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 March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-11526
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FIRST COLONIAL GROUP, INC.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2228154
- ---------------------------------------- -------------------------
(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) (IDENTIFICATION NO.)
76 S. MAIN ST., NAZARETH, PA 18064
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO _____
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 1,745,725 SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON MARCH 31, 1999.
<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 12
ITEM 3 - Quantitative and Qualitative Discussion About 27
Market Risk
PART II - OTHER INFORMATION
ITEM 5 - Other Information 31
ITEM 6 - Exhibits and Reports on Form 8-K 31
SIGNATURES 32
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
March 31 Dec. 31
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Cash and Due From Banks $ 12,038 $ 12,259
Federal Funds Sold -- 2,000
--------- ---------
Total Cash and Cash Equivalents 12,038 14,259
Interest-Bearing Deposits With Banks 6,753 3,301
Investment Securities Held-to-Maturity 15,050 17,723
(Fair Value: Mar. 31, 1999 - $15,177;
Dec. 31, 1998 - $17,920)
Securities Available-for-Sale at Fair Value 117,925 98,389
Mortgage Loans Held-for-Sale 1,070 603
Total Loans, Net of Unearned Discount 209,717 212,437
LESS: Allowance for Possible Loan Losses (2,669) (2,691)
--------- ---------
Net Loans 207,048 209,746
Premises and Equipment, Net 6,663 6,885
Accrued Interest Income 2,460 2,542
Other Real Estate Owned 601 636
Other Assets 4,952 4,412
--------- ---------
TOTAL ASSETS $ 374,560 $ 358,496
========= =========
LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 40,941 $ 38,885
Interest-Bearing Deposits 269,653 255,664
--------- ---------
Total Deposits 310,594 294,549
Securities Sold Under Agreements to Repurchase 6,075 5,094
Long-Term Debt 20,000 20,000
Accrued Interest Payable 3,563 3,536
Other Liabilities 3,680 3,600
--------- ---------
TOTAL LIABILITIES 343,912 326,779
--------- ---------
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 - 1,748,775 shares at Mar. 31, 1999
and 1,745,725 shares at Dec. 31, 1998 8,744 8,729
Additional Paid in Capital 13,935 13,873
Retained Earnings 9,487 9,023
Employee Stock Ownership Plan Debt (1,435) (435)
Accumulated Other Comprehensive Income (83) 527
--------- ---------
Total Shareholders' Equity 30,648 31,717
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 374,560 $ 358,496
========= =========
</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
Mar. 31, Mar. 31,
1999 1998
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $4,396 $4,913
Interest on Investment Securities
Taxable 1,341 1,170
Tax-Exempt 388 259
Interest on Deposits with Banks and
Federal Funds Sold 99 43
------ ------
Total Interest Income 6,224 6,385
------ ------
INTEREST EXPENSE
Interest on Deposits 2,342 2,327
Interest on Short-Term Borrowings 46 72
Interest on Long-Term Debt 280 287
------ ------
Total Interest Expense 2,668 2,686
------ ------
NET INTEREST INCOME 3,556 3,699
Provision for Possible Loan Losses 125 112
------ ------
Net Interest Income After Provision
for Possible Loan Losses 3,431 3,587
------ ------
OTHER INCOME
Trust Revenue 266 211
Service Charges on Deposit Accounts 372 350
Investment Securities Gains, Net 216 100
Gain on Sale of Mortgage Loans 78 40
Other Operating Income 182 159
------ ------
Total Other Income 1,114 860
------ ------
OTHER EXPENSES
Salaries and Employee Benefits 1,640 1,614
Net Occupancy and Equipment Expense 535 551
Other Operating Expenses 1,373 1,243
------ ------
Total Other Expenses 3,548 3,408
------ ------
Income Before Income Taxes 997 1,039
Applicable Income Taxes 212 271
------ ------
NET INCOME $ 785 $ 768
====== ======
PER SHARE DATA
Basic Net Income $ 0.46 $ 0.45
Diluted Net Income $ 0.46 $ 0.45
Cash Dividends $ 0.19 $ 0.18
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
---------------------------
Three Months Ended
---------------------------
Mar. 31, Mar. 31,
1999 1998
------ -----
<S> <C> <C>
Net Income $ 785 $ 768
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on securities
Unrealized gains (losses) arising in period (403) (73)
Reclassification adjustment; gain included
in net income (8) (78)
----- -----
Other Comprehensive Income (411) (151)
----- -----
Comprehensive Income $ 374 $ 617
===== =====
</TABLE>
Other comprehensive income is shown net of tax of $(187) and $5 for March 31,
1999 and March 31, 1998, 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>
Three Months Ended
OPERATING ACTIVITIES March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Net Income $785 $768
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses 125 112
Depreciation and Amortization 255 243
Amortization of Security Discounts (36) (20)
Amortization of Security Premiums 59 28
Amortization of Deferred Fees on Loans 1 (167)
Mortgage Loans Originated for Sale (10,266) (19,929)
Mortgage Loan Sales 9,799 19,281
Gain on Sale of Mortgage Loans (78) (40)
Investment Securities Gains, Net (801) (100)
Changes in Assets and Liabilities:
(Increase) Decrease in Accrued Interest Income 82 (289)
Increase (Decrease) in Accrued Interest Payable 27 (105)
Net Increase in Other Assets (617) (846)
Net Increase in Other Liabilities 440 586
------- --------
Net Cash Used In Operating Activities (225) (478)
------- --------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities Available-for-Sale 5,090 6,542
Proceeds from Maturities of Securities Held-to-Maturity 2,662 3,523
Proceeds from Sales of Securities Available-for-Sale 8,503 1,430
Proceeds from Sales of Securities Held-to-Maturity --- 248
Proceeds from Sales of Securities Held-to-Maturity
Purchase of Securities Available-for-Sale (33,265) (18,423)
Purchase of Securities Held-to-Maturity --- (6,540)
Net Increase in Interest Bearing Deposits With Banks (3,452) (3,816)
Net Decrease in Loans 2,568 11,935
Purchase of Premises and Equipment, Net (1) (63)
Proceeds from Sale of Other Real Estate Owned 117 90
------- -------
Net Cash Used In Investing Activities (17,778) (5,074)
------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest
Bearing Demand Deposits and Savings Accounts 2,654 7,218
Net Increase in Certificates of Deposits 13,391 902
Proceeds from Sale of Treasury Stock --- 84
Net Increase (Decrease) in Repurchase Agreements 981 (4,260)
Net Increase in ESOP Debt (1,000) ---
Proceeds from Issuance of Stock 77 ---
Cash Dividends Paid (321) (310)
------- ------
Net Cash Provided by Financing Activities 15,782 3,634
------- ------
Decrease in Cash and Cash Equivalents (2,221) (1,918)
Cash and Cash Equivalents, January 1 14,259 14,829
------- ------
Cash and Cash Equivalents, March 31, $12,038 $12,911
======= =======
</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, 1998.
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 ended March 31, 1999 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-K for the year ended December 31, 1998, 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
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
<PAGE>
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-K for the year ended December 31, 1998, 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 February 26, 1999 the Company paid its 1999 first quarter dividend on its
common stock of $.19 per share to shareholders of record on February 11, 1999.
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 March 31,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1999
<S> <C> <C> <C>
Net Income $ 785
Basic Earnings Per Share
Income Available to Common Shareholders $ 785 1,705,578 $ 0.46
Effect of Dilutive Securities
Stock Options 5,418
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 785 1,710,996 $ 0.46
------ --------- -------
1998
Net Income $ 768
Basic Earnings Per Share
Income Available to Common Shareholders $ 768 1,715,325 $ 0.45
Effect of Dilutive Securities
Stock Options 7,739
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 768 1,723,064 $ 0.45
------ --------- -------
</TABLE>
Average common shares outstanding in the three month period ending March 31,
1999 and 1998 do not include 41,349 and 23,136, 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>
Three Month Period Ended March 31, 1999 1998
---------- ----------
<S> <C> <C>
Beginning Balance $2,691,000 $2,664,000
Additions
Provision for loan losses charged to
operating expenses 125,000 112,000
Recoveries of loans 18,000 24,000
---------- ----------
total Additions 143,000 136,000
Deductions
Loans charged off 165,000 126,000
---------- ----------
Ending Balance $2,669,000 $2,674,000
</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 March 31, 1999 1998
-------- ----------
<S> <C> <C>
Principal amount of impaired loan $501,000 $1,428,000
Deferred loan costs --- 1,000
-------- ----------
501,000 1,429,000
Less valuation allowance 173,000 504,000
-------- ----------
$328,000 $926,000
</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 March
31, 1999 is as follows:
<TABLE>
1999 1998
-------- --------
<S> <C> <C>
Valuation allowance at January 1, $303,000 $138,000
Provision for loan impairment --- 112,000
Transfer from Unallocated Allowance (112,000) 279,000
Direct charge-offs 18,000 25,000
-------- --------
Valuation allowance at March 31, $173,000 $504,000
</TABLE>
Total cash collected on impaired loans during the three month period ended March
31, 1999 was $45,000, of which $32,000 was credited to the principal balance
outstanding on such loans and $13,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the first three
months of 1999 was $14,000. Interest income recognized in the first three months
of 1999 was $6,224,000. The valuation allowance for impaired loans of $173,000
at March 31, 1999 is included in the "Allowance for Possible Loan Losses" which
amounts to $2,669,000 at March 31, 1999. There was no provision for loan
impairment for the period ended March 31, 1999.
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
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 established standards for the
method that public business enterprises report selected information regarding
operating segments in financial reports issued to shareholders. The disclosure
information required consists of a measure of segment profit and loss, certain
revenue and expense items and segment assets based upon specified quantitative
thresholds, as it is reported internally to the chief operating decision maker
on both an interim and annual basis. The statement is effective for fiscal years
beginning after December 15, 1997. Management has determined that the
Corporation consists of one segment: community banking.
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.
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company has reserve $1.5 million against possible claims which may be
asserted against the Bank in connection with certain pre-need funeral trusts
which were allegedly directed by funeral directors to be invested in a private
placement annuity issued by EA International Trust. In April, 1999, two funeral
directors whose funds were invested in this annuity commenced suit against the
Bank; if all funeral directors whose funds were invested in this annuity were to
pursue claims, the Bank's maximum exposure would be approximately $5.5 million
plus interest and costs. The Bank has been advised that it has significant
defenses to these claims and intends to vigorously defend against such claims.
The Bank has discontinued its involvement in this annuity and is pursuing
indemnification for some or all of these possible losses from its insurance
carriers and from EA International Trust.
<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 month period ended March 31, 1999.
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-K for the year ended December 31, 1998, 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-K for the year ended December 31, 1998, 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 March
31, 1999, cash, due from banks, Federal funds sold and interest bearing deposits
with banks totaled $18,791,000, and securities maturing within one year totaled
<PAGE>
$5,361,000. At December 31, 1998, cash, due from banks, Federal funds sold and
interest bearing deposits with banks, totaled $17,560,000, and securities
maturing within one year were $4,493,000. Securities sold under an agreement to
repurchase totaled $6,075,000 at March 31, 1999 and $5,094,000 at December 31,
1998. 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 $6,480,000 at March 31, 1999 and $3,193,000 at December 31,
1998. 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 March 31, 1999. The Company has $2,000,000 in Federal
funds sold at December 31, 1998.
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of
credit in the amount of $25,000,000 at March 31, 1999, subject to certain
collateral requirements. The Bank had no short-term (overnight) borrowings
against this line at March 31, 1999 or at December 31, 1998. The Bank had
additional borrowings from the Federal Home Loan Bank at March 31, 1999 totaling
$20,000,000 of which $8,000,000 is due in August 2000, $5,000,000 is due in
December 2001 and $7,000,000 is due in October 2003.
Cash flows for the three months ended March 31, 1999 consisted of cash used
in investing activities of $17,778,000 and cash used by operating activities of
$225,000 offset in part by cash provided by financing activities of $15,782,000
resulting in a decrease in cash and cash equivalents of $2,221,000.
Cash used by operating activities was the result of mortgage loans
originated for sale of $10,266,000 and an increase in other assets of $617,000,
partially offset by mortgage loan sales of $9,799,000, net operating income of
$785,000, an increase in other liabilities of $440,000, depreciation and
amortization of $255,000 and a provision for possible loan losses of $125,000.
Cash was used in investing activities for the purchase of securities
available-for-sale of $33,265,000 and a net increase in interest-bearing
deposits with banks of $3,452,000, partially offset by proceeds from sales of
securities available-for-sale of $8,503,000, proceeds from maturities of
securities available-for-sale and held-to-maturity of $5,090,000 and $2,662,000,
respectively and a net decrease in loans of $2,568,000. Cash provided by
financing activities consisted principally of an increase in certificates of
deposit of $13,391,000, increases in interest and non-interest bearing demand
deposits and savings accounts of $2,654,000 and an increase in repurchase
agreements of $981,000, partially offset by an increase in ESOP debt of
$1,000,000 and the payment of cash dividends of $321,000.
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 March 31, 1999 was $30,648,000 as
compared to $31,717,000 at December 31, 1998, for a decrease of $1,069,000, or
<PAGE>
3.4%. This decrease was attributable to an increase of $1,000,000 in debt
related to Employee Stock Ownership Plan, a decrease of $610,000 in the value of
the securities available for sale (see discussion on "Investment Securities"),
and the payment of cash dividends of $321,000, offset in part by net income for
the first three months of 1999 of $785,000 and proceeds from the sale of common
stock pursuant to the Dividend Reinvestment Plan of $77,000.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan.
During the first three months of 1999, 3,050 shares of common stock were
purchased from authorized and unissued shares at an average price of $25.29 per
share for proceeds of approximately $77,000.
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 3%to 5% 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 March 31, 1999, 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 March 31, 1999 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,025 16.55% $15,964 8.00% --- ---
Bank $29,845 15.03% $15,886 8.00% $19,857 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $30,475 15.27% $ 7,983 4.00% --- ---
Bank $29,961 13.58% $ 7,930 4.00% $11,912 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $30,475 8.37% $14,564 4.00% --- ---
Bank $26,961 7.47% $14,437 4.00% $18,046 5.00%
</TABLE>
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Action
(Dollars in Thousands)
At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,555 16.97% $15,819 8.00% --- ---
Bank $29,450 15.02% $15,684 8.00% $19,605 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $30,938 15.64% $ 7,906 4.00% --- ---
Bank $26,596 13.57% $ 7,842 4.00% $11,763 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $30,938 8.60% $14,114 4.00% --- ---
Bank $26,596 7.47% $13,951 4.00% $17,439 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 March 31, 1999 were $374,560,000, representing an increase
of 4.5% over total assets of $358,496,000 at December 31, 1998. Deposits
increased by $16,045,000 or 5.4% from $294,549,000 on December 31, 1998 to
$310,594,000 on March 31, 1999. Contributing to this increase were increases in
certificates of deposit of $13,391,000, non-interest bearing checking deposits
of $2,056,000 and savings and money market deposits of $865,000, partially
offset by a decline in interest bearing checking deposits of $267,000. Loans
outstanding at March 31, 1999 were $209,717,000 as compared to $212,437,000 at
December 31, 1998. This is a decrease of $2,720,000 or 1.3%. The decline in
loans was primarily the result of a decrease of $3,954,000 or 4.9% in
residential real estate loans. During the first three months of 1999, $9,800,000
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 the first quarter of
1999. The Bank continues to service all of these loans. There were $1,070,000
and $603,000 of residential real estate loans identified as held-for-sale at
March 31, 1999 and December 31, 1998, respectively. Additionally, the net
decrease in loans during the first three months of 1999 included a $854,000 or
1.4% decrease in commercial loans partially offset by a $2,088,000 or 2.9%
increase in consumer loans. The loan to deposit ratio was 67.5% at March 31,
1999 and 72.1% at December 31, 1998.
Premises and equipment decreased by $222,000 to $6,663,000 at March 31,
1999 from $6,885,000 at December 31, 1998.
The Company had long-term debt totaling $20,000,000 at March 31, 1999 and
December 31, 1998 from the Federal Home Loan Bank of Pittsburgh. Of this amount
$8,000,000 matures in August 2000, $5,000,000 matures in December 2001 and the
remaining $7,000,000 matures on 2008. The interest rates associated with these
loans are 5.89% fixed, 5.08% variable (at LIBOR plus 3 basis points) and 4.86%
fixed to December 2003 at which time the rate may be converted at the option of
the lender to a variable rate of LIBOR plus 15 basis points, 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.
<PAGE>
During the first quarter of 1999, the Company's Employee Stock Ownership
Plan (ESOP) borrowed $1,000,000 from the Company's subsidiary, First C. G.
Company, payable over twenty years with interest due quarterly and principal
annually in October. The interest rate on this loan is at the Bank's prime rate
(7.75% at March 31, 1999). The proceeds from this loan were used to purchase
35,500 shares of the Company's common stock. In the second quarter of 1998, the
ESOP borrowed $500,000 from First C. G. Company. This loan is due in 2005 with
interest due quarterly and principal annually in October. The interest rate on
this loan is at the Bank's prime rate (7.75% at March 31, 1999 and December 31,
1998). The balance outstanding on these ESOP loans was $1,435,000 at March 31,
1999 and $435,000 at December 31, 1998.
At March 31, 1999 and December 31, 1998 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 March 31, 1999 was $785,000, a
17,000 or 2.2% increase compared to net income of $768,000 for the same period
in 1998. The earnings improvement is attributable to an increase in total other
income of $100,000 or 13.9%, exclusive of investment security gains of $216,000
and gains on the sale of mortgages of $78,000 and a decrease in Federal income
taxes of $59,000 or 21.8% partially offset by a decrease in net interest income
of $143,000 or 3.9%, an increase in other expenses of $140,000 or 4.1% and a
$13,000 or 11.6% increase in the provision for possible loan losses.
Basic earnings per share for the three months ended March 31, 1999 were
$0.46 as compared to $0.45 for the corresponding period in 1998. Average shares
outstanding during this three month period were 1,710,996 in 1999 and 1,723,064
in 1998. Diluted earnings per share for the three month period ended March 31,
199 were $0.46 compared to $0.45 for the same period in 1998. 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
The "Rate/Volume Analysis" table segregates, in detail, the major factors
that contributed to the changes in net interest income, for the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998, into amounts
attributable to both rate and volume variances. In calculating the variances,
the changes were first segregated into (1) changes in volume (change in volume
times the old rate), (2) changes in rate (changes in rate times the old volume)
and (3) changes in rate/volume (changes in rate times the change in volume). The
changes in rate/volume have been allocated in their entirety to the change in
rates. 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.
<PAGE>
Net interest income amounted to $3,556,000 for the three months ended March
31, 1999 as compared to $3,699,000 for the three months ended March 31, 1998, a
decrease of $143,000 or 4.0%. This decrease is the result of lower loan volumes
combined with a smaller decline in interest expense.
Total taxable-equivalent interest income declined $93,000 primarily the
result of the lower volumes in the loan category. Taxable equivalent income from
loans for the first quarter declined $517,000 or 10.5% over the same period in
1998. This was comprised of a $1,352,000 decrease due to volume partially offset
by an $835,000 increase as a result of an increase in rate/volume. Average
year-to-date earning assets increased to $337,108,000 at March 31, 1999 from
$322,528,000 at March 31, 1998, a 4.5% increase.
Total interest expense declined $18,000 during the first three months of
1999, compared to the same period in 1998. This decline was principally the
result of lower interest rates on deposit accounts and borrowed money. Interest
expense attributed to time deposits increased $23,000 during the first three
months of 1999, compared to the first three months of 1998. The increase in time
deposit interest expense was due to a higher level of interest-bearing deposits.
Partially offsetting this growth in interest expense were lower interest rates
paid on all deposit accounts and borrowings 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 three months ended March 31, 1999 compared to the same period in 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>
Three Months Ended
March 31, 1999
Over / (Under)
March 31, 1998
CHANGE DUE TO:
TOTAL RATE VOLUME
<S> <C> <C> <C>
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ 57 $ (172) $ 229
Federal Funds Sold (1) (12) 11
Investment Securities 368 (1,194) 1,562
Loans Held for Sale 17 (25) 42
Loans (534) 860 (1,394)
------- ------- -------
Total Interest Income (93) (543) 450
------- ------- -------
INTEREST EXPENSE
Demand Deposits, Savings & Clubs (8) (52) 44
Time Deposits 23 (374) 397
Federal Funds Purchased and Securities (24) 29 (53)
Sold Under Agreements to Repurchase
Short-Term Borrowings (2) (2) --
Long-Term Borrowings (7) (108) 101
------- ------- -------
Total Interest Expense (18) (507) 489
------- ------- -------
Net Increase (Decrease) in Interest Income $ (75) $ (36) $ (39)
</TABLE>
<PAGE>
Other Income and Other Expenses
Other income for the three months ended March 31, 1999 including service
charges, trust fees, gains on the sale of mortgage loans and other miscellaneous
income, but exclusive of securities gains or losses, was $898,000 as compared to
$760,000 for the same period in 1998. This was an increase of $138,000 or 18.2%.
The revenues from the Trust Department operations were $211,000 for the three
months ended March 31, 1998 compared to $266,000 for the three months ended
March 31, 1999, an increase of $55,000 or 26.1%. There were $78,000 in gains on
the sale of mortgage loans for the three month period ended March 31, 1999 as
compared to $40,000 for the same period in 1998, an increase of $38,000 or
95.0%.
Total other expenses for the three month period ended March 31, 1999
increased by $140,000 or 4.1% to $3,548,000 over total other expenses for the
same period in 1998 of $3,408,000. Included in this increase is a $26,000 or
1.6% increase in salary and benefit expenses which were $1,640,000 as compared
to $1,614,000 in 1998. 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 $535,000 for the
three months ended March 31, 1999 and $551,000 for the three months ended March
31, 1998, a decrease of $16,000 or 2.9%. Other operating expenses for the three
month period ended March 31, 1999 were $1,373,000, an increase of $130,000 or
10.5% over the $1,243,000 in other expenses for the same period in 1998.
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 March 31,
1999 and December 31, 1998.
Available-for-sale securities are carried at fair value with the net
unrealized gains or losses reported in equity. The Company had $117,925,000 in
available-for-sale securities at March 31, 1999 with a net unrealized loss of
$83,000. At December 31, 1998 available-for-sale securities amounted to
$98,389,000 with a net unrealized gain of $527,000.
Held-to-maturity securities totaling $15,050,000 at March 31, 1999 are
carried at cost. At December 31, 1998, the held-to-maturity securities totaled
$17,723,000. The Company has the intent and ability to hold the held-to-maturity
securities until maturity. The Company, at March 31, 1999, 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
conditions and other relevant factors. Management currently believes that the
allowance is adequate to absorb known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is largely dependent upon
economic conditions which are beyond the scope of management's control.
<PAGE>
For the first three months of 1999, the provision for loan losses was
$125,000 compared to $112,000 for the same period in 1998. Net charge offs were
$147,000 for the three months ended March 31, 1999 compared with $102,000 for
the three months ended March 31, 1998. The ratio of the allowance for loan
losses to total loans at March 31, 1999 was 1.27% compared to 1.27% at December
31, 1998. This was primarily the result of a decline in total loans to
$209,717,000 at March 31, 1999 from $212,437,000 at December 31, 1998. This
decline was the result of the sale of $9,800,000 of mortgage loans during the
first three months of 1999. The allowance for possible loan losses at March 31,
1999 totaled $2,669,000, a decrease of $22,000 or 0.8% over the December 31,
1998 amount of $2,691,000.
As provided by SFAS No. 114, as amended by SFAS No. 118, $173,000 of the
Allowance for Possible Loan Losses is allocated to impaired loans at March 31,
1999 (See Note I "Impaired Loans").
Transactions in the allowance for loan losses are as follows:
ALLOWANCE FOR LOAN LOSSES
<TABLE>
1999 1998
---------- ----------
<S> <C> <C>
Balance, January 1, $2,691,000 $2,664,000
Provision charged to Operating Expenses 125,000 112,000
Loans Charged Off (165,000) (126,000)
Recoveries 18,000 24,000
---------- ----------
Balance March 31, $2,669,000 $2,674,000
</TABLE>
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
At March 31, 1999
- -----------------
<S> <C>
Commercial $903,000
Residential Real Estate 140,000
Consumer 749,000
Unallocated 877,000
----------
Total $2,669,000
</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 1.08% of total loans at March 31, 1999 compared to 1.13% at March 31, 1998.
The decrease in this ratio is the result of a $203,000 or 8.3% increase in non
performing loans to $2,254,000 over the one year period ending March 31, 1999.
The ratio of the allowance for loan losses to non performing assets was 118.4%
at March 31, 1999 compared to 108.8% at March 31, 1998.
Non accruing loans at March 31, 1999 of $1,096,000 decreased from March 31,
1998 level of $1,926,000. This $830,000 decrease was primarily the result of a
commercial loan payoff of $225,000 and a commercial real estate foreclosure in
the amount of $579,000. 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 March 31, 1999, loans past due 90 days or more and still
accruing interest were $1,158,000 compared to $531,000 at March 31, 1998. The
$627,000 increase in loans past due 90 days from March 31, 1998 to March 31,
1999 was the result of increases in mortgage and consumer loans past due 90 days
or more of $492,000 and $191,000, respectively. This was offset in part by a
decrease in commercial loans of $56,000.
<PAGE>
<TABLE>
NON-PERFORMING LOANS
March 31, December 31, March 31,
1999 1998 1998
<S> <C> <C> <C>
Non-accrual loans on a cash basis $1,096,000 $1,245,000 $1,926,000
Non-accrual loans as a percentage
of total loans 0.52% 0.59% 0.88%
Accruing loans past due 90 days
or more $1,158,000 $1,021,000 $ 531,000
Accruing loans past due 90 days
or more as a percentage of total
loans 0.55% 0.48% 0.24%
Other Real Estate Owned from
Foreclosed Property $ 601,000 $ 636,000 $ 194,000
Allowance for loan losses to
nonperforming loans 118.40% 118.80% 108.83%
Nonperforming assets to total loans 1.07% 1.07% 1.13%
Allowance for loan losses to total loans 1.27% 1.27% 1.23%
</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 March 31, 1999.
YEAR 2000
The Company has adopted a Year 2000 policy to address the "Year 2000" Issue
concerning the inability of certain information systems and automated equipment
to properly recognize and process dates containing the Year 2000 and beyond. If
not corrected, these systems and equipment could produce inaccurate or
unpredictable results commencing on January 1, 2000. The Company, similar to
most financial services providers, is particularly vulnerable to the potential
impact of the Year 2000 Issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware, and
other equipment both within the Company's direct control and outside of the
Company's ownership, yet with which the Company electronically or operationally
interfaces.
In order to address the Year 2000 Issue, the Company has developed and
implemented a five phase compliance plan divided into the following major
components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and
Testing; and (5) Implementation. The Company has completed the first three
phases of the plan for all of its mission-critical systems and is currently
working on the final two phases.
<PAGE>
The Company has identified its mission-critical systems as those that
affect the Company's ability to process banking transactions and its general
accounting systems. Such systems include deposit, loan and trust accounting,
check and deposit processing and branch teller equipment.
The Company purchases most of its computer software from major outside
providers of bank software. A significant component of the Year 2000 plan is to
install the Year 2000 compliant software provided by these vendors and also to
test these supplied systems. The Company's major software providers have
informed the Company that, based on tests they have conducted and continue to
conduct, they believe their respective systems to be Year 2000 compliant. In
addition, the Company is conducting its own tests on these systems provided by
vendors. The Company also has some internally generated programmed software.
This software has been corrected for Year 2000 and is in final testing. The
Company anticipates that all mission-critical systems will be tested by June
1999.
The Company has reviewed the impact of Year 2000 on other equipment and
systems such as heating, air conditioning, telecommunications, electric service,
vaults, photocopiers, personal computers, printers and other equipment where
necessary. Some of this equipment, such as personal computers, has been
replaced. Other items such as vaults, heating, air conditioning, photocopiers
and printers have been tested and found "not date sensitive". The Company's
providers of telecommunications and electric service have been contacted. These
providers have indicated they do not expect any interruption of service in the
Year 2000.
Other important segments of the Year 2000 plan are to identify those
suppliers and customers whose possible lack of Year 2000 preparedness might
expose the Company to financial loss. Included in this process was
communications to all the Company's customers and identification of loan and
deposit customers whose failure to address the Year 2000 Issue might impact
their banking relationship. As a result of this communication, the Company has
identified those customers who may be affected by the Year 2000. Risk factors
have been assigned to these customers. The Company does not anticipate any
significant loss as a result of these risks. The Company has initiated
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company has developed contingency plans to address any or all systems
that, despite all testing, still do not operate correctly in the Year 2000. The
contingency plans provide for manual and personal computer based systems to
process checks, deposits and loan transactions. The Company will increase its
inventories of the various required supplies, such as new account and loan
forms, deposit withdrawal forms and other pre-printed forms, available at the
Company's Main Office and branch offices. Alternative communications systems
have been established and alternative power sources are being investigated.
These plans will be finalized and tested during the first half of 1999. At this
time, the Company cannot estimate the cost, if any, that might be required to
implement such contingency plans.
<PAGE>
During the first quarter of 1999, the Company spent $30,000 on Year 2000
compliance matters. As of March 31, 1999, $881,000 has been spent on this
project. These expenses are comprised of the replacement of branch teller and
new account systems for $645,000, replacement of personal computers for
$205,000, replacement of mortgage lending software for $19,000 and enhancements
to banking and trust systems of $12,000. Additional expenses expected in 1999
include $80,000 for an alternative electric power system, $40,000 for replacing
an automated teller machine, $25,000 for branch new account systems, $15,000 for
check processing software and $50,000 for other banking systems. The expenses
related to Year 2000 are financed by the general revenues of the Company and are
included in the Company's other operating expenses in the Company's financial
statement.
The Company anticipates that its total Year 2000 project cost will not
exceed $1,100,000. This estimated project cost is based upon currently available
information. The aforementioned Year 2000 project cost estimate also may change
as the Company progresses in its Year 2000 program and obtains additional
information and conducts further testing. At this time, no significant projects
have been delayed as a result of the Company's Year 2000 effort.
Financial institution regulators have intensively focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of senior management
and directors. Year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with regulatory exams. The Federal
banking agencies have highly prioritized Year 2000 compliance in order to avoid
major disruptions to the operations of financial institutions and the country's
financial systems when the new century begins.
The Federal banking agencies have been conducting Year 2000 compliance
examinations. The failure to implement an adequate Year 2000 program can be
identified as an unsafe and unsound banking practice. The Company and the Bank
are subject to regulation and supervision by the Federal Reserve Bank and the
Comptroller of the Currency which regularly conducts reviews of the safety and
soundness of the Company's operations, including the Company's progress in
becoming Year 2000 compliant. The regulatory agencies have established
examination procedures which contain three categories of ratings:
"Satisfactory", "Needs Improvement" and "Unsatisfactory". Institutions that
receive a Year 2000 rating of Unsatisfactory may be subject to formal
enforcement action, supervisory agreements, cease and desist orders, civil money
penalties, or the appointment of a conservator. In addition, Federal banking
agencies will be taking into account Year 2000 compliance programs when
<PAGE>
reviewing applications and may deny an application based on Year 2000 related
issues. Failure by the Company to adequately prepare for Year 2000 issues could
negatively impact the Company's banking operations, including the imposition of
restrictions upon its operations by the Comptroller of the Currency.
Despite the Company's activities in regards to the Year 2000 Issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations,
and business prospects. There is also no guarantee that the hardware, software
and systems of third parties such as utility companies, other banks, computer
services and supply companies, the Federal Reserve Bank, other Federal agencies
and other vendors who provide services and supplies to the Company will be free
of unfavorable Year 2000 issues. The failure of such third parties could have a
material adverse impact upon the Company.
<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 (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 (36.3% of total loans) and commercial loans
supported by real estate (24.3% of total loans) in its loan portfolio. 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 "Assets and Liabilities").
The Company does not own any trading assets and does not have any hedging
transactions in place such as interest rate swaps.
Interest Rate Sensitivity
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>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended, March 31, 1999 1998
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 $ 7,278 $ 85 4.68% $ 2,393 $ 28 4.68%
Federal Funds Sold 1,267 14 4.40 1,067 15 5.64
Investment Securities
Taxable 87,181 1,341 6.16 74,798 1,169 6.24
Non-Taxable (1) 32,134 588 7.32 20,615 392 7.60
Net Loans Held for Sale 2,963 26 3.52 1,360 9 2.64
Loans (1) (2) 209,018 4,377 8.36 225,002 4,911 8.72
Reserve for Loan Losses (2,733) -- -- (2,707) -- --
--------- ----- -------- -----
Net Loans 206,285 4,377 8.48 222,295 4,911 8.84
--------- ----- -------- -----
Total Interest-Earning Assets 337,108 6,431 7.64 322,528 6,524 8.08
Non-Interest Earning Assets 27,124 -- -- 24,162 -- --
--------- ----- -------- -----
TOTAL ASSETS, INT INCOME $ 364,232 6,431 7.08 $346,690 6,524 7.52
--------- ----- -------- -----
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 49,448 132 1.08 $ 47,463 136 1.16
Money Market Deposits 13,620 92 2.72 14,423 101 2.80
Savings & Club Deposits 61,998 336 2.16 60,801 331 2.16
CD's over $100,000 4,295 41 3.80 4,780 46 3.84
All Other Time Deposits 131,073 1,741 5.32 123,367 1,713 5.56
--------- ----- -------- -----
Total Int-Bearing Deposits 260,434 2,342 3.60 250,834 2,327 3.72
Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase 5,695 42 2.96 7,141 66 3.68
Short-Term Borrowings 321 4 5.00 321 6 7.48
Long-Term Borrowings 20,000 280 5.60 18,374 287 6.24
--------- ----- -------- -----
Total Int-Bearing Liabilities 286,450 2,668 3.72 276,670 2,686 3.88
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 38,990 -- -- 32,315 -- --
Other Liabilities 7,660 -- -- 7,365 -- --
--------- ----- -------- -----
TOTAL LIABILITIES 333,100 2,668 3.20 316,350 2,686 3.40
SHAREHOLDERS' EQUITY 31,132 -- -- 30,340 -- --
--------- ----- -------- -----
TOTAL LIABILITIES AND EQUITY $ 364,232 2,668 2.92 $346,690 2,686 3.80
NET INTEREST INCOME $ 3,763 $ 3,838
----- -----
Net Interest Spread 3.92 4.20
Effect of Interest-Free Sources
Used to Fund Earnings Assets 0.56 0.56
Net Interest Margin 4.48% 4.76%
---- ----
</TABLE>
<PAGE>
The net interest margin of 4.48% for the three month period ended March 31,
1999, decreased from the 4.76% net interest margin for the first three months of
1998. The yield on interest earning assets was 7.64% during the first three
months of 1998 as compared to 8.08% in 1998. The average interest rate paid on
interest bearing deposits and other borrowings was 3.72% for the first three
months of 1999 as compared to 3.88% in 1998.
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 March 31, 1999,
assets of $151,163,000 (40.4% of total assets) were subject to interest rate
changes within one year. Liabilities subject to rate change within one year were
$178,089,000. A negative one-year gap position of $26,926,000 existed as of
March 31, 1999. The ratio of rate-sensitive assets to rate-sensitive liabilities
for the one-year time frame was 84.9%. The "Interest Sensitivity Analysis" in
the following table presents a sensitivity gap analysis of the Company's assets
and liabilities at March 31, 1999.
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------
INTEREST SENSITIVITY ANALYSIS
(Dollars in Thousands) as of March 31, 1999
- -------------------------------------------------------------------------------
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 $ 6,753 $ --- $ --- $ --- $ --- $ 6,753
Inv Securities 29,247 11,154 20,680 52,141 19,753 132,975
Loans Held-for-Sale 1,070 --- --- --- --- 1,070
Loans 31,760 13,833 24,628 74,103 62,724 207,048
Other Assets 12,038 --- --- --- 14,676 26,714
------- -------- -------- ------- -------- --------
TOTAL ASSETS $80,868 $24,987 $ 45,308 $126,244 $ 97,153 $374,560
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 40,941 $ 40,941
Int-Bearing
Deposits 96,143 21,468 49,403 40,089 62,550 269,653
Securities Sold
Under Agreements
to Repurchase 6,075 --- --- --- --- 6,075
Long-Term Debt 5,000 --- --- 15,000 --- 20,000
Other --- --- --- --- 7,243 7,243
Capital --- --- --- --- 30,648 30,648
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $107,218 $21,468 $ 49,403 $55,089 $141,382 $374,560
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(26,350) $ 3,519 $ (4,095) $71,155 $(44,229) $ ---
Cumulative Int
Sensitivity Gap $(26,350)$(22,831)$ (26,926) $44,229 $ --- $ ---
Cumulative Gap
RSA/RSL 75.42% 82.26% 84.88% 118.97% 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: May 15, 1999 BY: /S/ S. ERIC BEATTIE
-------------------- ----------------------
S. ERIC BEATTIE
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: May 15, 1999 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> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 12,038
<INT-BEARING-DEPOSITS> 6,753
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,925
<INVESTMENTS-CARRYING> 15,050
<INVESTMENTS-MARKET> 15,177
<LOANS> 209,717
<ALLOWANCE> 2,669
<TOTAL-ASSETS> 374,560
<DEPOSITS> 310,594
<SHORT-TERM> 6,075
<LIABILITIES-OTHER> 7,243
<LONG-TERM> 20,000
0
0
<COMMON> 8,744
<OTHER-SE> 21,904
<TOTAL-LIABILITIES-AND-EQUITY> 374,560
<INTEREST-LOAN> 4,396
<INTEREST-INVEST> 1,729
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 6,224
<INTEREST-DEPOSIT> 2,342
<INTEREST-EXPENSE> 2,668
<INTEREST-INCOME-NET> 3,556
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 216
<EXPENSE-OTHER> 3,548
<INCOME-PRETAX> 997
<INCOME-PRE-EXTRAORDINARY> 785
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 785
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 4.48
<LOANS-NON> 1,096
<LOANS-PAST> 1,158
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,691
<CHARGE-OFFS> 165
<RECOVERIES> 82
<ALLOWANCE-CLOSE> 2,669
<ALLOWANCE-DOMESTIC> 1,792
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<ALLOWANCE-UNALLOCATED> 877
</TABLE>
