Stock
under
Stock
Option
Plan (6,610
shares) 33 74 107
Purchase of
Treasury
Stock
(3,279)
shares) (107) (107)
Sale of
Treas Stock
under
Dividend
Reinv Plan
(1,361
shares) 33 33
Cash
Dividends
Paid (1,139) (1,139)
Stock
Dividend
of 5%
(78,132
shares) 391 1,474 (1,865) ---
Cash in
Lieu of
Fractional
Shares (4) (4)
ESOP Loan
Pymt 122 122
Unall ESOP
Shares
Committed
to
Employees
(4,415
shares) 50 50
Unreal Net
Gain on
Sec Avail-
for-Sale 953 953
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1997 $ 8,277 $11,014 $10,250 $ (94)$ (390) $1,300 $30,357
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) For the Year Ended Dec 31,
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,283 $ 2,822 $ 1,401
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in)
Operating Activities:
Provision for Possible Loan Losses 605 670 1,798
Depreciation and Amortization 884 748 624
Accretion of Security Discounts (70) (130) (152)
Amortization of Security Premiums 124 179 186
Deferred Taxes (277) (99) (156)
Amortization of Deferred Fees on Loans (170) (110) 48
Investment Securities Gains, Net (601) (308) (22)
Loss (Gain) on Sale of Mortgage Loans (178) 30 (22)
Mortgage Loans Originated for Sale (27,183) (24,690) (7,273)
Mortgage Loan Sales 27,145 19,509 6,336
Changes in Assets and Liabilities:
Increase in Accrued Interest Income (212) (142) (130)
Increase (Decrease) in Accrued
Interest Payable 261 (220) 743
Decrease (Increase) in Other Assets (545) 1 75
Increase (Decrease) in Other
Liabilities 625 (6) 384
-------- -------- -------
Net Cash Provided by (Used in)
Operating Activities 3,691 (1,746) 3,840
-------- -------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities
Available-for-Sale 13,986 15,401 11,055
Proceeds from Maturities of Securities
Held-to-Maturity 8,047 5,671 3,284
Proceeds from Sales of Securities
Available-for-Sale 13,279 19,842 11,177
Purchase of Securities Available-for-Sale (40,485) (32,686) (19,306)
Purchase of Securities Held-to-Maturity (5,838) (6,905) (2,836)
Net (Increase) Decrease in Interest-
Bearing Deposits With Banks (110) 550 (434)
Net Increase in Loans (10,130) (22,614) (9,937)
Purchase of Premises and Equipment (1,126) (997) (1,508)
Proceeds from Sale of Other
Real Estate Owned 846 361 463
-------- -------- -------
Net Cash Used in Investing Activities (21,531) (21,377) (8,042)
-------- -------- -------
FINANCING ACTIVITIES
Net (Decrease) Increase in Interest
and Non-Interest-Bearing Demand Deposits
and Savings Accounts 3,804 3,143 (12,555)
Net Increase in Certificates of Deposit 10,783 10,423 19,125
Net Increase (Decrease) in Long-Term Debt --- 18,000 (87)
Net Increase (Decrease) in
Repurchase Agreements 5,009 (2,302) (2,931)
Net Increase (Decrease) in
Short-Term Borrowings --- (7,000) 6,250
Proceeds from Issuance of Common Stock 361 290 252
Purchase of Treasury Stock (107) (102) ---
Proceeds from Sale of Treasury Stock 33 64 ---
Cash Dividends Paid (1,139) (1,011) (972)
Cash in Lieu of Fractional Shares (4) (2) ---
-------- -------- -------
Net Cash Provided by Financing Activities 18,740 21,503 9,082
-------- -------- -------
Increase (Decrease) in Cash and
Cash Equivalents 900 (1,620) 4,880
Cash and Cash Equivalents, January 1, 13,929 15,549 10,669
-------- -------- -------
Cash and Cash Equivalents, December 31, $ 14,829 $ 13,929 $15,549
======== ======== =======
</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, except per share
data) December 31, 1997 and 1996
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 thirteen 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 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
<PAGE>
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.
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.
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.
<PAGE>
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 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.
<PAGE>
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 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).
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).
<PAGE>
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
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share (SFAS 128)". SFAS 128
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Prior periods
earnings per share calculations have been restated to reflect the adoption of
SFAS No. 128. Basic and diluted earnings per share are calculated as follows.
There is no difference between basic and diluted earnings per share for the
years ended December 31, 1997, 1996 and 1995.
<PAGE>
For the Year Ended December 31,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1997
<S> <C> <C> <C>
Net Income $3,283
Basic Earnings Per Share
Income Available to Common Shareholders $3,283 1,620,627 $ 2.02
Effect of Dilutive Securities
Stock Options 4,829
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $3,283 1,625,456 $ 2.02
------ --------- -------
1996
Net Income $2,822
Basic Earnings Per Share
Income Available to Common Shareholders $2,822 1,600,883 $ 1.76
Effect of Dilutive Securities
Stock Options 2,707
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $2,822 1,603,590 $ 1.76
------ --------- -------
1995
Net Income $1,401
Basic Earnings Per Share
Income Available to Common Shareholders $1,401 1,579,428 $ 0.89
Effect of Dilutive Securities
Stock Options 174
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $1,401 1,579,602 $ 0.89
------ --------- -------
</TABLE>
Average common shares outstanding in 1997, 1996 and 1995 do not include 23,138,
26,688 and 30,587, respectively of average weighted unallocated shares held by
the ESOP. The exclusion of these unallocated shares held by the ESOP is due to
the Company's adoption of SOP 93-6 (see Note A.8.). Share and per share
information have been restated to reflect the 5% stock dividends of May, 1997
and May, 1996.
<PAGE>
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 $11,120,000, $9,798,000 and $8,509,000, for the
years ended December 31, 1997, 1996 and 1995, respectively. Cash paid for taxes
was $1,465,000 in 1997, $1,353,000 in 1996 and $440,000 in 1995.
13. Financial Instruments
The estimated fair value as of December 31, 1997 and 1996 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 $5,000, $18,000 and $38,000 at
December 31, 1997, 1996 and 1995, respectively. These amounts were included in
the Company's total contribution expense of $61,000, $51,000 and $142,000 for
1997, 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 $524,000,
$299,000 and $294,000 for the years ended December 31, 1997, 1996 and 1995,
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.
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
<PAGE>
extinguishments 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
did not have a material impact on the Company's consolidated financial position
or results of operations.
18. Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which is effective for years beginning after December 15,
1997. SFAS No. 130 requires entities presenting a complete set of financial
statements to include details of comprehensive income. Comprehensive income
consists of net income or loss for the current period and income, expenses,
gains and losses that bypass the income statement and are reported directly in a
separate component of equity. The effect of adopting SFAS No. 130 is not
expected to be material.
19. Disclosures About Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which is
effective for all periods beginning after December 15, 1997. SFAS No. 131
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. Management is currently evaluating the disclosure
impact of SFAS No. 131 on its financial statements.
20. Stock Dividend
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.
21. Reclassifications
Certain reclassifications of prior years amounts have been made to conform
to the 1997 presentation.
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
<PAGE>
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 1997, 1996 and 1995.
Available-for-sale securities are measured at fair value, with unrealized gains
and losses reported, net of tax, as a component in equity. Held-to-maturity
securities are carried at amortized cost.
Available-for-sale securities had unrealized holding gains of $1,300,000
(net of the tax effect of $670,000) in 1997 and unrealized holding gains of
$347,000 (net of the tax effect of $179,000) in 1996. At December 31, the equity
securities in the available-for-sale category include Federal Reserve Bank stock
in the amount of $239,000 in 1997 and 1996, and Federal Home Loan Bank stock in
the amount of $1,699,000 in 1997 and $1,659,000 in 1996 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,
1997 and 1996 are summarized as follows.
<PAGE>
<TABLE>
1997
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ 9,008 $ 58 $ -- $ 9,066
U. S. Government Agency 14,512 72 28 14,556
State and Political Subdivisions 16,865 465 -- 17,330
Mortgage-Backed Securities 26,791 116 95 26,812
Other Debt Securities --- --- -- ---
Equity Securities 3,878 1,393 11 5,260
------- ------- ------- -------
Total $71,054 $ 2,104 $ 134 $73,024
</TABLE>
<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>
1997
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ --- $ -- $ -- $ ---
U. S. Government Agency 6,008 46 3 6,051
State and Political Subdivisions 3,169 64 -- 3,233
Mortgage-Backed Securities 8,579 99 16 8,662
------- ------- ------- -------
Total $17,756 $ 209 $ 19 $17,946
</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>
<PAGE>
The following table lists the maturities of debt securities at December 31,
1997 and 1996, 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
<TABLE>
At December 31, 1997 Available-for-Sale Held-to-Maturity
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Debt Securities
Due in one year or less $ 3,459 $3,474 $ 387 $ 389
Due after one year
through five years 7,342 7,419 1,213 1,226
Due after five years
through ten years 15,450 15,539 7,266 7,343
Due after ten years 14,134 14,520 311 326
-------- ------- ------ ------
40,385 40,952 9,177 9,284
Mortgage-backed securities 26,791 26,812 8,579 8,662
Equity securities 3,878 5,260 --- ---
-------- ------- ------ ------
Total investments $ 71,054 $73,024 $17,756 $17,946
</TABLE>
Maturities of Debt Securities
<TABLE>
At December 31, 1967 Available-for-Sale Held-to-Maturity
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Debt Securities
Due in one year or less $ 900 $ 904 $ 1,954 $ 1,951
Due after one year
through five years 10,814 10,878 3,475 3,498
Due after five years
through ten years 11,293 11,213 7,566 7,598
Due after ten years 10,889 10,884 1,450 1,460
-------- ------- ------ ------
33,896 33,879 14,445 14,507
Mortgage-backed securities 19,131 19,145 6,554 6,617
Equity securities 3,226 3,755 --- ---
-------- ------- ------ ------
Total investments $ 56,253 $56,779 $20,999 $21,124
</TABLE>
<PAGE>
Investment securities with a carrying amount of $14,001,000 and $7,994,000
at December 31, 1997 and 1996, 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 1997, 1996 and 1995 were $13,279,000, $19,842,000 and
$11,177,000, respectively. Gross gains of $615,000 and gross losses of $14,000
were realized on those sales in 1997. Gross gains of $418,000 and gross losses
of $110,000 were realized on the sales in 1996. In 1995, gross realized gains
were $93,000 and gross realized losses were $71,000.
<PAGE>
NOTE C - LOANS
Major classifications of loans at December 31, 1997 and 1996 are as
follows:
<TABLE>
1997 1996
<S> <C> <C>
Real Estate/Residential $ 138,539 $ 134,013
Real Estate/Construction 12,361 10,923
Real Estate/Commercial 34,579 39,421
Consumer/Installment 35,914 28,870
Commercial (Non-Real Estate)
and Agricultural 9,086 8,715
State and Political Subdivisions 944 906
Other 20 28
--------- ---------
Total Gross Loans 231,443 222,876
Less Unearned Discount (1,856) (2,759)
--------- ---------
Total Loans $ 229,587 $ 220,117
</TABLE>
Included in total gross loans are unamortized loan fees totaling $137,000
at December 31, 1997 and $395,000 at December 31, 1996. There were loans
totaling $813,000 on which the accrual of interest has been discontinued or
reduced at December 31, 1997. During 1997, an average of $821,000 of loans was
on non-accrual status. Non-accrual loans at December 31, 1996 amounted to
$1,440,000 and averaged $1,979,000 during 1996. Loans 90 days and over past due
and still accruing totaled $802,000 at December 31, 1997 and $1,283,000 at
December 31, 1996.
<PAGE>
NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows.
<TABLE>
Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Beginning Balance $ 2,532 $ 2,443 $ 2,187
Additions
Provisions for loan losses
charged to operating expenses 605 670 1,798
Recoveries of loans 97 86 216
------- ------- -------
Total Additions 702 756 2,014
Deductions
Loans charged-off (570) (667) (1,758)
------- ------- -------
Ending Balance $ 2,664 $ 2,532 $ 2,443
</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, 1997 1996 1995
<S> <C> <C> <C>
Principal amount of impaired loans $ 523 $ 1,149 $ 2,035
Accrued Interest --- --- ---
Deferred loan costs 1 7 4
------ -------- --------
524 1,156 2,039
Less valuation allowance (138) (128) (238)
------ -------- --------
$ 386 $ 1,028 $ 1,801
</TABLE>
<PAGE>
<TABLE>
At December 31, 1997 1996 1995
<S> <C> <C> <C>
Cash collected on impaired loans
credited to principal balance $ 657 $ 1,446 $ 138
Recognized as interest income 111 40 44
----- ------ ------
Total $ 768 $ 1,486 $ 182
Interest that would have accrued
on impaired loans $ 64 $ 210 $ 214
</TABLE>
The valuation allowance for impaired loans at December 31, 1997, 1996 and
1995 is included in the "Allowance for Possible Loan Losses" which amounts to
$2,664,000, $2,532,000 and $2,443,000, respectively.
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, 1997 1996 1995
<S> <C> <C> <C>
Valuation allowance at January 1, $ 128 $ 238 $ 160
Provision for loan impairment 158 206 187
Direct charge-offs (148) (325) (125)
Recoveries --- 9 16
------ ---- ----
Valuation allowance at December 31, $ 138 $128 $238
</TABLE>
NOTE F - PREMISES AND EQUIPMENT
Major classifications of these assets at December 31, 1997 and 1996 are
summarized as follows.
<TABLE>
Estimated Useful Lives 1997 1996
<S> <C> <C> <C>
Land ---- $ 939 $ 939
Premises 10 - 20 years 6,948 6,855
Equipment 3 - 10 years 5,329 4,337
------ ------
13,216 12,131
Accumulated depreciation
and amortization (5,917) (5,101)
------ ------
Total Premises and Equipment $7,299 $7,030
</TABLE>
Depreciation and amortization expense amounted to $857,000, $730,000 and
$607,000 in 1997, 1996 and 1995, respectively.
<PAGE>
NOTE G - SHORT-TERM BORROWINGS
FEDERAL RESERVE DISCOUNT BORROWINGS
<TABLE>
Year Ended December 31, 1997 1996 1995
<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 $ ---
Average interest rate during
the year ---% 5.12% ---%
</TABLE>
FEDERAL HOME LOAN BANK BORROWINGS
<TABLE>
Year Ended December 31, 1997 1996 199
<S> <C> <C> <C>
Balance outstanding at December 31, $ --- $ --- $ 7,000
Maximum amount outstanding at any
month-end during the year $ 6,890 $10,000 $11,000
Average amount outstanding
during the year $ 1,217 $ 3,400 $ 6,109
Average interest rate during
the year 5.85% 5.51% 6.34%
</TABLE>
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of
credit in the amount of $12,895,000, all of which was available at December 31,
1997.
There were no short-term borrowings in the form of Federal Funds purchased
at December 31, 1997, 1996 and 1995.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Balance outstanding at December 31, $ 8,804 $ 3,795 $ 6,096
Maximum amount outstanding at any
month-end during the year $ 14,290 $ 7,087 $12,332
Average amount outstanding
during the year $ 6,459 $ 4,740 $ 9,298
Average interest rate during
the year 3.72% 3.14% 3.72%
</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, 1997 and $18,000,000 at December
31, 1996. These loans will mature in one to four years. The weighted average
interest rate on these loans was 5.94% and 5.65% at December 31, 1997 and 1996,
respectively. 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, 1997 are as follows.
<TABLE>
ESOP FHLB Total
Debt Debt Debt
<S> <C> <C> <C>
1998 $ 65 $ 5,000 $ 5,065
1999 65 --- 65
2000 65 8,000 8,065
2001 65 5,000 5,065
2002 65 --- 65
2003 and beyond 65 --- 65
----- ------- -------
Total $ 390 $18,000 $18,390
</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>
1997 1996 1995
<S> <C> <C> <C>
Advertising $ 524 $ 299 $ 294
Consulting Fees $ 530 $ 269 $ 276
Data Processing Services $ 607 $ 594 $ 515
Federal Deposit Insurance Premiu $ 34 $ 2 $ 288
Litigation Costs and Legal Fees $ 587 $ 147 $ 405
Postage $ 247 $ 247 $ 258
Printing, Stationery and Supplie $ 363 $ 343 $ 299
</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, 1997 1996 1995
<S> <C> <C> <C>
Federal
Current $1,573 $ 1,235 $ 671
Deferred (benefit) (277) (99) (156)
------ ------ ----
Total $1,296 $1,136 $515
</TABLE>
The income tax provision reconciled to the tax computed statutory Federal
rate is as follows.
<TABLE>
Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Federal tax expense
at statutory rate $1,557 $1,346 $651
Increase (decrease)
in taxes resulting from:
Tax-exempt investment
securities income (261) (195) (124)
Tax-exempt interest
on loans (16) (18) (19)
Other, net 16 3 7
------ -------- ----
Applicable Income Taxes $1,296 $ 1,136 $515
</TABLE>
Deferred tax assets and liabilities consist of the following.
<TABLE>
At December 31, 1997 1996
<S> <C> <C>
Deferred Tax Assets:
Loan Loss Reserve $ 614 $ 561
Deferred Compensation 428 433
Post-Retirement Benefits 59 51
Deferred Loan Fees 67 84
Depreciation 30 21
Miscellaneous Reserves 220 ---
Other 15 40
--------- ----------
Total 1,433 1,190
--------- ----------
Deferred Tax Liability:
Unrealized Securities Gains 670 179
Other --- 35
--------- ----------
Total 670 214
--------- ----------
Net $ 763 $ 976
</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 1993, the ESOP borrowed $650,000 from a bank payable over ten years. The
interest rate on this loan is that bank's prime rate plus 1.25% (for an interest
rate of 9.75% at December 31, 1997 and 9.50% at December 31, 1996). The balance
outstanding on this loan was $390,000 at December 31, 1997.
During 1997, the ESOP made the final principal payments on two additional
loans. In 1985, the ESOP borrowed $350,000 from a commercial bank. The loan was
payable over twelve years, with interest and principal due quarterly. This loan
had interest at a rate of 87.5% of prime plus 1/4% which was 7.47% at December
31, 1996. This loan was paid in full at maturity on March 31, 1997. The ESOP
borrowed an additional $385,000 in August 1987 from a commercial bank. This loan
was payable over ten years, with interest and principal due quarterly. The loan
had an interest rate of 92% of the prime rate (for an interest rate of 7.59% at
December 31, 1996). This loan matured on July 1, 1997 and was paid in full. The
ESOP's total outstanding debt at December 31, 1996 was $512,000.
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
$41,000, $52,000 and $67,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
Compensation expense related to the ESOP amounted to $275,000, $229,000 and
$178,000 for the years ended December 31, 1997, 1996 and 1995, respectively. As
provided by SOP 93-6 (see Note A.8.), the ESOP compensation expense includes
$50,000 in 1997 and $18,000 in 1996 and $3,000 in 1995, 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 4,415 in 1997,
5,637 in 1996 and 4,724 in 1995.
Dividends on unallocated shares used for debt service were $23,000, $38,000
and $37,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
The total shares held by the ESOP were 215,066 and 213,446 at December 31,
1997 and 1996, respectively. ESOP shares have been restated to reflect the 5%
stock dividends of May, 1997 and May, 1996.
NOTE L - OTHER BENEFIT PLAN
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 $84,000, $71,000 and $55,000 in
1997, 1996 and 1995, 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, 1997 and 1996.
Actuarial present value of benefit obligations is as follows:
<TABLE>
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
at December 31, 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Accumulated benefit obligation, all of
which is vested $ 55 $ 47 $ 477 $ 495
Projected benefit obligation
for service rendered to date $(366) $(200) $(477) $(495)
Plan assets at fair value -- -- -- --
----- ----- ----- -----
Projected benefit obligation
in excess of plan assets (366) (200) (477) (495)
Unrecognized net (gain) loss from past
experience different from that
assumed and effects of changes
in assumptions (43) (207) 5 6
Prior service cost not yet recognized
in net periodic pension cost -- -- -- --
Unrecognized net assets at December 31,
being recognized over 15 years (5) (5) -- --
Adjustment to recognize
additional minimum liability -- -- (5) (6)
----- ----- ----- -----
Accrued Pension Cost $(414) $(412) $(477) $(495)
</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
1997, 1996 and 1995 for the Officers' Supplemental Retirement Plan. The weighted
average assumed discount rate used in determining the actuarial present value of
the projected benefit obligation for the Deferred Directors' Plan was 7.5% in
1997, 1996 and 1995. The weighted average expected long-term rate of return on
assets was 8% for 1997, 1996 and 1995 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.
<TABLE>
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
at December 31, 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits
earned during the period $ 10 $ 15 $ 14 $ -- $ -- $ --
Interest cost on projected
benefit obligation 11 15 15 36 36 36
Net amortization and deferral (19) (10) (11) -- -- --
---- ---- ---- ---- ---- ----
Net Periodic Pension Cost $ 2 $ 20 $ 18 $ 36 $ 36 $ 36
</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 have retired 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 1997, 1996 and 1995. 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, 1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits
earned during the period $ --- $ --- $ 5
Interest cost on accumulated
benefit obligation 14 15 25
Amortization of transition obligation 8 8 15
------ ------ -----
Net periodic post-retirement benefit cost $ 22 $ 23 $ 45
</TABLE>
The assumptions used to develop the net periodic post-retirement benefit
cost and the accrued post-retirement benefit cost were as follows.
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Discount rate 7.00% 7.00% 7.00%
Medical care cost trend rate 10.00% 11.00% 12.00%
</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, 1997 1996
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $203 $181
Active, eligible employees --- 36
Active, not-yet-eligible employees --- --
---- ----
Accumulated post-retirement benefit obligation 203 217
Plan assets at fair value --- ---
---- ----
Accumulated benefit obligation in excess of plan assets 203 217
Unrecognized transition obligation (232) (247)
Unrecognized net gain (loss) 93 92
---- ----
Accrued post-retirement benefit cost $ 64 $ 62
</TABLE>
At December 31, 1997, $173,000 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 $16,000 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, $22,000 and $28,000 in 1997,
1996 and 1995, 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. In 1997, options to purchase 19,000 common shares of
the Company's stock at a price of $23.50 per share were awarded under this plan.
No options were granted under these Plans in 1996. In January of 1998, options
to purchase 29,500 shares of the Company's common stock at a price of $37.00 per
share were awarded. The aggregate number of shares which may be issued under
these plans are 287,706 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 1,157 shares of the Company's common
stock at the fair market value of the Company's common stock of $14.69 per
share. The Plan 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 1,157 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 1,157 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
23,152 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
<TABLE>
Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C> <C>
Net Income As reported $3,283 $2,822 $1,401
Pro forma $3,265 $2,814 $1,385
Basic earnings per share As reported $ 2.02 $ 1.76 $ 0.89
Pro forma $ 2.01 $ 1.76 $ 0.88
Diluted earnings per share As reported $ 2.02 $ 1.76 $ 0.89
Pro forma $ 2.01 $ 1.75 $ 0.88
</TABLE>
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 1997, 1996 and 1995, respectively: dividend yield
of 2.1%, 3.1% and 3.8%; expected volatility of 39.0%, 39.5% and 54.3%; risk-free
interest rates of 6.7%, 7.0% and 7.2%; and expected lives of 10 years.
<PAGE>
A summary of the status of the Company's Employee Stock Option Plans as of
December 31, 1997 and 1996, and changes during the years ending on those dates
is presented below. The number of shares and price per share have been restated
to reflect the 5% stock dividends of May, 1997 and May, 1996.
<PAGE>
<TABLE>
Year Ended December 31, 1997
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 12,079 $ 15.29
Granted 19,000 23.50
Exercised 5,742 16.46
------ --------
Outstanding at end of year 25,337 $ 21.42
Options exercisable at year-end 4,753
Weighted average fair value of
options granted during the year $ 23.50
</TABLE>
<TABLE>
Year Ended December 31, 1996
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 17,821 $ 16.43
Granted None ---
Exercised 5,742 17.75
------ --------
Outstanding at end of year 12,079 $ 15.79
Options exercisable at year-end 8,913
Weighted average fair value of
options granted during the year N/A
</TABLE>
<TABLE>
Year Ended December 31, 1995
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 17,821 $ 16.43
Granted None ---
Exercised None ---
------ --------
Outstanding at end of year 17,821 $ 16.43
Options exercisable at year-end 15,721
Weighted average fair value of
options granted during the year N/A
</TABLE>
The following information applies to options outstanding at December 31,
1997.
EMPLOYEE STOCK OPTION PLAN
Number outstanding 25,337
Range of exercise prices $15.19 - $23.50
Weighted-average exercise price $21.42
Weighted-average remaining contractual life 9.12 years
A summary of the status of the Company's Non-Employee Director Stock Option
Plan as of December 31, 1997 and 1996, and changes during the years ending on
those dates are presented below. The number of shares and price per share have
been restated to reflect the 5% stock dividends of May, 1997 and May, 1996.
<PAGE>
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<TABLE>
Year Ended December 31, 1997
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 10,413 $ 14.92
Granted None ---
Exercised 868 14.69
Expired 289 14.69
----- --------
Outstanding at end of year 9,256 $ 14.96
Options exercisable at year-end 5,785
Weighted average fair value of
options granted during the year N/A
</TABLE>
<TABLE>
Year Ended December 31, 1996
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 10,413 $ 14.60
Granted 1,157 17.62
Exercised 289 14.69
Expired 868 14.69
----- --------
Outstanding at end of year 10,413 $ 14.92
Options exercisable at year-end 3,858
Weighted average fair value of
options granted during the year $ 17.62
</TABLE>
<TABLE>
Year Ended December 31, 1995
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 9,256 $ 14.69
Granted 2,314 14.29
Exercised None ---
Expired 1,157 14.69
----- --------
Outstanding at end of year 10,413 $ 14.60
Options exercisable at year-end 2,025
Weighted average fair value of
options granted during the year $ 14.29
</TABLE>
<PAGE>
The following information applies to options outstanding at December 31, 1997.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Number outstanding 9,256
Range of exercise prices $14.29 - $17.62
Weighted-average exercise price $14.96
Weighted-average remaining contractual life 6.78 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, 1997 are payable as follows.
Operating Leases
1998 $ 381
1999 373
2000 388
2001 406
2002 394
2003 and beyond 1,947
-------
Total $ 3,889
The total rental expense was $421,000, $530,000 and $594,000 in 1997, 1996
and 1995, 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, 1997 are as follows.
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $18,354
Standby letters of credit $ 5,330
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
87.3% as of December 31, 1997.
<PAGE>
NOTE Q - CONCENTRATIONS OF CREDIT RIS
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, 1997, the Bank had residential real estate loans
outstanding totaling $138,539,000, which is 60.3% of total loans. The Bank also
had real estate related commercial loans outstanding at December 31, 1997
totaling $34,579,000, which is 15.1% of total loans. Loans to various
residential apartment building owners totaling $8,368,000 are included in the
Bank's total real estate commercial loans. These loans represent 24% of the
total real estate related commercial loans.
NOTE R - RELATED PARTY TRANSACTIONS
The amount of loans by the Company to its directors and executive officers
was approximately $1,311,000 and $3,087,000 at December 31, 1997 and 1996,
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 1997 activity of these loans follows.
Balance, January 1, 1997 $ 3,087
New loans 203
Repayments (1,979)
--------
Balance, December 31, 1997 $ 1,311
<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, 1997, that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $3,227,000.
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 subordinated debt instruments, and the allowance for possible
loan losses. Management believes that, as of December 31, 1997, 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, 1997 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,271 16.03% $15,609 8.00% --- ---
Bank $27,200 13.97% $15,576 8.00% $19,470 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $28,829 14.78% $ 7,804 4.00 --- ---
Bank $24,163 12.41% $ 7,788 4.00% $11,682 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $28,829 8.33% $13,551 4.00% --- ---
Bank $24,163 7.06% $13,416 4.00% $16,770 5.00%
</TABLE>
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Action
(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% --- ---
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% --- ---
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% --- ---
Bank $22,435 7.20% $12,456 4.00% $15,570 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 1997 was approximately $4,305,000 and $4,702,000, respectively. For
1996, the average reserve balance was $3,585,000 and the year-end amount was
$3,857,000.
NOTE T - EQUITY TRANSACTIONS
The Company paid a 5% stock dividend on its common stock from authorized
but unissued shares on June 19, 1997 to all shareholders of record at the close
of business on May 30, 1997. 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 these 5% stock dividends.
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 1997, 11,696 common shares were
purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an
average cost of $24.51 per share for total proceeds of $287,000. The shares
purchased in 1997 were comprised of 10,292 new common shares at an average price
of $24.73 for proceeds of $254,000 and 1,404 shares from Treasury shares at an
<PAGE>
average price of $22.86 for proceeds of $33,000. In 1996, 14,449 common
shares were purchased pursuant to the Dividend Reinvestment and Stock Purchase
Plan at an average cost of $17.16 for proceeds of $248,000.
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, 1997 and 1996 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>
1997 1996
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 14,829 $ 14,829 $ 13,929 $ 13,929
Investment securities 17,946 17,756 21,124 20,999
Securities available-for-sale 73,024 73,024 56,779 56,779
Mortgage loans held-for-sale 759 759 721 721
</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>
1997 1996
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Assets:
Interest-bearing deposits
with banks $ 395 $ 395 $ 285 $ 285
Liabilities:
Deposits with stated
maturities 127,673 127,350 117,400 117,485
Securities sold under
agreements to repurchase 8,804 8,804 3,795 3,795
Short-term borrowings 4,925 5,000 --- ---
Long-term debt 12,805 13,390 17,994 18,512
</TABLE>
Fair value of financial instrument liabilities with no stated maturities
has been estimated to equal the carrying amount (the amount payable on demand).
<TABLE>
1997 1996
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Deposits with no
stated maturities $ 154,905 $ 154,905 $ 150,268 $150,268
</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>
1997 1996
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Total loans $228,278 $229,587 $219,180 $220,117
</TABLE>
There is no material difference between the carrying amount and the
estimated fair value of off-balance-sheet items totaling $23,684,000 at December
31, 1997 and $20,643,000 at December 31, 1996 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, 1997 1996
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 8 $ 16
Interest-Bearing Deposits
with Banks 904 656
Loan to Banking Subsidiary 1,000 1,000
Investment in Banking Subsidiary 24,760 22,633
Investment in Other Subsidiary 4,113 3,073
Other Assets 12 12
------- -------
TOTAL ASSETS $30,797 $27,390
LIABILITIES
Long-Term Debt $ 390 $ 512
Other Liabilities 50 73
------- -------
TOTAL LIABILITIES 440 585
SHAREHOLDERS' EQUITY 30,357 26,805
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $30,797 $27,390
</TABLE>
<PAGE>
<TABLE>
Condensed Statement of Income
For the Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
INCOME
Dividends from Subsidiaries $ 1,139 $ 1,111 $ 829
Interest on Loan to Subsidiary 89 114 149
Interest on Deposits with Banks 21 12 5
------- ------- -------
Total Income 1,249 1,237 983
------- ------- -------
EXPENSES
Interest on Long-Term Debt 41 52 67
Other Expenses 99 105 77
------- ------- -------
Total Expenses 140 157 144
------- ------- -------
Income Before Taxes and
Equity in Undistributed Net
Earnings of Subsidiaries 1,109 1,080 839
Federal Income Tax (Credit) (10) (11) 3
------- ------- -------
Income Before Equity in Undistributed
Net Earnings of Subsidiaries 1,119 1,091 836
Equity in Undistributed Net Earnings
of Subsidiaries 2,164 1,731 565
------- ------- -------
NET INCOME $ 3,283 $ 2,822 $ 1,401
</TABLE>
<PAGE>
<TABLE>
Condensed Statement of Cash Flows
For The Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,283 $ 2,822 $ 1,401
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Distribution in Excess of Undistributed
Net Earnings of Subsidiaries (2,164) (1,731) (565)
Changes in Assets and Liabilities:
(Increase) Decrease in Interest-Bearing
Deposits with Banks (248) (366) (94)
(Increase) Decrease in Other Assets --- (10) 40
Increase (Decrease) in Other Liabilities 23 7 (7)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 848 722 775
------- ------- -------
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)
Purchase of Treasury Stock (107) (102) --
Proceeds from the Sale of Treasury Stock 33 64 --
Proceeds from Issuance of Common Stock 361 290 252
Cash Dividends Paid (1,139) (1,011) (972)
Cash in Lieu of Fractional Shares (4) (3) --
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (856) (762) (807)
------- ------- -------
Decrease in Cash and Cash Equivalents 8 (40) (32)
Cash and Cash Equivalents, January 1, 16 56 88
------- ------- -------
Cash and Cash Equivalents, December 31, $ 8 $ 16 $ 56
------- ------- -------
</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 7, 1998 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 South 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, 1997, there were 760 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 1997 was $35.50 and
in December 1996 was $20.95. Stock prices and dividends per share have been
restated to reflect the 5% stock dividends of May, 1997 and May, 1996 (see "Note
T - Equity Transactions" in the "Notes to Consolidated Financial Statements").
<PAGE>
<TABLE>
1996 High Low Cash Dividends
Declared
<S> <C> <C> <C>
First Quarter $17.91 $16.32 $ 0.1542
Second Quarter 18.14 16.32 0.1619
Third Quarter 18.10 17.14 0.1619
Fourth Quarter 21.90 17.14 0.1619
--------
TOTAL $ 0.6399
</TABLE>
<TABLE>
1997
<S> <C> <C> <C>
First Quarter $23.57 $21.19 $ 0.1714
Second Quarter 24.50 22.38 0.1700
Third Quarter 34.25 23.50 0.1800
Fourth Quarter 35.50 34.69 0.1800
--------
TOTAL $ 0.7014
</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 South 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, 1997.
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 South 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.; 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 i Exchange Act of 1934" in the
Company's 1998 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 1998 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 1998 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
12/31/97 and 12/31/96
Consolidated Statements of Income for the Years Ended
12/31/97, 12/31/96 and 12/31/95
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended 12/31/97, 12/31/96 and 12/31/95
Consolidated Statements of Cash Flows for the Years Ended
12/31/97, 12/31/96 and 12/31/95
Notes to Consolidated Financial Statements
<PAGE>
2. Exhibits:
Number Title
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 Agreement dated July 19, 1994 by and between the Bank
and S. Eric Beattie
*10.10.1(12 Amendment No. 1 to Severance Agreement by and between the Board
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
*10.11.1(12) Amendment No. 1 to Severance Agreement by and between the Board
and Reid L. Heeren
*10.12 (9) Severance agreement dated July 19, 1994 by and between the Bank and
Arthur Williams
*10.12.112) Amendment No. 1 to Severance Agreement by and between the Board
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
*10.17 (11) 1996 Employee Stock Option Plan
*10.18 Severance Agreement dated September 22, 1997 by and between the
Board and Tomas J. Bamberger
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, 1997.
<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 30, 1998 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 30, 1998
By: /s/ S. Eric Beattie
S. ERIC BEATTIE
President, Chief Executive Officer
and Director (Principal Executive Officer)
March 30, 1998
By: /s/ Reid L. Heeren
REID L. HEEREN
Executive Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
March 30, 1998
By: /s/ Robert J. Bergren
ROBERT J. BERGREN
Director
March 30, 1998
<PAGE>
By: /s/ Gordon Mowrer
GORDON MOWRER
Director
March 30, 1998
By: /s/ Daniel B. Mulholland
DANIEL B. MULHOLLAND
Director
March 30, 1998
By: /s/ Robert C. Nagel
ROBERT C. NAGEL
Director
March 30, 1998
By: /s/ Charles J. Peischl
CHARLES J. PEISCHL, ESQUIRE
Director
March 30, 1998
By: /s/ Richard Stevens
RICHARD STEVENS
Director
March 30, 1998
By: /s/ Maria Zumas Thulin
MARIA ZUMAS THULIN
Director
March 30, 1998
Exhibit 10.10.1
AMENDMENT NO. 1 TO SEVERANCE AGREEMENT DATED AS OF JULY 19, 1994
BETWEEN NAZARETH NATIONAL BANK & TRUST CO. AND S. ERIC BEATTIE
Reference is made to a Severance Agreement dated as of July 19, 1994 by and
between Nazareth National Bank and Trust Co. and S. Eric Beattie (the "Severance
Agreement"). Section 1 of the Severance Agreement provides that the Severance
Agreement will continue until the earliest of certain dates set forth therein,
and clause (e) of Section 1 states as follows:
"(e) three years from the date hereof."
Clause (e) of Section 1 of the Severance Agreement is hereby amended to
read in full as follows:
"(e) December 31, 2000."
In all other respects the Severance Agreement shall continue in full force
and effect. The parties intend to be legally bound hereby.
NAZARETH NATIONAL BANK & TRUST CO.
(Corporate Seal)
BY: /s/ John J. Schlamp
ATTEST: /s/ Judith S. Files
Witness:
/s/ Judith S. Files /s/ S. Eric Beattie (Seal)
S. ERIC BEATTIE
FIRST COLONIAL GROUP, INC., a Pennsylvania Corporation, hereby consents to this
Amendment No. 1.
FIRST COLONIAL GROUP, INC.
BY: /s/ John J. Schlamp
ATTEST:
/s/ Judith S. Files
Exhibit 10.11.1
AMENDMENT NO. 1 TO SEVERANCE AGREEMENT DATED AS OF JULY 19, 1994
BETWEEN NAZARETH NATIONAL BANK & TRUST CO. AND REID L. HEEREN
Reference is made to a Severance Agreement dated as of July 19, 1994 by and
between Nazareth National Bank and Trust Co. and Reid L. Heeren (the "Severance
Agreement"). Section 1 of the Severance Agreement provides that the Severance
Agreement will continue until the earliest of certain dates set forth therein,
and clause (e) of Section 1 states as follows:
"(e) three years from the date hereof."
Clause (e) of Section 1 of the Severance Agreement is hereby amended to
read in full as follows:
"(e) December 31, 2000."
In all other respects the Severance Agreement shall continue in full force
and effect. The parties intend to be legally bound hereby.
NAZARETH NATIONAL BANK & TRUST CO.
(Corporate Seal)
BY: /s/ S. Eric Beattie
ATTEST: /s/ Judith S. Files
Witness:
/s/ Judith S. Files /s/ Reid L. Heeren (Seal)
REID L. HEEREN
Exhibit 10.12.1
AMENDMENT NO. 1 TO SEVERANCE AGREEMENT DATED AS OF JULY 19, 1994
BETWEEN NAZARETH NATIONAL BANK & TRUST CO. AND ARTHUR WILLIAMS
Reference is made to a Severance Agreement dated as of July 19, 1994 by and
between Nazareth National Bank and Trust Co. and Arthur Williams (the "Severance
Agreement"). Section 1 of the Severance Agreement provides that the Severance
Agreement will continue until the earliest of certain dates set forth therein,
and clause (e) of Section 1 states as follows:
"(e) three years from the date hereof."
Clause (e) of Section 1 of the Severance Agreement is hereby amended to
read in full as follows:
"(e) December 31, 2000."
In all other respects the Severance Agreement shall continue in full force
and effect. The parties intend to be legally bound hereby.
NAZARETH NATIONAL BANK & TRUST CO.
(Corporate Seal)
BY: /s/ S. Eric Beattie
ATTEST: /s/ Judith S. Files
Witness:
/s/ Judith S. Files /s/ Arthur Williams (Seal)
ARTHUR WILLIAMS
Exhibit 10.18
SEVERANCE AGREEMENT
Agreement made this 22nd day of September 1997, by and between Nazareth
National Bank and Trust Company, a banking association organized under the laws
of the United States ("Bank") and Tomas J. Bamberger, an individual
("Employee").
BACKGROUND
Employee is currently employed by the Bank in the position of Executive
Vice President and Chief Lending Officer. In consideration of Employee's past,
present and future services to the Bank, the Bank desires to provide for the
payment of certain compensation and other benefits to Employee upon the
occurrence of certain events, all as more fully set forth below.
In consideration of the mutual covenants and agreements herein contained,
and intending to be legally bound hereby, the parties agree as follows:
1. Term. This Agreement shall continue for a period beginning on the day
hereof and ending on the earliest of the following dates (the "Term"): (a) the
date Employee dies or becomes permanently disabled (i.e., upon his failure to
render services of the character which he had previously rendered to the Bank,
because of his physical or mental illness or other incapacity beyond his control
for a continuous period of six months or for shorter periods aggregating six
months in any twelve month period); (b) termination of Employee's employment
with the Bank for cause (as hereinafter defined); (c) mutual agreement of the
Bank and Employee; (d) subject to Section 2 hereof, termination by Employee of
Employee's employment with the Bank by resignation or otherwise; or (e) December
31, 2000. In the event the Employee's employment with the Bank is terminated
<PAGE>
during the Term other than as set forth in Section 2 hereof, the Employee shall
have no rights or benefits under this Agreement, but shall be entitled to any
other rights or benefits to which he or she might otherwise be entitled to. For
purposes of this Agreement, the term "cause" shall mean (i) conviction of
Employee for any felony, fraud or embezzlement or (ii) Employee failing or
refusing to comply with the written policies or directives of the Bank's Board
of Directors or the Employee being guilty of misconduct in connection with the
performance of his duties for the Bank and the Employee fails to cure such
non-compliance or misconduct within twenty days after receiving written notice
from the Bank's Board of Directors specifying such non-compliance or misconduct.
2. Termination. If during the Term hereof, the Employee's employment with
the Bank is terminated as set forth below, the Bank will pay to Employee the
amount set forth in Section 3 hereof and Employee shall be entitled to the
benefits set forth in Section 4 hereof:
(a) the Bank terminates Employee's employment with the Bank without cause;
or
(b) the Employee terminates Employee's employment with the Bank due to the
fact that the nature and scope of Employee's duties and authority or his
responsibilities with the Bank or the surviving or acquiring person are
materially reduced to a level below that which he enjoys on the date hereof, his
<PAGE>
then current base annual salary is materially reduced to a level below that
which he enjoys on the date hereof, the fringe benefits which the Bank provides
Employee on the date hereof are materially reduced, Employee's position or title
with the Bank or the surviving or acquiring person is materially reduced from
his current position or title with the Bank, or without Employee's consent,
Employee's principal place of employment with the Bank is changed to a location
greater than eighty miles from his current principal place of employment with
the Bank, provided, however, that for any termination by Employee under this
clause (b) the Employee shall have first given Bank ten (10) days written notice
of his intention to termination his employment pursuant to this clause (ii),
specifying the reason(s) for such termination, and provided further, that the
Bank shall not have cured or remedied the reason(s) specified in such notice
prior to the expiration of ten (10) days after receipt of such written notice.
3. Termination Payments to Employee. Commencing not later than 30 days
after the date Employee's employment with the Bank is terminated pursuant to
Section 2 hereof (the "Termination Date") and subject to Employee's compliance
with Section 8 hereof, the Bank shall pay compensation to Employee for a one
year period following the Termination Date (the "Compensation Period") at a per
annum rate equal to 100% of Employee's "base annual salary" on the Termination
Date. For purposes of this Agreement, the term "base annual salary" shall mean
the Employee's annual compensation rate on the Termination Date exclusive of
cash bonuses and payments under the Bank's Annual Incentive Bonus Plan. The Bank
agrees that it will make the payments due under this Section 3 on the first day
of each month following the Termination Date in an amount equal to 1/12 of 100%
of Employee's base annual salary on the Termination Date. Such payments to
Employee shall be reduced each month by the sum of the following:
<PAGE>
(a) by the amount of any pension or annuity benefits Employee receives
under the Bank's Defined Benefit Pension Plan as the same shall be amended from
time to time, if Employee had retired at age 65 (regardless of when he actually
retired) and had elected the single life annuity benefit (regardless of the
benefit he actually elected), and (b)in the event Employee commences employment
within the Compensation Period, by the amount of base annual salary to which he
is then entitled by virtue of his new employment. The intent of this paragraph
is that the sum of payments made under this Section 3 in any year, when added to
payments received under the Bank's Defined Benefit Pension Plan and base annual
salary received by virtue of other employment, will not exceed the Employee's
base annual salary on the Termination Date. The Employee covenants and agrees
that upon the termination of the Employee's employment with the Bank, the
Employee shall use his best efforts to secure new employment.
4. Other Benefits. In addition to the compensation set forth in Section 3
hereof, Employee shall be entitled to the following benefits from the Bank:
(a) for a period of one year following the Termination Date, reimbursement
for all reasonable expenses incurred by Employee in connection with the search
for new employment, including, without limitation, those of a placement agency
or service; provided, however, in no event shall the Bank be obligated to
reimburse Employee hereunder in excess of 1/3 of his base annual salary on the
Termination Date.
<PAGE>
(b) for a period of one year following the Termination Date, reimbursement
for all reasonable relocation expenses incurred by Employee in connection with
securing new employment; provided, however, in no event shall the Bank be
obligated to reimburse Employee hereunder in excess of 1/3 of his base annual
salary on the Termination Date.
(c) for a period of one year following the Termination Date, Employee shall
be entitled to participate in the following programs of the Bank:
(i) All medical, hospitalization and life insurance benefits shall be
continued for the Compensation Period except that should subsequent
employment be accepted during the Compensation Period, continuation of any
medical, hospitalization and life insurance benefits will be offset by
coverages provided through the Employee's subsequent employer.
(ii) If permitted under the terms thereof, Employee will remain a
participant under the Bank's Defined Benefit Pension Plan, however,
benefits will be actuarially reduced based upon the number of years
remaining until Employee's normal retirement date had he remained an
employee of the Bank.
5. Withholding. The Bank may withhold from any benefits payable under this
Agreement all federal, state, city or other taxes as shall be required pursuant
to any law or governmental regulation or ruling.
6. Source of Payment. All payments provided under this Agreement shall be
paid in cash from the general funds of the Bank. No special or separate fund
shall be required to be established by the Bank and the Employee shall have no
right, title or interest whatsoever in or to any investment which the Bank may
make to aid the Bank in meeting its obligations hereunder. Nothing contained in
this Agreement, and no action taken pursuant to its provisions, shall create or
<PAGE>
be construed to create a trust of any kind or a fiduciary relationship between
the Bank and Employee or any other person.
7. (a) Nonassignability. Neither this Agreement nor any right or interest
hereunder shall be assignable by Employee or his legal representatives without
the Bank's prior written consent.
(b) Attachment. Except as required by law, the right to receive payments
under this Agreement shall not be subject of anticipation, sale, encumbrance,
charge, levy, or similar process or assignment by operation of law.
8. Confidentiality and Non-Competition. All payments to Employee under this
Agreement shall be subject to Employee's compliance with the provisions of this
Section 8. If Employee fails to comply with such provisions, his right to any
future payments under this Agreement shall terminate and the Bank's obligations
under this Agreement to make such payments and provide such benefits shall
cease.
(a) Employee covenants and agrees that he will not, during the term of his
employment and at any time thereafter, except with the express prior written
consent of the Bank or pursuant to the lawful order of any judicial or
administrative agency of government, directly or indirectly, disclose,
communicate or divulge to any person, or use for the benefit of any person, any
knowledge or information with respect to the conduct or details of the Bank's
business which he, acting reasonably, believes or should believe to be of a
confidential nature and the disclosure of which not to be in the Bank's
interest.
<PAGE>
(b) Employee covenants and agrees that he will not, during the term of his
employment and for a period of one year thereafter, except with the express
prior written consent of the Bank, directly or indirectly, whether as employee,
employer, owner, partner, consultant, agent, director, officer, shareholder or
in any other capacity, engage in or assist any person to engage in any act or
action which he, acting reasonably, believes or should believe would be harmful
or inimical to the interests of the Bank.
(c) Employee covenants and agrees that he will not, during the term of his
employment and for a period of one year thereafter, except with the express
prior written consent of the Bank, in any capacity (including, but not limited
to, owner, partner, shareholder, consultant, agent, employee, employer, officer,
director or otherwise), directly or indirectly, for his own account or for the
benefit of any person, engage or participate in or otherwise be connected with
any commercial bank which has its principal office in either Northampton or
Lehigh Counties, Pennsylvania or Warren County, New Jersey except that the
foregoing shall not prohibit Employee from owning as a shareholder less than l%
of the outstanding stock of an issuer whose stock is publicly traded.
(d) The parties agree that any breach by Employee of any of the covenants
or agreements contained in this Section 8 will result in irreparable injury to
the Bank for which money damages could not adequately compensate the Bank and
therefore, in the event of any such breach, the Bank shall be entitled (in
addition to any other rights and remedies which it may have at law or in equity)
<PAGE>
to have an injunction issued by any competent court enjoining and
restraining Employee and/or any other person involved therein from continuing
such breach. The existence of any claim or cause of action which Employee may
have against the Bank or any other person (other than a claim for the Bank's
breach of this Agreement for failure to make payments hereunder) shall not
constitute a defense or bar to the enforcement of such covenants. In the event
of an alleged breach by Employee of any of the covenants or agreements contained
in this Section 8, the Bank shall continue any and all of the payments due
Employee under this Agreement until such time as a court shall enter a final and
unappealable order finding such a breach; provided, however, that the foregoing
shall not preclude a court from ordering Employee to repay such payments made to
him for the period after the breach is determined to have occurred or from
ordering that payments hereunder be permanently terminated in the event of a
material and willful breach.
(e) If any portion of the covenants or agreements contained in this Section
8, or the application thereof, is construed to be invalid or unenforceable, the
other portions of such covenant(s) or agreement(s) or the application thereof
shall not be affected and shall be given full force and effect without regard to
the invalid or unenforceable portions to the fullest extent possible. If any
covenant or agreement in this Section 8 is held unenforceable because of the
area covered, the duration thereof, or the scope thereof, then the court making
such deter mination shall have the power to reduce the area and/or duration
and/or limit the scope thereof, and the covenant or agreement shall then be
enforceable in its reduced form.
<PAGE>
(f) For purposes of this Section 8, the term "the Bank" shall include the
Bank, any successor to the Bank under Section 9 hereof, and all present and
future direct and indirect subsidiaries and affiliates of the Bank.
9. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon any corporate or other successor of the Bank which may acquire,
directly or indirectly, by merger, consolidation, purchase, or otherwise, all or
substantially all of the assets of the Bank, and shall otherwise inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
executors, administrators, successors and assigns. Nothing in the Agreement
shall preclude the Bank from consolidating or merging into or with or
transferring all or substantially all of its assets to another person. In that
event, such other person shall assume this Agreement and all obligations of the
Bank hereunder. Upon such a consolidation, merger, or transfer of assets and
assumption, the term "the Bank" as used herein, shall mean such other person and
this Agreement shall continue in full force and effect.
10. Waivers Not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
11. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice:
<PAGE>
If to Employee, to:
Tomas J. Bamberger
510 East Station Avenue
Coopersburg, Pennsylvania 18036
If to the Bank, to:
Nazareth National Bank and Trust Company
76 South Main Street
Nazareth, Pennsylvania 18064
Attn: Board of Directors
and to such other or additional person or persons as either party shall
have designated to the other party in writing by like notice.
12. Applicable Law; Jurisdiction. This Agreement shall be governed by and
construed and enforced in accordance with the substantive laws of the
Commonwealth of Pennsylvania with respect to contracts executed in and to be
wholly performed therein. Bank and Employee consent to the exclusive
jurisdiction of the Court of Common Pleas, Northampton County, Commonwealth of
Pennsylvania and the United States District Court for the Eastern District of
Pennsylvania in any and all actions arising hereunder and irrevoc ably consent
to service of process as set forth in Section 11 hereof.
13. General Provisions.
(a) This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof, and supersedes and replaces all prior
agreements between the parties. No amendment, waiver or termination of any of
the provisions hereof shall be effective unless in writing and signed by the
party against whom it is sought to be enforced. Any written amendment, waiver or
<PAGE>
termination hereof executed by the Bank and Employee shall be binding upon them
and upon all other persons, without the necessity of securing the consent of any
other person and no person shall be deemed to be a third party beneficiary under
this Agreement.
(b) This Agreement shall not limit or infringe upon the right of the Bank
to terminate the employment of Employee at any time for any reason, nor upon the
right of Employee to terminate his employment with the Bank.
(c) The term "person" as used in this Agreement means a natural person,
joint venture, corporation, sole proprietorship, trust, estate, partnership,
cooperative, association, non-profit organization or any other legally
cognizable entity.
(d) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same Agreement.
(e) No failure on the part of any party hereto to exercise and no delay in
exercising any right, power or remedy hereunder preclude any other or further
exercise thereof or the exercise of any other rights, power or remedy.
(f) The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall in no way restrict or modify any of the
terms or provisions hereof. (g) Nothing contained herein shall be construed to
require the Bank to violate applicable law, including, but not limited to,
applicable banking laws and regulations, and all obligations of the Bank under
this Agreement shall be deemed to be qualified accordingly.
<PAGE>
ATTEST: NAZARETH NATIONAL BANK AND
TRUST COMPANY
By:/s/ Judith S. Files By:/s/ S. Eric Beattie
, Secretary S. Eric Beattie, President
Witness:
/s/ Reid L. Heeren /s/ Tomas J. Bamberger (SEAL)
Tomas J. Bamberger
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 9, 1998 accompanying the
consolidated financial statements included in the 1997 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, 1997. We hereby consent to the incorporation by reference of said reporting
the Registration Statements 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).
/S/ GRANT THORNTON
Philadelphia, Pennsylvania
March 25, 1998
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