FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------------------
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 _____
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 1,840,274 SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON JUNE 30, 1999.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
ITEM 1 - Financial Statements
Consolidated Balance Sheet 2
Consoliated Statement of Income 3
Consolidated Statement of 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
Market Risk 30
PART 11 - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders 34
ITEM 5 - Other Information 34
ITEM 6 - Exhibits and Reports on Form 8-K 34
SIGNATURES 35
<PAGE>
<TABLE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, Dec. 31
1999 1998
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 13,412 $ 12,259
Federal Funds Sold 2,000 2,000
--------- ---------
Total Cash and Cash Equivalents 15,412 14,259
Interest-Bearing Deposits With Banks 5,054 3,301
Investment Securities Held-to-Maturity 17,118 17,723
(Fair Value: June 30, 1999 $16,794
Dec. 31, 1998 - $17,920)
Securities Available-for-Sale at Fair Value 114,939 98,389
Mortgage Loans Held-for-Sale 1,480 603
Total Loans, Net of Unearned Discount 217,989 212,437
LESS: Allowance for Possible Loan Losses (2,658) (2,691)
--------- ---------
Net Loans 215,331 209,746
Premises and Equipment, Net 6,649 6,885
Accrued Interest Income 2,859 2,542
Other Real Estate Owned 593 636
Other Assets 4,957 4,412
--------- ---------
TOTAL ASSETS $ 384,392 $ 358,496
--------- ----------
LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 41,889 $ 38,885
Interest-Bearing Deposits 279,583 255,664
--------- ---------
Total Deposits 321,472 294,549
Securities Sold Under Agreements to Repurchase 9,151 5,094
Long-Term Debt 20,000 20,000
Accrued Interest Payable 3,237 3,536
Other Liabilities 1,543 3,600
--------- ---------
TOTAL LIABILITIES 355,403 326,779
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 - 1,840,274 shares at June 30, 1999
and 1,745,725 shares at Dec. 31, 1998 9,201 8,729
Additional Paid in Capital 15,573 13,873
Retained Earnings 8,075 9,023
Employee Stock Ownership Plan Debt (1,435) (435)
Accumulated Other Comprehensive Income (Loss) (2,425) 527
--------- ---------
Total Shareholders' Equity 28,989 31,717
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 384,392 $ 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 Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 4,432 $ 4,747 $ 8,828 $ 9,660
Investment Securities Income
Taxable 1,647 1,269 2,988 2,439
Tax-Exempt 392 301 780 560
Interest on Deposits with Banks and
Federal Funds Sold 19 38 118 81
------- ------- ------- -------
Total Interest Income 6,490 6,355 12,714 12,740
------- ------- ------- -------
INTEREST EXPENSE:
Interest on Deposits 2,450 2,352 4,792 4,679
Interest on Short-Term Borrowing 76 73 122 145
Interest on Long-Term Debt 279 280 559 567
------- ------- ------- -------
Total Interest Expense 2,805 2,705 5,473 5,391
------- ------- ------- -------
NET INTEREST INCOME: 3,685 3,650 7,241 7,349
Provision for Possible Loan Losses 125 113 250 225
------- ------- ------- -------
Net Interest Income After Provision
For Possible Loan Losses 3,560 3,537 6,991 7,124
------- ------- ------- -------
OTHER INCOME:
Trust Revenue 337 264 603 475
Service Charges on Deposit Accounts 425 411 797 761
Investment Securities Gains, Net 345 363 561 463
Gains on the Sale of Mortgage Loans 13 132 91 172
Other Operating Income 155 156 337 315
------- ------- ------- -------
Total Other Income 1,275 1,326 2,389 2,186
------- ------- ------- -------
OTHER EXPENSES:
Salaries and Employee Benefits 1,653 1,618 3,293 3,232
Net Occupancy and Equipment Expense 515 530 1,050 1,081
Other Operating Expenses 1,459 1,496 2,832 2,739
------- ------- ------- -------
Total Other Expenses 3,627 3,644 7,175 7,052
------- ------- ------- -------
Income Before Income Taxes 1,208 1,219 2,205 2,258
Provision for Income Taxes 283 324 495 595
------- ------- ------- -------
NET INCOME $ 925 $ 895 $ 1,710 $ 1,663
======= ======= ======= =======
Per Share Data
Basic Net Income $ 0.52 $ 0.50 $ 0.96 $ 0.93
======= ======= ======= =======
Diluted Net Income $ 0.51 $ 0.49 $ 0.95 $ 0.92
======= ======= ======= =======
Cash Dividends $ 0.18 $ 0.17 $ 0.36 $ 0.34
======= ======= ======= =======
</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 Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 925 $ 895 $ 1,710 $1,663
Other Comprehensive Income (Loss),
Net of Tax
Unrealized gains (losses)
on securities
Unrealized gains (losses)
arising in period (2,570) (129) (3,322) (202)
Reclassification adjustment;
gain included in net income 228 (358) 370 (439)
------ ------ ------ ------
Other Comprehensive Income (Loss) (2,342) (487) (2,952) (641)
------ ------ ------ ------
Comprehensive Income (Loss) $(1,417) $ 408 $(1,242) $1,022
====== ====== ====== ======
</TABLE>
Other comprehensive income is shown net of tax (benefit) for the six months
ended June 30, 1999 and June 30, 1998 of $(1,521,000) and $330,000, respectively
and the three months ended June 30, 1999 and June 30, 1998 of $(1,206,000) and
$251,000, 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>
Six Months Ended
June 30, 1999 June 30, 1998
OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net Income $1,710 $1,663
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses 250 225
Depreciation and Amortization 510 491
Amortization of Security Discounts (96) (39)
Amortization of Security Premiums 131 98
Amortization of Deferred Fees on Loans 65 (190)
Mortgage Loans Originated for Sale (14,412) (28,418)
Mortgage Loan Sales 13,534 27,707
(Gain) on Sale of Mortgage Loans (91) (172)
Investment Securities Gains, Net (561) (463)
Changes in Assets and Liabilities:
Increase in Accrued Interest Income (319) (290)
Decrease in Accrued Interest Payable (299) (289)
Net Increase in Other Assets (354) (1,033)
Net Decrease in Other Liabilities (788) (184)
------- -------
Net Cash Used In Operating Activities (720) (894)
------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities
Available-for-Sale 8,572 12,139
Proceeds from Maturities of Securities
Held-to-Maturity 3,460 5,474
Proceeds from Sales of Securities
Available-for-Sale 13,858 4,571
Proceeds from Sales of Securities
Held-to-Maturity --- 248
Purchase of Securities Available-for-Sale (43,367) (28,963)
Purchase of Securities Held-to-Maturity (2,415) (7,284)
Net Increase in Interest Bearing
Deposits With Banks (1,753) (4,910)
Net Increase (Decrease) in Loans (5,940) 12,711
Purchase of Premises and Equipment, Net (211) (208)
Proceeds from Sale of Other Real Estate Owned 176 118
------- -------
Net Cash Used In Investing Activities (27,620) (9,104)
------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest
Bearing Demand Deposits and Savings Accounts 7,119 6,376
Net Increase in Certificates of Deposits 19,804 2,918
Net Decrease in Long-Term Debt --- (390)
Proceeds from Sale of Treasury Stock --- 94
Net Increase in ESOP Debt (1,000) (110)
Net (Decrease) Increase in Repurchase Agreements 4,057 (1,648)
Proceeds from Issuance of Stock 160 72
Cash Dividends Paid (643) (621)
Cash in Lieu of Fractional Shares (4) (6)
------- -------
Net Cash Provided by Financing Activities 29,493 6,685
------- -------
Increase (Decrease) in Cash and Cash Equivalents 1,153 (3,313)
Cash and Cash Equivalents, January 1 14,259 14,829
------- -------
Cash and Cash Equivalents, June 30, $15,412 $11,516
======= =======
</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 and six months ended June 30, 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
<PAGE>
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).
NOTE E - CASH DIVIDENDS
On May 21, 1999 the Company paid its 1999 second quarter dividend on its common
stock of $.19 per share to shareholders of record on May 7, 1999.
NOTE F - STOCK DIVIDEND
On June 24, 1999 the Company paid a 5% stock dividend to shareholders of record
on June 4, 1999. Fractional shares were paid in cash based on the closing price
of $23.312 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
The Company calculates earnings per share as provided by 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. Basic and diluted
earnings per share were calculated as follows.
<PAGE>
For the Three Months Ended June 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1999
<S> <C> <C> <C>
Net Income $ 925
Basic Earnings Per Share
Income Available to Common Shareholders $ 925 1,779,710 $ 0.52
Effect of Dilutive Securities
Stock Options 6,747
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 925 1,786,457 $ 0.51
------ --------- -------
1998
Net Income $ 895
Basic Earnings Per Share
Income Available to Common Shareholders $ 895 1,801,551 $ 0.50
Effect of Dilutive Securities
Stock Options 8,920
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 895 1,810,417 $ 0.49
------ --------- -------
</TABLE>
Average common shares outstanding in the three month period ended June 30, 1999
and 1998 did not include 55,844 and 24,250, 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
1999.
<PAGE>
For the Six Months Ended June 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1999
<S> <C> <C> <C>
Net Income $1,710
Basic Earnings Per Share
Income Available to Common Shareholders $1,710 1,785,287 $ 0.96
Effect of Dilutive Securities
Stock Options 6,876
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $1,710 1,792,163 $ 0.95
------ --------- -------
1998
Net Income $1,663
Basic Earnings Per Share
Income Available to Common Shareholders $1,663 1,801,323 $ 0.93
Effect of Dilutive Securities
Stock Options 8,600
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $1,663 1,809,923 $ 0.92
------ --------- -------
</TABLE>
Average common shares outstanding in the six month period ended June 30, 1999
and 1998 did not include 48,562 and 23,183, 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
1999.
<PAGE>
NOTE H - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
Six Month Period Ended June 30, 1999 1998
<S> <C> <C>
Beginning Balance $2,691,000 $2,664,000
Additions
Provision for loan losses charged to
operating expenses 250,000 225,000
Recoveries of loans 39,000 46,000
---------- ----------
Total Additions 289,000 271,000
Deductions
Loans charged off 322,000 255,000
---------- ----------
Ending Balance $2,658,000 $2,680,000
</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 June 30, 1999 1998
<S> <C> <C>
Principal amount of impaired loans $ 419,000 $1,203,000
Deferred loan costs --- 2,000
-------- --------
419,000 1,205,000
Less valuation allowance 151,000 446,000
-------- --------
$ 268,000 $ 759,000
</TABLE>
On January 1, 1995 a valuation for credit losses related to impaired loans was
established. The activity in this allowance account for the six months ending
June 30, 1999 was as follows:
<TABLE>
1999 1998
<S> <C> <C>
Valuation allowance at January 1, $303,000 $138,000
Provision for loan impairment 28,000 225,000
Transfer from Unallocated Allowance for
Possible Loan Losses (112,000) 117,000
Direct charge-offs (68,000) (34,000)
-------- --------
Valuation allowance at June 30, $151,000 $446,000
</TABLE>
Total cash collected on impaired loans during the six month period ended June
30, 1999 was $87,000 of which $37,000 was credited to the principal balance
outstanding on such loans and $50,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the first six
months of 1999 was $27,000. Interest income recognized for the first half of
1998 was $80,000. The valuation allowance for impaired loans of $151,000 at June
30, 1999 is included in the "Allowance for Possible Loan Losses" which amounts
to $2,658,000 at June 30, 1999. The provision for loan impairment of $28,000 for
the six month period ended June 30, 1999 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
consist 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 reserved $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, costs and attorneys fees. 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 and six month period ended June 30, 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 June 30, 1999,
cash, due from banks, Federal funds sold and interest bearing deposits with
banks totaled $20,466,000, and securities maturing within one year totaled
$3,352,000. At December 31, 1998, cash, due from banks, Federal funds sold and
interest bearing deposits with banks, totaled $17,560,000, and securities
<PAGE>
maturing within one year were $4,493,000. Securities sold under an agreement to
repurchase totaled $9,151,000 at June 30, 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 $4,350,000 at June 30, 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. Federal funds sold
totaled $2,000,000 at June 30, 1999. At December 31, 1998 there were Federal
funds sold totaling $2,000,000.
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit
in the amount of $25,000,000 at June 30, 1999, subject to certain collateral
requirements. The Bank had no short-term (overnight) borrowings against this
line at June 30, 1999 or at December 31, 1998. The Bank had additional
borrowings from the Federal Home Loan Bank at June 30, 1999 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 six months ended June 30, 1999 consisted of cash used in
operating activities of $720,000 and cash used in investing activities of
$27,620,000 offset in part by cash provided by financing activities of
$29,493,000 resulting in an increase in cash and cash equivalents of $1,153,000.
Cash used in operating activities was the result of mortgage loans originated
for sale of $14,412,000, a decrease in other liabilities of $788,000, gains on
investment securities of $561,000, an increase in accrued interest income of
$319,000, a decrease in accrued interest payable of $299,000, and an increase in
other assets of $354,000 partially reduced by mortgage loan sales of
$13,534,000, net operating income of $1,710,000, depreciation and amortization
of $510,000 and a provision for possible loan losses of $250,000. Cash was used
in investing activities for the purchase of securities available-for-sale and
held-to-maturity of $43,367,000 and $2,415,000, respectively, plus net increase
in interest-bearing deposits with banks of $1,753,000, and a net increase in
loans of $5,940,000, partially offset by proceeds from maturities of securities
available-for-sale and held-to-maturity of $8,572,000 and $3,460,000,
respectively, and proceeds from sales of securities available-for-sale of
$13,858,000. Cash provided by financing activities consisted principally of
increases in interest and non-interest bearing demand deposits and savings
accounts of $7,119,000, an increase in certificates of deposit of $19,804,000
and an increase of $4,057,000 in repurchase agreements offset in part by an
increase in the ESOP Debt of $1,000,000 and the payment of cash dividends of
$643,000.
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 June 30, 1999 was $28,989,000 as compared to
$31,717,000 at December 31, 1998, for a decrease of $2,728,000. This decrease
<PAGE>
was attributable to a decrease of $2,952,000 in the value of securities
available-for-sale (see discussion on "Investment Securities"), an increase of
$1,000,000 in the debt related to the Employee Stock Ownership Plan, the payment
of cash dividends of $643,000 and the payment of $4,000 in cash in lieu of
fractional shares from the 5% stock dividend of June 24, 1999 offset in part by
net income for the first six months of 1999 of $925,000, and proceeds from the
sale of common stock pursuant to the Dividend Reinvestment Plan of $160,000.
On June 24, 1999, the Company paid a 5% stock dividend to shareholders of record
on June 4, 1999. Fractional shares were paid in cash based on the closing price
of $23.312 per share on the record date.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. During
the first six months of 1999, 6,569 shares of common stock were purchased from
authorized and unissued shares at an average price of $23.70 per share for
proceeds of approximately $156,000.
The Company has a Non-Employee Director Stock Option Plan that provides for the
awarding of stock options to the Company's non-employee directors. During the
first six months of 1999, options to purchase 7,650 shares of the Company's
common stock at an average price of $21.81 per share were granted to certain
non-employee directors. Options for 496 shares of the Company's common stock
were exercised at a price of $13.99 per share by a non-employee director during
the first half of 1999.
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, that as of June 30, 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 June 30, 1999 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,778 16.13% $16,751 8.00% --- ---
Bank $30,390 14.47% $16,805 8.00% $21,006 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,160 14.88% $ 8,375 4.00 --- ---
Bank $27,364 13.03% $ 8,403 4.00% $12,064 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $31,160 8.19% $15,479 4.00% --- ---
Bank $27,364 7.24% $15,110 4.00% $18,887 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 June 30, 1998 were $384,392,000, representing an increase of
7.2% over total assets of $358,496,000 at December 31, 1998. Deposits increased
by $26,923,000 or 9.1% from $294,549,000 on December 31, 1998 to $321,472,000 on
June 30, 1999. Contributing to this increase were increases in non-interest
bearing checking deposits of $3,004,000, certificates of deposit of $19,804,000,
savings and money market deposits of $3,423,000 and interest-bearing checking
deposits of $692,000. Loans outstanding at June 30, 1999 were $217,989,000 as
compared to $212,437,000 at December 31, 1998. This is an increase of $3,552,000
or 1.7%. The increase in loans was primarily the result of an increase of
$11,335,000 or 15.9% in consumer loans. This increase was offset in part by a
$1,542,000 or 2.5% decrease in commercial loans and a $4,240,000 or 5.3%
decrease in residential real estate loans. During the first half of 1999,
$13,534,000 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 1999. The Bank
continues to service all of these loans. There were $1,480,000 of residential
real estate loans identified as held-for-sale at June 30, 1999. The loan to
deposit ratio was 67.8% at June 30, 1999 and 72.1% at December 31, 1998.
Premises and equipment decreased by $236,000 to $6,649,000 at June 30, 1999 from
$6,885,000 at December 31, 1998.
The Company had long-term debt totaling $20,000,000 at June 30, 1999 and at
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 in October 2008. The interest rates associated with
these loans are 5.89% fixed, 5.41% variable at LIBOR plus 3 basis points, and
4.86% fixed until 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.
During the first half 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
<PAGE>
June 30, 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 June 30, 1999 and December 31, 1998). The
balance outstanding on these ESOP loans was $1,435,000 at June 30, 1999 and
$435,000 at December 31, 1998.
At June 30, 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 June 30, 1999 was $925,000, a $30,000
or 3.4% increase compared to net income of $895,000 for the same period in 1998.
The earnings improvement was attributable to an increase in net interest income
of $23,000 or 0.6%, a $17,000 or 0.4% decrease in total other expenses, a
$41,000 or 12.7% decrease in Federal income taxes partially offset by an
increase in the provision for possible loan losses of $12,000 or 10.6%, a
decrease in total other income, exclusive of net securities gains of $33,000 or
3.4% and an $18,000 decrease in net securities gains.
Net income for the six months ended June 30, 1999 was $1,710,000 compared to
$1,663,000 for the same period in 1998. The earnings improvement was primarily
attributable to increases in total other income, higher gains on the sale of
securities and a reduction in Federal income taxes. During the first half of
1999, total other income, exclusive of net securities gains, increased by
$105,000 or 5.8% as compared to June 30, 1998. Also affecting earnings was a
$98,000 or 21.2% increase in net securities gains and a $100,000 or 16.8%
decline in Federal income taxes. These were offset in part by a decrease in net
interest income of $108,000 or 1.5% and an increase in the provision for
possible loan losses of $25,000 or 11.1% and total other expenses of $123,000 or
1.7%.
Basic earnings per share for the three months ended June 30, 1999 were $0.52 as
compared to $0.50 for the corresponding period in 1998. Average shares
outstanding during this three month period were 1,779,710 in 1999 and 1,801,551
in 1998. Basic earnings per share for the six months ended June 30, 1999 and
1998 were $0.96 and $0.95, respectively. Average shares outstanding during this
six month period were 1,785,287 in 1999 and 1,801,323 in 1998. Diluted earnings
per share for the three month period ended June 30, 1999 were $0.51 compared to
$0.49 for the same period in 1998. Diluted earnings per share for the six month
period ended June 30 were $0.95 and $0.92 in 1999 and 1998, respectively. Per
share earnings and average shares outstanding have been restated to reflect the
5% stock dividend paid on June 24, 1999. (see Note F
<PAGE>
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 and six
months ended March 31, 1999 as compared to the same period in 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.
Net interest income amounted to $3,685,000 for the three months ended June 30,
1999 as compared to $3,650,000 for the three months ended March 31, 1998, an
increase of $35,000 or 1.0%. This increase is the result of lower loan volumes
combined with a smaller decline in interest expense.
The fully taxable-equivalent net interest income was $7,661,000 for the first
six months of 1999, compared to $7,649,000 for the same period in 1998, a .16%
or $12,000 increase as shown in the following "Rate/Volume Analysis" table. This
increase in taxable-equivalent net interest income was primarily due to a
$171,000 increase related to volume partially offset by a $159,000 decrease
related to interest rates.
For the six months period ended June 30, 1999, net interest income was
$7,241,000 compared to $7,349,000 for the same period in 1998, a decrease of
$108,000 or 1.5%.
Total taxable-equivalent interest income grew $93,000 primarily the result of
the higher volumes in the investment security earning asset category.
Taxable-equivalent income from investment securities for the second quarter
increased $882,000 or 8.7% over the second half of 1998. This was comprised of a
$911,000 increase due to volume partially offset by a $29,000 decrease due to
rates as a result of declining yields. The increase in interest earned on
investment securities was partially reduced by a $855,000 reduction in taxable
equivalent interest earned on loans in the first half of 1999 as compared to
1998. This decrease was attributed to a $412,000 reduction due to a lower volume
of loans and $443,000 due to a reduction in interest rates on loans. Average
year-to-date earning assets increased to $345,119,000 at June 30, 1999 from
$323,648,000 at June 30, 1998, a 6.6% increase.
Total interest expense grew $81,000 during the first six months of 1999,
compared to the same period in 1998. This growth was principally the result of
higher volumes, primarily due to an increase in time deposits. Interest expense
attributed to time deposits increased $113,000 during the first six months of
1999, compared to the first six months of 1998. 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 and
securities sold under agreements to repurchase 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 six months ended June 30, 1999. 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>
Six Months Ended
June 30, 1999
Over / (Under)
June 30, 1998
CHANGE DUE TO:
TOTAL RATE VOLUME
<S> <C> <C> <C>
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ 44 $ (35) $ 79
Federal Funds Sold (7) (3) (4)
Investment Securities 882 (29) 911
Loans Held for Sale 29 20 9
Loans (855) (443) (412)
------- ------- -------
Total Interest Income 93 (491) 584
------- ------- -------
INTEREST EXPENSE
Demand Deposits, Savings & Clubs (1) (35) 34
Time Deposits 113 (206) 319
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase (25) (22) (3)
Short-Term Borrowings 2 (6) 8
Long-Term Borrowings (8) (63) 55
------- ------- -------
Total Interest Expense 81 (332) 413
------- ------- -------
Net Increase (Decrease) in Interest Income $ 12 $ (159) $ 171
</TABLE>
<PAGE>
Other Income and Other Expenses
Other income for the three months ended June 30, 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 $930,000 as compared to
$963,000 for the same period in 1998. This was a decrease of $33,000 due to a
$119,000 decline in the gains on the sale of mortgage loans, offset in part by
increases in service charges and Trust Department revenues. There were $13,000
in gains on the sale of mortgage loans for the three month period ended June 30,
1999 and of $132,000 for the same period in 1998. In the three month period
ended June 30, 1999, service charges were $425,000, a $14,000 increase over the
1998 amount of $411,000. The revenues from the Trust Department operations were
$337,000 for the three months ended June 30, 1999 as compared to $264,000 for
the three months ended June 30, 1998, an increase of $73,000 or 27.7%. Other
miscellaneous income for the three months ended June 30, 1999 was $155,000, as
compared to $156,000 for the same period in 1998.
Other income for the six months ended June 30, 1999 including service charges,
trust revenues, gains on the sale of mortgage loans and other miscellaneous
income, but exclusive of securities gains or losses, was $1,828,000 as compared
to $1,723,000 for the same period in 1998. This was an increase of $105,000 or
6.1%. In the six month period ended June 30, 1999 service charges were $797,000,
a $36,000 or 4.7% increase over the 1998 amount of $761,000. The increase in
service charge income is the result of an increase in deposit accounts. The
revenues from the Investment Management and Trust Division operations were
$603,000 for the six months ended June 30, 1999 as compared to $475,000 for the
six months ended June 30, 1998, an increase of $128,000 or 26.9%. During the six
months ended June 30, 1999, sales of mortgage loans resulted in a gain of
$91,000 as compared to $172,000 for the same period in 1998, a decrease of
$81,000. The gain in 1999 was the result of the sale of $13,534,000 of
residential real estate loans in the first half (see discussion on Assets and
Liabilities). Other operating income for the six months ended June 30, 1999 was
$337,000 as compared to $315,000 for the same period in 1998, an increase of
$22,000 or 7.1%.
Total other expenses for the three month period ended June 30, 1999 decreased by
$17,000 or 0.5% to $3,627,000 over total other expenses for the same period in
1998 of $3,644,000. Included in the total other expenses for the three month
period ended June 30, 1999 is a $35,000 or 2.2% increase in salary and benefit
expenses to a total of $1,653,000 as compared to $1,618,000 in 1998. These
increases were primarily due to general salary increases of approximately 3%.
Occupancy and equipment expenses were $515,000 for the three months ended June
30, 1999 and $530,000 for the three months ended June 30, 1998, a decrease of
$15,000 or 2.8%. Other operating expenses for the three month period ended June
30, 1999 were $1,459,000, a decrease of $37,000 or 2.5% from the $1,496,000 in
other expenses for the same period in 1998.
<PAGE>
Total other expenses for the six months ended June 30, 1999 increased by
$123,000 or 1.7%, to $7,175,000 from $7,052,000 for the same period in 1998.
Salaries and employee benefits were $3,293,000 for the six months ended June 30,
1999 as compared to $3,232,000 for the six months ended June 30, 1998
representing an increase of $61,000 or 1.9%. These increases were primarily due
to general salary increases of approximately 3%. Occupancy and equipment
expenses were $1,050,000 for the six months ended June 30, 1999 and $1,081,000
for the six months ended June 30, 1998, a decrease of $31,000 or 2.9%. Other
operating expenses for the six months ended June 30, 1999 were $2,832,000 in
relation to $2,739,000 for the six months ended June 30, 1998, an increase of
$93,000 or 3.4%.
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 June 30, 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 $114,939,000 in
available-for-sale securities at June 30, 1999 with a net unrealized loss of
$2,425,000. At December 31, 1998 available-for-sale securities amounted to
$98,389,000 with a net unrealized gain of $527,000.
During the six month period ended June 30, 1999, $13,297,000 of securities
available-for-sale were sold for a net gain of $561,000 as compared to
$4,571,000 of securities available-for-sale were sold for a net gain of $463,000
for the same time period in 1998.
Held-to-maturity securities totaling $17,118,000 at June 30, 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 June 30, 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 facators. At present, management currently believes that the
allowance is adequate to absorb known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is largely dependent upon
economic conditions which are beyond the scope of management's control.
For the first six months of 1999, the provision for loan losses was $250,000
compared to $225,000 for the same period in 1998. Net charge offs were $283,000
<PAGE>
for the six months ended June 30, 1999 compared with $209,000 for the six months
ended June 30, 1998. The ratio of the allowance for loan losses to total loans
at June 30, 1999 was 1.22% compared to 1.27% at December 31, 1998 and 1.24% at
June 30, 1998. This was primarily the result of an increase in total loans to
$217,989,000 at June 30, 1999 over $216,957,000 at December 31, 1998. The
allowance for possible loan losses at June 30, 1999 totaled $2,658,000, a
decrease of $33,000 or 1.2% from the December 31, 1998 amount of $2,691,000 and
$22,000 or 0.8% over the June 30, 1998 balance of $2,680,000.
As provided by SFAS No. 114, as amended by SFAS No. 118, $151,000 of the
Allowance for Possible Loan Losses is allocated to impaired loans at June 30,
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 250,000 225,000
Loans Charged Off 322,000 255,000
Recoveries 39,000 46,000
----------- ----------
Balance June 30, $ 2,658,000 $ 2,680,000
</TABLE>
The following table sets forth an allocation of the allowance for loan losses by
loan category:
<TABLE>
At June 30, 1999
<S> <C>
Commercial $ 952,000
Residential Real Estate 174,000
Consumer 733,000
Unallocated 799,000
----------
Total $2,658,000
</TABLE>
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
<PAGE>
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
1.16% of total loans at June 30, 1999 compared to 1.3% at June 30, 1998. The
decrease in this ratio is the result of a $302,000 or 10.6% decrease in non
performing loans to $2,532,000 over the one year period ending June 30, 1998.
The ratio of the allowance for loan losses to non performing assets was 104.97%
at June 30, 1999 compared to 94.6% at June 30, 1998.
Non accruing loans at June 30, 1999 of $941,000 decreased from June 30, 1998
level of $1,816,000. This $875,000 decrease was primarily the result of the
charge off of a commercial loan. At the present time, management is of the
opinion that these loans present a minimal amount of exposure to the Bank.
Loans past due 90 days or more and still accruing interest are loans that are
generally well secured and expected to be restored to a current status in the
near future. As of June 30, 1999, loans past due 90 days or more and still
accruing interest were $1,591,000 compared to $1,018,000 at June 30, 1998. The
$573,000 increase in loans past due 90 days from June 30, 1998 to June 30, 1998
was the result of increases in mortgage and commercial loans past due 90 days or
more.
<PAGE>
NON-PERFORMING LOANS
<TABLE>
June 30, December 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
Non-accrual loans on a cash basis $ 941,000 $1,245,000 $1,816,000
Non-accrual loans as a percentage
of total loans 0.43% 0.59% 0.89%
Accruing loans past due 90 days
or more $1,591,000 $1,021,000 $1,018,000
Accruing loans past due 90 days
or more as a percentage of total
loans 0.73% 0.48% 0.47%
Other Real Estate Owned from
Foreclosed Property $ 593,000 $ 636,000 $ 238,000
Allowance for loan losses to
nonperforming loans 104.97% 118.80% 94.57%
Nonperforming assets to total loans 1.16% 1.07% 1.31%
Allowance for loan losses to total loans 1.22% 1.27% 1.24%
</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 June 30, 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 completed all five phases of the
plan for all of its mission-critical systems.
<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 was to install
the Year 2000 compliant software provided by these vendors and also to test
these supplied system. The Company's major software providers have informed the
Company that, based on tests they have conducted, they believe their respective
systems to be Year 2000 compliant. In addition, the Company has conducted its
own tests on these systems provided by vendors. The Company completed testing
and implementation of all mission-critical system in 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 also assessed the amount of currency the Bank will require at
year-end as a result of expected increased customer demand. The Company has made
arrangements with the Federal Reserve Bank to obtain any additional currency
required.
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
<PAGE>
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 have been finalized and tested during the first half of 1999 except
the plans with respect to the alternative power source. The Company has
purchased an electric generator for its Operations Center, which will be
installed in October. At this time, the Company cannot estimate the cost, if
any, that might be required to implement such contingency plans.
During the second quarter of 1999, the Company spent $68,000 on Year 2000
compliance matters. During the first half of 1999, the Company spent $98,000 on
Year 2000. As of June 30, 1999, $949,000 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 $231,000,
replacement of mortgage lending software for $19,000, replacement of ATMs for
$28,000, customer communication $5,000, and enhancements to banking and trust
systems of $20,000. Additional expenses expected in 1999 include $80,000 for an
alternative electric power system, $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
$1,250,000. 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
<PAGE>
agencies will be taking into account Year 2000 compliance programs when
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 (34.8% of total loans) and commercial loans
supported by real estate (21.3% 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.
<PAGE>
<TABLE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
Six Months Ended, June 30, 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 $ 4,185 $ 100 4.78% $ 1,733 $ 56 6.46%
Federal Funds Sold 785 18 4.59 917 25 5.46
Investment Securities
Taxable 95,769 2,988 6.24 78,048 2,439 6.26
Non-Taxable (1) 33,049 1,182 7.15 22,824 849 7.44
Net Loans Held for Sale 2,455 53 4.32 1,801 24 2.66
Loans (1) (2) 211,599 8,792 8.31 221,038 9,647 8.72
Reserve for Loan Losses 2,723 -- -- (2,713) -- --
--------- ----- -------- -----
Net Loans 208,876 8,792 8.42 218,325 9,647 8.84
--------- ----- -------- -----
Total Interest-Earning Assets 345,119 13,133 7.61 323,648 13,040 8.06
Non-Interest Earning Assets 27,366 -- -- 24,645 -- --
--------- ----- -------- -----
TOTAL ASSETS, INT INCOME $ 372,485 13,133 7.05 $348,293 13,040 7.48
--------- ----- -------- -----
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 50,576 271 1.07 $ 48,165 277 1.16
Money Market Deposits 13,785 188 2.73 14,274 200 2.80
Savings & Club Deposits 63,160 690 2.19 61,435 673 2.20
CD's over $100,000 4,631 91 3.93 4,795 91 3.80
All Other Time Deposits 134,744 3,551 5.27 123,308 3,438 5.58
--------- ----- -------- -----
Total Int-Bearing Deposits 266,896 4,791 3.59 251,977 4,679 3.72
Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase 5,903 88 2.98 6,048 113 3.74
Short-Term Borrowings 1,398 34 4.86 1,132 32 5.66
Long-Term Borrowings 20,000 559 5.59 18,227 567 6.22
--------- ----- -------- -----
Total Int-Bearing Liabilities 294,197 5,472 3.72 277,384 5,391 3.88
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 40,213 -- -- 33,130 -- --
Other Liabilities 7,196 -- -- 7,179 -- --
--------- ----- -------- -----
TOTAL LIABILITIES 341,606 5,472 3.20 317,693 5,391 3.40
SHAREHOLDERS' EQUITY 30,879 -- -- 30,600 -- --
--------- ----- -------- -----
TOTAL LIABILITIES AND EQUITY $ 372,485 5,472 2.94 $348,293 5,391 3.10
NET INTEREST INCOME $7,661 $7,649
----- -----
Net Interest Spread 4.11 4.18
Effect of Interest-Free Sources
Used to Fund Earnings Assets 0.33 0.54
Net Interest Margin 4.44% 4.72%
---- ----
</TABLE>
<PAGE>
The net interest margin of 4.44% for the six month period ended June 30, 1999,
decreased from the 4.72% net interest margin for the first six months of 1998.
The yield on interest earning assets was 7.61% during the first six months of
1999 as compared to 8.06% in 1998. The average interest rate paid on interest
bearing deposits and other borrowings was 3.72% for the first six 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 June 30, 1999, assets of
$161,016,000 (41.8% of total assets) were subject to interest rate changes
within one year. Liabilities subject to rate change within one year were
$175,277,000. A negative one-year gap position of $14,261,000 existed as of June
30, 1999. The ratio of rate-sensitive assets to rate-sensitive liabilities for
the one-year time frame was 91.9%. The "Interest Sensitivity Analysis" in the
following table presents a sensitivity gap analysis of the Company's assets and
liabilities at June 30, 1999.
<PAGE>
Interest Sensitivity Analysis
(Dollars in Thousands) as of June 30, 1999
<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 $ 5,054 $ --- $ --- $ --- $ --- $ 5,054
Federal Funds Sold 2,000 --- --- --- --- 2,000
Inv Securities 15,608 16,387 20,055 67,553 12,454 132,057
Loans Held-for-Sale 1,480 --- --- --- --- 1,480
Loans 48,421 13,939 24,660 78,211 50,100 215,331
Other Assets 13,412 --- --- --- 15,058 28,470
------- -------- -------- ------- -------- --------
TOTAL ASSETS $85,975 $30,326 $ 44,715 $145,764 $ 77,612 $384,392
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 41,889 $ 41,889
Int-Bearing
Deposits 80,889 21,275 50,962 61,709 64,748 279,583
Securities Sold
Under Agreements
to Repurchase 9,151 --- --- --- --- 9,151
Long-Term Debt 13,000 --- --- 7,000 --- 20,000
Other --- --- --- --- 4,780 4,780
Capital --- --- --- --- 28,989 28,989
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $103,040 $21,275 $ 50,962 $68,709 $140,406 $384,392
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(17,065) $ 9,051 $ (6,247) $77,055 $(62,794) $ ---
Cumulative Int
Sensitivity Gap $(17,065) $(8,014)$(14,261) $62,794 $ --- $ ---
Cumulative Gap
RSA/RSL 83.44% 93.55% 91.86% 125.74% 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 4. Submission of Matters to a Vote of Security Holders
On May 13, 1999, the Company held its annual meeting of shareholders. At the
annual meeting, the shareholders elected Robert J. Bergren and Richard Stevens,
III as Class 3 Directors of the Company to serve for a term of four years and
until their successors are duly elected and qualified. The following is a
tabulation of the vote for these directors.
Votes
Withheld
For Authority
--------------- --------------
Robert J. Bergren 1,371,136 27,473
Richard Stevens, III 1,371,261 27,348
The other directors whose terms of office as a director continued after the
meeting are S. Eric Beattie, Gordon B. Mowrer, Daniel B. Mulholland, Robert C.
Nagel, Charles J. Peischl, and Maria Z. Thulin.
ITEM 5. Other Information
Pursuant to the provision of the Company's By-Laws, the Board of Directors
authorized an increase in the size of the Board of Directors of both the Company
and the Bank to ten members on June 17, 1999. The Board of Directors appointed
Mr. Christian F. Martin, IV, Chairman and Chief Executive Officer of The Martin
Guitar Company and Mr. John H. Ruhle, Jr., President and Chairman of Reeb
Millwork Corporation as directors of both the Company and the Bank.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.20 Severance Agreement dated March 1, 1999 by and between
the Board and Robert McGovern
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: August 13, 1999 BY: /S/ S. ERIC BEATTIE
-------------------------- --------------------
S. ERIC BEATTIE
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: August 13, 1999 BY: /S/ REID L. HEEREN
------------------------- -------------------
REID L. HEEREN
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
SEVERANCE AGREEMENT
Agreement made this 1st day of March 1999, by and between Nazareth National
Bank and Trust Company, a banking association organized under the laws of the
United States ("Bank") and Robert M. McGovern, Jr., an individual ("Employee").
BACKGROUND
Employee is currently employed by the Bank in the position of Executive
Vice President and Senior Trust Officer. In consideration of Employee's past,
present and future services to the Bank, the Bank desires to provide for the
payment of certain compensation and other benefits to Employee upon the
occurrence of certain events, all as more fully set forth below.
In consideration of the mutual covenants and agreements herein contained,
and intending to be legally bound hereby, the parties agree as follows:
1. Term. This Agreement shall continue for a period beginning on the
day hereof and ending on the earliest of the following dates (the "Term"):
(a) the date Employee dies or becomes permanently disabled (i.e., upon his
failure to render services of the character which he had previously
rendered to the Bank, because of his physical or mental illness or other
incapacity beyond his control for a continuous period of six months or for
shorter periods aggregating six months in any twelve month period); (b)
termination of Employee's employment with the Bank for cause (as
hereinafter defined); (c) mutual agreement of the Bank and Employee; (d)
subject to Section 2 hereof, termination by Employee of Employee's
<PAGE>
employment with the Bank by resignation or otherwise; or (e) December 31,
2000. In the event the Employee's employment with the Bank is terminated
during the Term other than as set forth in Section 2 hereof, the Employee
shall have no rights or benefits under this Agreement, but shall be
entitled to any other rights or benefits to which he or she might otherwise
be entitled to. For purposes of this Agreement, the term "cause" shall mean
(i) conviction of Employee for any felony, fraud or embezzlement or (ii)
Employee failing or refusing to comply with the written policies or
directives of the Bank's Board of Directors or the Employee being guilty of
misconduct in connection with the performance of his duties for the Bank
and the Employee fails to cure such noncompliance or misconduct within
twenty days after receiving written notice from the Bank's Board of
Directors specifying such non-compliance or misconduct.
2. Termination. If during the Term hereof, the Employee's employment
with the Bank is terminated as set forth below, the Bank will pay to
Employee the amount set forth in Section 3 hereof and Employee shall be
entitled to the benefits set forth in Section 4 hereof:
(a) the Bank terminates Employee's employment with the Bank without
cause; or
(b) the Employee terminates Employee's employment with the Bank due to
<PAGE>
the fact that the nature and scope of Employee's duties and authority or
his responsibilities with the Bank or the surviving or acquiring person are
materially reduced to a level below that which he enjoys on the date
hereof, his then current base annual salary is materially reduced to a
level below that which he enjoys on the date hereof, the fringe benefits
which the Bank provides Employee on the date hereof are materially reduced,
Employee's position or title with the Bank or the surviving or acquiring
person is materially reduced from his current position or title with the
Bank, or without Employee's consent, Employee's principal place of
employment with the Bank is changed to a location greater than eighty miles
from his current principal place of employment with the Bank, provided,
however, that for any termination by Employee under this clause (b) the
Employee shall have first given Bank ten (10) days written notice of his
intention to termination his employment pursuant to this clause (ii),
specifying the reason(s) for such termination, and provided further, that
the Bank shall not have cured or remedied the reason(s) specified in such
notice prior to the expiration of ten (10) days after receipt of such
written notice.
3. Termination Payments to Employee. Commencing not later than 30 days
after the date Employee's employment with the Bank is terminated pursuant
to Section 2 hereof (the "Termination Date") and subject to Employee's
compliance with Section 8 hereof, the Bank shall pay compensation to
Employee for a one year period following the Termination Date (the
<PAGE>
"Compensation Period") at a per annum rate equal to 100% of Employee's
"base annual salary" on the Termination Date. For purposes of this
Agreement, the term "base annual salary" shall mean the Employee's annual
compensation rate on the Termination Date exclusive of cash bonuses and
payments under the Bank's Annual Incentive Bonus Plan. The Bank agrees that
it will make the payments due under this Section 3 on the first day of each
month following the Termination Date in an amount equal to 1/12 of 100% of
Employee's base annual salary on the Termination Date. Such payments to
Employee shall be reduced each month by the sum of the following: (a) by
the amount of any pension or annuity benefits Employee receives under any
Defined Benefit Pension Plan maintained by the Bank as the same shall be
amended from time to time, computed as if Employee had retired at age 65
(regardless of when he actually retired) and had elected the single life
annuity benefit (regardless of the benefit he actually elected), and (b) in
the event Employee commences employment within the Compensation Period, by
the amount of base annual salary to which he is then entitled by virtue of
his new employment. The intent of this paragraph is that the sum of
payments made under this Section 3 in any year, when added to payments
received under the Bank's Defined Benefit Pension Plan and base annual
salary received by virtue of other employment, will not exceed the
Employee's base annual salary on the Termination Date. The Employee
<PAGE>
covenants and agrees that upon the termination of the Employee's employment
with the Bank, the Employee shall use his best efforts to secure new
employment.
4. Other Benefits. In addition to the compensation set forth in
Section 3 hereof, Employee shall be entitled to the following benefits from
the Bank:
(a) for a period of one year following the Termination Date,
reimbursement for all reasonable expenses incurred by Employee in
connection with the search for new employment, including, without
limitation, those of a placement agency or service; provided, however, in
no event shall the Bank be obligated to reimburse Employee hereunder in
excess of 1/3 of his base annual salary on the Termination Date.
(b) for a period of one year following the Termination Date,
reimbursement for all reasonable relocation expenses incurred by Employee
in connection with securing new employment; provided, however, in no event
shall the Bank be obligated to reimburse Employee hereunder in excess of
1/3 of his base annual salary on the Termination Date.
(c) for a period of one year following the Termination Date, Employee
shall be entitled to participate in the following programs of the Bank:
(i) All medical, hospitalization and life insurance benefits
shall be continued for the Compensation Period except that should
subsequent employment be accepted during the Compensation Period,
continuation of any medical, hospitalization and life insurance
benefits will be offset by coverages provided through the Employee's
subsequent employer.
<PAGE>
(ii) If permitted under the terms thereof, Employee will remain a
participant under the Bank's Defined Benefit Pension Plan, however,
benefits will be actuarially reduced based upon the number of years
remaining until Employee's normal retirement date had he remained an
employee of the Bank.
5. Withholding. The Bank may withhold from any benefits payable under this
Agreement all federal, state, city or other taxes as shall be required pursuant
to any law or governmental regulation or ruling.
6. Source of Payment. All payments provided under this Agreement shall be
paid in cash from the general funds of the Bank. No special or separate fund
shall be required to be established by the Bank and the Employee shall have no
right, title or interest whatsoever in or to any investment which the Bank may
make to aid the Bank in meeting its obligations hereunder. Nothing contained in
this Agreement, and no action taken pursuant to its provisions, shall create or
be construed to create a trust of any kind or a fiduciary relationship between
the Bank and Employee or any other person.
7. (a) Nonassignability. Neither this Agreement nor any right or interest
hereunder shall be assignable by Employee or his legal representatives without
the Bank's prior written consent.
(b) Attachment. Except as required by law, the right to receive
payments under this Agreement shall not be subject of anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by operation of
law.
<PAGE>
8. Confidentiality and Non-Competition. All payments to Employee under this
Agreement shall be subject to Employee's compliance with the provisions of this
Section 8. If Employee fails to comply with such provisions, his right to any
future payments under this Agreement shall terminate and the Bank's obligations
under this Agreement to make such payments and provide such benefits shall
cease.
(a) Employee covenants and agrees that he will not, during the term of
his employment and at any time thereafter, except with the express prior
written consent of the Bank or pursuant to the lawful order of any judicial
or administrative agency of government, directly or indirectly, disclose,
communicate or divulge to any person, or use for the benefit of any person,
any knowledge or information with respect to the conduct or details of the
Bank's business which he, acting reasonably, believes or should believe to
be of a confidential nature and the disclosure of which not to be in the
Bank's interest.
(b) Employee covenants and agrees that he will not, during the term of
his employment and for a period of one year thereafter, except with the
express prior written consent of the Bank, directly or indirectly, whether
as employee, employer, owner, partner, consultant, agent, director,
officer, shareholder or in any other capacity, engage in or assist any
person to engage in any act or action which he, acting reasonably, believes
or should believe would be harmful or inimical to the interests of the
Bank.
<PAGE>
(c) Employee covenants and agrees that he will not, during the term of
his employment and for a period of one year thereafter, except with the
express prior written consent of the Bank, in any capacity (including, but
not limited to, owner, partner, shareholder, consultant, agent, employee,
employer, officer, director or otherwise), directly or indirectly, for his
own account or for the benefit of any person, engage or participate in or
otherwise be connected with any commercial bank which has its principal
office in either Northampton or Lehigh Counties, Pennsylvania or Warren
County, New Jersey except that the foregoing shall not prohibit Employee
from owning as a shareholder less than 1% of the outstanding stock of an
issuer whose stock is publicly traded.
(d) The parties agree that any breach by Employee of any of the
covenants or agreements contained in this Section 8 will result in
irreparable injury to the Bank for which money damages could not adequately
compensate the Bank and therefore, in the event of any such breach, the
Bank shall be entitled (in addition to any other rights and remedies which
it may have at law or in equity) to have an injunction issued by any
competent court enjoining and restraining Employee and/or any other person
involved therein from continuing such breach. The existence of any claim or
<PAGE>
cause of action which Employee may have against the Bank or any other
person (other than a claim for the Bank's breach of this Agreement for
failure to make payments hereunder) shall not constitute a defense or bar
to the enforcement of such covenants. In the event of an alleged breach by
Employee of any of the covenants or agreements contained in this Section 8,
the Bank shall continue any and all of the payments due Employee under this
Agreement until such time as a court shall enter a final and unappealable
order finding such a breach; provided, however, that the foregoing shall
not preclude a court from ordering Employee to repay such payments made to
him for the period after the breach is determined to have occurred or from
ordering that payments hereunder be permanently terminated in the event of
a material and willful breach.
(e) If any portion of the covenants or agreements contained in this
Section 8, or the application thereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or
the application thereof shall not be affected and shall be given full force
and effect without regard to the invalid or unenforceable portions to the
fullest extent possible. If any covenant or agreement in this Section 8 is
held unenforceable because of the area covered, the duration thereof, or
the scope thereof, then the court making such determination shall have the
power to reduce the area and/or duration and/or limit the scope thereof,
and the covenant or agreement shall then be enforceable in its reduced
form.
<PAGE>
(f) For purposes of this Section 8, the term "the Bank" shall include
the Bank, any successor to the Bank under Section 9 hereof, and all present
and future direct and indirect subsidiaries and affiliates of the Bank.
9. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon any corporate or other successor of the Bank which may acquire,
directly or indirectly, by merger, consolidation, purchase, or otherwise, all or
substantially all of the assets of the Bank, and shall otherwise inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
executors, administrators, successors and assigns. Nothing in the Agreement
shall preclude the Bank from consolidating or merging into or with or
transferring all or substantially all of its assets to another person. In that
event, such other person shall assume this Agreement and all obligations of the
Bank hereunder. Upon such a consolidation, merger, or transfer of assets and
assumption, the term "the Bank" as used herein, shall mean such other person and
this Agreement shall continue in full force and effect.
10. Waivers Not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
<PAGE>
11. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice:
If to Employee, to:
Mr. Robert M. McGovern, Jr.
2804 Liberty Street
Allentown, Pennsylvania 18104
If to the Bank, to:
Nazareth National Bank and Trust Company
76 South Main Street
Nazareth, Pennsylvania 18064
Attn: Board of Directors
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
12. Applicable Law~ Jurisdiction. This Agreement shall be governed by and
construed and enforced in accordance with the substantive laws of the
Commonwealth of Pennsylvania with respect to contracts executed in and to be
wholly performed therein. Bank and Employee consent to the exclusive
jurisdiction of the Court of Common Pleas, Northampton County, Commonwealth of
Pennsylvania and the United States District Court for the Eastern District of
Pennsylvania in any and all actions arising hereunder and irrevocably consent to
service of process as set forth in Section 11 hereof.
<PAGE>
13. General Provisions.
(a) This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements between the parties. No amendment, waiver or
termination of any of the provisions hereof shall be effective unless in
writing and signed by the party against whom it is sought to be enforced.
Any written amendment, waiver or termination hereof executed by the Bank
and Employee shall be binding upon them and upon all other persons, without
the necessity of securing the consent of any other person, and no person
shall be deemed to be a third party beneficiary under this Agreement.
(b) This Agreement shall not limit or infringe upon the right of the
Bank to terminate the employment of Employee at any time for any reason,
nor upon the right of Employee to terminate his employment with the Bank.
(c) The term "person" as used in this Agreement means a natural
person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any other
legally cognizable entity.
(d) This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same Agreement.
<PAGE>
(e) No failure on the part of any party hereto to exercise and no
delay in exercising any right, power or remedy hereunder preclude any other
or further exercise thereof or the exercise of any other rights, power or
remedy.
(f) The headings of the sections of this Agreement have been inserted
for convenience of reference only and shall in no way restrict or modify
any of the terms or provisions hereof.
(g) Nothing contained herein shall be construed to require the Bank to
violate applicable law, including, but not limited to, applicable banking
laws and regulations, and all obligations of the Bank under this Agreement
shall be deemed to be qualified accordingly.
ATTEST: NAZARETH NATIONAL BANK AND
TRUST COMPANY
By: /S/ Michelle L. Frable BY: /S/ S. Eric Beattie
Michelle L. Frable, Secretary S. Eric Beattie, President
Witness:
/S/ Susan M. Kresge /S/ Robert M. McGovern, Jr.
ROBERT M. McGOVERN, JR.(SEAL)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714719
<NAME> First Colonial Group
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
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0
0
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</TABLE>
