FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------------------
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
76 S. MAIN ST., NAZARETH, PA 18064
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(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: 1,844,019 SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON SEPTEMBER 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 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)
Sept. 30, Dec. 31
1999 1998
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 13,722 $ 12,259
Federal Funds Sold 2,000 2,000
--------- ---------
Total Cash and Cash Equivalents 15,722 14,259
Interest-Bearing Deposits With Banks 6,476 3,301
Investment Securities Held-to-Maturity 20,289 17,723
(Fair Value: Sept. 30, 1999 $19,909
Dec. 31, 1998 - $17,920)
Securities Available-for-Sale at Fair Value 132,544 98,389
Mortgage Loans Held-for-Sale 484 603
Total Loans, Net of Unearned Discount 200,987 212,437
LESS: Allowance for Possible Loan Losses (2,496) (2,691)
--------- ---------
Net Loans 198,491 209,746
Premises and Equipment, Net 7,051 6,885
Accrued Interest Income 2,627 2,542
Other Real Estate Owned 678 636
Other Assets 5,984 4,412
--------- ---------
TOTAL ASSETS $ 390,346 $ 358,496
--------- ----------
LIABILITIES
Deposits
Non-Interest Bearing Deposits $ 41,485 $ 38,885
Interest-Bearing Deposits 275,976 255,664
--------- ---------
Total Deposits 317,461 294,549
Securities Sold Under Agreements to Repurchase 7,949 5,094
Long-Term Debt 30,000 20,000
Accrued Interest Payable 3,725 3,536
Other Liabilities 1,965 3,600
--------- ---------
TOTAL LIABILITIES 361,100 326,779
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 - 1,844,019 shares at Sept. 30, 1999
and 1,745,725 shares at Dec. 31, 1998 9,220 8,729
Additional Paid in Capital 15,634 13,873
Retained Earnings 8,621 9,023
Employee Stock Ownership Plan Debt (1,435) (435)
Accumulated Other Comprehensive Income (Loss) (2,794) 527
--------- ---------
Total Shareholders' Equity 29,246 31,717
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 390,346 $ 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 Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
---------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 4,738 $ 4,722 $13,566 $14,382
Investment Securities Income
Taxable 1,808 1,244 4,796 3,683
Tax-Exempt 366 333 1,146 893
Interest on Deposits with Banks and
Federal Funds Sold 22 94 140 175
------- ------- ------- -------
Total Interest Income 6,934 6,393 19,648 19,133
------- ------- ------- -------
INTEREST EXPENSE:
Interest on Deposits 2,502 2,422 7,294 7,101
Interest on Short-Term Borrowing 107 48 229 193
Interest on Long-Term Debt 345 280 904 847
------- ------- ------- -------
Total Interest Expense 2,954 2,750 8,427 8,141
------- ------- ------- -------
NET INTEREST INCOME: 3,980 3,643 11,221 10,992
Provision for Possible Loan Losses --- 113 250 338
------- ------- ------- -------
Net Interest Income After Provision
For Possible Loan Losses 3,980 3,530 10,971 10,654
------- ------- ------- -------
OTHER INCOME:
Trust Revenue 271 275 874 750
Service Charges on Deposit Accounts 432 419 1,229 1,180
Investment Securities Gains (Losses), Net (4) --- 557 463
Gains on the Sale of Mortgage Loans 63 135 154 307
Other Operating Income 175 162 512 477
------- ------- ------- -------
Total Other Income 937 991 3,326 3,177
------- ------- ------- -------
OTHER EXPENSES:
Salaries and Employee Benefits 1,726 1,612 5,019 4,844
Net Occupancy and Equipment Expense 560 501 1,610 1,582
Other Operating Expenses 1,470 1,233 4,302 3,972
------- ------- ------- -------
Total Other Expenses 3,756 3,346 10,931 10,398
------- ------- ------- -------
Income Before Income Taxes 1,161 1,175 3,366 3,433
Provision for Income Taxes 276 304 771 899
------- ------- ------- -------
NET INCOME $ 885 $ 871 $ 2,595 $ 2,534
======= ======= ======= =======
Per Share Data
Basic Net Income $ 0.49 $ 0.48 $ 1.45 $ 1.41
======= ======= ======= =======
Diluted Net Income $ 0.49 $ 0.48 $ 1.44 $ 1.40
======= ======= ======= =======
Cash Dividends $ 0.19 $ 0.18 $ 0.55 $ 0.52
======= ======= ======= =======
</TABLE>
See accompanying notes to interim financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 885 $ 871 $ 2,595 $2,534
Other Comprehensive Income (Loss),
Net of Tax
Unrealized gains (losses)
on securities
Unrealized gains (losses)
arising in period (366) (22) (3,689) (180)
Reclassification adjustment;
gain included in net income (3) 5 368 (422)
------ ------ ------ ------
Other Comprehensive Income (Loss) (369) (17) (3,321) (602)
------ ------ ------ ------
Comprehensive Income (Loss) $ 516 $ 888 $ (726) $1,932
====== ====== ====== ======
</TABLE>
Other comprehensive income (loss) is shown net of tax (benefit) expense for the
nine months ended Sept. 30, 1999 and Sept. 30, 1998 of $(1,712,000) and
$310,000, respectively and the three months ended Sept. 30, 1999 and Sept. 30,
1998 of $(191,000) and $9,000, respectively.
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Nine Months Ended
Sept 30, 1999 Sept 30, 1998
OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net Income $2,595 $2,534
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses 250 338
Depreciation and Amortization 763 750
Amortization of Security Discounts (167) (60)
Amortization of Security Premiums 192 151
Amortization of Deferred Fees on Loans (92) (178)
Mortgage Loans Originated for Sale (36,799) (36,949)
Mortgage Loan Sales 36,922 36,402
Gain on Sale of Mortgage Loans (154) (307)
Investment Securities Gains, Net (557) (463)
Changes in Assets and Liabilities:
Increase in Accrued Interest Income (85) (256)
Increase (Decrease) in Accrued Interest Payable 189 (76)
Net Increase in Other Assets (1,357) (1,498)
Net Decrease in Other Liabilities (227) (207)
------- -------
Net Cash Provided By Operating Activities 1,473 181
------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities
Available-for-Sale 11,467 22,796
Proceeds from Maturities of Securities
Held-to-Maturity 3,622 7,173
Proceeds from Sales of Securities
Available-for-Sale 16,857 4,571
Proceeds from Sales of Securities
Held-to-Maturity --- 248
Purchase of Securities Available-for-Sale (66,957) (54,627)
Purchase of Securities Held-to-Maturity (6,211) (7,284)
Net Increase in Interest Bearing
Deposits With Banks (3,176) (4,176)
Net Decrease in Loans 11,029 16,839
Purchase of Premises and Equipment, Net (840) (422)
Proceeds from Sale of Other Real Estate Owned 176 232
------- -------
Net Cash Used In Investing Activities (34,033) (14,650)
------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest
Bearing Demand Deposits and Savings Accounts 4,803 10,629
Net Increase in Certificates of Deposits 18,110 5,013
Net Increase (Decrease) in Long-Term Debt 10,000 (390)
Proceeds from Sale of Treasury Stock --- 94
Net Increase in ESOP Debt (1,000) (110)
Net Increase (Decrease) in Repurchase Agreements 2,855 (999)
Proceeds from Issuance of Stock 240 150
Cash Dividends Paid (981) (948)
Cash in Lieu of Fractional Shares (4) (6)
------- -------
Net Cash Provided by Financing Activities 34,023 13,433
------- -------
Increase (Decrease) in Cash and Cash Equivalents 1,463 (1,036)
Cash and Cash Equivalents, January 1 14,259 14,829
------- -------
Cash and Cash Equivalents, September 30, $15,722 $13,793
======= =======
</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 nine months ended September 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 August 20, 1999 the Company paid its 1999 third quarter dividend on its
common stock of $.19 per share to shareholders of record on August 6, 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
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share (SFAS 128)". SFAS 128
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosures of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Prior periods
earnings per share calculations have been restated to reflect the adoption of
SFAS No. 128. Basic and diluted earnings per share were calculated as follows.
<PAGE>
For the Three Months Ended Sept. 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1999
<S> <C> <C> <C>
Net Income $ 885
Basic Earnings Per Share
Income Available to Common Shareholders $ 885 1,784,423 $ 0.49
Effect of Dilutive Securities
Stock Options 4,108
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 885 1,788,531 $ 0.49
------ --------- -------
1998
Net Income $ 871
Basic Earnings Per Share
Income Available to Common Shareholders $ 871 1,805,430 $ 0.48
Effect of Dilutive Securities
Stock Options 7,485
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 871 1,812,915 $ 0.48
------ --------- -------
</TABLE>
Average common shares outstanding in the three month period ended September 30,
1999 and 1998 did not include 57,520 and 23,572, 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 Nine Months Ended Sept 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
1999
<S> <C> <C> <C>
Net Income $2,595
Basic Earnings Per Share
Income Available to Common Shareholders $2,595 1,784,866 $ 1.45
Effect of Dilutive Securities
Stock Options 4,015
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $2,595 1,788,881 $ 1.44
------ --------- -------
1998
Net Income $2,534
Basic Earnings Per Share
Income Available to Common Shareholders $2,534 1,801,925 $ 1.41
Effect of Dilutive Securities
Stock Options 6,826
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $2,534 1,808,751 $ 1.40
------ --------- -------
</TABLE>
Average common shares outstanding in the nine month period ended September 30,
1999 and 1998 did not include 51,581 and 22,582, respectively of average
weighted unallocated shares held by the ESOP. The exclusion of these unallocated
shares held by the ESOP is due to the Company's adoption of SOP 93-6. Share and
per share information have been restated to reflect the 5% stock dividend of
June 1998.
<PAGE>
NOTE H - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
Nine Month Period Ended September 30, 1999 1998
<S> <C> <C>
Beginning Balance $2,691,000 $2,664,000
Additions
Provision for loan losses charged to
operating expenses 250,000 338,000
Recoveries of loans 68,000 74,000
---------- ----------
Total Additions 318,000 412,000
Deductions
Loans charged off 513,000 432,000
---------- ----------
Ending Balance $2,496,000 $2,644,000
</TABLE>
NOTE I - IMPAIRED LOANS
The Company measures impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, impairment may be measured based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Company has identified a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
loan agreement. The accrual of interest is discontinued on such loans and no
income is recognized until all recorded amounts of interest and principal are
recovered in full.
Loan impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit loses related to loan impairment are as follows:
<PAGE>
<TABLE>
At September 30, 1999 1998
<S> <C> <C>
Principal amount of impaired loans $ 532,000 $ 808,000
Deferred loan costs --- 2,000
-------- --------
532,000 810 000
Less valuation allowance (111,000) (188,000)
-------- --------
$ 421,000 $ 622,000
</TABLE>
The activity in this allowance account for the nine months ended September 30,
1999 and 1998 was as follows:
<TABLE>
1999 1998
<S> <C> <C>
Valuation allowance at January 1, $303,000 $138,000
Provision for loan impairment 28,000 179,000
Transfer from Unallocated Allowance for
Possible Loan Losses (61,000) ---
Direct charge-offs (159,000) (129,000)
-------- --------
Valuation allowance at September 30, $111,000 $188,000
</TABLE>
Total cash collected on impaired loans during the nine month period ended
September 30, 1999 was $111,000, of which $87,000 was credited to the principal
balance outstanding on such loans and $24,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the first nine
months of 1999 was $44,000. The valuation allowance for impaired loans of
$111,000 at September 30, 1999 is included in the "Allowance for Possible Loan
Losses" which amounts to $2,496,000 at September 30, 1999. The provision for
loan impairment of $28,000 for the nine month period ended September 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
consists of net income or loss for the current period and other comprehensive
income - income, expenses, gains and losses that bypass the income statement and
are reported directly in a separate component of equity. Other comprehensive
income includes, for example, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investment securities.
The Corporation has elected to report comprehensive income on a separate
scheduled titled "Statement of Comprehensive Income".
<PAGE>
NOTE K - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
On January 1, 1998, the Corporation adopted the Financial Accounting Standards
Board issued (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This statement provides users of financial statements with
information about an entity's different types of business activities and the
different economic environments in which it operates to better understand the
entity's performance and its prospects for future net cash flows, and to make
more informed judgments about the entity as a whole. The effect of adopting SFAS
No. 131 is not expected to have a material impact on the Company's financial
statements.
NOTE L - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activity". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the beginning
of any fiscal quarter. The Company is currently reviewing the provisions of SFAS
No. 133.
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. As of September 30, 1999,
six funeral directors whose funds were invested in this annuity have 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 attorney 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 nine month period ended September 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-KSB 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 September 30,
1999, cash, due from banks, Federal funds sold and interest bearing deposits
with banks totaled $22,198,000, and securities maturing within one year totaled
<PAGE>
$3,552,000. At December 31, 1998, cash, due from banks, Federal funds sold and
interest bearing deposits with banks, totaled $17,560,000, and securities
maturing within one year were $4,493,000. Securities sold under an agreement to
repurchase totaled $7,949,000 at September 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 $6,329,000 at September 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.
At September 30, 1999 and 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 September 30, 1999, subject to certain
collateral requirements. The Bank had no short-term (overnight) borrowings
against this line at September 30, 1999 or at December 31, 1998. The Bank had
additional borrowings from the Federal Home Loan Bank at September 30, 1999
totaling $30,000,000 of which $8,000,000 is due in August 2000, $5,000,000 is
due in December 2001, $10,000,000 is due in August 2004 and $7,000,000 is due in
October 2008.
Cash flows for the nine months ended September 30, 1999 consisted of cash
provided by operating activities of $1,473,000 and cash provided by financing
activities of $34,023,000, offset in part by cash used in investing activities
of $34,033,000 resulting in an increase in cash and cash equivalents of
$1,463,000.
Cash provided by operating activities was the result of mortgage loan sales of
$36,922,000, net operating income of $2,595,000, depreciation and amortization
of $763,000 and a provision for possible loan losses of $250,000, partially
reduced by mortgage loans originated for sale of $36,799,000, an increase in
other assets of $1,357,000, an increase in accrued interest income of $85,000
and a decrease in other liabilities of $227,000. Cash was used in investing
activities for the purchase of securities available-for-sale and
held-to-maturity of $66,957,000 and $6,211,000, respectively, plus net increase
in interest-bearing deposits with banks of $3,176,000, partially offset by
proceeds from maturities of securities available-for-sale and held-to-maturity
of $11,467,000 and $3,622,000, respectively, net decreases in loans of
$11,029,000, and proceeds from sales of securities available-for-sale of
$16,857,000. Cash provided by financing activities consisted principally of
increases in interest and non-interest bearing demand deposits and savings
accounts of $4,803,000 an increase in certificates of deposit of $18,110,000, an
increase in long-term debt with the Federal Home Loan Bank of $10,000, an
increase in repurchase agreements of $2,855,000 and the proceeds from the sale
of common stock of $240,000, offset in part by an increase in ESOP debt of
$1,000,000, the payment of cash dividends of $981,000 and cash paid in lieu of
fractional shares of $4,000.
<PAGE>
The Company recognizes the importance of maintaining adequate capital levels to
support sound, profitable growth and to encourage depositor and investor
confidence. Shareholders' equity at September 30, 1999 was $29,246,000 as
compared to $31,717,000 at December 31, 1998, for a decrease of $2,471,000. This
decline was attributable to a decrease of $3,321,000 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 $981,000 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 nine months of 1999 of $2,595,000 and proceeds from the
sale of common stock pursuant to the Dividend Reinvestment Plan of $240,000.
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 nine months of 1999, 10,643 shares of common stock were purchased from
authorized and unissued shares at an average price of $22.55 per share for
proceeds of approximately $240,000.
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, that as of September 30, 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 Sept 30, 1999 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,917 16.50% $16,471 8.00% --- ---
Bank $30,571 14.85% $16,467 8.00% $20,583 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,421 15.29% $ 8,235 4.00 --- ---
Bank $27,875 13.54% $ 8,233 4.00% $12,350 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $31,421 7.99% $15,714 4.00% --- ---
Bank $27,875 7.12% $15,658 4.00% $19,572 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% $19,667 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% $11,800 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% $17,514 5.00%
</TABLE>
<PAGE>
The Company is not aware of any trends, events or uncertainties that will have a
material effect on the Company's liquidity, capital resources or operations,
except for higher interest rates which could cause deposit disintermediation and
an increase in interest expense and the possibility of inflationary trends, the
results of which cannot be determined at this time. The Company is not under any
agreement with the regulatory authorities nor is it aware of any current
recommendation by regulatory authorities which, if they were implemented, would
have a material adverse effect on liquidity, capital resources, or the
operations of the Company.
Assets and Liabilities
Total assets at September 30, 1999 were $390,346,000, representing an increase
of $31,850,000 or 8.9% over total assets of $358,496,000 at December 31, 1998.
Deposits increased by $22,912,000 or 7.8% from $294,549,000 on December 31, 1998
to $317,461,000 on September 30, 1999. Contributing to this increase were
increases in certificates of deposit of $18,110,000, interest bearing checking
deposits of $2,249,000, non-interest bearing checking deposits of $2,600,000,
and money market deposits of $699,000, partially offset by a decline in savings
deposits of $746,000. Loans outstanding at September 30, 1999 were $200,987,000
as compared to $212,437,000 at December 31, 1998. This is a decrease of
$11,450,000 or 5.7%. The decline in loans was primarily the result of a decrease
of $24,502,000 or 30.5% in residential real estate loans. During the first nine
months of 1999, $36,922,000 of residential real estate loans were sold. Included
in those sales was the sale of $20,977,000 of adjustable rate residential
mortgage loans in September, 1999. These loans were originated in years prior to
1999 and were sold to provide liquidity and reduce the Company's interest rate
risk. The remaining $15,945,000 of sold residential real estate loans were
primarily originated in 1999 and sold at various times during the nine month
period. These loans were fixed rate and sold to provide funds for other lending
opportunities. The Bank continues to service all of these loans. There were
$484,000 of residential real estate loans identified as held-for-sale at
September 30, 1999. Additionally, the net decrease in loans during the first
nine months of 1999 included a $2,960,000 or 4.9% decrease in commercial loans
partially offset by a $16,011,000 or 22.4% increase in consumer loans. The loan
to deposit ratio was 63.3% at September 30, 1999 and 72.1% at December 31, 1998.
Premises and equipment decreased by $166,000 to $7,051,000 at September 30, 1999
from $6,885,000 at December 31, 1998.
The Company had long-term debt totaling $30,000,000 at September 30, 1999 as
compared to $20,000,000 at December 31, 1998. Of the loans outstanding at
September 30, 1999, $8,000,000 matures in August 2000, $5,000,000 matures in
December 2001, $10,000,000 matures in August 2004 and $7,000,000 matures in
October 2008. The interest rates associated with these loans are variable
(changes quarterly based on the three month LIBOR plus 6 basis points), variable
(changes quarterly based on the three month LIBOR plus 8 basis points), 6.06%
fixed and 4.86% fixed, respectively. The loans are secured by the Bank's
<PAGE>
investment and residential real estate loans and securities. These funds were
borrowed to improve liquidity and to fund loans. The $10,000,000 loan maturing
in August 2004 was originated in August 1999 at an interest rate of 6.06% fixed
for 2 years at which time it can convert to a quarterly adjustable rate of LIBOR
plus 15 basis points if the LIBOR rate is 7.5% or higher. The proceeds from this
new loan were used in the investment portfolio for the purpose of improving the
Company's earnings.
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
September 30, 1999). The proceeds from this loan were used to purchase 35,500
shares of the Company's common stock. 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 September 30, 1999 and December 31, 1998).
The balance outstanding on these ESOP loans was $1,435,000 at September 30, 1999
and $435,000 at December 31, 1998.
At September 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 September 30, 1999 was $885,000, a
$14,000 or 1.6% increase compared to net income of $871,000 for the same period
in 1998. The earnings improvement was attributable to an increase in net
interest income of $337,000 or 9.3%, an increase in total other income of
$22,000 or 2.6%, exclusive of gains on the sale of mortgage loans and net losses
on the sale of investment securities, a decrease in the provision for possible
loan losses of $113,000 and a $28,000 or 9.2% decrease in Federal income taxes,
partially offset by an increase in total operating expenses of $410,000 or
12.3%, lower gains on the sale of residential real estate loans of $72,000 or
53% and $4,000 in net losses on the sale of investment securities.
Net income for the nine months ended September 30, 1999 was $2,595,000 compared
to $2,534,000 for the same period in 1998, this is an increase of $61,000 or
2.4%. The earnings improvement was primarily attributable to increases in total
other income and net interest income. During the first nine months of 1999, net
interest income increased $229,000 or 2% as compared to September 30, 1998.
During this period, the provision for possible loan losses was $88,000 or 26%
lower than that in 1988. Also affecting earnings was a $208,000 or 8.6% increase
in total other income exclusive of $94,000 increase in security gains and a
$153,000 reduction in gains on the sale of mortgages, an increase in total other
expenses of $533,000 or 5.1% and a decrease in Federal income taxes of $128,000
or 14.2%.
<PAGE>
Basic and diluted earnings per share for the three months ended September 30,
1999 were $0.49 as compared to $0.48 for the corresponding period in 1998.
Average basic shares outstanding during this three month period were 1,784,423
in 1999 and 1,803,416 in 1998. Basic earnings per share for the nine months
ended September 30, 1999 were $1.45 as compared to $1.41 for the corresponding
period in 1998. Average basic shares outstanding during this nine month period
were 1,784,866 in 1999 and 1,801,925 in 1998. Diluted earnings per share for the
nine month period ended September 30 were $1.44 and $1.40 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)
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 nine
months ended September 30, 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 $3,980,000 for the three months ended September
30, 1999 as compared to $3,643,000 for the three months ended September 30,
1998, an increase of $337,000 or 9.3%. This increase was primarily the result of
increases in interest earning assets and deposits.
The fully taxable-equivalent net interest income was $11,842,000 for the first
nine months of 1999, compared to $11,469,000 for the same period in 1998, a 3.3%
or $373,000 increase as shown in the following "Rate/Volume Analysis" table.
This increase in taxable-equivalent net interest income was primarily due to a
$359,000 increase related to volume and a $14,000 increase related to interest
rates.
For the nine months ended September 30, 1999, net interest income was
$11,221,000 compared to $10,992,000 for the same period in 1994, an increase of
$229,000 or 2.1%.
Total taxable-equivalent interest income grew $659,000 primarily the result of
the higher volumes in the investment security earning asset category. Income
from investment securities for the third quarter increased $1,497,000 or 29.7%
over the same period in 1998. This was comprised of a $1,989,000 increase due to
volume partially offset by a $492,000 decrease due to rates as a result of
<PAGE>
declining yields. Average year-to-date earning assets increased to $351,179,000
at September 30, 1999 from $325,435,000 at September 30, 1998, a 7.9% increase.
Total interest expense grew $286,000 during the first nine 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 $187,000 during the first nine months of
1999, compared to the first nine 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 all deposit accounts as a
result of repricing due to market conditions (see Item 3. - Quantitative and
Qualitative Discussion About Market Risk).
<PAGE>
The following table sets forth a "Rate/Volume Analysis" which segregates in
detail the major factors that contributed to the changes in net interest income
for the nine months ended September 30, 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>
Nine Months Ended
September 30, 1999
Over / (Under)
September 30, 1998
CHANGE DUE TO:
TOTAL RATE VOLUME
<S> <C> <C> <C>
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ (28) $ (26) $ (2)
Federal Funds Sold (7) --- (7)
Investment Securities 1,497 (492) 1,989
Loans Held for Sale 11 15 (4)
Loans (814) (423) (391)
------- ------- -------
Total Interest Income $ 659 $ (926) $ 1,585
------- ------- -------
INTEREST EXPENSE
Demand Deposits, Savings & Clubs $ 6 $ (85) $ 91
Time Deposits 187 (517) 704
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase (19) (31) 12
Short-Term Borrowings 55 (39) 94
Long-Term Borrowings 57 (143) 200
------- ------- -------
Total Interest Expense 286 (815) 1,101
------- ------- -------
Net Increase (Decrease) in Interest Income $ 373 $ (111) $ 484
</TABLE>
<PAGE>
Other Income and Other Expenses
Other income for the three months ended September 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 $941,000 as compared to
$991,000 for the same period in 1998. This was a decrease of $50,000 or 5%. This
decrease was the result of a $72,000 or 53% decline in the gains on the sale of
mortgage loans and a $4,000 decline in Trust revenue, offset in part by
increases in service charges and other income. There were $63,000 in gains on
the sale of mortgage loans for the three month period ended September 30, 1999
as compared to $135,000 for the same period in 1998. In the three month period
ended September 30, 1999, service charges were $432,000, a $13,000 or 3.1%
increase over the 1998 amount of $419,000. The revenues from the Trust
Department operations were $271,000 for the three months ended September 30,
1999 as compared to $275,000 for the three months ended September 30, 1998, a
decline of $4,000 or 1.5%. Other miscellaneous income for the three months ended
September 30, 1999 was $175,000, an increase of $13,000 or 8% compared to
$162,000 for the same period in 1998.
Other income for the nine months ended September 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
$2,769,000 as compared to $2,714,000 for the same period in 1999. This was an
increase of $55,000 or 2%. In the nine month period ended September 30, 1999
service charges were $1,229,000, a $49,000 or 4.2% increase over the 1998 amount
of $1,180,000. The increase in service charge income is the result of higher
fees assessed to noncustomer use of the Bank's ATM network and an increase in
Debit Card fees. The revenues from the Investment Management and Trust Division
operations were $874,000 for the nine months ended September 30, 1999 as
compared to $750,000 for the nine months ended September 30, 1998, an increase
of $124,000 or 16.5%. This increase is due to growth in new Trust accounts and
estate fees. During the nine months ended September 30, 1999, sales of mortgage
loans resulted in a gain of $154,000 as compared to $307,000 for the same period
in 1998, a decrease of $153,000 or 49.8%. The gain was the result of the sale of
$36,922,000 and $36,402,000 of residential real estate loans in the first nine
months of 1999 and 1998, respectively (see discussion on Assets and
Liabilities). Other operating income for the nine months ended September 30,
1999 was $512,000 as compared to $477,000 for the same period in 1998, a
increase of $35,000 or 7.3%.
Total other expenses for the three month period ended September 30, 1999
increased by $410,000 or 12.2% to $3,756,000 over total other expenses for the
same period in 1998 of $3,346,000. Included in this increase is a $114,000 or
7.1% increase in salary and benefit expenses which were $1,726,000 as compared
to $1,612,000 in 1998. These increases were primarily due to general salary
increases of approximately 3% and additional staff necessitated by the opening
of our fourteenth branch located on Main Street in Stroudsburg, Pennsylvania.
Occupancy and equipment expenses were $560,000 for the three months ended
<PAGE>
September 30, 1999 and $501,000 for the three months ended September 30, 1998,
an increase of $59,000 or 11.8%. The increase in occupancy expenses were related
to the new branch and renovations to the Company's Operations Center. Other
operating expenses for the three month period ended September 30, 1999 were
$1,470,000, an increase of $237,000 or 19.2% over the $1,233,000 in other
expenses for the same period in 1998. This increase was primarily the result of
higher legal and marketing expenses
Total other expenses for the nine months ended September 30, 1999 increased by
$533,000 or 5.1%, to $10,931,000 from $10,398,000 for the same period in 1998.
Salaries and employee benefits were $5,019,000 for the nine months ended
September 30, 1999 as compared to $4,844,000 for the nine months ended September
30, 1998 representing an increase of $175,000 or 3.6%. These increases are
primarily due to general salary increases of approximately 3% and additional
staff added during the third quarter for the new branch. Occupancy and equipment
expenses were $1,610,000 for the nine months ended September 30, 1999 and
$1,582,000 for the nine months ended September 30, 1998, an increase of $28,000
or 1.8%. Other operating expenses for the nine months ended September 30, 1999
were $4,302,000 in relation to $3,972,000 for the nine months ended September
30, 1998, an increase of $330,000 or 8.3%. Included in the other operating
expenses was a $299,000 increase in legal expenses.
Investment Securities
The Company classifies its debt and marketable securities into three categories:
trading, available-for-sale, and held-to-maturity as provided by the Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The Company had no trading securities at September 30, 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 $132,544,000 in
available-for-sale securities at September 30, 1999 with a net unrealized loss
of $2,794,000. At December 31, 1998 available-for-sale securities amounted to
$98,389,000 with a net unrealized gain of $527,000.
During the nine month period ended September 30, 1999, $16,300,000 of securities
available-for-sale were sold for a net gain of $557,000 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 $20,289,000 at September 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 September 30, 1999, did not hold any
securities identified as derivatives.
<PAGE>
Allowance and Provision for Possible Loan Losses
The provision is based on management's analysis of the adequacy of the allowance
for loan losses. In its evaluation, management considers past loan experience,
overall characteristics of the loan portfolio, current economic conditions and
other relevant factors. Management currently believes that the allowance is
adequate to absorb known and inherent losses in the loan portfolio. Ultimately,
however, the adequacy of the allowance is largely dependent upon economic
conditions which are beyond the scope of management's control.
For the first nine months of 1999, the provision for loan losses was $250,000
compared to $338,000 for the same period in 1998. Net charge offs were $445,000
for the nine months ended September 30, 1999 compared with $358,000 for the nine
months ended September 30, 1998. The ratio of the allowance for loan losses to
total loans at September 30, 1999 was 1.24% compared to 1.27% at December 31,
1998 and 1.24% at September 30, 1998. This was primarily the result of
management's decision not to make a provision to the reserve during the third
quarter of 1999 due to a decline in total loans to $200,987,000 at September 30,
1999 from $212,437,000 at December 31, 1998. This decline was the result of the
sale of $36,922,000 of mortgage loans during the first nine months of 1999. The
allowance for possible loan losses at September 30, 1999 totaled $2,496,000, a
decrease of $195,000 or 7.2% over the December 31, 1999 amount of $2,691,000 and
$148,000 or 5.6% over the September 30, 1998 balance of $2,644,000.
As provided by SFAS No. 114, as amended by SFAS No. 118, $111,000 of the
Allowance for Possible Loan Losses is allocated to impaired loans at September
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 250,000 338,000
Loans Charged Off (513,000) (432,000)
Recoveries 68,000 74,000
----------- ----------
Balance September 30, $ 2,496,000 $ 2,644,000
</TABLE>
<PAGE>
The following table sets forth an allocation of the allowance for loan losses by
loan category:
<TABLE>
At September 30, 1999
<S> <C>
Commercial $ 940,000
Residential Real Estate 161,000
Consumer 774,000
Unallocated 621,000
----------
Total $2,496,000
</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
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.
Total non-performing assets (non-accruing loans and loans past due over 90 days)
amounted to $2,489,000 at September 30, 1999 as compared to $2,266,000 at
December 31,1998 and $2,506,000 at September 30, 1998. The ratio of
non-performing loans to total loans was 1.24% and 1.18% at September 30, 1999
and 1998, respectively. The increase in this ratio is primarily the result of a
decrease in total loans due to the sale of residential real estate loans.
Non-accruing loans at September 30, 1999 of $1,111,000 decreased from September
30, 1998 level of $1,554,000. This $443,000 decrease was primarily the result of
the charge off of a commercial loan. These loans are secured by commercial real
estate. At the present time, management is of the opinion that these loans
present a minimal amount of exposure to the Bank.
Loans past due 90 days or more and still accruing interest are loans that are
generally well secured and expected to be restored to a current status in the
near future. As of September 30, 1999, loans past due 90 days or more and still
accruing interest were $1,378,000 compared to $952,000 at September 30, 1998.
The $426,000 increase in loans past due 90 days from September 30, 1998 to
September 30, 1999 was the result of increases in mortgage and commercial loans
past due 90 days or more.
<PAGE>
NON-PERFORMING LOAN
NON-PERFORMING LOANS
<TABLE>
Sept 30, December 31, Sept 30,
1999 1998 1998
<S> <C> <C> <C>
Non-accrual loans on a cash basis $1,111,000 $1,245,000 $1,554,000
Non-accrual loans as a percentage
of total loans 0.55% 0.59% 0.73%
Accruing loans past due 90 days
or more $1,378,000 $1,021,000 $ 952,000
Accruing loans past due 90 days
or more as a percentage of total
loans 0.69% 0.48% 0.45%
Other Real Estate Owned from
Foreclosed Property $ 678,000 $ 636,000 $ 209,000
Allowance for loan losses to
nonperforming loans 100.32% 118.80% 105.51%
Nonperforming assets to total loans 1.24% 1.07% 1.18%
Allowance for loan losses to total loans 1.24% 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 September 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 systems. 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 systems 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 were 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
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
<PAGE>
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 November. At this time, the Company cannot estimate the cost, if
any, that might be required to implement such contingency plans.
During the third quarter of 1999, the Company spent $28,000 on Year 2000
compliance matters. During the first nine months of 1999, the Company spent
$126,000 on Year 2000 compliance matters. As of September 30, 1999, a total of
$977,000 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 $11,000,
alternative electric power system $11,000, and enhancements to banking and trust
systems of $32,000. Additional expenses expected in 1999 include $80,000 for an
alternative electric power system, $25,000 for branch new account systems, and
$40,000 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
<PAGE>
penalties, or the appointment of a conservator. In addition, Federal banking
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 (27.6% 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.
The following table "Consolidated Comparative Statement Analysis" sets forth a
comparison of average daily balances, interest income and interest expense on a
fully taxable equivalent basis and interest rates calculated for each major
category of interest-earning assets and interest-bearing liabilities. For the
purposes of this analysis, the computations in the "Consolidated Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
were no state or local taxes on income applicable to the Company.
<PAGE>
<TABLE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended, September 30, 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 $ 3,250 $ 117 4.80% $ 3,288 $ 145 5.88%
Federal Funds Sold 659 23 4.65 791 30 5.05
Investment Securities
Taxable 101,426 4,796 6.31 78,718 3,683 6.24
Non-Taxable (1) 32,206 1,737 7.19 24,385 1,353 7.40
Net Loans Held for Sale 1,946 51 3.49 2,088 40 2.56
Loans (1) (2) 214,407 13,545 8.43 218,882 14,359 8.75
Reserve for Loan Losses (2,715) -- -- (2,717) -- --
--------- ----- -------- -----
Net Loans 211,692 13,545 8.53 216,165 14,359 8.85
--------- ----- -------- -----
Total Interest-Earning Assets 351,179 20,269 7.69 325,435 19,610 8.04
Non-Interest Earning Assets 28,392 -- -- 25,000 -- --
--------- ----- -------- -----
TOTAL ASSETS, INT INCOME $ 379,571 20,269 7.12 $350,435 19,610 7.47
--------- ----- -------- -----
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 52,092 412 1.05 $ 48,901 424 1.16
Money Market Deposits 13,894 287 2.76 14,343 303 2.81
Savings & Club Deposits 63,519 1,048 2.20 61,373 1,014 2.20
CD's over $100,000 4,937 149 4.03 4,755 134 3.76
All Other Time Deposits 134,175 5,398 5.25 124,610 5,226 5.59
--------- ----- -------- -----
Total Int-Bearing Deposits 271,617 7,294 3.59 253,982 7,101 3.73
Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase 5,973 140 3.12 5,654 159 3.75
Short-Term Borrowings 2,301 89 5.16 751 34 6.04
Long-Term Borrowings 21,355 904 5.64 18,151 847 6.23
--------- ----- -------- -----
Total Int-Bearing Liabilities 301,246 8,427 3.73 278,538 8,141 3.89
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 41,132 -- -- 34,021 -- --
Other Liabilities 6,834 -- -- 7,144 -- --
--------- ----- -------- -----
TOTAL LIABILITIES 349,212 8,427 3.21 319,703 8,141 3.40
SHAREHOLDERS' EQUITY 30,359 -- -- 30,732 -- --
--------- ----- -------- -----
TOTAL LIABILITIES AND EQUITY $ 379,571 8,427 2.96 $350,435 8,141 3.09
NET INTEREST INCOME $11,842 $11,469
----- -----
Net Interest Spread 3.96 4.15
Effect of Interest-Free Sources
Used to Fund Earnings Assets 0.53 0.54
Net Interest Margin 4.49% 4.69%
---- ----
</TABLE>
<PAGE>
The net interest margin of 4.49% for the nine month period ended September 30,
1999, decreased from the 4.69% net interest margin for the first nine months of
1998. The yield on interest earning assets was 7.69% during the first nine
months of 1999 as compared to 8.04% in 1998. The average interest rate paid on
interest bearing deposits and other borrowings was 3.73% for the first nine
months of 1999 as compared to 3.89 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 September 30, 1999,
assets of $135,829,000 (34.8% of total assets) were subject to interest rate
changes within one year. Liabilities subject to rate change within one year were
$176,881,000. A negative one-year gap position of $41,052,000 existed as of
September 30, 1999. The ratio of rate-sensitive assets to rate-sensitive
liabilities for the one-year time frame was 76.8%. The "Interest Sensitivity
Analysis" in the following table presents a sensitivity gap analysis of the
Company's assets and liabilities at September 30, 1999.
<PAGE>
Interest Sensitivity Analysis
(Dollars in Thousands) as of September 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 $ 6,477 $ --- $ --- $ --- $ --- $ 6,477
Federal Funds Sold 2,000 --- --- --- --- 2,000
Inv Securities 21,004 14,408 24,004 81,394 12,023 152,833
Loans Held-for-Sale 484 --- --- --- --- 484
Loans 23,994 10,959 18,777 67,109 77,652 198,491
Other Assets 13,722 --- --- --- 16,339 30,061
------- -------- -------- ------- -------- --------
TOTAL ASSETS $67,681 $25,367 $ 42,781 $148,503 $106,014 $390,346
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 41,485 $ 41,485
Int-Bearing
Deposits 91,961 34,509 29,462 58,625 61,420 275,977
Securities Sold
Under Agreements
to Repurchase 7,949 --- --- --- --- 7,949
Long-Term Debt 13,000 --- --- 17,000 --- 30,000
Other --- --- --- --- 5,689 5,689
Capital --- --- --- --- 29,246 29,246
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $112,910 $34,509 $ 29,462 $75,625 $137,840 $390,346
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(45,229) $(9,142) $ 13,319 $72,878 $(31,826) $ ---
Cumulative Int
Sensitivity Gap (45,229) (54,371) (41,052) 31,826 --- ---
Cumulative Gap
RSA/RSL 59.94% 63.12% 76.79% 112.60% 100.00%
</TABLE>
(1) Historically, non-interest-bearing deposits reflect insignificant changes in
deposit trends and, therefore, the Company classifies these deposits over five
years.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8K
No reports on Form 8K were filed for the quarter during
which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST COLONIAL GROUP, INC.
DATE: November 15, 1999 BY: /S/ S. ERIC BEATTIE
---------------------------- --------------------
S. ERIC BEATTIE
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: November 15, 1999 BY: /S/ REID L. HEEREN
--------------------------- -------------------
REID L. HEEREN
VICE PRESIDENT
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714719
<NAME> First Colonial Group
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<CASH> 13,722
<INT-BEARING-DEPOSITS> 6,476
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 132,544
<INVESTMENTS-CARRYING> 20,289
<INVESTMENTS-MARKET> 19,909
<LOANS> 200,987
<ALLOWANCE> 2,496
<TOTAL-ASSETS> 390,346
<DEPOSITS> 317,461
<SHORT-TERM> 7,949
<LIABILITIES-OTHER> 5,690
<LONG-TERM> 30,000
0
0
<COMMON> 9,220
<OTHER-SE> 20,026
<TOTAL-LIABILITIES-AND-EQUITY> 390,346
<INTEREST-LOAN> 13,566
<INTEREST-INVEST> 5,942
<INTEREST-OTHER> 140
<INTEREST-TOTAL> 19,648
<INTEREST-DEPOSIT> 7,294
<INTEREST-EXPENSE> 8,427
<INTEREST-INCOME-NET> 11,221
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 557
<EXPENSE-OTHER> 10,931
<INCOME-PRETAX> 3,366
<INCOME-PRE-EXTRAORDINARY> 2,595
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,595
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 4.49
<LOANS-NON> 1,111
<LOANS-PAST> 1,378
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,691
<CHARGE-OFFS> 513
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<ALLOWANCE-CLOSE> 2,496
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</TABLE>
