FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------------------
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-11526
-----------------------------------------------------
FIRST COLONIAL GROUP, INC.
- --------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2228154
- ------------------------------ -----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
76 S. MAIN ST., NAZARETH, PA 18064
- ------------------------------------------------------- -----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO _____
-------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 1,742,643 SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON SEPTEMBER 30, 1998.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1 - Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Income 3
Consolidated Statement of Comprehensive Income 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3 - Quantitative and Qualitative Discussion About 26
Market Risk
PART II - OTHER INFORMATION
ITEM 5 - Other Information 30
ITEM 6 - Exhibits and Reports on Form 8-K 30
SIGNATURES 31
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Sept. 30, Dec. 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and Due From Banks $13,793 $12,629
Federal Funds Sold --- 2,200
-------- --------
Total Cash and Cash Equivalents 13,793 14,829
Interest-Bearing Deposits With Banks 4,571 395
Investment Securities Held-to-Maturity
(Fair Value: Sept. 30, 1998 - $19,931;
Dec. 31, 1997 - $17,946) 19,716 17,756
Securities Available-for-Sale at Fair Value 98,145 73,024
Mortgage Loans Held-for-Sale 1,306 759
Total Loans, Net of Unearned Discount 212,718 229,587
LESS: Allowance for Possible Loan Losses (2,644) (2,664)
-------- --------
Net Loans 210,074 226,923
Premises and Equipment, Net 7,042 7,299
Accrued Interest Income 2,488 2,232
Other Real Estate Owned 209 284
Other Assets 4,928 3,237
-------- --------
TOTAL ASSETS $362,272 $346,738
======== ========
LIABILITIES
Deposits
Non-Interest Bearing Deposits $36,974 $32,800
Interest-Bearing Deposits 260,923 249,455
-------- --------
Total Deposits 297,897 282,255
Securities Sold Under Agreements to Repurchase 7,805 8,804
Long-Term Debt 18,000 18,390
Accrued Interest Payable 3,390 3,466
Other Liabilities 3,382 3,466
-------- --------
TOTAL LIABILITIES 330,474 316,381
-------- --------
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 - 1,742,643 shares at Sept. 30, 1998
and 1,655,413 shares at Dec. 31, 1997 8,713 8,277
Additional Paid in Capital 13,705 11,014
Retained Earnings 8,853 10,250
Less Treasury Stock at Cost: 0 shares at
Sept. 30, 1998 and 2,779 shares at Dec. 31, 1997 --- (94)
Employee Stock Ownership Plan Debt (500) (390)
Net Unrealized Gain on Securities Available-for-Sale 1,027 1,300
-------- --------
Total Shareholders' Equity 31,798 30,357
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $362,272 $346,738
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
---------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 4,722 $ 5,228 $14,382 $14,899
Investment Securities Income
Taxable 1,244 1,165 3,683 3,426
Tax-Exempt 333 215 893 595
Interest on Deposits with Banks and
Federal Funds Sold 94 23 175 53
------- ------- ------- -------
Total Interest Income 6,393 6,631 19,133 18,973
------- ------- ------- -------
INTEREST EXPENSE:
Interest on Deposits 2,422 2,411 7,101 6,897
Interest on Short-Term Borrowing 48 95 193 280
Interest on Long-Term Debt 280 292 847 856
------- ------- ------- -------
Total Interest Expense 2,750 2,798 8,141 8,033
------- ------- ------- -------
NET INTEREST INCOME: 3,643 3,833 10,992 10,940
Provision for Possible Loan Losses 113 143 338 443
------- ------- ------- -------
Net Interest Income After Provision
For Possible Loan Losses 3,530 3,690 10,654 10,497
------- ------- ------- -------
OTHER INCOME:
Trust Revenue 275 191 750 570
Service Charges on Deposit Accounts 419 284 1,180 835
Investment Securities Gains, Net --- 6 463 240
Gains on the Sale of Mortgage Loans 135 66 307 115
Other Operating Income 162 219 477 621
------- ------- ------- -------
Total Other Income 991 766 3,177 2,381
------- ------- ------- -------
OTHER EXPENSES:
Salaries and Employee Benefits 1,612 1,451 4,844 4,405
Net Occupancy and Equipment Expense 501 549 1,582 1,655
Other Operating Expenses 1,233 1,265 3,972 3,528
------- ------- ------- -------
Total Other Expenses 3,346 3,265 10,398 9,588
------- ------- ------- -------
Income Before Income Taxes 1,175 1,191 3,433 3,290
Provision for Income Taxes 304 336 899 919
------- ------- ------- -------
NET INCOME $ 871 $ 855 $ 2,534 $ 2,371
======= ======= ======= =======
Per Share Data
Basic Net Income $ 0.51 $ 0.49 $ 1.48 $ 1.39
======= ======= ======= =======
Diluted Net Income $ 0.51 $ 0.50 $ 1.47 $ 1.40
======= ======= ======= =======
Cash Dividends $ 0.19 $ 0.17 $ 0.55 $ 0.50
======= ======= ======= =======
</TABLE>
See accompanying notes to interim financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 871 $ 855 $2,534 $2,371
Other Comprehensive Income,
Net of Tax
Unrealized gains (losses)
on securities:
Unrealized gains (losses)
arising in period (22) 384 (180) (490)
Reclassification adjustment;
gain included in net income (5) (16) (422) (194)
------ ------ ------ ------
Other Comprehensive Income (17) 368 (602) (294)
------ ------ ------ ------
Comprehensive Income $ 888 $1,223 $1,932 $2,665
====== ====== ====== ======
</TABLE>
Other comprehensive income is shown net of tax for the nine months ended
Sept. 30, 1998 and Sept. 30, 1997 of $310,000 and $151,000, respectively and the
three months ended Sept. 30, 1998 and Sept. 30, 1997 of $9,000 and $190,000,
respectively.
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Nine Months Ended
Sept 30, 1998 Sept 30, 1997
OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net Income $2,534 $2,371
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses 338 443
Depreciation and Amortization 750 644
Amortization of Security Discounts (60) (51)
Amortization of Security Premiums 151 93
Amortization of Deferred Fees on Loans (178) (190)
Mortgage Loans Originated for Sale (36,949) (23,242)
Mortgage Loan Sales 36,402 23,336
(Gain) Losson Sale of Mortgage Loans (307) 115
Investment Securities Gains, Net (463) (240)
Changes in Assets and Liabilities:
Increase in Accrued Interest Income (256) (442)
Increase (Decrease) in Accrued Interest Payable (76) 161
Net Increase in Other Assets (1,498) (1,311)
Net (Increase) Decrease in Other Liabilities (207) 177
------- -------
Net Cash Provided By
Operating Activities 181 1,634
------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities
Available-for-Sale 22,796 7,389
Proceeds from Maturities of Securities
Held-to-Maturity 7,173 5,541
Proceeds from Sales of Securities
Available-for-Sale 4,571 12,198
Proceeds from Sales of Securities
Held-to-Maturity 248 ---
Purchase of Securities Available-for-Sale (54,627) (32,282)
Purchase of Securities Held-to-Maturity (7,284) (5,838)
Net (Increase) in Interest Bearing
Deposits With Banks (4,176) (151)
Net (Increase) Decrease in Loans 16,839 (8,154)
Purchase of Premises and Equipment, Net (422) (969)
Proceeds from Sale of Other Real Estate Owned 232 677
------- -------
Net Cash (Used In) Investing Activities (14,650) (21,589)
------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest
Bearing Demand Deposits and Savings Accounts 10,629 6,482
Net Increase in Certificates of Deposits 5,013 10,750
Net Decrease in Long-Term Debt (390) ---
Proceeds from Sale of Treasury Stock 94 20
Net Increase in ESOP Debt (110) ---
Net (Decrease) Increase in Repurchase Agreements (999) 1,158
Proceeds from Issuance of Stock 150 190
Cash Dividends Paid (948) (846)
Cash in Lieu of Fractional Shares (6) (4)
------- -------
Net Cash Provided by Financing Activities 13,433 17,750
------- -------
Increase in Cash and Cash Equivalents (1,036) (2,205)
Cash and Cash Equivalents, January 1 14,829 13,929
------- -------
Cash and Cash Equivalents, Sept. 31, $13,793 $11,724
======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - GENERAL
The accompanying financial statements, footnotes and discussion should be read
in conjunction with the audited financial statements, footnotes, and discussion
contained in the Company's Annual Report for the year ended December 31, 1997.
The financial information presented herein is unaudited; however, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the unaudited financial information have been made.
The results for the three and nine months ended September 30, 1998 are not
necessarily indicative of results to be expected for the full year or any other
interim period.
NOTE B - SUBSIDIARIES
First Colonial Group, Inc. (the Company) is a Pennsylvania business corporation
which is registered as a bank holding company under the Bank Holding Company Act
of 1956. The Company has two wholly-owned subsidiaries, Nazareth National Bank
and Trust Company (the "Bank") founded in 1897 and First C. G. Company, Inc.
founded in 1986.
NOTE C - INVESTMENT CONSIDERATIONS
In analyzing whether to make, or to continue, an investment in the Company,
investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997, a copy of which can be
obtained from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S.
Main Street, Nazareth, PA 18064.
NOTE D - FORWARD LOOKING STATEMENTS
The information contained in this Quarterly Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, the discussion in "Item 3
- - Quantitative and Qualitative Discussion About Market Risk", statements or
estimates concerning the effect of the "Year 2000" issues on the Company's
<PAGE>
systems and software and the Company's plans with regard to "Year 2000" issues
and other statements which are not historical facts or 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 Quarterly 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).
NOTE E - CASH DIVIDENDS
On August 21, 1998 the Company paid its 1998 third quarter dividend on its
common stock of $.19 per share to shareholders of record on August 7, 1998.
NOTE F - STOCK DIVIDEND
On June 25, 1998 the Company paid a 5% stock dividend to shareholders of record
on June 5, 1998. Fractional shares were paid in cash based on the closing price
of $36.00 per share on the record date. Net income per share and average shares
outstanding have been restated to reflect the 5% stock dividend.
NOTE G - EARNINGS PER 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
disclosures 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.
<PAGE>
For the Three Months Ended Sept. 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1998
<S> <C> <C> <C>
Net Income $ 871
Basic Earnings Per Share
Income Available to Common Shareholders $ 871 1,719,457 $ 0.51
Effect of Dilutive Securities
Stock Options 7,129
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 871 1,726,586 $ 0.51
------ --------- -------
1997
Net Income $ 855
Basic Earnings Per Share
Income Available to Common Shareholders $ 855 1,705,031 $ 0.50
Effect of Dilutive Securities
Stock Options 8,180
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 855 1,713,211 $ 0.50
------ --------- -------
</TABLE>
Average common shares outstanding in the three month period ending September 30,
1998 and 1997 do not include 21,770 and 22,583, 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. Share and per
share information have been restated to reflect the 5% stock dividend of June
1998.
<PAGE>
For the Nine Months Ended Sept. 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1998
<S> <C> <C> <C>
Net Income $2,534
Basic Earnings Per Share
Income Available to Common Shareholders $2,534 1,717,220 $ 1.48
Effect of Dilutive Securities
Stock Options 6,501
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $2,534 1,723,721 $ 1.47
------ --------- -------
1997
Net Income $2,371
Basic Earnings Per Share
Income Available to Common Shareholders $2,371 1,700,370 $ 1.39
Effect of Dilutive Securities
Stock Options 8,180
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $2,371 1,708,550 $ 1.39
------ --------- -------
</TABLE>
Average common shares outstanding in the nine month period ending September 30,
1998 and 1997 do not include 21,521 and 23,691, 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. Share and per
share information have been restated to reflect the 5% stock dividend of June
1998.
<PAGE>
NOTE H - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
Nine Month Period Ended September 30, 1998 1997
---------- ----------
<S> <C> <C>
Beginning Balance $2,664,000 $2,532,000
Additions
Provision for loan losses charged to
operating expenses 338,000 443,000
Recoveries of loans 74,000 65,000
---------- ----------
Total Additions 412,000 508,000
Deductions
Loans charged off 432,000 421,000
---------- ----------
Ending Balance $2,644,000 $2,619,000
</TABLE>
NOTE I - IMPAIRED LOANS
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 on 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 are as follows:
<PAGE>
<TABLE>
At September 30, 1998 1997
--------------- --------------
<S> <C> <C>
Principal amount of impaired loans $808,000 $292,000
Deferred loan costs 2,000 3,000
--------------- --------------
810,000 295,000
Less valuation allowance 188,000 89,000
---------------- --------------
$622,000 $206,000
</TABLE>
On January 1, 1995 a valuation for credit losses related to impaired loans was
established. The activity in this allowance account for the quarter ending
September 30, 1998 is as follows:
<TABLE>
1998 1997
------------- -----------
<S> <C> <C>
Valuation allowance at January 1, $138,000 $128,000
Provision for loan impairment 179,000 55,000
Transfer from Unallocated Allowance for
Possible Loan Losses --- ---
Direct charge-offs (129,000) 94,000
Recoveries --- ---
------------- ------------
Valuation allowance at September 30, $188,000 $89,000
</TABLE>
Total cash collected on impaired loans during the nine month period ended
September 30, 1998 was $489,000, of which $467,000 was credited to the principal
balance outstanding on such loans and $22,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the first nine
months of 1998 was $125,000. Interest income recognized in the first nine months
of 1998 was $19,133,000. The valuation allowance for impaired loans of $188,000
at September 30, 1998 is included in the "Allowance for Possible Loan Losses"
which amounts to $2,644,000 at September 30, 1998. The provision for loan
impairment of $179,000 for the nine month period ended September 30, 1998 is
included in the "Provision for Possible Loan Losses" as reflected on the
"Consolidated Statement of Income" for the same period.
NOTE J - REPORTING OF COMPREHENSIVE INCOME
On January 1, 1998, the Corporation adopted the Financial Accounting Standards
Board issued (SFAS) No. 130, "Reporting Comprehensive Income", which requires
presenting a complete set of financial statements to include details of
comprehensive income that arises in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income income, expenses, gains and losses that bypass the income statement and
are reported directly in a separate component of equity. Other comprehensive
income includes, for example, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investment securities.
The Corporation has elected to report comprehensive income on a separate
scheduled titled "Statement of Comprehensive Income".
<PAGE>
NOTE K - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION
On January 1, 1998, the Corporation adopted the Financial Accounting Standards
Board issued (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This statement provides users of financial statements with
information about an entity's different types of business activities and the
different economic environments in which it operates to better understand the
entity's performance and its prospects for future net cash flows, and to make
more informed judgments about the entity as a whole. The effect of adopting SFAS
No. 131 is not expected to have a material impact on the Company's financial
statements.
NOTE L - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITY
In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activity". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the beginning
of any fiscal quarter. The Company is currently reviewing the provisions of SFAS
No. 133.
<PAGE>
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following financial review and analysis is of the financial condition and
earnings performance of the Company and its wholly owned subsidiaries for the
three and nine month period ended September 30, 1998.
The information contained in this Quarterly Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, the discussion in "Item 3
- - Quantitative and Qualitative Discussion About Market Risk", statements 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 which are not historical facts or 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 Quarterly 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).
In analyzing whether to make, or to continue, an investment in the Company,
investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997, a copy of which can be
obtained from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S.
Main Street, Nazareth, PA 18064.
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 liquidity are money market investments,
securities available-for-sale, funds received from the repayment of loans,
short-term borrowings and borrowings from the Federal Home Loan Bank. At
September 30, 1998, cash, due from banks, Federal funds sold and
<PAGE>
interest bearing deposits with banks totaled $18,364,000, and securities
maturing within one year totaled $3,371,000. At December 31, 1997, cash, due
from banks, Federal funds sold and interest bearing deposits with banks, totaled
$15,224,000, and securities maturing within one year were $3,861,000. Securities
sold under an agreement to repurchase totaled $7,805,000 at September 30, 1998
and $8,804,000 at December 31, 1997. The Bank is a member of the Federal Home
Loan Bank of Pittsburgh. The Bank had interest bearing demand deposits at the
Federal Home Loan Bank of Pittsburgh in the amount of $4,493,000 at September
30, 1998 and $110,000 at December 31, 1997. These deposits are included in due
from banks on the Company's financial statements. As a result of this
relationship, the Company places most of its short-term funds at the Federal
Home Loan Bank of Pittsburgh. There were no Federal funds sold at September 30,
1998. At December 31, 1997 there were Federal funds sold totaling $2,200,000.
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of
credit in the amount of $25,000,000 at September 30, 1998, subject to certain
collateral requirements. The Bank had no short-term (overnight) borrowings
against this line at September 30, 1998 or at December 31, 1997. The Bank had
additional borrowings from the Federal Home Loan Bank at September 30, 1998
totaling $18,000,000 of which $5,000,000 is due in November 1998, $8,000,000 is
due in August 2000 and $5,000,000 is due in December 2001.
Cash flows for the nine months ended September 30, 1998 consisted of cash
used in investing activities of $14,650,000 offset in part by cash provided by
financing activities of $13,433,000 and cash provided by operating activities of
$181,000 resulting in a decrease in cash and cash equivalents of $1,036,000.
Cash provided by operating activities was the result of mortgage loan sales
of $36,402,000, net operating income of $2,534,000, depreciation and
amortization of $750,000 and a provision for possible loan losses of $338,000,
partially reduced by mortgage loans originated for sale of $36,949,000, an
increase in other assets of $1,498,000, an increase in accrued interest income
of $256,000 and a decrease in other liabilities of $207,000. Cash was used in
investing activities for the purchase of securities available-for-sale and
held-to-maturity of $54,627,000 and $7,284,000, respectively, plus net increase
in interest-bearing deposits with banks of $4,176,000, partially offset by
proceeds from maturities of securities available-for-sale and held-to-maturity
of $22,796,000 and $7,173,000, respectively, and net decreases in loans of
$16,839,000, proceeds from sales of securities available-for-sale and
held-to-maturity of $4,571,000 and $248,000, respectively. Cash provided by
financing activities consisted principally of increases in interest and
non-interest bearing demand deposits and savings accounts of $10,629,000 and an
increase in certificates of deposit of $5,013,000 offset in part by a decrease
in repurchase agreements of $999,000, the payment of cash dividends of $948,000
and a decrease in long-term debt of $390,000.
<PAGE>
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 September 30, 1998 was $31,798,000
as compared to $30,357,000 at December 31, 1997, for an increase of $1,441,000
or 4.7%. This increase was attributable to net income for the first nine months
of 1998 of $2,534,000, proceeds from the sale of treasury stock in the Dividend
Reinvestment Plan of $94,000, proceeds from the sale of common stock pursuant to
the Dividend Reinvestment Plan of $150,000 less the payment of cash dividends of
$948,000, a decrease of $273,000 in the value of the securities available for
sale (see discussion on "Investment Securities"), an increase of $110,000 in
debt related to Employee Stock Ownership Plan and the payment of $6,000 in cash
in lieu of fractional shares from the 5% stock dividend of June 25, 1998.
On June 25, 1998, the Company paid a 5% stock dividend to shareholders of
record on June 5, 1998. Fractioinal shares were paid in cash based on the
closing price of $36.00 per share on the record date.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan.
During the first nine months of 1998, 4,530 shares of common stock were
purchased from authorized and unissued shares at an average price of $32.97 per
share for proceeds of approximately $150,000.
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, that as of September 30, 1998, the Company and the Bank met
all capital adequacy requirements to which they were subject.
<PAGE>
Capital Ratios
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At September 30, 1998 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,001 16.65% $15,856 8.00% --- ---
Bank $29,363 14.93% $15,734 8.00% $19,667 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $30,520 15.40% $ 7,927 4.00% --- ---
Bank $26,502 13.48% $ 7,864 4.00% $11,800 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $30,520 8.61% $14,179 4.00% --- ---
Bank $26,502 7.57% $14,004 4.00% $17,514 5.00%
</TABLE>
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Action
(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>
<PAGE>
The Company is not aware of any trends, events or uncertainties that will
have a material effect on the Company's liquidity, capital resources or
operations, except for higher interest rates which could cause deposit
disintermediation and an increase in interest expense and the possibility of
inflationary trends, the results of which cannot be determined at this time. The
Company is not under any agreement with the regulatory authorities nor is it
aware of any current recommendation by regulatory authorities which, if they
were implemented, would have a material adverse effect on liquidity, capital
resources, or the operations of the Company.
Assets and Liabilities
Total assets at September 30, 1998 were $362,272,000, representing an
increase of 4.5% over total assets of $346,738,000 at December 31, 1997.
Deposits increased by $15,642,000 or 5.5% from $282,255,000 on December 31, 1997
to $297,897,000 on September 30, 1998. Contributing to this increase were
increases in interest bearing checking deposits of $8,692,000, certificates of
deposit of $4,748,000 and non-interest bearing checking deposits of $4,174,000,
partially offset by a decline in savings and money market deposits of
$1,972,000. Loans outstanding at September 30, 1998 were $212,718,000 as
compared to $229,587,000 at December 31, 1997. This is a decrease of $16,869,000
or 7.3%. The decline in loans was primarily the result of a decrease of
$13,708,000 or 14.8% in residential real estate loans. During the first nine
months of 1998, $36,402,000 of residential real estate loans were sold. Most of
the loans sold were fixed rate with 30 or 15 year maturities. These loans were
sold to reduce the Company's interest-rate risk and to provide liquidity for
future lending opportunities. Most of the loans sold were originated in years
prior to 1998. The Bank continues to service all of these loans. There were
$1,306,000 of residential real estate loans identified as held-for-sale at
September 30, 1998. Additionally, the net decrease in loans during the first
nine months of 1998 included a $7,951,000 or 11.3% decrease in commercial loans
partially offset by a $4,790,000 or 7.1% increase in consumer loans. The loan to
deposit ratio was 71.4% at September 30, 1998 and 81.3% at December 31, 1997.
Premises and equipment decreased by $257,000 to $7,042,000 at September 30,
1998 from $7,299,000 at December 31, 1997.
The Company had long-term debt totaling $18,000,000 at September 30, 1998
as compared to $18,390,000 at December 31, 1997. Included in this total were
outstanding borrowings of $18,000,000 from the Federal Home Loan Bank of
Pittsburgh at September 30, 1998 and December 31, 1997. Of this amount
$5,000,000 matures in November 1998, $8,000,000 matures in August 2000 and the
remaining $5,000,000 matures in December 2001. The interest rates associated
with these loans are 5.96% fixed, 5.89% fixed and 5.39% variable (changes
quarterly based on the three month LIBOR plus 8 basis points), respectively. The
loans are secured by the Bank's investment and residential real estate loans and
securities. These funds were borrowed to improve liquidity and to fund loans.
Long-term debt of $390,000 relating to Employee Stock Option Plan (ESOP) and
<PAGE>
payable to another bank was paid in full during the first half of 1998. This
debt was repaid by a loan from the Company's subsidiary, First C. G. Company to
the ESOP in the amount of $500,000. This new loan, due in 2009, carries an
interest rate of prime plus 1/2 (currently 9% at 9/30/98) and annual principal
payments of $50,000 starting in June 1999.
At September 30, 1998 and December 31, 1997 the Bank had no short-term
borrowings from the Federal Home Loan Bank of Pittsburgh against a line of
credit of $25,000,000.
Results of Operations
The net income for the three months ended September 30, 1998 was $871,000,
a $16,000 or 1.9% increase compared to net income of $855,000 for the same
period in 1997. The earnings improvement is attributable to an increase in total
other income of $162,000 or 23.3%, exclusive of gains on the sale of mortgages
of $135,000, a decrease in Federal income taxes of $32,000 or 9.5% and a $30,000
or 21.0% decrease in the provision for possible loan losses partially offset by
a decrease in net interest income of $190,000 or 5.0% and an increase in other
expenses of $81,000 or 2.5%.
Net income for the nine months ended September 30, 1998 was $2,534,000
compared to $2,371,000 for the same period in 1997. The earnings improvement is
primarily attributable to increases in total other income and net interest
income. During the first nine months of 1998, net interest income increased
$52,000 or 0.5% as compared to September 30, 1997. Also affecting earnings was a
$381,000 increase in total other income exclusive of security gains and gains on
the sale of mortgages of $463,000 and $307,000, an increase in total other
expenses of $810,000 and a decrease in Federal income taxes of $20,000.
Basic earnings per share for the three months ended September 30, 1998 were
$0.51 as compared to $0.50 for the corresponding period in 1997. Average shares
outstanding during this three month period were 1,726,586 in 1998 and 1,712,170
in 1997. Basic earnings per share for the nine months ended September 30, 1998
were $1.48 as compared to $1.39 for the corresponding period in 1997. Average
shares outstanding during this nine month period were 1,723,721 in 1998 and
1,707,519 in 1997. Diluted earnings per share for the three month period ended
September 30, 1998 were $0.51 compared to $0.50 for the same period in 1997.
Diluted earnings per share for the nine month period ended September 30 were
$1.47 and $1.40 in 1998 and 1997, respectively. Per share earnings and average
shares outstanding have been restated to reflect the 5% stock dividend paid on
June 25, 1998. (see Note F)
Net Interest Income
Net interest income amounted to $3,643,000 for the three months ended
September 30, 1998 as compared to $3,833,000 for the three months ended
September 30, 1997, a decrease of $190,000 or 5.0%.
<PAGE>
The fully taxable-equivalent net interest income was $11,469,000 for the
first nine months of 1998, compared to $11,268,000 for the same period in 1997,
a 1.8% or $201,000 increase as shown in the following "Rate/Volume Analysis"
table. This increase in taxable-equivalent net interest income was primarily due
to a $459,000 increase related to volume partially offset by a $258,000 decrease
related to interest rates.
Total taxable-equivalent interest income grew $309,000 primarily the result
of the higher volumes in the investment security earning asset category. Income
from investment securities for the third quarter increased $709,000 or 16.4%
over the same period in 1997. This was comprised of a $1,250,000 increase due to
volume partially offset by a $541,000 decrease due to rates as a result of
declining yields. Average year-to-date earning assets increased to $325,435,000
at September 30, 1998 from $312,096,000 at September 30, 1997, a 4.3% increase.
Total interest expense grew $108,000 during the first nine months of 1998,
compared to the same period in 1997. This growth was principally the result of
higher volumes, primarily due to an increase in time deposits. Interest expense
attributed to time deposits increased $304,000 during the first nine months of
1998, compared to the first nine months of 1997. The increase in time deposits
was used to finance the earning asset growth. Partially offsetting this growth
in interest expense were lower interest rates paid on savings accounts as a
result of repricing due to market conditions (see Item 3. - Quantitative and
Qualitative Discussion About Market Risk).
<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 nine months ended September 30, 1998. The interest income included in
the table has been adjusted to a fully taxable equivalent amount using the
Federal statutory tax rate of 34%.
RATE/VOLUME ANALYSIS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Nine Months Ended
September 30, 1998
Over / (Under)
September 30, 1997
CHANGE DUE TO:
TOTAL RATE VOLUME
<S> <C> <C> <C>
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ 93 $ (71) $ 164
Federal Funds Sold 29 (36) 65
Investment Securities 709 (541) 1,250
Loans Held for Sale 5 (47) 52
Loans (527) 265 (792)
------- ------- -------
Total Interest Income 309 (430) 739
------- ------- -------
INTEREST EXPENSE
Demand Deposits, Savings & Clubs (100) (154) 54
Time Deposits 304 (66) 370
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase (11) 7 (18)
Short-Term Borrowings (76) 33 (109)
Long-Term Borrowings (9) 8 (17)
------- ------- -------
Total Interest Expense 108 (172) 280
------- ------- -------
Net Increase (Decrease) in Interest Income $ 201 $ (258) $ 459
</TABLE>
<PAGE>
Other Income and Other Expenses
Other income for the three months ended September 30, 1998 including
service charges, trust fees, gains on the sale of mortgage loans and other
miscellaneous income, but exclusive of securities gains or losses, was $991,000
as compared to $760,000 for the same period in 1997. This was an increase of
$231,000 or 30.4%. In the three month period ended September 30, 1998, service
charges were $419,000, a $135,000 or 47.5% increase over the 1997 amount of
$284,000. The revenues from the Trust Department operations were $275,000 for
the three months ended September 30, 1998 as compared to $191,000 for the three
months ended September 30, 1997, an increase of $84,000 or 44.0%. There were
$135,000 in gains on the sale of mortgage loans for the three month period ended
September 30, 1998 as compared to $66,000 for the same period in 1997, an
increase of $69,000 or 104.5%. Other miscellaneous income for the three months
ended September 30, 1998 was $162,000, a decrease of $57,000 compared to
$219,000 for the same period in 1997.
Other income for the nine months ended September 30, 1998 including service
charges, trust revenues, gains on the sale of mortgage loans and other
miscellaneous income, but exclusive of securities gains or losses, was
$2,714,000 as compared to $2,141,000 for the same period in 1998. This was an
increase of $573,000 or 26.8%. In the nine month period ended September 30, 1998
service charges were $1,180,000, a $345,000 or 41.3% increase over the 1997
amount of $835,000. The increase in service charge income is the result of the
implementation of fees assessed to noncustomers use of the Bank's ATM network
and the introduction of a new Debit Card program. The revenues from the
Investment Management and Trust Division operations were $750,000 for the nine
months ended September 30, 1998 as compared to $570,000 for the nine months
ended September 30, 1997, an increase of $180,000 or 31.6%. During the nine
months ended September 30, 1998, sales of mortgage loans resulted in a gain of
$307,000 as compared to $115,000 for the same period in 1997, an increase of
$192,000. The gain in 1998 was the result of the sale of $36,402,000 of
residential real estate loans in the first nine months (see discussion on Assets
and Liabilities). Other operating income for the nine months ended September 30,
1998 was $477,000 as compared to $621,000 for the same period in 1997, a
decrease of $144,000 or 23.2%.
Total other expenses for the three month period ended September 30, 1998
increased by $81,000 or 2.5% to $3,346,000 over total other expenses for the
same period in 1997 of $3,625,000. Included in this increase is a $161,000 or
11.1% increase in salary and benefit expenses which were $1,612,000 as compared
to $1,451,000 in 1997. These increases are primarily due to general salary
increases of approximately 4% and additional staff necessitated by current and
planned future growth. Occupancy and equipment expenses were $501,000 for the
three months ended September 30, 1998 and $549,000 for the three months ended
September 30, 1997, a decrease of $48,000 or 8.7%. Other operating expenses for
the three month period ended September 30, 1998 were $1,233,000, a decrease of
$32,000 or 2.5% over the $1,265,000 in other expenses for the same period in
1997.
<PAGE>
Total other expenses for the nine months ended September 30, 1998 increased
by $810,000 or 8.4%, to $10,398,000 from $9,588,000 for the same period in 1997.
Salaries and employee benefits were $4,844,000 for the nine months ended
September 30, 1998 as compared to $4,405,000 for the nine months ended September
30, 1997 representing an increase of $439,000 or 10.0%. These increases are
primarily due to general salary increases of approximately 4% and additional
staff necessitated by current and planned future growth. Occupancy and equipment
expenses were $1,582,000 for the nine months ended September 30, 1998 and
$1,665,000 for the nine months ended September 30, 1997, a decrease of $73,000
or 4.4%. Other operating expenses for the nine months ended September 30, 1998
were $3,972,000 in relation to $3,528,000 for the nine months ended September
30, 1997, an increase of $444,000 or 12.6%. Included in the other operating
expense total was a special $300,000 provision to a reserve for claims and
contingent liabilities in the operation of the Trust Division. This contingent
reserve totals $800,000 and is included in other liabilities on the Consolidated
Balance Sheet Statement.
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 No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". The Company had no trading securities at September
30, 1998 and December 31, 1997.
Available-for-sale securities are carried at fair value with the net
unrealized gains or losses reported in equity. The Company had $98,145,000 in
available-for-sale securities at September 30, 1998 with a net unrealized gain
of $1,027,000. At December 31, 1997 available-for-sale securities amounted to
$73,024,000 with a net unrealized gain of $1,300,000.
During the nine month period ended September 30, 1998, $4,571,000 of
securities available-for-sale were sold for a net gain of $463,000 as compared
to $12,198,000 of securities available-for-sale were sold for a net gain of
$240,000 for the same time period in 1997.
Held-to-maturity securities totaling $19,716,000 at September 30, 1998 are
carried at cost. At December 31, 1997, the held-to-maturity securities totaled
$17,756,000. The Company has the intent and ability to hold the held-to-maturity
securities until maturity. The Company, at September 30, 1998, did not hold any
securities identified as derivatives.
Allowance and Provision for Possible Loan Losses
The provision is based on management's analysis of the adequacy of the
allowance for loan losses. In its evaluation, management considers past loan
experience, overall characteristics of the loan portfolio, current economic
<PAGE>
condition and other relevant facators. Management currently believes that the
allowance is adequate to absorb known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is largely dependent upon
economic conditions which are beyond the scope of management's control.
For the first nine months of 1998, the provision for loan losses was
$338,000 compared to $443,000 for the same period in 1997. Net charge offs were
$358,000 for the nine months ended September 30, 1998 compared with $356,000 for
the nine months ended September 30, 1997. The ratio of the allowance for loan
losses to total loans at September 30, 1998 was 1.24% compared to 1.16% at
December 31, 1997 and 1.15% at September 30, 1997. This was primarily the result
of a decline in total loans to $212,718,000 at September 30, 1998 from
$229,587,000 at December 31, 1997. This decline was the result of the sale of
$36,402,000 of mortgage loans during the first nine months of 1998. The
allowance for possible loan losses at September 30, 1998 totaled $2,644,000, a
decrease of $20,000 or 0.8% over the December 31, 1997 amount of $2,664,000 and
$25,000 or 1.0% over the September 30, 1997 balance of $2,619,000.
As provided by SFAS No. 114, as amended by SFAS No. 118, $188,000 of the
Allowance for Possible Loan Losses is allocated to impaired loans at September
30, 1998 (See Note I "Impaired Loans").
Transactions in the allowance for loan losses are as follows:
ALLOWANCE FOR LOAN LOSSES
<TABLE>
1998 1997
<S> <C> <C>
Balance, January 1, $2,664,000 $2,532,000
Provision charged to Operating Expenses 338,000 443,000
Loans Charged Off (432,000) (421,000)
Recoveries 74,000 65,000
---------- ----------
Balance June 30, $2,644,000 $2,619,000
</TABLE>
The following table sets forth an allocation of the allowance for loan
losses by loan category:
At September 30, 1998
<TABLE>
<S> <C> <C>
Commercial $1,541,000
Residential Real Estate 141,000
Consumer 672,000
Unallocated 290,000
----------
Total $2,644,000
</TABLE>
<PAGE>
Non-Performing Loans
The following discussion relates to the Bank's non-performing loans which
consist of those on a non-accrual basis and accruing loans which are past due
ninety days or more.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection effort, that
the borrower's financial condition is such that the collection of interest is
doubtful. The Company views these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Interest on these loans is recognized
only when received. The following table shows the balance of non-performing
loans for each of the periods indicated.
Non performing assets (non accruing loans and loans past due over 90 days)
were 1.18% of total loans at September 30, 1998 compared to 0.79% at September
30, 1997. The increase in this ratio is the result of a $712,000 or 39.7%
increase in non performing loans to $2,506,000 over the one year period ending
September 30, 1998. The ratio of the allowance for loan losses to non performing
assets was 105.5% at September 30, 1998 compared to 1.45% at September 30, 1997.
Non accruing loans at September 30, 1998 of $1,554,000 increased from
September 30, 1997 level of $554,000. This $1,000,000 increase was primarily the
result of one commercial loan being placed on non accrual status during 1998.
These loans are secured by commercial real estate. At the present time,
management is of the opinion that these loans present a minimal amount of
exposure to the bank.
Loans past due 90 days or more and still accruing interest are loans that
are generally well secured and expected to be restored to a current status in
the near future. As of September 30, 1998, loans past due 90 days or more and
still accruing interest were $952,000 compared to $1,240,000 at September 30,
1997. The $288,000 decrease in loans past due 90 days from September 30, 1997 to
September 30, 1998 was the result of increases in mortgage and commercial loans
past due 90 days or more of $302,000 and $7,000, respectively. This was offset
in part by an increase in consumer loans of $21,000.
<PAGE>
<TABLE>
NON-PERFORMING LOANS
Sept 30, December 31, Sept 30,
1998 1997 1997
<S> <C> <C> <C>
Non-accrual loans on a cash basis $1,554,000 $ 813,000 $ 554,000
Non-accrual loans as a percentage
of total loans .73% .35% .24%
Accruing loans past due 90 days
or more $ 952,000 $ 802,000 $1,240,000
Accruing loans past due 90 days
or more as a percentage of total
loans .45% .35% .59%
Other Real Estate Owned from
Foreclosed Property $ 209,000 $ 284,000 $ 443,000
Allowance for loan losses to
nonperforming loans 105.51% 163.64% 145.99%
Nonperforming assets to total loans 1.18% .71% .79%
Allowance for loan losses to total loans 1.24% 1.16% 1.15%
</TABLE>
There are no significant loans classified for regulatory purposes that have
not been included in the above table of non-performing loans. The Company has no
significant loans that qualify as "Troubled Debt Restructuring" as defined by
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 15 "Accounting for Debtors and Creditors for Troubled Debt
Restructuring" at September 30, 1998.
YEAR 2000
The Company has completed 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. The Company is currently developing a Year 2000 Contingency
Plan. 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.
<PAGE>
ITEM 3. Quantitative and Qualitative Discussion About Market Risk
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest earning
assets, other than those which possess a short term to maturity. 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.
The following table "Consolidated Comparative Statement Analysis" sets
forth a comparison of average daily balances, interest income and interest
expense on a fully taxable equivalent basis and interest rates calculated for
each major category of interest-earning assets and interest-bearing liabilities.
For the purposes of this analysis, the computations in the "Consolidated
Comparative Statement Analysis" were prepared using the Federal statutory rate
of 34%; there were no state or local taxes on income applicable to the Company.
<PAGE>
<TABLE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended, September 30, 1998 1997
Int Avg Int Avg
Avg Inc/ Yield/ Avg Inc/ Yield/
Bal Exp Rate Bal Exp Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS
Int-Bearing Deposits with Banks $ 3,288 $ 145 5.88% $ 978 $ 52 7.09%
Federal Funds Sold 791 30 5.05 16 1 8.33
Investment Securities
Taxable 78,718 3,683 6.24 69,032 3,426 6.61
Non-Taxable (1) 24,385 1,353 7.40 15,705 902 7.65
Net Loans Held for Sale 2,088 40 2.56 983 35 4.75
Loans (1) (2) 218,882 14,359 8.75 227,982 14,886 8.71
Reserve for Loan Losses (2,717) -- -- (2,600) -- --
--------- ----- -------- -----
Net Loans 216,165 14,359 8.85 225,382 14,886 8.80
--------- ----- -------- -----
Total Interest-Earning Assets 325,435 19,610 8.04 312,096 19,301 8.24
Non-Interest Earning Assets 25,000 -- -- 24,138 -- --
--------- ----- -------- -----
TOTAL ASSETS, INT INCOME $ 350,435 19,610 7.47 $336,234 19,301 7.65
--------- ----- -------- -----
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 48,901 424 1.16 $ 44,630 393 1.17
Money Market Deposits 14,343 303 2.81 14,144 297 2.80
Savings & Club Deposits 61,373 1,014 2.20 63,177 1,151 2.43
CD's over $100,000 4,755 134 3.76 5,202 165 4.23
All Other Time Deposits 124,610 5,226 5.59 117,433 4,891 5.55
--------- ----- -------- -----
Total Int-Bearing Deposits 253,982 7,101 3.73 244,586 6,897 3.76
Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase 5,654 159 3.75 6,141 170 3.69
Short-Term Borrowings 751 34 6.04 2,970 110 4.93
Long-Term Borrowings 18,151 847 6.23 18,432 856 6.19
--------- ----- -------- -----
Total Int-Bearing Liabilities 278,538 8,141 3.89 272,129 8,033 3.93
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 34,021 -- -- 30,579 -- --
Other Liabilities 7,144 -- -- 5,882 -- --
--------- ----- -------- -----
TOTAL LIABILITIES 319,703 8,141 3.40 308,590 8,033 3.47
SHAREHOLDERS' EQUITY 30,732 -- -- 27,644 -- --
--------- ----- -------- -----
TOTAL LIABILITIES AND EQUITY $ 350,435 8,141 3.09 $336,234 8,033 3.19
NET INTEREST INCOME $11,469 $11,268
----- -----
Net Interest Spread 4.15 4.31
Effect of Interest-Free Sources
Used to Fund Earnings Assets 0.54 0.50
Net Interest Margin 4.69% 4.81%
---- ----
</TABLE>
<PAGE>
The net interest margin of 4.69% for the nine month period ended September
30, 1998, decreased from the 4.81% net interest margin for the first nine months
of 1997. The yield on interest earning assets was 8.04% during the first nine
months of 1998 as compared to 8.24% in 1997. A decrease in yields on investments
securities was partially offset by an increase in loan yields. The average
interest rate paid on interest bearing deposits and other borrowings was 3.89%
for the first nine months of 1998 as compared to 3.93% in 1997. The decrease in
the net interest margin was supported by an increase in the effect of interest
free sources of funds to 0.54% for the first nine months of 1998 from 0.50% in
the same period in 1997. This increase is the result of higher non-interest
bearing deposits in 1998.
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
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. The mismatch of assets and liabilities in a specific time frame
is referred to as interest sensitivity gap. Generally, in an environment of
rising interest rates, a negative gap will decrease net interest income, and in
an environment of falling interest rates, a negative gap will increase net
interest income.
Assets and liabilities are allocated to a specific time period based on
their scheduled repricing date or on an historical basis. At September 30, 1998,
assets of $154,088,000 (43% of total assets) were subject to interest rate
changes within one year. Liabilities subject to rate change within one year were
$188,724,000. A negative one-year gap position of $34,636,000 existed as of
September 30, 1998. The ratio of rate-sensitive assets to rate-sensitive
liabilities for the one-year time frame was 90%. The "Interest Sensitivity
Analysis" in the following table presents a sensitivity gap analysis of the
Company's assets and liabilities at September 30, 1998.
<PAGE>
Interest Sensitivity Analysis
(Dollars in Thousands) as of September 30, 1998
<TABLE>
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 $ 4,571 $ --- $ --- $ --- $ --- $ 4,571
Inv Securities 21,301 15,496 18,757 43,292 19,015 117,861
Loans Held-for-Sale 1,306 --- --- --- --- 1,306
Loans 37,457 15,939 25,468 71,434 59,776 210,074
Other Assets 13,793 --- --- --- 14,667 28,460
------- -------- -------- ------- -------- --------
TOTAL ASSETS $78,428 $31,435 $ 44,225 $114,726 $ 92,458 $362,272
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 36,974 $ 36,974
Int-Bearing
Deposits 96,691 24,237 41,991 38,931 59,073 260,923
Time Deposits --- --- --- --- --- ---
Securities Sold
Under Agreements
to Repurchase 7,805 --- --- --- --- 7,805
Long-Term Debt 18,000 --- --- --- --- 18,000
Other --- --- --- --- 6,772 6,772
Capital --- --- --- --- 31,798 31,798
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $122,496 $24,237 $ 41,991 $38,931 $134,617 $362,272
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(44,068) $ 7,198 $ 2,234 $75,795 $(41,159) $ ---
Cumulative Int
Sensitivity Gap $(44,068)$(36,870)$ (34,636) $41,159 $ --- $ ---
Cumulative Gap
RSA/RSL 64.02% 74.87% 81.65% 118.08% 100.0%
</TABLE>
(1) Historically, non-interest-bearing deposits reflect insignificant changes in
deposit trends and, therefore, the Company classifies these deposits over five
years.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8K
No reports on Form 8K were filed for the quarter during which this report
is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST COLONIAL GROUP, INC.
DATE: November 13, 1998 BY: /S/ S. ERIC BEATTIE
----------------------------- -------------------------------
S. ERIC BEATTIE
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: November 13, 1998 BY: /S/ REID L. HEEREN
------------------------------ -------------------------------
REID L. HEEREN
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714719
<NAME> First Colonial Group
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 13,793
<INT-BEARING-DEPOSITS> 4,571
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,145
<INVESTMENTS-CARRYING> 19,716
<INVESTMENTS-MARKET> 19,931
<LOANS> 214,024
<ALLOWANCE> 2,644
<TOTAL-ASSETS> 362,272
<DEPOSITS> 297,897
<SHORT-TERM> 7,805
<LIABILITIES-OTHER> 6,772
<LONG-TERM> 18,000
0
0
<COMMON> 8,713
<OTHER-SE> 23,085
<TOTAL-LIABILITIES-AND-EQUITY> 362,272
<INTEREST-LOAN> 14,382
<INTEREST-INVEST> 4,576
<INTEREST-OTHER> 175
<INTEREST-TOTAL> 19,133
<INTEREST-DEPOSIT> 7,101
<INTEREST-EXPENSE> 8,141
<INTEREST-INCOME-NET> 10,992
<LOAN-LOSSES> 338
<SECURITIES-GAINS> 463
<EXPENSE-OTHER> 10,398
<INCOME-PRETAX> 3,433
<INCOME-PRE-EXTRAORDINARY> 2,534
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,534
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 4.69
<LOANS-NON> 1,554
<LOANS-PAST> 952
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,664
<CHARGE-OFFS> 432
<RECOVERIES> 74
<ALLOWANCE-CLOSE> 2,644
<ALLOWANCE-DOMESTIC> 2,354
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 290
</TABLE>
