SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for (fee required) for the fiscal year ended
December 31, 1998.
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File Number 0-11526
FIRST COLONIAL GROUP, INC.
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(Name of Registrant as Specified in its charter)
Pennsylvania 23-2228154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
76 South Main Street, Nazareth, Pennsylvania 18064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-746-7300
Securities registered pursuant to Section 12
(b) of the Exchange Act:
None
Securities registered pursuant to Section 12
(g) of the Exchange Act:
Common Stock, $5.00 Par Value
(Title of Class)
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
during the preceeding 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
<PAGE>
The aggregate market value of voting stock held by non-affiliates of the
registrant is $35,476,135. (1)
The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of March 24, 1999 was 1,745,725.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Company's Proxy Statement to be filed in connection
with its 1999 Annual Meeting of Shareholders are incorporated by reference in
Part III of this report.
Other documents incorporated by reference are listed in the Exhibit Index.
(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the registrant's Common Stock outstanding, reduced by the
amount of Common Stock held by executive officers, directors and shareholders
owning in excess of 10% of the registrant's Common Stock, multiplied by the last
sale price for the registrant's Common Stock on March 24, 1999. Includes an
aggregate of 146,373 shares, with an aggregate market value of $3,476,359, held
by the Trust Department of Nazareth National Bank & Trust Company in Trust for
persons other than executive officers, directors and 10% shareholders of the
registrant. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder may be deemed an
affiliate of the registrant or that such person is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
<PAGE>
PART I
Item 1. Description of Business
Forward Looking Information
The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements or estimates
concerning the effect of the "Year 2000" issues on the Company's systems and
software and the Company's plans with regard to "Year 2000" issues and other
statements as to management's beliefs, expectations or opinions. Such forward
looking statement 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 including, without limitation, the effect of
economic conditions and related uncertainties, the effect of interest rates on
the Company and the Bank, Federal and statement government regulation,
competition, and the time, expense and unanticipated problems in addressing the
Year 2000 issue. These and other risks, uncertainties and other factors are
discussed elsewhere in this Annual Report on Form 10-K.
Investment Considerations
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:
Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control, may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earning assets, may adversely
affect loan demand and the cost of funds and, consequently, the profitability of
the Company. Any future decreases in interest rates may adversely affect the
Company's profitability because such decreases may reduce the amounts which the
Company may earn on its assets. Economic downturns could result in the
delinquency of outstanding loans. Management does not expect any one particular
factor to affect the Company's results of operations. However, a downtrend in
several areas, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to remain profitable.
<PAGE>
Effect of Interest Rates on the Bank and the Company. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest which in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. At December 31, 1998 total interest earning assets
maturing or repricing within one year was less than total interest bearing
liabilities maturing or repricing during the same time period by $31,238,000,
representing a negative cumulative one year gap of 82%. If interest rates rise,
the Company could experience a decrease in net interest income. Like all
financial institutions, the Company's balance sheet is affected by fluctuations
in interest rates. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from financial institutions
into direct investments, such as U. S. Government and corporate securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than financial institutions. See "Item 7, Management's
Discussion of Financial Condition and Results of Operations".
Federal and State Government Regulations. The operations of the Company and
the Bank are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
Accounting Standards. The operations of the Company and the Bank are
affected by accounting standards issued by the Financial Accounting Standards
Board ("FASB") which the Company is required to adopt. The adoption of such
standards can have the effect of reducing the Company's earnings and capital.
Information on current FASB standards that affect the Company can be found in
the Notes to Consolidated Financial Statements contained under the caption,
"Item 8, Financial Statements and Supplementary Data".
<PAGE>
Competition. The Company faces strong competition from many other banks,
savings institutions and other financial institutions which have branch offices
or otherwise operate in the Company's market area, as well as many other
companies now offering a range of financial services. Most of these competitors
have substantially greater financial resources than the Company including a
larger capital base which allows them to attract customers seeking larger loans
than the Bank is able to make. In addition, many of the Bank's competitors have
higher legal lending limits than does the Bank. Particularly intense competition
exists for sources of funds including savings and retail time deposits and for
loans, deposits and other services that the Bank offers.
Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset potential losses
on the Company's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan losses through a charge to earnings resulting in reduced profitability.
Dividends. While the Board of Directors presently intends to follow a
policy of paying cash dividends, the dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends will
be paid in the future. See the information contained under the caption in "Item
5. Market for Registrant's Common Equity and Related Stockholder Matters".
Market for Common Stock. While the Company's common stock is listed on the
Nasdaq Stock Market, there is no assurance that an active trading market for the
Company's common stock will exist at a particular time. See the information
contained under the caption in "Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters".
"Anti-Takeover" and "Anti-Greenmail" Provisions and Management
Implications. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to
discourage, make more costly or more difficult, or prevent a future takeover
offer, prevent shareholders from receiving a premium for their securities in a
takeover offer, and enhance the possibility that a future bidder for control of
the Company will be required to act through arms-length negotiation with the
Company's Board of Directors. Copies of the Company's Articles of the
Incorporation are on file with the SEC and Pennsylvania Department of State.
<PAGE>
Year 2000 Compliance. The Company has adopted a "Year 2000 Policy" and
conducted a comprehensive review of its computer systems and operations to
identify the areas that could be affected by the Year 2000 issue. The issue with
respect to Year 2000 is whether systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause complete
system failures. The Company's estimates of the costs that incurred and costs to
be incurred to prepare for Year 2000 compliance will not exceed $1,100,000;
however, there can be no assurance that the 2000 year problem will not have an
adverse effect on the financial condition and results of operations of the
Company. See "Management Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" in "Item 7. Management's Discussion of
Financial Condition and Results of Operations".
Stock Not an Insured Deposit. Investments in the shares of the Company's
common stock are not deposits insured against loss by the FDIC or any other
entity.
Bespeaks Caution Doctrine. Investor should be aware that the U. S. Court of
Appeals for the Third Circuit in In Re: Donald J. Trump Casino Securities
Litigation Taj Mahal, (No. 92-5350 filed October 14, 1993) adopted a legal
doctrine entitled the "Bespeaks Caution Doctrine" which may prevent them from
recovering from the Company based upon material misrepresentations or omissions
contained in the Company's disclosure documents to the extent that such
documents contained sufficient cautionary statements to apprise investors of the
risks of an investment in the Company's securities. The foregoing investment
considerations may have the effect of bringing this document, as well as other
Company disclosure documents, within the purview of the "Bespeaks Caution
Doctrine".
General
First Colonial Group, Inc. (the "Company) is a Pennsylvania business
corporation which is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"). The Company was
incorporated on December 30, 1982 for the purpose of acquiring Nazareth National
Bank and Trust Company (the "Bank") and thereby enabling the Bank to operate
within a bank holding company structure. The Company became an active bank
holding company on November 25, 1983 when it acquired the Bank. The Bank is a
wholly-owned subsidiary of the Company. In July, 1986, the Company established
another wholly-owned subsidiary, First C. G. Company, Inc. This subsidiary is a
Delaware business corporation formed for the purpose of investing in various
types of securities.
The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
business. The Company, through the Bank, derives substantially all of its income
<PAGE>
from the furnishing of banking and banking-related services. The Bank has its
principal banking office as well as three branch offices in Nazareth,
Pennsylvania. It also presently has two branch offices in Bethlehem,
Pennsylvania, three branch offices in Easton, Pennsylvania, one branch in
Brodheadsville, Pennsylvania, one branch in Stroudsburg, Pennsylvania, one
branch in East Stroudsburg, Pennsylvania and one branch in Allentown,
Pennsylvania. The Bank has nineteen automated teller machines (ATMs), one at
each branch office (except the Main Street Nazareth branch), four free-standing
drive-up machines at the Northampton Crossings Shopping Center, Easton,
Pennsylvania and free-standing machines at its operation center, The First
Colonial Building in the Bethlehem Business Park, Hanover Township,
Pennsylvania, at St. Luke's Hospital, Fountain Hill, Pennsylvania and at a
hardware store in Nazareth, Pennsylvania.
The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in distributions of the assets or earnings of the
Bank, are necessarily subject to the prior claims of creditors of the Bank,
except to the extent that claims of the Company itself as a creditor may be
recognized. Such claims on the Bank by creditors other than the Company include
obligations relating to federal funds purchased and certain other borrowings, as
well as deposit liabilities.
The Company directs the policies and coordinates the financial resources of
the Bank. The Company provides and performs various technical, advisory and
auditing services for the Bank, coordinates the Bank's general policies and
activities, and participates in the Bank's major business decisions.
As of December 31, 1998 the Company, on a consolidated basis, had total
assets of $358,496,000, total deposits of $294,549,000, and total shareholders'
equity of $31,717,000.
<PAGE>
Nazareth National Bank and Trust Company
History and Business
The Bank was incorporated under the laws of the United States of America as
a national bank in 1897 under its present name. Since that time, the Bank has
operated as a banking institution doing business at several locations in
Northampton County, Pennsylvania. The Bank is a member of the Federal Reserve
System.
As of December 31, 1998, the Bank had total assets of $354,785,000, total
deposits of $294,818,000 and total shareholders' equity of $27,158,000. Its
deposits are insured by the Bank Insurance Fund ("BIF") maintained by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law.
The Bank engages in a full service commercial and consumer banking and
trust business. The Bank, with its main office at 76 South Main Street,
Nazareth, Pennsylvania, also provides services to its customers through its
branch network of thirteen full service banks, which includes drive-in
facilities at most locations, ATMs at each branch office (except the Main Street
Nazareth branch) and bank-by-mail services. Nine of the Bank's full service
offices are located in Northampton County, Pennsylvania. Three offices are
located in Monroe County, Pennsylvania. One office is located in Lehigh County,
Pennsylvania. The Bank also has free standing ATMs located in its Operations
Center, the First Colonial Building in the Bethlehem Business Park, Hanover
Township, Pennsylvania, in the lobby of St. Luke's Hospital in the Borough of
Fountain Hill, Pennsylvania, in a hardware store in Nazareth, Pennsylvania, and
four free-standing drive-up ATM's at Northampton Crossings Shopping Center,
Lower Nazareth Township, Easton, Pennsylvania.
The Bank's services include accepting time, demand and savings deposits,
including NOW accounts (Flex Checking), regular savings accounts, money market
accounts, fixed rate certificates of deposit and club accounts, including the
Vacation Club, the College Club(R) and the Christmas Club. The Bank offers
Mastercard(R) and VISA(R), as well as a Constant Cash account (a pre-approved
line of credit activated by writing checks against a checking account) and the
First Colonial Club(R) and Quality Checking(R) (deposit package programs which
provide checking accounts with other services including credit card protection,
discount travel, shopping services and other related financial services). Its
services also include making secured and unsecured commercial and consumer
loans, financing commercial transactions either directly or through regional
industrial development corporations, making construction and mortgage loans, and
renting safe deposit facilities. Additional services include making residential
mortgage loans (both fixed rate and variable rate), home equity lines of credit,
loans to purchase manufactured homes, revolving credit loans with overdraft
checking protection, small business loans, student loans, recreational vehicles
and new and used car and truck loans
<PAGE>
The Bank's business loans include seasonal credit and collateral loans and
term loans as well as accounts receivable and inventory financing. Most of the
Bank's commercial customers are small to medium size businesses operating in
Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in
the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas of
Pennsylvania.
Trust services provided by the Bank include services as executor and
trustee under wills and deeds, as guardian, custodian and as trustee and agent
for pension, profit sharing and other employee benefit trusts as well as various
investment, pension and estate planning services. Trust services also include
service as transfer agent and registrar of stock and bond issues and as escrow
agent. In addition, the Bank provides discount brokerage through an outside
supplier of this service, and various tax services.
The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
Competition
All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trade area of Northampton and Lehigh Counties (known as the
Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the
Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas. In order to
keep pace with its competition and the continuing growth of these areas, the
Bank may, in the future, consider establishing additional new branches, although
no assurance can be given that any new branches will be opened or if opened,
that they will be successful. The Bank competes with local commercial banks as
well as other commercial banks with branches in the Bank's market area. The Bank
considers its major competition to be Ambassador/Lafayette Bank, headquartered
in Easton, Pennsylvania, with a branch in Nazareth; First Union Bank,
headquartered in Charlotte, North Carolina, with branch offices in Easton and
Bethlehem, Pennsylvania; Summit Bancorporation, headquartered in Princeton, New
Jersey, with branches in Bethlehem, Easton and Allentown, Pennsylvania; and PNC
Bank headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth,
Brodheadsville, Easton and Allentown, Pennsylvania.
The Bank, along with other commercial banks, competes with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies, regulated small loan
companies, credit unions and the issuers of commercial paper and other
securities, such as shares in money market funds. The Bank also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in the corporate trust and investment management
services. Many of the Bank's competitors have financial resources larger than
the Bank's.
<PAGE>
Management believes that the Bank is generally competitive with all
competing financial institutions in its service areas with respect to interest
rates paid on time and savings deposits, service charges on deposit accounts and
interest rates charged on loans.
First C. G. Company, Inc.
In July 1986, the Company established a wholly-owned subsidiary, First C.
G. Company, Inc., a Delaware corporation, for the purpose of investing in
various types of securities. As of December 31, 1998, First C. G. Company, Inc.
had total assets of $4,273,000, of which $2,810,000 was invested in common
stocks and $435,000 in a loan to the Bank's ESOP and most of the remaining
assets were in other tax-exempt and taxable securities and interest-bearing bank
deposits. The total shareholders' equity at December 31, 1998 was $3,909,000.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The regulatory framework is intended primarily for the
protection of depositors, other customers and the federal deposit insurance
funds and not for the protection of shareholders. To the extent that the
following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on the business and prospects of the Company and the Bank.
The Company
The Company is registered as a "bank holding company" under the Bank
Holding Act of 1956, as amended (the "Holding Company Act"), and is, therefore,
subject to supervision and regulation by the Board of Governors of the Federal
Reserve Board (the "Federal Reserve Board"). The Company is also regulated by
the Pennsylvania Department of Banking.
Under the Holding Company Act, the Company is required to secure the prior
approval of the Federal Reserve Board before it can merge or consolidate with
any other bank holding company or acquire all or substantially all of the assets
of any bank or acquire direct or indirect ownership or control of any voting
shares of any bank that is not already majority owned by it, if after such
acquisition, it would directly or indirectly own or control more than 5% of the
voting shares of such bank. See "Interstate Banking".
<PAGE>
The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company engaged in non-banking activities unless
the Federal Reserve Board, by order or regulation, has found such activities to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making such determination, the Federal Reserve Board
considers whether the performance of these activities by a bank holding company
can reasonably be expected to produce benefits to the public which outweigh
possible adverse effects. The Federal Reserve Board has by regulation determined
that certain activities including, among others, operating a mortgage, finance,
credit card or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
nonoperating basis; and, certain stock brokerage and investment advisory
services, are closely related to banking within the meaning of the Holding
Company Act.
Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions. The
Bank currently is rated "satisfactory" under the Community Reinvestment Act.
Under the policy of the Federal Reserve Board with respect to bank holding
company operations, a bank holding company is deemed to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee
that any "undercapitalized" (as such term is defined in the statute) insured
depository institution subsidiary will comply with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards as of the time the institution failed to
comply with such capital restoration plan.
Under the Holding Company Act, the Company is required to file periodic
reports and other information concerning its operations with, and is subject to
examination by, the Federal Reserve Board. In addition, under the Banking Code
of 1965, the Pennsylvania Department of Banking has the authority to examine the
books, records and affairs of any Pennsylvania bank holding company or to
require any documentation deemed necessary to ensure compliance with the Banking
code.
<PAGE>
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities, and is subject to the Securities and
Exchange Commission's rules and regulations relating to periodic reporting,
reporting to shareholders, proxy solicitation and insider trading.
The Bank
The Bank, as a national bank, is subject to The National Bank Act. The Bank
is also subject to the supervision of, and is regularly examined by, the Office
of the Comptroller of the Currency of the United States (the "OCC") and is
required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions. Under current Pennsylvania
law, banking institutions located in Pennsylvania, such as the Bank, may
establish branches within any county in the Commonwealth, subject to the prior
regulatory approval.
As a national bank, the Bank is a member of the FDIC and a member of the
Federal Reserve System and, therefore, is subject to additional regulation by
these agencies. Some of the aspects of the lending and deposit business of the
Bank which are regulated by these agencies include personal lending, mortgage
lending and reserve requirements. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
The Bank is subject to certain limitations on the amount of cash dividends
it can pay. See "Note S - Regulatory Matters" in the Notes to Consolidated
Financial Statements which appears elsewhere herein.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Company and the Company's non-bank subsidiary.
Substantially all of the deposits of the Bank are insured up to applicable
limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit
insurance assessments to maintain the BIF. The insurance assessments are based
upon a matrix that takes into account a bank's capital level and supervisory
rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it
charged on bank deposits insured by the BIF to the statutory minimum of $2,000
annually for "well-capitalized" banks. On September 30, 1996, the Deposit
Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA
reduced the amount of FDIC insurance premiums for savings association deposits
acquired by banks to the same levels assessed for deposits insured by BIF. DIFA
further provides for assessments to be imposed on all insured depository
institutions with respect to deposits to pay for the cost of Financing
<PAGE>
Corporation bonds; however, banks are assessed for this purpose at only this
purpose at only one-fifth the rate of the assessment on savings associations
until December 31, 1999. As a result of these changes, the deposit insurance
assessment for banks and for thrifts has been nearly equalized and will be
identical for comparably rated institutions after January 1, 2000, at which time
banks will share equally in the FICO assessment and the BIF and SAIF funds will
be merged.
Capital Regulation
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial condition and results of
operation. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital from 3% to 5% of average assets
(leverage ratio). The 3% leverage ratio is a minimum for the top-rated banking
organizations without any supervisory, financial or operational weaknesses or
deficiencies and other banking organizations are expected to maintain leveral
capital ratios 100 to 200 basis points above the minimum depending on their
financial condition. Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, as of December 31, 1998 that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
The following tables provide a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated.
<PAGE>
Capital Ratios
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 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>
CAPITAL RATIOS
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,271 16.03% $15,609 8.00% --- ---
Bank $27,200 13.97% $15,576 8.00% $19,470 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $28,829 14.78% $ 7,804 4.00 --- ---
Bank $24,163 12.41% $ 7,788 4.00% $11,682 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $28,829 8.33% $13,551 4.00% --- ---
Bank $24,163 7.06% $13,416 4.00% $16,770 5.00%
</TABLE>
<PAGE>
Interstate Banking
On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state after September 9, 1995. Beginning June 1, 1997, a bank may
merge with a bank in another state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997. States may enact laws opting out of interstate branching before June
1, 1997, subject to certain conditions. States may also enact laws permitting
interstate merger transactions before June 1, 1997 and host states may impose
conditions on a branch resulting from an interstate merger transaction that
occurs before June 1, 1997, if the conditions do not discriminate against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance after May 31, 1997. Pennsylvania has enacted a law opting in
immediately to interstate merger and interstate branching transactions.
Interstate acquisitions and mergers would both be subject, in general, to
certain concentration limits and state entry rules relating to the age of the
bank.
Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de novo" branches. Pennsylvania has
enacted such a law.
National Monetary Policy
In addition to being affected by general economic conditions, the earnings
and growth of the Bank and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
Federal Reserve Board and the FDIC. An important function of the Federal Reserve
Board is to regulate the money supply, credit conditions and interest rates.
Among the instruments used to implement these objectives are open market
operations in United States Government securities, setting the discount rate and
changes in reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall growth and distribution of
credit, bank loans, investments and deposits, and their use may also affect
interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had
a significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Company and the
Bank cannot be predicted.
<PAGE>
Fair Value of Financial Instruments
The Financial Accounting Standards Board ("FASB") issued statement of
financial accounting standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires all entities to disclose the estimated
fair value of its assets and liabilities considered to be financial instruments.
Financial instruments consist primarily of securities, loans and deposits. The
Company has provided these disclosures as of December 31, 1998 and 1997 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 8, Financial Statements and Supplementary Data".
Accounting for Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Trading securities are measured at fair value with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1998 and 1997. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements. The classification of securities can be found in Note B of the Notes
to Consolidated Financial Statements contained under the caption, "Item 7,
Financial Statements".
Employees
As of December 31, 1998 the Company had approximately 204 employees, of
whom 44 were part-time. The Company considers its relationship with its
employees to be good.
Additional Information
The tables listed below, which are set forth on pages 17 through 23 herein,
contain unaudited information relevant to the business of the Company and the
Bank:
Investment Securities
Investment Securities Yield by Maturity
Loan Portfolio by Type
Loan Maturities and Interest Sensitivity
Allocation of the Allowance for Possible Loan Losses
Percentage of Total Loans in each Category to Total Loans
Average Deposit Balances by Major Classification
Maturities of Certificates of Deposit of $100,000 or more
<PAGE>
INVESTMENT SECURITIES
Summary of Available-for-Sale and Held-to-Maturity Securities at December
31,
<TABLE>
1998
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 7,026 $ 7,125
U. S. Government Agency 24,482 24,441
State and Political Subdivisions 27,860 28,466
Mortgage-Backed Securities 33,322 33,141
Other Debt Securities --- ---
Equity Securities 4,900 5,216
------- -------
Total $97,590 $98,389
</TABLE>
<TABLE>
1997
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 9,008 $ 9,066
U. S. Government Agency 14,512 14,556
State and Political Subdivisions 16,865 17,330
Mortgage-Backed Securities 26,791 26,812
Other Debt Securities --- ---
Equity Securities 3,878 5,260
------- -------
Total $71,054 $73,024
</TABLE>
<TABLE>
1996
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 7,020 $ 7,054
U. S. Government Agency 14,272 14,161
State and Political Subdivisions 11,808 11,864
Mortgage-Backed Securities 19,131 19,145
Other Debt Securities 796 800
Equity Securities 3,226 3,755
------- -------
Total $56,253 $56,779
</TABLE>
<TABLE>
1998
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ --- $ ---
U. S. Government Agency 4,992 5,026
State and Political Subdivisions 6,770 6,943
Mortgage-Backed Securities 5,961 5,951
------- -------
Total $17,723 $17,920
</TABLE>
<TABLE>
1997
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ --- $ ---
U. S. Government Agency 6,008 6,051
State and Political Subdivisions 3,169 3,233
Mortgage-Backed Securities 8,579 8,662
------- -------
Total $17,756 $17,946
</TABLE>
<TABLE>
1996
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
<S> <C> <C>
U. S. Treasury $ 999 $ 1,003
U. S. Government Agency 10,229 10,243
State and Political Subdivisions 3,217 3,261
Mortgage-Backed Securities 6,554 6,617
------- -------
Total $20,999 $21,124
</TABLE>
<PAGE>
INVESTMENT SECURITIES YIELD BY MATURITY
The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 1998 are presented in the following
table. Weighted average yields on tax-exempt obligations have been computed on a
fully taxable equivalent basis assuming a tax rate of 34%. All average yields
were calculated on the book value of the related securities. Equity and other
securities having no stated maturity have been included in the "After 10 Years"
category.
Available-for-Sale and Held-to-Maturity Investment Securities Yield
by Maturity, December 31, 1998
<TABLE>
AVAILABLE-FOR-SALE
AT FAIR VALUE After 1 But After 5 But
(Dollars in Thousands, Within One Year Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ 4,043 5.85 % $ 3,082 6.27 % $ -- -- %
U. S. Government Agency -- -- -- -- 12,510 6.55
Mortgage-backed Securities 17 6.76 2,150 5.96 2,162 6.38
State and Political
Subdivisions --- -- 2,010 7.29 7,584 7.12
Equity Securities -- -- -- -- -- --
----- ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 4,060 5.85 % $ 7,242 6.46 % $22,256 6.73%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.59 3.20 9.48
==== ==== ====
</TABLE>
<TABLE>
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands, After 10 Years Total
Unaudited) Amount Yield Amount Yield
<S> <C> <C> <C> <C>
U. S. Treasury $ -- -- % $ 7,125 6.03 %
U. S. Government Agency 11,931 6.73 24,441 6.64
Mortgage-backed Securities 28,812 6.16 33,141 6.16
State and Political
Subdivisions 18,872 7.50 28,466 7.38
Equity Securities 5,216 3.56 5,216 3.56
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $64,831 6.45 % $98,389 6.49 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 19.21 14.88
===== =====
</TABLE>
<TABLE>
HELD-TO-MATURITY
AT AMORTIZED COST After 1 But After 5 But
(Dollars in Thousands, Within One Year Within 5 Years Within 10 Years
Unaudited) Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
U. S. Government Agency $ -- -- % $ -- -- % $ 4,992 7.00 %
Mortgage-backed Securities -- -- 756 6.12 1,137 6.79
State and Political
Subdivisions 250 6.44 760 7.33 2,139 7.00
------ ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 250 6.44 % $ 1,516 6.73 % $ 8,268 6.97%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.05 3.79 8.31
==== ==== ====
</TABLE>
<PAGE>
<TABLE>
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands, After 10 Years Total
Unaudited) Amount Yield Amount Yield
<S> <C> <C> <C> <C>
U. S. Government Agency $ -- -- % $ 4,992 7.00 %
Mortgage-backed Securities 4,068 6.37 5,961 6.42
State and Political
Subdivisions 3,621 8.64 6,770 7.89
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 7,689 7.44 % $17,723 7.15 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 21.97 13.75
===== =====
</TABLE>
<PAGE>
LOAN PORTFOLIO BY TYPE
The loan portfolio by type is summarized in the following table for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994.
Loan Portfolio by Type
<TABLE>
(Dollars in Thousands) For the Year Ended December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate - Residential $119,914 $138,539 $134,013 $122,293 $117,205
Real Estate - Construction 11,689 12,361 10,923 4,959 2,861
Real Estate - Commercial 29,587 34,579 39,421 35,316 35,673
Consumer/Installment 40,184 35,914 28,870 27,685 24,626
Commercial (non-Real Estate)
and Agricultural 10,900 9,086 8,715 5,403 7,503
State and Political Subdivisions 1,178 944 906 1,290 288
Other 10 20 28 13 18
-------------------------------------------------
TOTAL GROSS LOANS 213,462 231,443 222,876 196,959 188,174
Unearned Income (1,025) (1,856) (2,759) (3,829) (2,959)
-------------------------------------------------
Total Loans 212,437 229,587 220,117 193,130 185,215
Allowance for Possible
Loan Losses (2,691) (2,664) (2,532) (2,443) (2,187)
-------------------------------------------------
NET LOANS $209,746 $226,923 $217,585 $190,687 $183,028
=================================================
</TABLE>
At December 31, 1998 there were no categories of loans exceeding 10% of
total loans which are not otherwise disclosed as the categories of loans listed
in the above table.
<PAGE>
LOANS MATURITIES AND INTEREST SENSITIVITY
The maturity ranges of items in the loan portfolio (excluding residential
mortgages of 1 to 4 family residences and consumer loans) of the Bank and the
amount of loans with predetermined interest rates and floating interest rates
due after one year, as of December 31, 1998, are summarized in the table set
forth below. The determination of maturities included in the table are based
upon contract terms. Demand loans that do not have a defined repayment term are
reported as maturing within one year. In situations where a rollover is
appropriate, the Bank's policy in this regard is to evaluate the credit for
collectibility consistent with the normal loan evaluation process. This policy
is used primarily in evaluating ongoing customers' use of their lines of credit
with the Bank that are at floating interest rates. Management continues to
emphasize the granting of floating interest rate loans to better match the
interest sensitivity of deposits.
Loan Maturity and Interest Sensitivity
<TABLE>
Due in Due in Due in
As of December 31, 1998 One Year One to Over
(Dollars in Thousands) or Less Five Years Five Years Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate - Construction $ 988 $2,199 $8,502 $11,689
Real Estate - Commercial 1,377 6,850 21,360 29,587
Commercial (Non-Real Estate)
and Agricultural 1,260 4,775 4,865 10,900
------ ------ ------- -------
TOTAL $3,625 $13,824 $34,727 $52,176
====== ======= ======= =======
Loan Maturity After 1 Year With:
Predetermined Interest Rate $2,865 $6,384
Floating Interest Rate 10,959 28,343
------ ------
TOTAL $13,824 $34,727
======= =======
</TABLE>
<PAGE>
The following table details the Allocation of the Allowance for Possible
Loan Losses by the various loan categories. The allocation is not necessarily
indicative of the categories in which future loan losses will occur, and the
entire allowance is available to absorb losses in any category of loans.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
As of December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial $1,350 $1,183 $663 $1,049 $1,142
Real Estate- Construction 4 6 7 3 69
Real Estate - Residential 128 191 198 184 143
Consumer/Installment 738 785 811 534 451
Unallocated 471 499 853 673 382
------ ------ ------ ------ ------
TOTAL $2,691 $2,664 $2,532 $2,443 $2,187
====== ====== ====== ====== ======
</TABLE>
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS
<TABLE>
As of December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial 19.13 % 19.28 % 22.02 % 21.33 % 23.11 %
Real Estate - Construction 5.50 5.34 4.90 2.52 1.52
Real Estate - Residential 56.45 59.86 60.13 62.09 62.28
Consumer/Installment 18.92 15.52 12.95 14.06 13.09
----- ----- ----- ----- -----
TOTAL 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
====== ====== ====== ====== ======
</TABLE>
<PAGE>
The average balances of deposits for each of the years ended December 31,
1998, 1997 and 1996 are presented in the following table.
AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION
<TABLE>
For the Year Ended December 31,
1998 1997 1996
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits
Non-Interest Bearing $ 35,254 --- % $ 31,074 --- % $ 27,826 --- %
Interest Bearing 48,988 1.15 45,338 1.17 43,206 1.55
Money Market Deposits 14,366 2.81 14,380 2.81 16,297 2.82
Savings & Club Accounts 61,177 2.21 62,746 2.44 62,783 2.49
Certificates of Deposit
under $100,000 124,823 5.59 118,846 5.58 103,221 5.50
Certificates of Deposit
of $100,000 or more 4,700 3.72 5,014 4.19 5,167 4.84
------ ---- ------ ---- ------ ----
Total Deposits $289,308 $277,398 $258,500
======== ======== ========
</TABLE>
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
<TABLE>
At December 31,
(Dollars in Thousands) 1998 1997
-----------------------------------
<S> <C> <C>
Three Months or Less $821 $428
Over Three, Through Six Months 1,380 1,454
Over Six, Through Twelve Months 1,508 977
Over Twelve Months 1,017 1,499
-----------------------------------
TOTAL $4,726 $4,358
===================================
</TABLE>
There were no brokered deposits at December 31, 1998 and 1997.
<PAGE>
Item 2. Description of Property
The principal banking office of the Bank and the executive offices of the
Bank and the Company are located at 76 South Main Street in the Borough of
Nazareth, Northampton County, Pennsylvania, which building is owned by the Bank.
In addition, the Bank owns additional properties located at 29 South Broad
Street, Nazareth, Pennsylvania (Mortgage and Installment Loan Center); 553
Nazareth Drive, Nazareth, Pennsylvania (Branch Office); 33 S. Broad Street,
Nazareth (Branch Office), 2000 Sullivan Trail, Easton, Pennsylvania (Branch
Office), 3864 Adler Place, Bethlehem Business Park, Bethlehem, Pennsylvania
(First Colonial Building, Computer and Operations Center), Rt. 209
Brodheadsville, Pennsylvania (Branch Office), and 3856 Easton-Nazareth Highway
(Route 248), Lower Nazareth Township, Easton, Pennsylvania (free-standing,
drive-up ATM location).
The Bank also leases facilities for its branch office located at 44 East
Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath
Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at
101 South Third Street, Easton, Pennsylvania; its branch office located at 1125
N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located in the
Hall Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its
branch office located within Redner's Supermarket, Airport Road, Allentown,
Pennsylvania; and its branch office located within Redner's Supermarket,
Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania;
and its branch office located within Wal-Mart's at 355 Lincoln Avenue, East
Stroudsburg, Pennsylvania.
Item 3. Legal Proceedings
From time-to-time, the Company and the Bank are partners to routine
litigation incidental to their business.
Neither the Company, the Bank nor any of their properties is subject to any
material legal proceedings, nor are any such proceedings known to be
contemplated by any governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.
<PAGE>
Item 4.1: Executive Officers of the Registrant
The following table sets forth certain information, as of March 30, 1999,
concerning the executive officers of the Company and certain executive officers
of the Bank who are not also Directors. All executive officers are elected by
the respective Boards of Directors of the Company and the Bank and hold office
at the discretion of such Boards.
Positions Positions
Name/Age with the Company with the Bank
Reid L. Heeren 57 (a) Treasurer since January, Executive Vice President
1987; Vice President since and Chief Financial
April, 1985 Officer since August, 1997
Senior Vice President and
Chief Financial Officer
since January, 1987;
Cashier since
November, 1984
Tomas J. Bamberger 57 (b) None Executive Vice President
and Senior Loan Officer
since September, 1997
Arthur Williams 53 (c) None Executive Vice President,
Administration since
August, 1997; Senior Vice
President, Administration
since November, 1988.
Robert M. McGovern 60 (d) None Executive Vice President,
Senior Trust Officer
since February, 1999
(a) Mr. Heeren was previously Senior Vice President, Chief Financial Officer
and Cashier of the Bank from January 1987 to August 1997 and Vice
President, Finance of the Bank from November, 1984 to January, 1987. Prior
to November, 1984, Mr. Heeren was employed by the American Bank and Trust
Company, headquartered in Reading, Pennsylvania, as Vice President for
Financial Management (September, 1982 to November, 1984) and was Vice
President, Community Banking, Chester County, Pennsylvania (March, 1982 to
September, 1982).
(b) Mr. Bamberger was previously Executive Vice President and Senior Loan
Officer of First Valley Bank/Summit Bank (PA) from February 1984 to
September 1997. Prior to that, he was Senior Vice President and Senior Loan
Officer of the First National Bank of Allentown from March 1982 to February
1984. Mr. Bamberger started his banking career in October 1967 at Girard
Bank in Philadelphia. He was a Vice President and Divisional Manager in
commercial lending when he left in February 1982.
<PAGE>
(c) Mr. Williams was previously Senior Vice President, Administration of the
Bank from November, 1988 to August, 1997 and Vice President of the Bank,
serving as branch administrator with business development and commercial
lending duties, from April 1985 to November, 1988. Prior to April 1985, Mr.
Williams was a Vice President of United Penn Bank, serving as Regional
Administrator of its Northern Region (March 1980 to March 1985).
(d) Mr. McGovern was previously Vice President and Senior Trust Specialist of
First Union National Bank from April 1998 to February 1999. Prior to that,
Vice President/Trust of CoreStates Bank 1996 to 1998 and prior to that Vice
President/Trust of Meridian Bank 1985 to 1996. The Meridian period postions
progressed from Marketing Officer in 1985 to Assistant Vice President to
Vice President in 1996. Note: The changes from Meridian to CoreStates to
First Union were the result of mergers.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market under
the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1998, there were 738 shareholders of record.
The declaration and payment of dividends is at the sole discretion of the Board
of Directors, and their amount depends upon the earnings, financial condition,
and capital needs of the Company and the Bank and certain other factors
including restrictions arising from Federal banking laws and regulations (see
"Note S- Regulatory Matters" in the "Notes to Consolidated Financial
Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price was $29.125 in December 1998 and
$33.80 in December 1997. Stock prices and dividends per share have been restated
to reflect the 5% stock dividends of June 1998 and May 1997 (see "Note T -
Equity Transactions" in the "Notes to Consolidated Financial Statements"
contained in "Item 8, Financial Statements and Supplementary Data").
<TABLE>
- -------------------------------------------------------------------------------
1997 Cash Dividends
High Low Declared
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $22.45 $20.18 $ 0.1633
Second Quarter 23.33 21.31 0.1633
Third Quarter 32.62 22.38 0.1714
Fourth Quarter 33.81 33.04 0.1714
-------
TOTAL $ 0.6694
- -------------------------------------------------------------------------------
1998
First Quarter $35.24 $32.62 $ 0.1810
Second Quarter 36.50 33.33 0.1810
Third Quarter 36.00 26.75 0.1900
Fourth Quarter 29.75 26.75 0.1900
-------
TOTAL $ 0.7419
- -------------------------------------------------------------------------------
</TABLE>
The Company did not sell any of its equity securities during 1998 that were not
registered under the Securities Act.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
Consolidated Financial Highlights
- --------------------------------------------------------------------------------
(Dollars in Thousands, Percentage Change
except per share data) 1998 1997 1996 1998/97 1997/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At Year-End
Assets $ 358,496 $ 346,738 $ 322,352 3.4 % 7.6%
Deposits 294,549 282,255 67,668 4.4 5.5
Loans 212,437 229,587 220,117 (7.5) 4.3
Shareholders' Equity 31,717 30,357 26,805 4.5 13.3
For the Year
Net Interest Income $ 14,496 $ 14,613 $ 13,557 (0.8)% 7.8%
Net Income 3,032 3,283 2,822 (7.6) 16.3
Per Share *
Basic Net Income $ 1.76 $ 1.92 $ 1.68 (0.8)% 14.8%
Diluted Net Income 1.75 1.92 1.68 (0.9) 14.8
Dividends Paid 0.74 0.67 0.61 10.4 9.4
Book Value 18.17 17.49 16.37 3.9 6.8
Financial Ratios
Return on average assets .86% .97% .92%
Return on average equity 9.79% 11.67% 11.16%
Average shareholders' equity
to average assets 8.78% 8.30% 8.24%
</TABLE>
* Per share data have been restated to reflect the 5% stock dividends of June
1998, May 1997 and May 1996.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following financial review and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of First Colonial Group, Inc. (the "Company") with a
primary focus on the analysis of operating results for the years ended December
31, 1998, 1997 and 1996. The Company's consolidated earnings are derived
primarily from the operations of Nazareth National Bank and Trust Company (the
"Bank") and First C. G. Company, Inc. ("First C. G."). The information below
should be read in conjunction with the Company's consolidated financial
statements and accompanying notes thereto, and other detailed information
appearing elsewhere in this report. Additional financial information can be
found in the Company's Form 10-K report, a copy of which may be obtained upon
request. During the two most recent fiscal years, there have been no changes in
or disagreements with the Company's accountants on accounting and financial
disclosure. The information concerning share and per share data included in this
discussion has been restated to reflect the 5% stock dividends of June 1998, May
1997 and May 1996.
Forward Looking Statements
The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements or estimates
concerning the effect of the "Year 2000" issues on the Company's systems and
software and the Company's plans with regard to "Year 2000" issues and other
statements as to management's beliefs, expectations or opinions. Such forward
looking statements are subject to risks and uncertainties and may be affected by
various factors which may cause actual results to differ materially from those
in the forward looking statements including, without limitation, the effect of
economic conditions and related uncertainties, the effect of interest rates on
the Company and the Bank, Federal and state government regulation, competition,
and the time, expense and unanticipated problems in addressing the Year 2000
issue. These and other risks, uncertainties and other factors are discussed in
this Annual 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).
<PAGE>
Financial Performance Summary
In 1998, First Colonial Group recorded net income of $3,032,000. The 1998
net income is $251,000 or 7.6% lower than 1997 net income of $3,283,000. The
decrease was primarily the result of a provision expense of $1,000,000 to the
special reserve for possible losses resulting from specific pre-need funeral
trusts which the Bank had been directed to invest in a private placement
annuity. The Company's net income in 1998, exclusive of this special reserve,
would have been $3,692,000, an increase of 12.5% or $409,000 over net income in
1997. Net income in 1996 was $2,822,000.
The basic earnings per share were $1.76, $1.92 and $1.68 in 1998, 1997 and
1996, respectively. The diluted earnings per share were $1.75 in 1998, $1.92 in
1997 and $1.68 in 1996. Diluted earnings per share include the effect of common
stock equivalents such as options (see Note A.12 of the "Notes to Consolidated
Financial Statements"). The basic and diluted earnings per share, exclusive of
the special reserve in 1998, would have been $2.14.
The Company's return on average assets was .86% in 1998 as compared to .97%
in 1997 and .92% in 1996. The return on average equity was 9.79%, 11.67% and
11.16% in 1998, 1997 and 1996, respectively
The Company continued to achieve growth in total assets and deposits. Total
assets at December 31, 1998 were $358,496,000 as compared to $346,738,000 at
year end 1997. This is an increase of $11,758,000 or 3.4%. During 1998 total
deposits grew by 4.4% or $12,294,000 to a year-end total of $294,549,000. Total
deposits at December 31, 1997 were $282,255,000. Total loans amounted to
$212,437,000 and $229,587,000 at December 31, 1998 and 1997, respectively. The
loan decrease in 1998 was $17,150,000 or 7.5%. This decrease is attributed to
the sale of $42,880,000 of residential real estate loans during 1998.
The principal factors affecting earnings in 1998 were a $757,000 or 19.8%
increase in other income, including service charges, trust revenues and higher
net gains on the sales of securities and mortgages of $341,000, a decrease in
the provision for possible loan losses of $155,000 and a reduction in Federal
income taxes of $265,000. These earnings improvement factors were offset by a
decline in net interest income of $117,000 and higher operating expenses of
$1,311,000, including the provision for the special reserve of $1,000,000.
The 1997 earnings increase was the result of a $1,056,000 increase in net
interest income, an increase in other income of $1,181,000 and a $65,000
reduction in the provision for possible loan losses. Partially offsetting the
earnings increases were higher operating expenses of $1,681,000 and an increase
in Federal income taxes of $160,000.
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Dollars in Thousands,
except per share data)
For the Year Ended
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF INCOME:
Interest Income $ 25,367 $ 25,444 $ 23,135 $ 21,896 $ 18,986
Interest Expense 10,871 10,831 9,578 9,252 7,152
--------- --------- --------- --------- ---------
Net Interest Income 14,496 14,613 13,557 12,644 11,834
Provision for Possible
Loan Losses 450 605 670 1,798 420
Gains (Losses) on the
Sale of Mortgage Loans 398 178 (30) 22 37
Other Income, Excluding
Securities and Loan
Sale Gains 3,460 3,044 2,364 2,230 1,896
Securities Gains, Net 722 601 308 22 97
Other Expense 14,563 13,252 11,571 11,204 10,084
--------- --------- --------- --------- ---------
Income Before Income Taxes
and Cumulative Effect of
Accounting Method Change 4,063 4,579 3,958 1,916 3,360
Applicable Income Taxes 1,031 1,296 1,136 515 1,018
--------- --------- --------- --------- ---------
Net Income $ 3,032 $ 3,283 $ 2,822 $ 1,401 $2,342
--------- --------- --------- --------- ---------
Cash Dividends Paid $ 1,275 $ 1,139 $ 1,011 $ 972 $ 936
Cash Dividends Paid Per Share 0.74 0.67 0.61 0.59 0.57
Dividends Paid to Net Income 42.05% 34.69% 35.82% 69.38% 39.97%
PER SHARE DATA:
Basic Income $ 1.76 $ 1.92 $ 1.68 $ 0.85 $ 1.44
Diluted Net Income 1.75 1.92 1.68 0.85 1.44
Basic Average Common
Shares Outstanding 1,719,096 1,701,658 1,680,927 1,658,399 1,633,462
Dilutive Average Common
Shares Outstanding 1,726,569 1,706,729 1,683,770 1,658,792 1,633,462
CONSOLIDATED BALANCE SHEET DATA:
Total Assets $358,496 $346,738 $322,352 $298,514 $284,553
Loans (Net of
Unearned Discount) 212,437 229,587 220,117 193,130 185,215
Mortgage Loans
Held-for-Sale 603 759 721 1,006 69
Deposits 294,549 282,255 267,668 254,102 247,532
Securities Sold Under
Agreements to Repurchase 5,094 8,804 3,795 6,096 9,027
Debt (Short-Term
and Long-Term) 20,000 18,390 18,512 7,643 1,612
Shareholders' Equity 31,717 30,357 26,805 24,767 22,400
Book Value Per Share 18.17 17.49 16.37 16.04 14.66
SELECTED CONSOLIDATED RATIOS:
Net Income To:
Average Total Assets 0.86% 0.97% 0.92% 0.48% 0.85%
Average Shareholders' Equity 9.79% 11.67% 11.16% 5.98% 10.51%
Average Shareholders'
Equity to Average Assets 8.78% 8.30% 8.24% 8.00% 8.10%
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year Ended December 31,
<TABLE>
1998 1997 1996
Int Avg Int Avg Int Avg
Avg Inc/ Yield/ Avg Inc/ Yield/ Avg Inc/ Yield/
Bal Exp Rate Bal Exp Rate Bal Exp Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INT-EARNING
ASSETS
Int-Bearing
Balances
with Banks $ 3,060 $ 176 5.75% $1,252 $ 71 5.67% $ 1,313 $ 78 5.96%
Fed Funds
Sold 641 34 5.30 18 1 5.56 16 2 5.43
Inv Sec
Taxable 80,939 5,002 6.18 69,876 4,592 6.57 67,241 4,386 6.42
Non-Tax(1) 26,155 1,923 7.35 16,653 1,268 7.62 12,318 935 7.59
Loans(1(2) 219,357 18,910 8.62 229,205 19,972 8.71 206,378 18,083 8.76
Allow for
Loan Losses (2,710) --- --- (2,614) --- --- (2,500) --- ---
-------- ------ -------- ------ -------- ------
Net Loans 216,647 18,910 8.73 226,591 19,972 8.81 203,878 18,083 8.87
-------- ------ -------- ------ -------- ------
Total Int-
Earn
Assets 327,442 26,045 7.95 314,390 25,904 8.24 284,766 23,484 8.25
Non-Int
Earn Assets 25,419 --- --- 24,391 --- --- 22,305 --- ---
-------- ------ -------- ------ -------- ------
TOTAL ASSETS,
INTEREST
INCOME $352,861 26,045 7.38 $338,781 25,904 7.65 $307,071 23,484 7.65
-------- ------ -------- ------ -------- ------
LIABILITIES
INTEREST-BEARING
LIABILITIES
Int-Bearing
Deposits
Demand
Deposits $ 48,988 562 1.15 $ 45,338 532 1.17 $ 43,206 670 1.55
Money
Market
Deposits 14,366 404 2.81 14,380 404 2.81 16,297 460 2.82
Savings &
Club
Deposits 61,177 1,350 2.21 62,746 1,530 2.44 62,783 1,566 2.49
CD's over
$100,000 4,700 175 3.72 5,014 210 4.19 5,167 250 4.84
All Other
Time Dep 124,823 6,975 5.59 118,846 6,636 5.58 103,221 5,675 5.50
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Deposits 254,054 9,466 3.73 246,324 9,312 3.78 230,674 8,622 3.74
Securities
Sold Under
Agreements
to Repurchase 5,821 210 3.61 6,459 240 3.72 4,680 149 3.18
Other Short-
Term
Borrowings 974 55 5.65 2,325 132 5.68 3,560 198 5.56
Long-Term
Debt 18,631 1,140 6.12 18,422 1,147 6.23 9,319 609 6.54
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Liabilities 279,480 10,871 3.89 273,530 10,831 3.96 248,233 9,578 3.86
<PAGE>
NON-INTEREST
BEARING
LIABILITIES
Non-Int-
Bearing
Deposits 35,254 --- --- 31,074 --- --- 27,826 --- ---
Other Liab 7,157 --- --- 6,054 --- --- 5,724 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB 321,891 10,871 3.38 310,658 10,831 3.49 281,783 9,578 3.40
SHAREHOLDERS'
EQUITY 30,970 --- --- 28,123 --- --- 25,288 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB &
SHAREHOLDERS'
EQUITY,
INTEREST
EXPENSE $352,861 10,871 3.08 $338,781 10,831 3.20 $307,071 9,578 3.12
NET INTEREST
INCOME $ 15,174 $15,073 $13,906
-------- ------- -------
Net Interest
Spread (3) 4.06 4.28 4.39
Effect of
Int-Free
Sources
Used to
Fund Earnings
Assets 0.57 0.51 0.49
NET INTEREST
MARGIN (4) 4.63% 4.79% 4.88%
---- ---- ----
</TABLE>
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The taxable equivalent adjustments included above are
$678,000, $460,000 and $349,000 for the years 1998, 1997and 1996, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of $358,000, $377,000 and $303,000 for the years 1998, 1997 and
1996, respectively, are included in interest income. Average loan balances
include non-accruing loans and average loans held-for-sale of $3,726,000,
$1,781,000 and $2,212,000 for 1998, 1997 and 1996, respectively.
(3) Net interest spread is the arithmetic difference between yield on
interest-earning assets and the rate paid on interest-bearing liabilities.
(4) Net interest margin is computed by dividing net interest income by averaging
interest-earning assets.
<PAGE>
Average Balances
The "Consolidated Comparative Statement Analysis" table sets forth a
comparison of average daily balances, interest income and interest expense on a
fully taxable equivalent basis and interest rates calculated for each major
category of interest-earning assets and interest-bearing liabilities. For
purposes of this analysis, the computations in the "Consolidated Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
are no state or local taxes on income applicable to the Company. For further
information relating to the effective income tax rate of the Company, see Note J
of the "Notes to Consolidated Financial Statements". Interest income on loans
includes loan fees of $358,000, $377,000 and $303,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Net Interest Income
Net interest income is the difference between the interest income on loans,
investments and other interest-earning assets, and the interest paid on deposits
and other interest-bearing liabilities. Net interest income is the primary
source of earnings for the Company. Therefore, changes in this category can be
essential to the overall net income of the Company. The net interest income, on
a fully taxable equivalent basis, amounted to $15,174,000 for 1998, an increase
of $101,000 over $15,073,000 in 1997. As shown in the "Rate/Volume Analysis"
table, the increase in net interest income in 1998 was attributable to higher
net interest income from changes in volume of $348,000 reduced in part by a
reduction in rates of $247,000. The volume-related change resulted primarily
from increases in investment securities partially offset by decreased average
balances for loans (see discussions on "Loan Portfolio" and "Mortgage Loans
Held-for-Sale") and an increase in time deposits. The rate-related change was
primarily the result of the decrease of interest earned on loans and investments
being greater than the decrease on interest paid on deposits and debt.
Net interest income, on a fully taxable equivalent basis, in 1997 increased
$1,167,000 over the 1996 figure of $13,906,000. This increase was the result of
growth in loans, investments, deposits and long-term debt. Also affecting 1997
was the increase in interest rates earned on deposits exceeding the interest
rates paid on interest-bearing liabilities.
The net interest margin, a measure of net interest income performance, is
determined by dividing net interest income by total interest-earning assets. The
net interest margin was 4.63% for 1998, 4.79% for 1997 and 4.88% for 1996. The
decrease in 1998 was the result of a decrease in the average rate earned on
loans and investments being greater than the decrease in the average interest
rate paid on interest-bearing deposits and debt. The result was a decline in the
interest spread, the difference of interest earned on assets less the interest
paid on deposits and debt. The interest spread was 4.06%, 4.28% and 4.39% for
1998, 1997 and 1996, respectively. The impact on earnings by the reduction in
the interest spread was diminished in part by the $4,180,000 increase in 1998 of
non-interest-bearing deposits.
<PAGE>
The following table sets forth a "Rate/Volume Analysis", which segregates
in detail the major factors that contributed to the changes in net interest
income for the years ended December 31, 1998 and 1997, as compared to the
respective previous periods, into amounts attributable to both rate and volume
variances. In calculating the variances, the changes were first segregated into
(1) changes in volume (change in volume times the old rate), (2) changes in
rates (change in rate times the old volume) and (3) changes in rate/volume
(changes in rate times the change in volume). The changes in rate/volume have
been allocated in their entirety to the change in rates. The interest income
included in the "Rate/Volume Analysis" table has been adjusted to a fully
taxable equivalent amount using the Federal statutory tax rate of 34%.
Non-accruing loans have been used in the daily average balances to determine
changes in interest income due to volume. Loan fees included in the interest
income calculation are not material.
RATE/VOLUME ANALYSIS
(Dollars in Thousands) (Fully Taxable Equivalent)
<TABLE>
Increase (Decrease) in Year Ended December 31,
1998 to 1997 1997 to 1996
Change Due to: Change Due To:
TOTAL RATE VOLUME TOTAL RATE VOLUME
----- --- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Interest-Bearing Balances
With Banks $ 105 $ 2 $ 103 $ (7) $ (3) $ (4)
Federal Funds Sold 33 (2) 35 (1) (1) ---
Investment Securities 1,065 (328) 1,393 539 73 466
Loans (1,062) (146) (916) 1,889 (140) 2,029
----- --- ----- ----- ----- -----
Total Interest Income 141 (474) 615 2,420 (71) 2,491
----- --- ----- ----- ----- -----
Interest Expense
Demand Deposits,
Savings & Clubs (150) (192) 42 (231) (235) 4
Time Deposits 304 (9) 313 921 75 846
Securities Sold Under
Agreements to Repurchase (30) (6) (24) 91 34 57
Short-Term Borrowings (77) --- (77) (66) 3 (69)
Long-Term Borrowings (7) (20) 13 538 (57) 595
----- --- ----- ----- ----- -----
Total Interest Expense 40 (227) 267 1,253 180 1,433
----- --- ----- ----- ----- -----
Increase in Net
Interest Income $ 101 $(247) $ 348 $1,167 $ 109 $1,058
</TABLE>
<PAGE>
Service Charges and Other Income
Service charge income on deposit accounts amounted to $1,594,000 in 1998
compared to $1,349,000 in 1997 and $1,083,000 in 1996. In 1998, the service
charges on deposit accounts increased by $245,000 or 18.2% over 1997 and the
1997 increase over 1996 was $266,000 or 24.5%. The increases in 1998 and 1997
were primarily the result of increases in the number of deposit accounts and
increases in some deposit-related fees, including the Bank's debit card.
In 1998, the Company had a gain on the sale of mortgage loans of $398,000
as compared to a gain of $178,000 in 1997. In 1996, there was a loss of $30,000
(see discussion on "Mortgage Loans Held-for-Sale").
Other operating income was $641,000 in 1998, as compared to $645,000 in
1997. Other operating income for 1996 was $585,000.
Investment Management and Trust Division
Revenue from the Bank's Investment Management and Trust Division operations
was $1,225,000 in 1998, representing an increase of $175,000 or 16.7% over
revenue of $1,050,000 in 1997. The Investment Management and Trust Division
revenue for 1997 increased by 50.9% or $354,000 over the 1996 revenue of
$696,000. Trust assets are held by the Bank for its customers in a fiduciary or
agency capacity, and thus, are not included in the financial statements of the
Company. The increase in 1998 and 1997 Trust revenue was the result of the
addition of new accounts and increased market values.
Other Expenses
Salaries and employee benefits represent a significant portion of
non-interest expense. These expenses, amounting to $6,385,000, increased by
$352,000 or 5.8% in 1998 compared to $6,033,000 in 1997. These expenses in 1997
amounted to an increase of $418,000 or 7.4% over the $5,615,000 reported in
1996. The increase in 1998 was primarily due to salary increases of
approximately 4% and the addition of staff in the Lending Division. Salary
expense in 1997 increased due to normal salary increases of approximately 4% and
the addition of the East Stroudsburg branch opened in January, 1997.
Occupancy and equipment expenses were $2,118,000 in 1998, which was $60,000
less than the 1997 amount of $2,178,000. The 1997 amount was $6,000 less than
the 1996 occupancy and equipment expense of $2,184,000. The decreases in 1998
and 1997 were achieved through the continued implementation of expense control
measures which offset the added expenses of a new teller system and Trust system
in 1998, and the new East Stroudsburg branch and the installation of check image
equipment added in 1997.
<PAGE>
Other operating expenses (such as the provision for the special reserve,
advertising, publicity, litigation costs, deposit insurance premiums, data
processing fees, legal, accounting, supplies, postage and telephone) in 1998
were $6,060,000, compared to $5,041,000 in 1997 and $3,772,000 in 1996. The
increase of $1,019,000 or 20.2% in other operating expense during 1998 was
primarily due to the povision of $1,000,000 to the special reserve for Trust
operations and higher legal and loan collection costs. The increase in 1997 of
$1,269,000 or 33.6% was the result of higher legal and professional fees and
advertising expenses as a result of increased marketing programs. The Company's
advertising costs are expensed as incurred. Advertising costs were $597,000,
$524,000 and $299,000 for the years ended December 31, 1998, 1997 and 1996,
respectively (see Notes A.14 and I of the "Notes to Consolidated Financial
Statements").
Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Trading securities are measured at fair value, with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1998 and 1997. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements (see Notes A.2 and B of the "Notes to Consolidated Financial
Statements").
Held-to-maturity securities totaled $17,723,000 at December 31, 1998 and
$17,756,000 at December 31, 1997. The Company has the intent and ability to hold
these securities until maturity. The fair value of these securities was
$17,920,000 and $17,946,000 at December 31, 1998 and 1997, respectively.
The Company, at December 31, 1998 and 1997, did not hold any securities
identified as derivatives in the form of Collateralized Mortgage Obligations
(CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment
<PAGE>
Conducts (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps,
futures or options. The Company held adjustable rate mortgage-backed securities
issued by U. S. Government Agencies totaling $20,029,000 at December 31, 1998
($15,961,000 in available-for-sale and $4,068,000 in held-to-maturity) and
$27,426,000 at December 31, 1997 ($21,723,000 in available-for-sale and
$5,703,000 in held-to-maturity). The interest rates on most of these securities
are tied to various indexes, are subject to various caps, and adjust annually.
The Company also held fixed rate mortgage-backed securities issued by U. S.
Government Agencies totaling $19,253,000 at December 31, 1998 ($17,360,000 in
available-for-sale and $1,893,000 in held-to-maturity) and $7,943,000 at
December 31, 1997 ($5,067,000 in available-for-sale and $2,876,000 in
held-to-maturity).
Securities Available-for-Sale
The Company had $98,389,000 of securities available-for-sale at December
31, 1998, as compared to $73,024,000 at December 31, 1997. At December 31, 1998,
the net unrealized gain on these securities was $527,000, net of the tax effect
of $272,000. There was a net unrealized gain of $1,300,000, net of the tax
effect of $670,000 on the available-for-sale securities at December 31, 1997.
The net unrealized gain or loss is included in shareholders' equity (see Notes
A.2 and B of the "Notes to Consolidated Financial Statements").
These securities are being held to meet the liquidity needs of the Company
and to provide flexibility to support earnings in changing interest rate
environments. The tax-free municipal securities in the available-for-sale
category will also be used to assist in managing the Company's Federal Tax
position. While management has the intent and the ability to hold
available-for-sale securities on a long-term basis or to maturity, they may sell
these securities under certain circumstances. Such occurrences could include,
but are not limited to, meeting current liquidity needs, adjusting maturities or
repricing periods to reduce interest rate risk, reducing Federal Income Tax
liability, improving current or future interest income, adjusting risk-based
capital position, changing portfolio concentrations, and providing funds for
increased loan demand or deposit withdrawals. Upon the sale of an
available-for-sale security, the actual gain or loss is included in income.
<PAGE>
During 1998, $11,342,000 of securities available-for-sale were sold,
resulting in a total net gain of $722,000, which was recorded in income and
includes net gains on equity securities sold by First C. G. of $694,000. The
securities sold were primarily U. S. Treasury, U. S. Agency and mortgage-backed
bonds held by the Bank and equity securities held by First C. G. The sales by
the Bank were executed to provide liquidity and improve future interest income.
The sales of equity securities by First C. G. were made to recognize certain
gains and reposition the equity portfolio. Securities purchased by the Company
in 1998 totaled $76,280,000. Included in these purchases were $35,447,000 in U.
S. Agency fixed rate bonds, $21,856,000 in U. S. Agency mortgage-backed bonds,
$14,219,000 in municipal securities, $2,127,000 in public housing bonds,
$1,031,000 in U. S. Treasury bonds, and $1,600,000 in equity securities. The
securities sold in 1997 totaling $13,279,000 were primarily U. S. Treasury, U.
S. Agency, mortgage-backed and municipal bonds held by the Bank and equity
securities held by First C. G. The 1997 sales resulted in net gains of $601,000.
These gains include net gains of $560,000 on equity securities held by First C.
G. The sales were made to provide liquidity, improve future income and diversify
the equity portfolio. Security purchases in 1997 amounted to $46,283,000 which
were primarily U. S. Agency mortgage-backed bonds, U. S. Agency fixed rate
bonds, municipal securities and U. S. Treasury bonds. In 1996, a net gain on
security transactions of $308,000 was recorded on sales of $19,842,000.
Loan Portfolio
At December 31, 1998, total loans (net of unearned discounts of $1,025,000
in 1998 and $1,856,000 in 1997) of $212,437,000 were $17,150,000, or 7.5% less
than the 1997 amount of $229,587,000. The decline in loans in 1998 was primarily
the result of a decrease of $18,625,000 or 13.4% in residential real estate
loans, a decrease of $4,992,000 or 14.4% in commercial real estate loans and a
decrease of $672,000 or 5.4% in real estate construction loans partially offset
by a $4,270,000 or 11.9% increase in consumer loans and a $2,038,000 or 20.3%
increase in commercial and municipal loans. Loans Outstanding at December 31 by
Major Category are as follows:
<TABLE>
- -------------------------------------------------------------------
Dollars in Thousands at 1998 1997
December 31,
- -------------------------------------------------------------------
<S> <C> <C>
Real Estate Residential $119,914 $138,539
Real Estate Construction 11,689 12,361
Real Estate Commercial 29,587 34,579
Consumer 40,184 35,914
Municipal 1,178 944
Commercial & Other 10,910 9,106
--------- --------
Total 213,462 231,443
Unearned Discount 1,025 1,856
----------------- ------------------
Net $212,437 $229,587
- -------------------------------------------------------------------
</TABLE>
<PAGE>
The decline in residential real estate loans was the result of management's
decision to sell $21,564,000 of these loans originated in the prior year to
reduce the Bank's interest rate risk and concentration in these types of loans
(see discussion on " Mortgage Loans Held-for-Sale").
The Company's primary geographic area for its lending activities includes
Monroe, Northampton and Lehigh counties, Pennsylvania.
Making loans to businesses and individuals entails risks to the Company,
including ascertaining cash flows, evaluating the credit history, assets and
liabilities of a potential borrower, and determining the value of the various
types of collateral pledged as security. Lending involves determining risks,
managing those risks and charging an appropriate interest rate to compensate for
taking such risks, and to cover the cost of funds (see previous discussion on
"Market Risk").
The loan to deposit ratio was 72.1% at December 31, 1998 and 81.3% at
December 31, 1997. Additional information concerning loans is shown in Note C of
the "Notes to Consolidated Financial Statements".
Mortgage Loans Held-for-Sale
In 1998, management continued a program of selling most of its newly
originated residential real estate loans in the secondary market. The purpose of
this plan is to reduce the Company's interest rate risk and to provide funds to
support a higher level of loan originations.
The sales of residential real estate loans in the secondary market for 1998
amounted to $42,880,000. The amount of these loans originated in 1998 was
$21,316,000, with the remaining $21,564,000 being originated in prior years of
which $759,000 was identified as held-for-sale at December 31, 1997. The sale of
prior years loans in excess of those identified as held-for-sale was done to
restructure the loan portfolio, reducing interest rate risk and the level of
concentration in residential real estate loans. A net gain of $398,000 was
recorded on these sales. In addition, $603,000 of residential real estate loans
was identified as held-for-sale at December 31, 1998. All of these loans were
originated during 1998. An unrealized loss of $1,000 on these loans is included
in other operating expenses for 1998.
In 1997, the Company originated $10,754,000 of residential real estate
loans which were sold in the secondary market. In addition, during 1997,
$16,391,000 of these loans that were originated in prior years were sold. A net
gain of $178,000 was recognized on these sales in 1997. At December 31, 1997,
<PAGE>
At December 31, 1997, $759,000 of residential real estate loans were identified
as held-for-sale. Included in other operating expenses in 1997 is an unrealized
loss of $13,000 on these loans. During 1996, the Company had net losses of
$30,000 on the sale of $19,509,000 of residential real estate loans. The other
operating expenses for 1996 include an unrealized loss of $10,000 on mortgage
loans held-for-sale of $721,000 at year-end 1996.
The Company intends to continue to originate residential real estate loans
in 1999 and to sell most of the fixed-rate loans in the secondary market. The
Company services all of its sold residential mortgage loans and plans to
continue this practice.
Non-Performing Loans
The following discussion relates to the Bank's non-performing loans which
consist of those on a non-accrual basis and accruing loans which are past due
ninety days or more.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. The Company views these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Interest on these loans is recognized
only when received. The table "Non-Accrual Loans" shows the balance and the
effect on interest income of non-accrual loans for each of the periods
indicated. There were $1,245,000 of loans on a non-accrual status at December
31, 1998. The increase in non-accrual loans during 1998 of $432,000 resulted
from the deterioration of certain residential real estate and consumer loans.
Management believes there is sufficient collateral to cover any possible losses
on these loans.
The Company does not have any significant loans that qualify as "Troubled
Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and
Creditors for Troubled Debt Restructuring", at December 31, 1998 and 1997.
<PAGE>
Non-Accrual Loans
<TABLE>
- -------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans on
a cash basis $ 1,245 $ 813 $ 1,440 $ 2,181 $ 1,724
Non-accrual loans
as a percentage
of total loans .59% .35% .65% 1.13% .93%
Interest which would
have been recorded
at original rate $ 144 $ 64 $ 210 $ 214 $ 168
Interest that was
reflected in income 23 111 40 44 --
Net impact on
interest income $ (121) $ 47 $ (170) $ (170) $ (168)
- -------------------------------------------------------------------------------
</TABLE>
Set forth below are the amounts of loans outstanding as of the end of each
of the periods indicated that are 90 days and over past due and are on an
accrual basis and are not included in the table above. Management continues to
accrue interest on these loans since they are secured and in the process of
collection and are expected to be eventually paid in full.
Accruing Loans Past Due 90 Days or More
<TABLE>
- --------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accruing loans past due
90 days or more $ 1,021 $ 802 $ 986 $ 1,115 $ 1,069
Accruing loans past due
90 days or more
as a percentage
of total loans .48% .35% .45% .58% .58%
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Company measures impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, impairment may be measured based on a
loan's observable market price, or the fair value of the collateral if the loan
is collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Company has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued in such loans and
no income is recognized until all recorded amounts of interest and principal are
recovered in full.
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit loses related to loan impairment at December 31, 1998 and 1997 are as
follows:
<TABLE>
- ------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Principal amount of impaired loans $524 $523
Accrued interest --- ---
Deferred loan costs --- 1
------- -------
524 524
Less valuation allowance
at December 31, (303) (138)
-------- --------
$221 $386
- ------------------------------------------------------------
</TABLE>
The activity in the allowance account for credit losses related to impaired
loans is as follows:
<TABLE>
- -----------------------------------------------------------------
(Dollars in Thousands)
for the year ended 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Valuation allowance at January 1, $138 $128
Provision for loan impairment 294 158
Direct charge-offs (129) (148)
Recoveries --- ---
------- -------
Valuation allowance at December 31, $303 $138
- -----------------------------------------------------------------
</TABLE>
Total cash collected on impaired loans during 1998 was $506,000, of which
$483,000 was credited to the principal balance outstanding on such loans, and
$23,000 was recognized as interest income.
Total cash collected on impaired loans during 1997 was $768,000, of which
$657,000 was credited to the principal balance outstanding on such loans and
$111,000 was recognized as interest income. Interest that would have been
accrued on impaired loans was $144,000 and $64,000 in 1998 and 1997,
respectively. The valuation allowance for impaired loans of $303,000 at December
31, 1998 and $138,000 at December 31, 1997 is included in the "Allowance for
Possible Loan Losses" which amounts to $2,691,000 and $2,664,000 at December 31,
1998 and 1997, respectively.
<PAGE>
Shown in the following table is the amount of "Other Real Estate Owned" as
of the end of each of the periods indicated recorded as an asset on the
Company's books as the result of the foreclosure of certain non-performing real
estate loans.
OTHER REAL ESTATE OWNED
<TABLE>
- -----------------------------------------------------------------
(Dollars in
Thousands)
at December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other Real Estate $ 636 $ 284 $ 595 $ 364 $ 373
Owned
- -----------------------------------------------------------------
</TABLE>
Allowance and Provision
for Possible Loan Losses
The allowance for possible loan losses constitutes the amount available to
absorb estimated losses within the loan portfolio. As of December 31, 1998, the
allowance for possible loan losses was $2,691,000 as compared to the December
31, 1997 amount of $2,664,000 and the December 31, 1996 amount of $2,532,000.
The allowance for possible loan losses as a percentage of total loans
outstanding as of December 31, 1998 was 1.27%. This compares to 1.16% at the end
of 1997 and 1.15% at the end of 1996. The increase in the allowance for possible
loan losses of $27,000 was the result of management's review of loans
outstanding (see discussion on "Loan Portfolio") and non-performing loans (the
sum of non-accrual loans and accruing loans past due 90 days or more) of
$2,266,000 as of December 31, 1998 as compared to $1,615,000 as of December 31,
1997 (see tables on "Non-Accrual Loans" and "Accruing Loans Past Due 90 Days or
More"). Net charge-offs as detailed in the table "Allowance for Possible Loan
Losses" were $423,000 in 1998 or $50,000 less than the 1997 amount of $473,000.
The 1998 charge-offs were the result of losses on commercial, consumer and
residential real estate loans. The net charge-offs in 1997 were primarily the
result of losses on commercial, consumer and residential loans. Net loans
charged-off in 1996 were $581,000. The ratio of net loan charge-offs to average
loans outstanding was .19%, .21% and .28% in 1998, 1997 and 1996, respectively.
The provision for loan losses for the year ended December 31, 1998 was
$450,000 as compared to $605,000 for the year ended December 31, 1997 and
$670,000 for the year ended December 31, 1996. The decrease in 1998 from 1997
was $155,000. In 1997, the decrease in the provision was $65,000 from 1996.
The allowance for possible loan losses is established through a provision
for possible loan losses charged to expenses. Loans are charged against the
allowance for possible loan losses when management believes that the
collectibility of the principal is unlikely. The risk characteristics of the
loan portfolio are managed through various control processes, including credit
<PAGE>
evaluations of individual borrowers, periodic reviews, diversification by
industry, and the establishment of lending targets to various segments of the
portfolio. Risk is further mitigated through the application of lending
procedures such as the holding of adequate collateral and the establishment of
contractual guarantees. Management believes that these procedures provide
adequate assurances against the adverse impact from any event or set of
conditions, and that the level of the allowance for possible loan losses is
sufficient to meet the present and potential risk characteristics of the loan
portfolio, including the current level of non-performing and past-due loans.
Management ranks loans or portions thereof which present unfavorable
factors according to the degree of collectibility. Such analysis and
examinations form the principal foundation on which management makes an ongoing
evaluation as to the adequacy of the allowance for possible loan losses.
<PAGE>
<TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
- -------------------------------------------------------------------------------
(Dollars in Thousands)
For the Year Ended December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses
at Beginning of Year $ 2,664 $ 2,532 $ 2,443 $ 2,187 $ 1,953
Loans Charged-Off by Category:
Commercial 133 249 365 161 259
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 59 20 31 -- 35
Consumer/Installment 348 301 271 319 144
Other -- -- -- 1,278 --
-------- -------- -------- -------- -------
Total Loans Charged-Off 540 570 667 1,758 438
-------- -------- -------- -------- -------
Loans Recovered by Category:
Commercial 42 19 39 105 170
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 1 1 -- -- --
Consumer/Installment 74 77 47 97 82
Other -- -- -- 14 --
-------- -------- -------- -------- --------
Total Loans Recovered 117 97 86 216 252
-------- -------- -------- -------- --------
Net Loans Charged-Off 423 473 581 1,542 186
-------- -------- -------- -------- --------
Provision Charged to Expense 450 605 670 1,798 420
-------- -------- -------- -------- --------
Allowance for Loan Losses
at End of Period $ 2,691 $ 2,664 $ 2,532 $ 2,443 $ 2,187
======== ======== ======== ======== ========
Total Loans
Average $217,191 $228,245 $206,378 $190,874 $178,624
Year-End $212,437 $229,587 $220,117 $193,130 $185,215
Net Loans Charged Off to:
Average Loans .19% .21% .28% .81% .10%
Loans at Year-End .20% .21% .26% .80% .10%
Allowance for Possible
Loan Losses at Year-End 15.72% 17.76% 22.95% 63.12% 8.50%
Provision for Possible
Loan Losses 94.00% 78.18% 86.72% 85.76% 44.29%
Allowance for Possible
Loan Losses at Year-End to:
Average Loans 1.24% 1.17% 1.23% 1.28% 1.22%
Loans at Year-End 1.27% 1.16% 1.15% 1.26% 1.18%
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
Deposits
Deposits are the primary source of the Company's funds. During 1998,
deposits increased by $12,294,000 or 4.4% to a total of $294,549,000 at December
31, 1998, from a total of $282,255,000 at December 31, 1997. Average deposits
for 1998 were $289,308,000, an increase of $11,910,000 or 4.3% over the average
total deposits for 1997 of $277,398,000. Contributing to the increase in
deposits was the strong growth of checking deposits both interest and
non-interest bearing as consumers responded to a marketing campaign to attract
these types of deposits and continued growth in certificates of deposit. The
deposit growth in checking deposits and certificates of deposit was partially
offset by declines in savings accounts, money market accounts and certificates
of deposit over $100,000. The continued growth of deposits held by the Company
and the banking industry in general could be adversely affected by the flow of
funds into credit unions, mutual funds and other investment options.
The Bank's time deposits, excluding certificates of deposit under $100,000,
increased in 1998 with average balances of $124,823,000, which was $5,977,000 or
5.0% higher than the 1997 average balance of $118,846,000. Non-interest bearing
deposits averaged $35,254,000 in 1998 as compared to $31,074,000 in 1997, an
increase of $4,180,000 or 13.4%. In addition, there was an increase in average
interest-bearing demand deposits of $3,650,000 or 8.0% to $48,988,000 in 1998
from $45,338,000 in 1997. Offsetting some of this growth were declines in
average savings and club deposits of $1,569,000 or 2.5% from an average balance
of $62,746,000 in 1997 to an average balance of $61,177,000 in 1998, and
declines in average money market deposits which averaged $14,366,000 in 1998 as
compared to $14,380,000 in 1997, a decrease of $14,000. Average certificates of
deposit over $100,000 were $4,700,000 in 1998 as compared to $5,014,000 in 1997,
a decline of $314,000 or 6.3%.
<PAGE>
Short-Term Borrowings
The Bank had securities sold under agreements to repurchase totaling
$5,094,000 at December 31, 1998 and $8,804,000 at December 31, 1997. At December
31, 1998 and 1997, there were no short-term borrowings in the form of Federal
funds purchased, Federal Reserve Bank discount borrowings or Federal Home Loan
Bank borrowings. Additional information relating to short-term borrowings can be
found in Note G of the "Notes to Consolidated Financial Statements".
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to raise funds to support
asset growth, meet deposit withdrawal and other borrowing needs, maintain
reserve requirements and otherwise operate the Company on an ongoing basis. The
Company manages its assets and liabilities to maintain liquidity and earnings
stability. Among the sources of asset liquidity are money market investments,
short-term investment securities, and funds received from the repayment of loans
and short-term borrowings. At year-end 1998, cash, due from banks, Federal funds
sold and interest-bearing deposits with banks totaled $17,560,000, and
securities maturing within one year totaled $4,493,000. At year-end 1997, cash,
due from banks, Federal funds sold and interest-bearing deposits with banks
totaled $15,224,000, and securities maturing within one year were $3,861,000.
The Bank is a member of the Federal Home Loan Bank of Pittsburgh,
Pennsylvania. The Bank had interest-bearing deposits at the Federal Home Loan
Bank of Pittsburgh in the amount of $3,193,000 at December 31, 1998, and
$110,000 at December 31, 1997. These deposits are included in interest-bearing
deposits with banks on the Company's financial statements. As a result of this
relationship, the Bank places most of its short-term funds at the Federal Home
Loan Bank of Pittsburgh in place of other banks. The Federal Home Loan Bank of
Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000,
all of which was available at December 31, 1998.
The Bank had three long-term loans from the Federal Home Loan Bank of
Pittsburgh totaling $20,000,000 at December 31, 1998 and $18,000,000 at December
31, 1997. These loans were originated in 1998 and 1996 with the proceeds used to
fund the growth in residential real estate loans. The loans are for $8,000,000
originated in August, 1996, and due August, 2000, at a fixed rate of 5.89%,
$5,000,000 originated in December, 1996 and due December, 2001, at a variable
rate at LIBOR plus 3 basis points (5.36% at December 31, 1998), and $7,000,000
originated in October, 1998 and due October, 2008, at a fixed rate of 4.86%
<PAGE>
at a fixed rate of 4.86% 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. If the lender elects to convert the fixed rate loan to a variable rate,
the Bank may prepay the loan in full at the time of conversion without a
penalty. The Bank had an additional loan from the Federal Home Loan Bank at
December 31, 1997 in the amount of $5,000,000 that was paid in full in November,
1998. This loan was originated in 1996 and had a fixed interest rate of 5.96%
(see Note H of the "Notes to Consolidated Financial Statements").
Cash flows for the year ended December 31, 1998 consisted of cash used by
investing activities of $12,437,000 offset in part by cash provided by financing
activities of $9,295,000 and cash provided by operating activities of $2,572,000
resulting in a net decrease in cash and cash equivalents of $570,000. The cash
used in investing activities was primarily for the purchase of securities
available-for-sale in the amount of $66,712,000, the purchase of securities
held-to-maturity in the amount of $9,722,000 and a $2,906,000 increase in
interest-bearing deposits with banks. These cash uses were partially offset by
the proceeds from the maturities of securities available-for-sale of
$29,744,000, the proceeds from the maturities of securities held-to-maturity of
$9,403,000, the sales of securities available-for-sale of $11,094,000 and a net
decrease in loans of $16,614,000. The cash provided by financing activities was
comprised of a net increase in interest and non-interest bearing demand deposits
of $10,669,000, a net increase in certificates of deposit of $1,625,000, and a
net increase in long-term debt of $1,610,000. Partially offsetting these
increases were cash dividends paid of $1,275,000 and a net decrease in
repurchase agreements of $3,710,000. The cash provided by operating activities
was comprised principally of proceeds from mortgage loan sales of $42,879,000,
net income of $3,032,000, depreciation and amortization of $1,004,000 and the
provision for possible loan losses of $450,000, reduced in part by mortgage
loans originated for sale of $42,723,000, net investment securities gains of
$722,000 and a net increase in other assets of $739,000.
The Company recognizes the importance of maintaining adequate capital
levels to support sound, profitable growth and to encourage depositor and
investor confidence. Shareholders' equity at December 31, 1998 was $31,717,000
as compared to $30,357,000 at December 31, 1997, an increase of $1,360,000 or
4.5%. This increase was primarily attributable to retained earnings and the sale
of common shares pursuant to the Dividend Reinvestment Plan. At December 31,
1998, unrealized gains on securities available-for-sale, which are included in
shareholders' equity, amounted to $527,000 (net of tax effect of $272,000).
Included in shareholders' equity at December 31, 1997 was $1,300,000 (net of tax
effect of $670,000) of unrealized losses on securities available-for-sale (see
discussion on "Securities Available-for-Sale").
<PAGE>
The Company paid a 5% stock dividend on its common stock from authorized
but unissued shares on June 25, 1998 to all shareholders of record at the close
of business on June 5, 1998. On June 19, 1997, the Company paid a 5% stock
dividend on its common stock from authorized but unissued shares to all
shareholders of record at the close of business on May 30, 1997. The Company
also paid a 5% stock dividend on June 19, 1996 to shareholders of record on May
31, 1996. Fractional shares on the stock dividends were paid in cash. The number
of average shares and per share information in this report has been restated to
reflect these 5% stock dividends.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. In
1998, 10,390 common shares were purchased pursuant to this Plan at an average
price of $31.47 for total proceeds of $327,000. The shares purchased in 1998
were comprised of 7,611 new common shares at an average price of $30.61 for
proceeds of $233,000 and 2,779 common shares from Treasury shares at an average
price of $33.82 for proceeds of $94,000. In 1997, 12,280 common shares were
purchased pursuant to the Plan at an average price of $23.34 per share. The
total proceeds were $287,000. New common shares purchased in 1997 totaled 10,806
at an average price of $23.55 for proceeds of $254,000. The remaining purchase
of 1,474 shares were from Treasury shares at an average price of $21.77 for
proceeds of $33,000.
A Non-Employee Director Stock Option Plan was adopted by the Company in
1994. This plan provides for the awarding of stock options to the Company's
non-employee directors. No options were issued under this Plan in 1998 and 1997.
No options were exercised under this plan in 1998. During 1997, options for 911
shares of the Company's common stock were exercised by a non-employee director
at a price of $13.99 per share.
The Company also has a "Stock Option Plan" that was originally adopted in
1986 and the "1996 Stock Option Plan" that was adopted in 1996 which provide for
the granting of options to acquire the Company's common stock to officers and
key employees. In 1998, options to purchase 30,975 shares of the Company's
common stock at a price of $35.24 per share were granted to certain officers. No
options were exercised under this plan in 1998. In 1997, options to purchase
19,950 shares of the Company's common stock at a price of $22.38 per share were
granted to certain officers. During 1997, options for 6,029 shares of the
Company's common stock issued pursuant to the 1986 Plan were exercised at an
average price of $15.68 per share.
<PAGE>
The Company Stock Option Plans are accounted for under Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees"
and its related interpretations. This accounting method is permitted under
Financial Accounting Standards Board standard SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows an entity to use a fair-value based
method for valuing stock-based compensation which measures compensation cost at
the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the Standard permits entities to continue accounting for employee
stock options and similar instruments under Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees and Its Related
Interpretations. Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair-value based method of accounting defined in
SFAS No. 123 had been applied. The Company's stock option plans are accounted
for under APB Opinion No. 25. Additional information relating to the Company's
Stock Option Plans can be found in Notes A.9 and N of the "Notes to Consolidated
Financial Statements".
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Additional
information relating to the Company's and Bank's capital requirements and
capital ratios can be found in Note S of the "Notes to Consolidated Financial
Statements".
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate
equity-to-assets ratio. Another significant effect of inflation is on other
expenses, which tend to rise during periods of general inflation.
<PAGE>
Management believes the most significant impact on financial results is the
Company's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain an essentially balanced
position between interest-sensitive assets and liabilities in order to protect
against wide interest-rate fluctuations.
Year 2000
The Company has adopted a Year 2000 policy to address the "Year 2000" Issue
concerning the inability of certain information systems and automated equipment
to properly recognize and process dates containing the Year 2000 and beyond. If
not corrected, these systems and equipment could produce inaccurate or
unpredictable results commencing on January 1, 2000. The Company, similar to
most financial services providers, is particularly vulnerable to the potential
impact of the Year 2000 Issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware, and
other equipment both within the Company's direct control and outside of the
Company's ownership, yet with which the Company electronically or operationally
interfaces.
In order to address the Year 2000 Issue, the Company has developed and
implemented a five phase compliance plan divided into the following major
components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and
Testing; and (5) Implementation. The Company has completed the first three
phases of the plan for all of its mission-critical systems and is currently
working on the final two phases.
The Company has identified its mission-critical systems as those that
affect the Company's ability to process banking transactions and its general
accounting systems. Such systems include deposit, loan and trust accounting,
check and deposit processing and branch teller equipment.
The Company purchases most of its computer software from major outside
providers of bank software. A significant component of the Year 2000 plan is to
install the Year 2000 compliant software provided by these vendors and also to
test these supplied systems. The Company's major software providers have
informed the Company that, based on tests they have conducted and continue to
conduct, they believe their respective systems to be Year 2000 compliant. In
addition, the Company is conducting its own tests on these systems provided by
vendors. The Company also has some internally generated programmed software.
This software has been corrected for Year 2000 and is in final testing. The
Company anticipates that all mission-critical systems will be tested by June
1999.
<PAGE>
The Company has reviewed the impact of Year 2000 on other equipment and
systems such as heating, air conditioning, telecommunications, electric service,
vaults, photocopiers, personal computers, printers and other equipment where
necessary. Some of this equipment, such as personal computers, has been
replaced. Other items such as vaults, heating, air conditioning, photocopiers
and printers have been tested and found "not date sensitive". The Company's
providers of telecommunications and electric service have been contacted. These
providers have indicated they do not expect any interruption of service in the
Year 2000.
Other important segments of the Year 2000 plan are to identify those
suppliers and customers whose possible lack of Year 2000 preparedness might
expose the Company to financial loss. Included in this process was
communications to all the Company's customers and identification of loan and
deposit customers whose failure to address the Year 2000 Issue might impact
their banking relationship. As a result of this communication, the Company has
identified those customers who may be affected by the Year 2000. Risk factors
have been assigned to these customers. The Company does not anticipate any
significant loss as a result of these risks. The Company has initiated
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company has developed contingency plans to address any or all systems
that, despite all testing, still do not operate correctly in the Year 2000. The
contingency plans provide for manual and personal computer based systems to
process checks, deposits and loan transactions. The Company will increase its
inventories of the various required supplies, such as new account and loan
forms, deposit withdrawal forms and other pre-printed forms, available at the
Company's Main Office and branch offices. Alternative communications systems
have been established and alternative power sources are being investigated.
These plans will be finalized and tested during the first half of 1999. At this
time, the Company cannot estimate the cost, if any, that might be required to
implement such contingency plans.
During 1998, the Company spent $496,000 on Year 2000 compliance matters. As
of December 31, 1998, $851,000 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 $177,000, replacement of
mortgage lending software for $17,000 and enhancements to banking and trust
systems of $12,000. Additional expenses expected in 1999 include $70,000 for an
alternative electric power system, $40,000 for replacing an automated teller
<PAGE>
machine, $26,000 for replacing additional personal computers, $25,000 for branch
new account systems, $23,000 for additional mortgage lending software, $15,000
for check processing software and $50,000 for other banking systems. The
expenses related to Year 2000 are financed by the general revenues of the
Company and are included in the Company's other operating expenses in the
Company's financial statement.
The Company anticipates that its total Year 2000 project cost will not
exceed $1,100,000. This estimated project cost is based upon currently available
information. The aforementioned Year 2000 project cost estimate also may change
as the Company progresses in its Year 2000 program and obtains additional
information and conducts further testing. At this time, no significant projects
have been delayed as a result of the Company's Year 2000 effort.
Financial institution regulators have intensively focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of senior management
and directors. Year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with regulatory exams. The Federal
banking agencies have highly prioritized Year 2000 compliance in order to avoid
major disruptions to the operations of financial institutions and the country's
financial systems when the new century begins.
The Federal banking agencies have been conducting Year 2000 compliance
examinations. The failure to implement an adequate Year 2000 program can be
identified as an unsafe and unsound banking practice. The Company and the Bank
are subject to regulation and supervision by the Federal Reserve Bank and the
Comptroller of the Currency which regularly conducts reviews of the safety and
soundness of the Company's operations, including the Company's progress in
becoming Year 2000 compliant. The regulatory agencies have established
examination procedures which contain three categories of ratings:
"Satisfactory", "Needs Improvement" and "Unsatisfactory". Institutions that
receive a Year 2000 rating of Unsatisfactory may be subject to formal
enforcement action, supervisory agreements, cease and desist orders, civil money
penalties, or the appointment of a conservator. In addition, Federal banking
agencies will be taking into account Year 2000 compliance programs when
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.
<PAGE>
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.
Earnings Per Common Share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" in 1987. SFAS No. 128 eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. Prior periods' earnings per share
calculations have been restated to reflect the adoption of SFAS No. 128 (see
Note A.12. of the "Notes to Consolidated Financial Statements").
Accounting for the Impairment
of Long-Lived Assets
The Company has adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain intangibles and how to value long-lived assets to
be disposed of. The adoption of SFAS No. 121 had no material effect on the
Company's consolidated financial position or results of operations.
Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
The Company has adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", as amended by
SFAS No. 127, which provides accounting guidance on transfers of financial
<PAGE>
assets, servicing of financial assets and extinguishment of liabilities. This
statement is effective for transfers of financial assets, servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
Adoption of this statement had no material impact on the Company's consolidated
financial position or results of operations.
Reporting Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires entities presenting a complete set of financial statements to include
details of comprehensive income. Comprehensive income consists of net income or
loss for the current period and income, expenses, gains and losses that bypass
the income statement and are reported directly in a separate component of
equity. The Company's financial statements have been reclassified to reflect the
provision of SFAS No. 130 (see Note A.7 of the "Notes to Consolidated Financial
Statements").
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.
Quarterly Financial Data (Unaudited)
The following represents summarized quarterly financial data of the
Company, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation.
Net income per share of common stock has been restated to reflect retroactively
the 5% stock dividends of June, 1998, May, 1997 and May, 1996.
<PAGE>
QUARTERLY FINANCIAL DATA (Unaudited)
Dollars in Thousands,
except per share data
<TABLE>
Three Months Ended
1998 Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C>
Interest income $6,234 $6,393 $6,355 $6,385
Net interest income 3,504 3,643 3,650 3,699
Provision for possible
loan losses 112 113 113 112
Net gain (loss) on sale
of securities and mortgages 350 135 495 140
Income before income taxes 630 1,175 1,219 1,039
Net income $ 498 $ 871 $ 895 $ 768
====== ====== ====== ======
Basic net income per share $ 0.28 $ 0.51 $ 0.52 $ 0.45
====== ====== ====== ======
Diluted net income per share $ 0.28 $ 0.51 $ 0.51 $ 0.45
====== ====== ====== ======
1997 Dec. 31 Sept. 30 June 30 March 31
Interest income $6,471 $6,631 $6,312 $6,030
Net interest income 3,673 3,833 3,634 3,473
Provision for possible
loan losses 162 143 187 113
Net gain (loss) on sale
of securities and mortgages 424 72 144 139
Income before income taxes 1,289 1,191 1,132 967
Net income $ 912 $ 855 $ 812 $ 704
====== ====== ====== ======
Basic net income per share $ 0.53 $ 0.49 $ 0.48 $ 0.42
====== ====== ====== ======
Diluted net income per share $ 0.53 $ 0.49 $ 0.48 $ 0.42
====== ====== ====== ======
</TABLE>
<PAGE>
Item 7A. Quantitative and Qualitative Discussion About Market Risk
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 (56.5% of total loans) and commercial loans
supported by real estate (13.9% of total loans) in its loan portfolio (see Note
Q of the "Notes to Consolidated Financial Statements"). These loans are subject
to interest and economic risks. The Bank also originates residential real estate
loans for sale in the secondary market. Such loans are identified as "Mortgage
Loans Held-for-Sale" on the Company's Balance Sheet and are subject to interest
rate risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does
not own any trading assets and does not have any hedging transactions in place
such as interest rate swaps (see discussions on "Investment Securities" and
"Securities Available-for-Sale").
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the extent to which net interest
income would change due to changes in the level of interest rates. The objective
of interest rate sensitivity management is to reduce a company's vulnerability
to future interest rate fluctuations and to enhance consistent growth of net
interest income. The Bank's Asset/Liability Management Committee meets
semi-monthly to examine, among other subjects, interest rates for various
products and interest sensitivity.
Rate sensitivity arises from the difference between the volumes of assets
which are rate-sensitive as compared to the volumes of liabilities which are
rate-sensitive. A comparison of interest-rate-sensitive assets to interest-
rate-sensitive liabilities is monitored by the Bank on a regular basis using
several time periods. The mismatch of assets and liabilities in a specific time
frame is referred to as interest sensitivity gap. Generally, in an environment
of rising interest rates, a negative gap (interest sensitive liabilities being
greater than interest sensitive assets in a given period of time) will decrease
net interest income, and in an environment of falling interest rates, a negative
gap will increase net interest income.
<PAGE>
Assets and liabilities are allocated to a specific time period based on
their scheduled repricing date or on an historical basis. At December 31, 1998,
assets of $143,809,000 (40% of total assets) were subject to interest rate
changes within one year. This compares to assets subject to interest rate
changes within one year of $151,613,000 (44% of total assets) at the end of 1997
and $149,441,000 (46% of total assets) at the end of 1996. Liabilities subject
to rate change within one year were $175,047,000, $166,220,000 and $167,266,000
in 1998, 1997 and 1996, respectively. A negative one-year gap position of
$31,238,000 existed as of December 31, 1998. The gap positions at December 31,
1997 and 1996 were negative $14,607,000 and negative $17,825,000, respectively.
The ratio of rate-sensitive assets to rate-sensitive liabilities for the
one-year time frame was .82 at the end of 1998, compared to .91 at the end of
1997 and .89 at the end of 1996. The "Interest Sensitivity Analysis" in the
following table presents a sensitivity gap analysis of the Company's assets and
liabilities at December 31, 1998 for five time-intervals. The Company's negative
gap position for the one year time frame increased in 1998 as a result of an
increase in interest-bearing demand deposits with a maturity of one year or less
and an extension of loan maturities. The change in the deposit mix was due to
consumer concerns over lower interest rates paid on deposits. The change in loan
maturities was due in part to customers refinancing at lower interest rates and
the sale of residential mortgage loans. Management intends to continue to
purchase adjustable rate securities, make adjustable rate loans, market
longer-term certificates of deposit and sell fixed-rate mortgage loans to
maintain an acceptable gap position.
<PAGE>
Interest Sensitivity Analysis
<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 $ 3,301 $ --- $ --- $ --- $ --- $ 3,301
Federal Funds Sold 2,000 --- --- --- --- 2,000
Inv Securities 21,980 9,627 18,944 44,252 21,309 116,112
Loans Held-for-Sale 603 --- --- --- --- 603
Loans 35,007 15,334 24,754 72,841 61,810 209,746
Other Assets 12,259 --- --- --- 14,475 26,734
------- -------- -------- ------- -------- --------
TOTAL ASSETS $75,150 $24,961 $ 43,698 $117,093 $ 97,594 $358,496
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 38,885 $ 38,885
Int-Bearing
Deposits 89,179 30,706 37,068 36,608 62,103 255,664
Securities Sold
Under Agreements
to Repurchase 5,094 --- --- --- --- 5,094
Long-Term Debt --- 13,000 --- 7,000 --- 20,000
Other --- --- --- --- 7,136 7,136
Capital --- --- --- --- 31,717 31,717
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $ 94,273 $43,706 $ 37,068 $43,608 $139,841 $358,496
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(19,123)$(18,745)$ 6,630 $73,485 $ 42,247 $ ---
Cumulative Int
Sensitivity Gap $(19,123)$(37,868)$(31,238) $42,247 $ --- $ ---
Cumulative Gap
RSA/RSL 79.7% 72.6% 82.5% 119.3% 100.0%
</TABLE>
(1) Historically, non-interest-bearing deposits reflect insignificant change in
deposit trends and, therefore, the Company classifies these deposits over
five years.
<PAGE>
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest-rate changes that are characteristic of various interest-rate-sensitive
assets and liabilities. Consequently, even though the Company currently has a
negative gap position because of the unequal sensitivity of these assets and
liabilities, management believes that this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
Bank's net income. This model produces an interest rate exposure report that
forecasts changes in the market value of portfolio equity under alternative
interest rate environments. The market value of portfolio equity is defined as
the present value of the Company's existing assets, liabilities and off-balance
sheet instruments. The calculated estimates of changes in the market value of
portfolio value at December 31, 1998 are as follows:
<PAGE>
- -------------------------------------------------------------------------------
Dollars in Thousands at December 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
Market Value of Percent of
Changes in Rate Portfolio Equity Change
- --------------------------- ---------------------- ------------------
<S> <C> <C> <C>
+ 400 basis points 25,838 (7.7)%
+ 300 basis points 26,533 (5.2)
+ 200 basis points 27,298 (2.5)
+ 100 basis points 28,153 0.6
Flat Rate 27,994 ---
- 100 basis points 29,013 3.6
- 200 basis points 32,667 16.7
- 300 basis points 39,611 41.5
- 400 basis points 47,275 68.9
- -------------------------------------------------------------------------------
</TABLE>
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest rate sensitivity of the Company's assets and
liabilities as well as the estimated effect of changes in interest rates on the
market value of portfolio equity could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
<PAGE>
Item 8. Financial Statements and Supplementary Data
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
- -------------------------------------------------------------------------------
(Dollars in Thousands) At December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 12,259 $ 12,629
Federal Funds Sold 2,000 2,200
--------- ---------
Total Cash and Cash Equivalents 14,259 14,829
Interest-Bearing Deposits With Banks 3,301 395
Investment Securities
(Fair Value: 1998 - $17,920; 1997- $17,946) 17,723 17,756
Securities Available-for-Sale at Fair Value 98,389 73,024
Mortgage Loans Held-for-Sale 603 759
Total Loans, Net of Unearned Discount 212,437 229,587
Less: Allowance for Possible Loan Losses (2,691) (2,664)
--------- ---------
Net Loans 209,746 226,923
Premises and Equipment, Net 6,885 7,299
Accrued Interest Income 2,542 2,232
Other Real Estate Owned 636 284
Other Assets 4,412 3,237
--------- ---------
TOTAL ASSETS $ 358,496 $ 346,738
========= =========
LIABILITIES
Deposits
Non-Interest-Bearing Deposits $ 38,885 $ 32,800
Interest-Bearing Deposits
(Includes Certificates of Deposit in Excess
of $100: 1998 - $4,726; 1997 - $4,358) 255,664 249,455
--------- ---------
Total Deposits 294,549 282,255
Securities Sold Under Agreements to Repurchase 5,094 8,804
Long-Term Debt 20,000 18,390
Accrued Interest Payable 3,536 3,466
Other Liabilities 3,600 3,466
--------- ---------
TOTAL LIABILITIES 326,779 316,381
--------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $5.00 a share -- --
Authorized: 500,000 shares, none issued
Common Stock, Par Value $5.00 a share
Authorized: 10,000,000 shares
Issued: 1,745,725 shares in 1998 and
1,655,413 shares in 1997 8,729 8,277
Additional Paid-in Capital 13,873 11,014
Retained Earnings 9,023 10,250
Less: Treasury Stock at Cost: None in 1998 and
2,779 shares in 1997 -- (94)
Employee Stock Ownership Plan Debt (435) (390)
Accumulated Other Comprehensive Income 527 1,300
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 31,717 30,357
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 358,496 $ 346,738
========= =========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
- -------------------------------------------------------------------------------
(Dollars in Thousands, except per share data)
For the Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 18,885 $ 19,943 $ 18,052
Interest on Investment Securities
Taxable 5,002 4,592 4,386
Tax-Exempt 1,269 837 617
Interest on Deposits with Banks and
Federal Funds Sold 211 72 80
-------- -------- --------
Total Interest Income 25,367 25,444 23,135
-------- -------- --------
INTEREST EXPENSE
Interest on Deposits 9,466 9,312 8,622
Interest on Short-Term Borrowings 265 372 347
Interest on Long-Term Debt 1,140 1,147 609
-------- -------- --------
Total Interest Expense 10,871 10,831 9,578
-------- -------- --------
NET INTEREST INCOME 14,496 14,613 13,557
Provision for Possible Loan Losses 450 605 670
-------- -------- --------
Net Interest Income After Provision
for Possible Loan Losses 14,046 14,008 12,887
-------- -------- --------
OTHER INCOME
Trust Revenue 1,225 1,050 696
Service Charges on Deposit Accounts 1,594 1,349 1,083
Investment Securities Gains, Net 722 601 308
Gain (Loss) on Sale of Mortgage Loans 398 178 (30)
Other Operating Income 641 645 585
-------- -------- --------
Total Other Income 4,580 3,823 2,642
-------- -------- --------
OTHER EXPENSES
Salaries and Employee Benefits 6,385 6,033 5,615
Net Occupancy and Equipment Expense 2,118 2,178 2,184
Other Operating Expenses 6,060 5,041 3,772
-------- -------- --------
Total Other Expenses 14,563 13,252 11,571
-------- -------- --------
Income Before Income Taxes 4,063 4,579 3,958
Applicable Income Taxes 1,031 1,296 1,136
-------- -------- --------
NET INCOME $ 3,032 $ 3,283 $ 2,822
======== ======== ========
Unrealized Gain (Loss) on Securities
Net of Tax $ (1,108) $ 354 $ (282)
-------- -------- --------
Comprehensive Income $ 1,924 $ 3,637 $ 2,540
======== ======== ========
PER SHARE DATA
Basic Net Income $ 1.76 $ 1.92 $ 1.68
Diluted Net Income $ 1.75 $ 1.92 $ 1.68
Cash Dividends $ 0.74 $ 0.67 $ 0.61
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
(Dollars in Thousands)
- -------------------------------------------------------------------------------
Accumulated
Add. Other
Common Paid-In Retained Treas. ESOP Comprehensive
Stock Capital Earnings Stock Debt Income Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan 1, 1996 7,355 7,968 9,567 --- (643) 520 24,767
1996
Net Income 2,822 2,822
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(10,191
shares) 51 133 184
Sale of
Common Stock
under Stock
Option Plan
(5,731 shs) 28 78 106
Purchase of
Treasury Stock
(4,431 shs) (102) (102)
Sale of
Treasury Stock
under Div
Reinv Plan
(3,570) (18) 82 64
Cash Div Paid (1,011) (1,011)
Stock Div
Paid of 5%
(73,712 shs) 369 1,032 (1,401) ---
Cash in Lieu
of Fractional
Shares (2) (2)
ESOP Loan
Pymt 131 131
Unall ESOP
Shares
Committed
to
Employees
(5,636 shs) 19 19
Unreal Net
Loss on
Sec Avail-
for-Sale (173) (173)
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1996 7,803 9,212 9,975 (20) (512) 347 26,805
1997
Net Income 3,283 3,283
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(10,036
shares) 50 204 254
Sale of
Common
Stock
under
Stock
Option
Plan (6,610
shares) 33 74 107
Purchase of
Treasury
Stock
(3,279)
shares) (107) (107)
Sale of
Treas Stock
under
Dividend
Reinv Plan
(1,361
shares) 33 33
Cash
Dividends
Paid (1,139) (1,139)
Stock
Dividend
of 5%
(78,132
shares) 391 1,474 (1,865) ---
Cash in
Lieu of
Fractional
Shares (4) (4)
ESOP Loan
Pymt 122 122
Unall ESOP
Shares
Committed
to
Employees
(4,415
shares) 50 50
Unreal Net
Gain on
Sec Avail-
for-Sale 953 953
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1997 $ 8,277 $11,014 $10,250 $ (94)$ (390) $1,300 $30,357
1998
Net Income 3,032 3,032
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(7,611
shares) 38 195 233
Sale of
Treasury
Stock
under
Dividend
Reinv
Plan
(2,779
shares) 94 94
Cash
Dividends
Paid (1,275) (1,275)
Stock
Dividend
of 5%
(82,701
shares) 414 2,564 (2,978) ---
Cash in
Lieu of
Fractional
Shares (6) (6)
ESOP Loan
Payment 455 455
Loan to ESOP (500) (500)
Unallocated
ESOP Shares
Committed
to Employees
(5,353 shares) 100 100
Unrealized
Net Loss
on Securities
Available-
for-Sale (773) (773)
------ ------- ------ --- ----- ---- -------
Balance
at Dec
31, 1998 $8,729 $13,873 $9,023 --- $(435) $527 $31,717
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
- ------------------------------------------------------------------------------
(Dollars in Thousands)
For the Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,032 $ 3,283 $ 2,822
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in)
Operating Activities:
Provision for Possible Loan Losses 450 605 670
Depreciation and Amortization 1,004 884 748
Accretion of Security Discounts (78) (70) (130)
Amortization of Security Premiums 242 124 179
Deferred Taxes (395) (277) (99)
Amortization of Deferred Fees on Loans (136) (170) (110)
Investment Securities Gains, Net (722) (601) (308)
Loss (Gain) on Sale of Mortgage Loans (397) (178) 30
Mortgage Loans Originated for Sale (42,723) (27,183) (24,690)
Mortgage Loan Sales 42,879 27,145 19,509
Changes in Assets and Liabilities:
Increase in Accrued Interest Income (310) (212) (142)
Increase (Decrease) in Accrued Int Payable 70 261 (220)
Decrease (Increase) in Other Assets (740) (545) 1
Increase (Decrease) in Other Liabilities 396 625 (6)
-------- -------- --------
Net Cash Provided by (Used in)
Operating Activities 2,572 3,69 (1,746)
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from Maturities of
Securities Available-for-Sale 29,744 13,986 15,401
Proceeds from Maturities of
Securities Held-to-Maturity 9,403 8,047 5,671
Proceeds from Sales of Securities
Available-for-Sale 11,094 13,279 19,842
Proceeds from Sales of Securities
Held-to-Maturity 248 -- --
Purchase of Securities Available-for-Sale (66,712) (40,485) (32,686)
Purchase of Securities Held-to-Maturity (9,722) (5,838) (6,905)
Net (Increase) Decrease in Interest-Bearing
Deposits With Banks (2,906) (110) 550
Net (Increase) Decrease in Loans 16,614 (10,130) (22,614)
Purchase of Premises and Equipment (494) (1,126) (997)
Proceeds from Sale of Other Real Estate Owned 294 846 361
-------- -------- --------
Net Cash Used in Investing Activities (12,437) (21,531) (21,377)
------ -------- --------
FINANCING ACTIVITIES
Net Increase in Interest
and Non-Interest-Bearing
Demand Deposits and Savings Accounts 10,669 3,804 3,143
Net Increase in Certificates of Deposit 1,625 10,783 10,423
Net Increase in Long-Term Debt 1,610 -- 18,000
Net Increase in ESOP Debt (45) -- --
Net Increase (Decrease) in
Repurchase Agreements (3,710) 5,009 (2,302)
Net Decrease in Short-Term Borrowings -- -- (7,000)
Proceeds from Issuance of Common Stock 333 361 290
Purchase of Treasury Stock -- (107) (102)
Proceeds from Sale of Treasury Stock 94 33 64
Cash Dividends Paid (1,275) (1,139) (1,011)
Cash in Lieu of Fractional Shares (6) (4) (2)
-------- -------- --------
Net Cash Provided by Financing Activities 9,295 18,740 21,503
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents (570) 900 (1,620)
Cash and Cash Equivalents, January 1, 14,829 13,929 15,549
-------- -------- --------
Cash and Cash Equivalents, December 31, $ 14,259 $ 14,829 $ 13,929
========= ======== ========
- -----------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands,
except per share date.)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
First Colonial Group, Inc. (the "Company") is a one bank holding company of
Nazareth National Bank and Trust Company (the "Bank"). The Bank is an
independent community bank providing retail and commercial banking services
through its thirteen offices in Northampton, Lehigh, and Monroe counties in
northeastern Pennsylvania.
The Bank competes with other banking and financial institutions in its
primary market communities, including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings and
loan associations, credit unions and money market funds actively compete for
savings and time deposits and for various types of loans. Such institutions, as
well as consumer finance and insurance companies, may be considered competitors
of the Bank with respect to one or more of the services it renders.
The Company and the Bank are subject to regulations of certain state and
Federal agencies and, accordingly, they are periodically examined by those
regulatory agencies. As a consequence of the extensive regulation of commercial
banking activities, the Bank's business is particularly susceptible to being
affected by state and Federal legislation and regulation which may have the
effect of increasing the cost of doing business.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Bank and First C. G. Company, Inc. All
significant inter-company balances and transactions have been eliminated. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenditures
for the periods. Therefore, actual results could differ significantly from those
estimates.
2. Investment Securities
As required by Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the Company
classifies debt and marketable equity securities in three categories: trading,
available-for-sale and held-to-maturity. Trading securities are measured at fair
value, with unrealized holding gains and losses included in income. The Company
does not have any securities classified as trading securities.
<PAGE>
Available-for-sale securities are measured at fair value, with unrealized gains
and losses, net of tax effect, reported in equity. Held-to-maturity securities
are carried at amortized cost, and the Company has the positive intent and
ability to hold such securities until maturity. The Company's classification of
its investment securities into these categories is detailed in "Note B -
Investment Securities". Investment securities held-to-maturity are principally
debt securities and are carried at cost, net of unamortized premiums and
discounts, which are recognized in interest income using the interest method
over the period to maturity. Gains or losses on disposition are based on the net
proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
3. Mortgage Loans Held-for-Sale
Mortgage loans held-for-sale are carried at the lower of aggregate cost or
fair value. Unrealized losses are included in other operating expenses. Realized
gains and losses from mortgage loan sales are included in total other income.
Interest and fee income earned during the holding period are included in
interest and fees on loans.
4. Loans and Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for possible loan losses. Interest income on loans is
accrued using various methods which approximate a constant yield.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. Upon such discontinuance, all unpaid accrued interest is reversed.
The allowance for possible loan losses is established through a provision
for loan losses charged to expenses. Loans are charged against the allowance for
possible loan losses when management believes that the collectibility of
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb possible loan losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay.
<PAGE>
As required by SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures", the Company measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that, as a practical expedient,
impairment may be measured based on the observable market price of a loan, or
the fair value of the collateral if the loan is collateral dependent. The
Company measures impairment based on the fair value of the collateral when it
determines that foreclosure is probable (see Note E).
5. Loan Fees and Related Costs
Certain origination and commitment fees, and certain direct loan
origination costs are deferred and amortized over the contractual life of the
related loans. This results in an adjustment of the yield on the related loan.
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of buildings and land improvements is computed
principally on the straight-line method, and for equipment, principally on an
accelerated method, over the estimated useful lives of the assets.
7. Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This standard requires entities presenting a complete set
of financial statements to include details of comprehensive income.
Comprehensive income consists of net income or loss for the current period and
income, expenses, gains, and losses that bypass the income statement and are
reported directly in a separate component of equity. These financial statements
have been reclassified to reflect the provisions of SFAS No. 130.
<PAGE>
The income tax effects allocated to comprehensive income is as follows:
<TABLE>
- --------------------------------------------------------------------------------
For the Year Ended December 31, Before Tax Tax Net of Tax
Amount Expense Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
- ------------------------------------------
Unrealized Gains on Securities
Unrealized Holding Gains (Losses)
Arising During Period $ (773) $(263) $ (510)
Less: Reclassification
Adjustment for Gains (Losses)
Realized in Net Income (906) (308) (598)
------- ----- -------
Other Comprehensive Income, Net $(1,679) $(571) $(1,108)
------- ----- -------
1997
- -----------------------------------------
Unrealized Gains on Securities
Unrealized Holding Gains
Arising During Period $ 953 $ 324 $ 629
Less: Reclassification
Adjustment for Gains (Losses)
Realized in Net Income (417) (142) (275)
------- ----- -------
Other Comprehensive Income, Net $ 536 $ 182 $ 354
------- ----- -------
1996
- -----------------------------------------
Unrealized Gains on Securities
Unrealized Holding Gains (Losses)
Arising During Period $ (173) $ (59) $ (114)
Less: Reclassification
Adjustment for Gains (Losses)
Realized in Net Income (255) (87) (168)
------- ----- -------
Other Comprehensive Income, Net $ (428) $ (146) $ (282)
------- ----- -------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
8. Income Taxes
The Company, in accordance with SFAS No. 109, "Accounting for Income
Taxes", computes the tax expense using the liability method whereby deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation,
loan origination fees, provision for possible loan losses, unrealized gains and
deferred expenses
9. Stock Option Plans
Under Stock Option Plans, options to acquire shares of common stock are
granted to certain officers and directors.
The Company Stock Option Plans are accounted for under Accounting
Principles Board (APB) Opinion 25 "Accounting for Stock Issued to Employees" and
its related interpretations". This accounting method is permitted under SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows an entity to
use a fair value-based method for valuing stock-based compensation which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the Standard permits entities to continue
accounting for employee stock options and similar instruments under APB Opinion
No. 25. Entities that continue to account for stock options using APB Opinion
No. 25 are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied (see Note N).
10. Employee Benefit Plans
The Company has established an Employee Stock Ownership Plan (ESOP)
covering eligible employees with one year of service as defined by the ESOP. The
Company accounts for its ESOP in accordance with Statement of Position (SOP)
93-6, "Employer's Accounting for Employee Stock Ownership Plans", issued by the
Accounting Standards Division of the American Institute of Certified Public
Accountants (AICPA). SOP 93-6 is applied to shares acquired by the ESOP after
December 31, 1992. For issuances of stock to the ESOP after December 15, 1989,
but prior to December 31, 1992, the shares allocated method is used to recognize
expense in the Company's financial statements. For issuances of stock prior to
December 15, 1989, the Company will continue the cash contribution method of
recognizing expense to the extent that it exceeds the cumulative expense that
would be recognized under the shares allocated method (see Note K).
<PAGE>
Employees who qualify may elect to participate in a deferred salary savings
401(k) plan. The Company contributes $.50 for each $1.00 up to the first 5% that
each employee contributes. The Company also has an executive compensation plan
which provides additional death, medical and retirement benefits to certain
officers (see Note L).
The Company has a deferred compensation plan involving the Directors of the
Company. This plan provides defined annual payments for 15 years beginning at
age 65 or death in exchange for the Directors deferring the payment of a portion
of their fees (see Note L)
The Company records the cost of post-retirement medical benefits on the
accrual basis as employees render service to earn the benefits and records a
liability for the unfunded accumulated post-retirement benefit obligation. The
transition obligation, representing the unfunded and unrecognized accumulated
past-service benefit obligation for all plan participants, will be amortized on
a straight-line basis over a 20-year period (see Note M).
11. Trust Assets and Revenue
Assets held by the Trust Department of the Bank in fiduciary or agency
capacities for its customers are not included in the accompanying consolidated
balance sheets since such assets are not assets of the Company. Operating
revenue and expenses of the Trust Department are included under their respective
captions in the accompanying consolidated statements of income and are recorded
on the accrual basis.
12. Per Share Information
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" in 1997. SFAS No. 128 eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. Prior periods earnings per share
calculations have been restated to reflect the adoption of SFAS No. 128. Basic
and diluted earnings per share are calculated as follows. There is no difference
between basic and diluted earnings per share for the years ended December 31,
1997 and 1996.
<PAGE>
<TABLE>
For the Year Ended December 31, Average
Income Shares Per Share
(numerator) (denominator) Amount
1998
- ------------------------------------------
<S> <C> <C> <C>
Net Income $3,032
Basic Earnings Per Share
Income Available to Common Shareholders $3,032 1,719,096 $1.76
Effect of Dilutive Securities
Stock Options 7,473
------ --------- -----
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $3,032 1,726,569 $1.75
------ --------- -----
1997
- ------------------------------------------
Net Income $3,283
Basic Earnings Per Share
Income Available to Common Shareholders $3,283 1,701,658 $1.92
Effect of Dilutive Securities
Stock Options 5,070
------ --------- -----
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $3,283 1,706,728 $1.92
------ --------- -----
1996
- ------------------------------------------
Net Income $2,822
Basic Earnings Per Share
Income Available to Common Shareholders $2,822 1,680,927 $1.68
Effect of Dilutive Securities
Stock Options 2,842
------ --------- -----
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $2,822 1,683,769 $1.68
------ --------- -----
</TABLE>
Average common shares outstanding in 1998, 1997 and 1996 do not include 24,859,
27,949 and 32,964, respectively of average weighted unallocated shares held by
the ESOP. The exclusion of these unallocated shares held by the ESOP is due to
the Company's adoption of SOP 93-6 (see Note A.8). Share and per share
information have been restated to reflect the 5% stock dividends of June, 1998,
May, 1997 and May, 1996.
<PAGE>
13. Statement of Cash Flows
The Company considers cash, due from banks and Federal funds sold as cash
equivalents for the purposes of the Consolidated Statements of Cash Flows.
Cash paid for interest was $9,800,000, $11,120,000 and $9,798,000, for the
years ended December 31, 1998, 1997 and 1996, respectively. Cash paid for taxes
was $1,458,000 in 1998, $1,465,000 in 1997 and $1,353,000 in 1996.
14. Advertising Costs
The Company expenses advertising costs as incurred
15. Transfer and Servicing of Assets and
Extinguishments of Liabilities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishments of liabilities. This
statement is effective for transfers of financial assets, servicing of financial
assets, and extinguishments of liabilities occurring after December 31, 1996.
Adoption of this new statement did not have a material impact on the Company's
consolidated financial position or results of operations.
16. 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.
17. Stock Dividends
The Company reduced retained earnings and increased additional
paid-in-capital for the year ended December 31, 1994 to charge retained earnings
for the stock dividends paid at the fair value of additional shares issued which
were previously recorded at par value.
<PAGE>
18. Reclassifications
Certain reclassifications of prior years amounts have been made to conform
to the 1998 presentation.
NOTE B - INVESTMENT SECURITIES
The Company classifies debt and marketable equity securities in three
categories: trading, available-for-sale and held-to-maturity as required by
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Trading securities are
measured at fair value, with unrealized holding gains and losses included in
income. The Company had no trading securities in 1998, 1997 and 1996.
Available-for-sale securities are measured at fair value, with unrealized gains
and losses reported, net of tax, as a component in equity. Held-to-maturity
securities are carried at amortized cost.
Available-for-sale securities had unrealized holding gains of $527,000 (net
of the tax effect of $272,000) in 1998 and unrealized holding gains of
$1,300,000 (net of the tax effect of $670,000) in 1997. At December 31, the
equity securities in the available-for-sale category include Federal Reserve
Bank stock in the amount of $256,000 in 1998 and $239,000 in 1997, and Federal
Home Loan Bank stock in the amount of $1,835,000 in 1998 and $1,699,000 in 1997
which are carried at cost.
The amortized cost, unrealized gains and losses, and fair value of the
Company's available-for-sale and held-to-maturity securities at December 31,
1998 and 1997 are summarized as follows.
<PAGE>
<TABLE>
1998
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ 7,026 $ 99 $ -- $ 7,125
U. S. Government Agency 24,482 94 135 24,441
State and Political Subdivisions 27,860 721 115 28,466
Mortgage-Backed Securities 33,322 85 266 33,141
Equity Securities 4,900 519 203 5,216
------- ------- ------- -------
Total $97,590 $ 1,518 $ 719 $98,389
</TABLE>
<TABLE>
1997
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury $ 9,008 $ 58 $ -- $ 9,066
U. S. Government Agency 14,512 72 28 14,556
State and Political Subdivisions 16,865 465 -- 17,330
Mortgage-Backed Securities 26,791 116 95 26,812
Equity Securities 3,878 1,393 11 5,260
------- ------- ------- -------
Total $71,054 $ 2,104 $ 134 $73,024
</TABLE>
<TABLE>
1998
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Government Agency $ 4,992 $ 35 $ 1 $ 5,026
State and Political Subdivisions 6,770 179 6 6,943
Mortgage-Backed Securities 5,961 39 49 5,951
------- ------- ------- -------
Total $17,723 $ 253 $ 56 $17,920
</TABLE>
<TABLE>
1997
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Government Agency $ 6,008 $ 46 $ 3 $ 6,051
State and Political Subdivisions 3,169 64 -- 3,233
Mortgage-Backed Securities 8,579 99 16 8,662
------- ------- ------- -------
Total $17,756 $ 209 $ 19 $17,946
</TABLE>
<PAGE>
The following table lists the maturities of debt securities at December 31,
1998 and 1997, classified as available-for-sale and held-to-maturity. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
- --------------------------------------------------------------------------------
Maturities of Debt Securities
At December 31, 1998 Available-For-Sale Held-To-Maturity
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,019 $ 4,043 $ 250 $ 251
Due after one year
through five years 4,973 5,092 760 777
Due after five years
through ten years 19,865 20,094 7,131 7,207
Due after ten years 30,511 30,803 3,621 3,734
------- ------- ------- -------
59,368 60,032 11,762 11,969
Mortgage-Backed Securities 33,322 33,141 5,961 5,951
Equity Securities 4,900 5,216 -- --
------- ------- ------- -------
Total Investments $97,590 $98,389 $17,723 $17,920
======= ======= ======= ======
</TABLE>
<TABLE>
At December 31, 1997 Available-For-Sale Held-To-Maturity
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,459 $ 3,474 $ 387 $ 389
Due after one year
through five years 7,342 7,419 1,213 1,226
Due after five years
through ten years 15,450 15,539 7,266 7,343
Due after ten years 14,134 14,520 311 326
------- ------- ------- -------
40,385 40,952 9,177 9,284
Mortgage-Backed Securities 26,791 26,812 8,579 8,662
Equity Securities 3,878 5,260 -- --
------- ------- ------- -------
Total Investments $71,054 $73,024 $17,756 $17,946
- -------------------------------------------------------------------------------
</TABLE>
Investment securities with a carrying amount of $12,262,000 and $14,001,000
at December 31, 1998 and 1997, respectively, were pledged to secure public
deposits, to qualify for fiduciary powers and for other purposes required or
permitted by law. There were no securities held other than U. S. Treasury or U.
S. Agencies from a single issuer which represented more than 10% of
shareholders' equity. Proceeds from sales of investments in debt and equity
securities during 1998, 1997 and 1996 were $11,342,000, $13,279,000 and
$19,842,000, respectively. Gross gains of $740,000 and gross losses of $18,000
were realized on those sales in 1998. Gross gains of $615,000 and gross losses
of $14,000 were realized on the sales in 1997. In 1996, gross realized gains
were $418,000 and gross realized losses were $110,000.
<PAGE>
NOTE C - LOANS
Major classifications of loans at December 31, 1998 and 1997 are as
follows.
<TABLE>
1998 1997
--------- ---------
<S> <C> <C>
Real Estate/Residential $ 119,914 $ 138,539
Real Estate/Construction 11,689 12,361
Real Estate/Commercial 29,587 34,579
Consumer/Installment 40,184 35,914
Commercial (Non-Real Estate)
and Agricultural 10,900 9,086
State and Political Subdivisions 1,178 944
Other 10 20
--------- ---------
Total Gross Loans 213,462 231,443
Less Unearned Discount (1,025) (1,856)
--------- ---------
Total Loans $ 212,437 $ 229,587
</TABLE>
Included in total gross loans are unamortized loan fees totaling $293,000
at December 31, 1998 and $137,000 at December 31, 1997. There were loans
totaling $1,245,000 on which the accrual of interest has been discontinued or
reduced at December 31, 1998. During 1998, an average of $1,560,000 of loans was
on non-accrual status. Non-accrual loans at December 31, 1997 amounted to
$813,000 and averaged $821,000 during 1997. Loans 90 days and over past due and
still accruing totaled $1,021,000 at December 31, 1998 and $802,000 at December
31, 1997.
<PAGE>
NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows.
<TABLE>
Year Ended December 31, 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Beginning Balance $ 2,664 $ 2,532 $ 2,443
Additions
Provisions for loan losses
charged to operating expenses 450 605 670
Recoveries of loans 117 97 86
------- ------- -------
Total Additions 567 702 756
Deductions
Loans charged-off (540) (570) (667)
------- ------- -------
Ending Balance $ 2,691 $ 2,664 $ 2,532
</TABLE>
NOTE E - IMPAIRED LOANS
The recorded investment in impaired loans and the valuation for credit
losses related to loan impairment are as follows.
<TABLE>
At December 31, 1998 1997 1996
<S> <C> <C> <C>
Principal amount of impaired loans $ 524 $ 523 $ 1,149
Accrued Interest -- -- --
Deferred loan costs -- 1 7
------- ------- -------
524 524 1,156
Less valuation allowance (303) (138) (128)
------- ------- -------
$ 221 $ 386 $ 1,028
</TABLE>
<PAGE>
<TABLE>
At December 31, 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash collected on impaired loans
credited to principal balance $ 483 $ 657 $1,446
Recognized as interest income 23 111 40
------ ------ ------
Total $ 506 $ 768 $1,486
Interest that would have accrued
on impaired loans $ 144 $ 64 $ 210
</TABLE>
The valuation allowance for impaired loans at December 31, 1998, 1997 and
1996 is included in the "Allowance for Possible Loan Losses" which amounts to
$2,691,000, $2,664,000 and $2,532,000, respectively.
The valuation for credit losses related to impaired loans is a part of the
allowance for possible loan losses. The activity in this valuation allowance
account is as follows.
<TABLE>
Year ended December 31, 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Valuation allowance at January 1, $ 138 $ 128 $ 238
Provision for loan impairment 294 158 206
Direct charge-offs (129) (148) (325)
Recoveries -- -- 9
----- ----- -----
Valuation allowance at December 31, $ 303 $ 138 $ 128
</TABLE>
NOTE F - PREMISES AND EQUIPMEN
Major classifications of these assets at December 31, 1998 and 1997 are
summarized as follows.
<TABLE>
Estimated Useful Lives 1998 1997
<S> <C> <C> <C>
Land ---- $939 $939
Premises 10 - 20 years 6,963 6,948
Equipment 3 - 10 years 5,768 5,329
------- ------
13,670 13,216
Accumulated depreciation
and amortization (6,785) (5,917)
-------- -------
Total Premises and Equipment $6,885 $7,299
</TABLE>
Depreciation and amortization expense amounted to $908,000, $857,000 and
$730,000 in 1998, 1997 and 1996, respectively.
<PAGE>
NOTE G - SHORT-TERM BORROWINGS
Federal Reserve Discount Borrowings
<TABLE>
Year Ended December 31, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance outstanding at December 31, $ -- $ -- $ --
Maximum amount outstanding at
any month-end during the year $ -- $ -- $ --
Average amount outstanding
during the year $ -- $ -- $ 10
Average interest rate during
the year ---% ---% 5.12%
</TABLE>
FEDERAL HOME LOAN BANK BORROWINGS
<TABLE>
Year Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Balance outstanding at December 31, $ -- $ -- $ --
Maximum amount outstanding at any
month-end during the year $ 1,422 $ 6,890 $10,000
Average amount outstanding
during the year $ 974 $ 1,217 $ 3,400
Average interest rate during
the year 5.65% 5.85% 5.51%
</TABLE>
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line
of credit in the amount of $25,000,000, all of which was available at December
31, 1998.
There were no short-term borrowings in the form of Federal Funds
purchased at December 31, 1998, 1997 and 1996.
Securities Sold Under Agreements to Repurchase
<TABLE>
Year Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Balance outstanding at December 31, $ 5,094 $ 8,804 $ 3,795
Maximum amount outstanding at any
month-end during the year $ 8,166 $14,290 $ 7,087
Average amount outstanding
during the year $ 5,821 $ 6,459 $ 4,740
Average interest rate during
the year 3.61% 3.72% 3.14%
</TABLE>
<PAGE>
NOTE H - LONG-TERM DEBT
The Company had long-term borrowings from the Federal Home Loan Bank of
Pittsburgh totaling $20,000,000 at December 31, 1998 and $18,000,000 at December
31, 1997. These loans will mature in two to ten years. The weighted average
interest rate on these loans was 5.41% and 5.94% at December 31, 1998 and 1997,
respectively. The Company also has an obligation as a party to the Employee
Stock Ownership Plan debt, which is discussed in Note K. The principal payments
due on the Company's debt at December 31, 1998 are as follows.
<TABLE>
ESOP FHLB Total
Debt Debt Debt
<S> <C> <C> <C>
1999 $ 65 $ --- $ 65
2000 65 8,000 8,065
2001 65 5,000 5,065
2002 65 --- 65
2003 65 --- 65
2004 and beyond 110 7,000 7,110
------ ------- -------
Total $ 435 $ 20,000 $ 20,435
</TABLE>
NOTE I - OTHER OPERATING EXPENSES
The following items which are greater than 1% of the aggregate of "Total
Interest Income" and "Total Other Income" are included in "Other Operating
Expenses" for the respective years indicated.
<TABLE>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising $ 597 $ 524 $ 299
Consulting Fees $ 416 $ 430 $ 269
Data Processing Services $ 583 $ 607 $ 594
Litigation Costs and Legal Fees $ 418 $ 237 $ 147
Loan Collection $ 346 $ 240 $ 223
Postage $ 256 $ 247 $ 247
Printing, Stationery and Supplies $ 328 $ 363 $ 343
Provisions for Trust Reserve $ 1,000 $ 500 $ ---
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE J - INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Applicable income tax expense (benefit) in the consolidated statements of income
is as follows.
<TABLE>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $1,426 $1,573 $1,235
Deferred (benefit) (395) (277) (99)
------ ------ ------
Total $1,031 $1,296 $1,136
- -------------------------------------------------------------------------------
</TABLE>
The income tax provision reconciled to the tax computed statutory Federal
rate is as follows.
<TABLE>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax expense
at statutory rate $1,385 $1,557 $1,346
Increase (decrease)
in taxes resulting from:
Tax-exempt investment
securities income (363) (261) (195)
Tax-exempt interest
on loans (23) (16) (18)
Other, net 32 16 3
------ ------- ------
Applicable Income Taxes $1,031 $1,296 $1,136
- -------------------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities consist of the following.
<TABLE>
At December 31, 1998 1997
<S> <C> <C>
Deferred Tax Assets:
Loan Loss Reserve $ 648 $ 614
Deferred Compensation 432 428
Post-Retirement Benefits 64 59
Deferred Loan Fees 50 67
Depreciation 47 30
Miscellaneous Reserves 537 220
Other 49 15
--------- ----------
Total 1,827 1,433
--------- ----------
Deferred Tax Liability:
Unrealized Securities Gains --- 670
Other --- ---
--------- ----------
Total --- 670
--------- ----------
Net $ 1,827 $ 763
</TABLE>
Based on management's evaluation of the likelihood of realization, no
valuation allowance has been provided.
<PAGE>
NOTE K- EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan (ESOP) for the
benefit of eligible employees.
In 1998, the ESOP borrowed $500,000 from the Company's subsidiary, First C.
G., payable over six years. The interest rate on this loan is at the Bank's
prime rate (an interest rate of 7.75% at December 31, 1998). The balance
outstanding on this loan was $435,000 at December 31, 1998. The proceeds from
this loan were used to purchase shares from retiring employees and to pay off
the balance on the 1993 loan of $358,000.
In 1993, the ESOP borrowed $650,000 from a bank payable over ten years. The
interest rate on this loan was that bank's prime rate plus 1.25% (an interest
rate of 9.75% at December 31, 1997). The balance outstanding on this loan was
$390,000 at December 31, 1997. During 1997, the ESOP made the final principal
payments on two additional loans. These obligations have been recorded as a
liability on the books of the Company and are collateralized by stock of the
Bank. Interest expense represents the actual interest paid by the ESOP. The
interest incurred on ESOP debt was $40,000, $41,000 and $52,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Compensation expense
related to the ESOP amounted to $310,000, $275,000 and $229,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. As provided by SOP 93-6
(see Note A.8), the ESOP compensation expense includes $100,000 in 1998 and
$50,000 in 1997 and $18,000 in 1996, which is the fair market value of the
shares related to the August 1993 loan that were allocated to the employees
during these years. The number of shares released was 5,353 in 1998, 4,635 in
1997 and 5,918 in 1996. Dividends on unallocated shares used for debt service
were $19,000, $23,000 and $38,000 for the years ended December 31, 1998, 1997
and 1996, respectively. The total shares held by the ESOP were 224,890 and
225,819 at December 31, 1998 and 1997, respectively. ESOP shares have been
restated to reflect the 5% stock dividends of June, 1998, May, 1997 and May,
1996.
<PAGE>
NOTE L - OTHER BENEFIT PLANS
Employees who qualify may elect to participate in a deferred salary savings
401(k) plan. A participating employee may contribute a maximum of 8% of his or
her compensation. The Company will contribute $.50 for each $1.00 up to the
first 5% that each employee contributes. Company payments are charged to current
operating expenses. These contributions were $75,000, $84,000 and $71,000 in
1998, 1997 and 1996, respectively.
The Company also has an executive compensation plan (the "Officers'
Supplemental Retirement Plan") which provides additional death, medical and
retirement benefits to certain officers.
The Company has a deferred compensation plan (the "Deferred Directors'
Plan") involving Directors of the Company. The plan requires defined annual
payments for 15 years beginning at age 65 or death. The annual benefit is based
upon the amount deferred plus interest. The Company has recorded the deferred
compensation liabilities using the present value method.
<PAGE>
The following table sets forth the funded status of the Officers'
Supplemental Retirement Plan and the Deferred Directors' Plan and the amounts
recognized in the Company's balance sheets at December 31, 1998 and 1997.
Actuarial present value of benefit obligations is as follows.
<TABLE>
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
At December 31, 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Accumulated benefit obligation, all of
which is vested $ 146 $ 55 $ 491 $ 477
Projected benefit obligation
for service rendered to date $(200) $(366) $(491) $(477)
Plan assets at fair value -- -- -- --
----- ----- ----- -----
Projected benefit obligation
in excess of plan assets (200) (366) (491) (477)
Unrecognized net (gain) loss from past
experience different from that
assumed and effects of changes
in assumptions (247) (43) 38 5
Prior service cost not yet recognized
in net periodic pension cost -- -- -- --
Unrecognized net assets at December 31,
being recognized over 15 years (4) (5) -- --
Adjustment to recognize
additional minimum liability -- -- (38) (5)
----- ----- ----- -----
Accrued Pension Cost $(451) $(414) $(491) $(477)
</TABLE>
The weighted average assumed discount rate and weighted average rate of
increase in future compensation levels used in determining the actuarial present
value of the projected benefit obligation were 6.5% in 1998 and 7.0% in 1997
and1996 for the Officers' Supplemental Retirement Plan. The weighted average
assumed discount rate used in determining the actuarial present value of the
projected benefit obligation for the Deferred Directors' Plan was 7.0% in 1998
and 7.5% in 1997 and 1996. The weighted average expected long-term rate of
return on assets was 8.0% for 1998, 1997 and 1996 for the Officers' Supplemental
Retirement Plan and 9.0% in each of those years for the Deferred Directors'
Plan.
<PAGE>
Net pension cost included the following components.
<TABLE>
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
At December 31, 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits
earned during the period $ 37 $ 10 $ 15 $ -- $ -- $ --
Interest cost on projected
benefit obligation 15 11 15 34 36 36
Net amortization and deferral (15) (19) (10) -- -- --
---- ---- ---- ---- ---- ----
Net Periodic Pension Cost $ 37 $ 2 $ 20 $ 34 $ 36 $ 36
</TABLE>
NOTE M - POST-RETIREMENT BENEFIT
The Company sponsors a post-retirement plan that covers a certain number of
retired employees and a limited group of current employees. This plan provides
medical insurance benefits to a group of previously qualified retirees and
spouses and to current full-time employees who were 60 years of age or older on
January 1, 1992 and who have retired from the Company after attaining age 65 and
are fully vested in the ESOP at the time of retirement. This plan is currently
unfunded.
As permitted by SFAS No. 106, the Company elected to delay the recognition
of the transition obligation by aggregating $308,000, which arose from adopting
SFAS No. 106, and amortize this amount on a straight-line basis over 20 years.
This election is recorded in the financial statements as a component of net
periodic post-retirement benefit cost.
The Company has determined the actuarially computed expense associated with
this benefit for 1998, 1997 and 1996. The components of the net periodic
post-retirement benefit cost for the years ended December 31 were as follows.
<PAGE>
<TABLE>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $--- $ --- $ ---
Interest cost on accumulated benefit obligation 11 14 15
Amortization of transition obligation 6 8 8
----- ------ -----
Net periodic post-retirement benefit cost $ 17 $ 22 $ 23
- -------------------------------------------------------------------------------
</TABLE>
The assumptions used to develop the net periodic post-retirement benefit
cost and the accrued post-retirement benefit cost were as follows.
<TABLE>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.50% 7.00% 7.00%
Medical care cost trend rate 8.50% 10.00% 11.00%
- -------------------------------------------------------------------------------
</TABLE>
The medical care cost trend rate used in the actuarial computation
ultimately is reduced to 7.0% in the year 2000 and 6.0% in 2003 and subsequent
years. This was accomplished using 1.0% decrements through the year 2000 and
0.5% decrements through the year 2003 and later.
<PAGE>
The table of actuarially computed plan assets and benefit obligations for
the Company is presented below.
<TABLE>
At December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $ 164 $ 203
Active, eligible employees --- ---
Active, not-yet-eligible employees --- ---
------ -----
Accumulated post-retirement benefit obligation 164 203
Plan assets at fair value --- ---
----- ----
Accumulated benefit obligation in excess of plan assets 164 203
Unrecognized transition obligation (216) (232)
Unrecognized net gain 117 93
----- -----
Accrued post-retirement benefit cost $ 65 $ 64
- -------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, $190,000 of the accrued post-retirement benefit cost
is included in "Total Other Liabilities". The effect of a one percentage point
increase in each future year's assumed medical care cost trend rate, holding all
other assumptions constant, would have been to increase the net periodic
post-retirement benefit cost by $13,000 and the accrued post-retirement benefit
cost by $1,000.
Health care benefits are provided to certain retired employees. The cost of
providing these benefits was approximately $20,000, $22,000 and $22,000 in 1998,
1997 and 1996, respectively. The cost is accrued over the service periods of
employees expected to receive benefits. Past-service costs are being amortized
principally over 30 years.
NOTE N - STOCK OPTIONS The Company adopted a Stock Option Plan in 1996 that
was similar to the Stock Option Plan established in 1986. Under the Stock Option
Plans, options to acquire shares of common stock may be granted to the officers
and key employees. The Stock Option Plans provide for the granting of options at
the fair market value of the Company's common stock at the time the options are
granted. Each option granted under the Stock Option Plans may be exercised
within a period of ten years from the date of grant. However, no option may be
exercised within one year from date of grant. In 1998, options to purchase
30,975 common shares of the Company's stock at a price of $35.24 per share were
awarded under this plan. In 1997, options to purchase 19,950 shares of the
Company's common stock at a price of $22.38 per share were awarded. The
aggregate number of shares which may be issued under these plans are 302,091
shares of common stock.
<PAGE>
In 1994, a Non-Employee Directors Stock Option Plan was adopted. This Plan
provides for the awarding of stock options to the Company's Directors. Pursuant
to this Plan, on May 1, 1994, each non-employee director of the Company was
automatically granted an option to purchase 1,214 shares of the Company's common
stock at the fair market value of the Company's common stock of $13.99 per
share. The Plan additionally provides that any non-employee director who is
first elected by the shareholders as a director of the Company or any subsidiary
after May 1, 1994, shall, as of that date of such election, automatically be
granted an option to purchase 1,214 shares of the Company's common stock. In
addition, on the fifth anniversary of the initial option grant, persons who
continue to be non-officer directors shall each be granted additional options to
purchase 1,214 shares of the Company's common stock. The aggregate number of
shares which may be issued under the Non-Employee Director Stock Option Plan is
24,309 shares of common stock
Had compensation cost for the Plans been determined based on the fair value
of the options at the grant dates consistent with the method required by SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
<TABLE>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income As reported $3,032 $3,283 $2,822
Pro forma $3,015 $3,265 $2,814
Basic earnings per share As reported $1.76 $1.92 $1.68
Pro forma $1.75 $1.91 $1.68
Diluted earnings per share As reported $1.75 $1.92 $1.68
Pro forma $1.74 $1.91 $1.67
- -------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 2.8%, 2.1% and 3.1%; expected volatility of 39.0%, 39.0% and 39.5%; risk-free
interest rates of 5.7%, 6.7% and 7.0%; and expected lives of 10 years.
A summary of the status of the Company's Employee Stock Option Plans as of
December 31, 1998, 1997 and 1996, and changes during the years ending on those
dates is presented below. The number of shares and price per share have been
restated to reflect the 5% stock dividends of June, 1998, May, 1997 and May,
1996.
<PAGE>
<TABLE>
Year Ended December 31, 1998
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 26,604 $ 20.40
Granted 30,975 35.24
Exercised --- ---
Expired 525 35.24
------ --------
Outstanding at end of year 57,054 $ 28.32
Options exercisable at year-end 11,641
Weighted average fair value of
options granted during the year $ 35.24
</TABLE>
<TABLE>
Year Ended December 31, 1997
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 12,683 $ 15.04
Granted 19,950 22.38
Exercised 6,029 15.68
Expired --- ---
------ --------
Outstanding at end of year 26,604 $ 20.40
Options exercisable at year-end 4,990
Weighted average fair value of
options granted during the year $ 22.38
</TABLE>
<TABLE>
Year Ended December 31, 1996
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 18,712 $ 15.65
Granted --- ---
Exercised 6,029 16.90
Expired --- ---
------ --------
Outstanding at end of year 12,683 $ 15.04
Options exercisable at year-end 9,358
Weighted average fair value of
options granted during the year N/A
</TABLE>
The following information applies to options outstanding at December
31, 1998.
EMPLOYEE STOCK OPTION PLAN
Number outstanding 57,054
Range of exercise prices $14.47 to $35.24
Weighted-average exercise price $28.32
Weighted-average remaining contractual life 8.48 years
A summary of the status of the Company's Non-Employee Director Stock Option Plan
as of December 31, 1998 and 1997, and changes during the years ending on those
dates are presented below. The number of shares and price per share have been
restated to reflect the 5% stock dividends of June, 1998, May, 1997 and May,
1996.
<PAGE>
<TABLE>
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Year Ended December 31, 1998
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 9,720 $ 14.24
Granted --- ---
Exercised --- ---
Expired --- ---
----- --------
Outstanding at end of year 9,720 $ 14.24
Options exercisable at year-end 8,504
Weighted average fair value of
options granted during the year N/A
</TABLE>
<TABLE>
Year Ended December 31, 1997
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 10,934 $ 14.21
Granted --- ---
Exercised 911 13.99
Expired 303 13.99
----- --------
Outstanding at end of year 9,720 $ 14.24
Options exercisable at year-end 6,074
Weighted average fair value of
options granted during the year N/A
</TABLE>
<TABLE>
Year Ended December 31, 1996
Weighted
Average
Excercise
Shares Price
<S> <C> <C>
Outstanding at beginning of year 10,934 $ 13.90
Granted 1,215 16.78
Exercised 303 13.99
Expired 912 13.99
----- --------
Outstanding at end of year 10,934 $ 14.21
Options exercisable at year-end 4,050
Weighted average fair value of
options granted during the year $ 16.78
</TABLE>
<PAGE>
The following information applies to options outstanding at December 31, 1998.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Number outstanding 9,720
Range of exercise prices $13.99 to $16.78
Weighted-average exercise price $14.24
Weighted-average remaining contractual life 5.83 years
NOTE O - COMMITMENTS AND CONTINGENCIES
The Company has non-cancellable operating lease agreements in excess of one
year with respect to various buildings and equipment. The minimum annual rental
commitments at December 31, 1998 are payable as follows.
Operating Leases
- -------------------------------------------
1999 $ 371
2000 386
2001 400
2002 383
2003 377
2004 and beyond 1,527
---------
Total $ 3,444
- -------------------------------------------
The total rental expense was $378,000, $421,000 and $530,000 in 1998, 1997
and 1996, respectively.
<PAGE>
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments
The contract or notional amounts as of December 31, 1998 are as follows.
Financial instruments whose
contract amounts represent credit risk:
- ---------------------------------------------------------------------------
Commitments to extend credit $19,884
Standby letters of credit $2,618
- ---------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support contracts entered into by customers. Most guarantees
extend for one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
When deemed necessary, collateral held by the Bank for financial
instruments varies, but may include personal or commercial real estate, accounts
receivable, inventory, equipment, certificates of deposit or marketable
securities. The extent of collateral held for any one financial instrument
ranges up to 100%. The average collateral held on financial instruments was
83.23% as of December 31, 1998.
<PAGE>
NOTE Q - CONCENTRATIONS OF CREDIT RISK
The Bank grants commercial, real estate and installment loans to customers
primarily in Northampton, Monroe and Lehigh Counties, Pennsylvania. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the economy of Northampton,
Monroe and Lehigh Counties.
At December 31, 1998, the Bank had residential real estate loans
outstanding totaling $119,914,000, which is 56.45% of total loans. The Bank also
had real estate related commercial loans outstanding at December 31, 1998
totaling $29,587,000, which is 13.93% of total loans. Loans to various
residential apartment building owners totaling $3,799,000 are included in the
Bank's total real estate commercial loans. These loans represent 12.84% of the
total real estate related commercial loans.
NOTE R - RELATED PARTY TRANSACTIONS
The amount of loans by the Company to its directors and executive officers
was approximately $1,298,000 and $1,311,000 at December 31, 1998 and 1997,
respectively. These loans were made in the ordinary course of business at
substantially the same terms and conditions as those with other borrowers.
An analysis of the 1998 activity of these loans follows.
Balance, January 1, 1998 $1,311
New loans 601
Repayments 614
------
Balance, December 31, 1998 $1,298
<PAGE>
NOTE S - REGULATORY MATTERS
The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings (as defined) plus
the retained earnings (as defined) from the prior two years. The dividends, as
of December 31, 1998, that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $3,547,000
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying subordinated debt instruments, and the allowance for possible
loan losses. Management believes that, as of December 31, 1998, the Company and
the Bank met all capital adequacy requirements to which they were subject.
The following table provides a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated.
<PAGE>
CAPITAL RATIOS
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 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>
CAPITAL RATIOS
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,271 16.03% $15,609 8.00% --- ---
Bank $27,200 13.97% $15,576 8.00% $19,470 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $28,829 14.78% $ 7,804 4.00 --- ---
Bank $24,163 12.41% $ 7,788 4.00% $11,682 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $28,829 8.33% $13,551 4.00% --- ---
Bank $24,163 7.06% $13,416 4.00% $16,770 5.00%
</TABLE>
<PAGE>
The Company is not aware of any known trends, events or uncertainties that
will have a material effect on the Company's liquidity, capital resources or
operations. The Company is not under any agreement with the regulatory
authorities nor is it aware of any current recommendation by regulatory
authorities which, if they were implemented, would have a material effect on
liquidity, capital, resources, or the operations of the Company.
Restrictions on cash and due from bank accounts are placed upon the banking
subsidiary by the Federal Reserve Bank. Certain amounts of reserve balances are
required to be on hand or on deposit at the Federal Reserve Bank based upon
deposit levels and other factors. The average and year-end amount of the reserve
balance for 1998 was approximately $5,152,000 and $5,675,000, respectively. For
1997, the average reserve balance was $4,305,000 and the year-end amount was
$4,702,000.
NOTE T - EQUITY TRANSACTIONS The Company paid a 5% stock dividend on its
common stock from authorized but unissued shares on June 25, 1998 to all
shareholders of record at the close of business on June 5, 1998. On June 19,
1997, the Company paid a 5% stock dividend on its common stock from authorized
but unissued shares to all shareholders of record at the close of business on
May 30, 1997. The Company also paid a 5% stock dividend on June 19, 1996 to
shareholders of record on May 31, 1996. Fractional shares on these stock
dividends were paid in cash. The number of shares and earnings per share as
stated in the following discussion of the shares issued under the Dividend
Reinvestment and Stock Purchase Plan have been restated to reflect these 5%
stock dividends.
A Dividend Reinvestment and Stock Purchase Plan was established in 1988.
The Plan provides the holders of common stock with a method to invest their cash
dividends and voluntary cash payments of not less than $100 or more than $1,000
per quarter in additional shares of the Company's common stock. Under this plan,
shares are sold, in general, at a discounted price of 5% below the average of
the high bid and asked price for the Company's common stock on the trading day
immediately preceding the investment date. In 1998, 10,390 common shares were
purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an
average cost of $31.47 per share for total proceeds of $327,000. The shares
purchased in 1998 were comprised of 7,611 new common shares at an average price
of $30.61 for proceeds of $233,000 and 2,779 shares from Treasury shares at an
average price of $33.82 for proceeds of $94,000. In 1997, 12,280 common shares
were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at
an average cost of $23.34 for proceeds of $287,000.
<PAGE>
NOTE U - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. For the Company, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many such
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. Also, it is the
Company's general practice and intent to hold its financial instruments (other
than available-for-sale) to maturity and to not engage in trading or sales
activities. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available, as generally provided in the Company's FRY-9C Regulatory
Reports, and estimation methodologies deemed suitable for the pertinent category
of financial instrument. The estimation methodologies and resulting fair values,
and recorded carrying amounts at December 31, 1998 and 1997 were as follows.
<PAGE>
Fair value of loans and deposits with floating interest rates is generally
presumed to approximate the recorded carrying amounts. Fair value of financial
instruments actively traded in a secondary market has been estimated using
quoted market prices.
<TABLE>
1998 1997
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 14,259 $ 14,259 $ 14,829 $ 14,829
Investment securities 17,920 17,723 17,946 17,756
Securities available-for-sale 98,389 98,389 73,024 73,024
Mortgage loans held-for-sale 603 603 759 759
</TABLE>
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities.
<TABLE>
1998 1997
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Assets:
Interest-bearing deposits
with banks $ 3,301 $ 3,301 $ 395 $ 395
Liabilities:
Deposits with stated
maturities 136,024 128,711 127,673 127,350
Securities sold under
agreements to repurchase 5,094 5,094 8,804 8,804
Long-term debt 20,419 20,000 17,730 18,390
</TABLE>
Fair value of financial instrument liabilities with no stated maturities
has been estimated to equal the carrying amount (the amount payable on demand).
<TABLE>
1998 1997
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Deposits with no
stated maturities $ 173,301 $ 165,838 $ 154,905 $154,905
</TABLE>
The fair value of the net loan portfolio has been estimated using present
value cash flow, discounted at the approximate current market rates adjusted for
non-interest operating costs and giving consideration to estimated prepayment
risk and credit loss factors.
<TABLE>
1998 1997
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
<S> <C> <C> <C> <C>
Total loans $238,031 $212,437 $228,278 $229,587
</TABLE>
There is no material difference between the carrying amount and the
estimated fair value of off-balance-sheet items totaling $22,502,000 at December
31, 1998 and $23,684,000 at December 31, 1997 which are primarily comprised of
unfunded loan commitments which are generally priced at market at the time of
funding.
The Company's remaining assets and liabilities are not considered financial
instruments. No disclosure of the relationship value of the Company's deposits
is required by SFAS No. 107.
<PAGE>
NOTE V - FIRST COLONIAL GROUP, INC. (PARENT COMPANY ONLY)
<TABLE>
Condensed Balance Sheets
- -------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 20 $ 8
Interest-Bearing Deposits
with Banks 130 904
Loan to Banking Subsidiary 1,000 1,000
Investment in Banking Subsidiary 27,158 24,760
Investment in Other Subsidiary 3,909 4,113
Other Assets 13 12
------- -------
Total Assets $32,230 $30,797
LIABILITIES
Long-Term Debt $ 435 $ 390
Other Liabilities 78 50
------- -------
Total Liabilities 513 440
Shareholders' Equity 31,717 30,357
------- -------
Total Liabilities and
Shareholders' Equity $32,230 $30,797
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Condensed Statement of Income
- -------------------------------------------------------------------------------
For the Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from Subsidiaries $ 688 $ 1,139 $ 1,111
Interest on Loan to Subsidiary 89 89 114
Interest on Deposits with Banks 5 21 12
------- ------- -------
Total Income 782 1,249 1,237
------- ------- -------
EXPENSES
Interest on Long-Term Debt 39 41 52
Other Expenses 94 99 105
------- ------- -------
Total Expenses 133 140 157
------- ------- -------
Income Before Taxes and
Equity in Undistributed Net
Earnings of Subsidiaries 649 1,109 1,080
Federal Income Tax (Credit) (12) (10) (11)
------- ------- -------
Income Before Equity in Undistributed
Net Earnings of Subsidiaries 661 1,119 1,091
Equity in Undistributed Net Earnings
of Subsidiaries 2,371 2,164 1,731
------- ------- -------
Net Income $ 3,032 $ 3,283 $ 2,822
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Condensed Statement of Cash Flows
- -------------------------------------------------------------------------------
For The Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,032 $ 3,283 $ 2,822
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Distribution in Excess of Undistributed
Net Earnings of Subsidiaries (2,467) (2,164) (1,731)
Changes in Assets and Liabilities:
(Increase) Decrease in Interest-Bearing
Deposits with Banks 774 (248) (366)
(Increase) Decrease in Other Assets (1) -- (10)
Increase (Decrease) in Other Liabilities 28 (23) 7
------- ------- -------
Net Cash Provided by Operating Activities 1,366 848 722
------- ------- -------
INVESTING ACTIVITIES
Repayment of Note from Bank Subsidiary -- -- 1,600
Issuance of Note Receivable to Bank Subsidiary -- -- (1,000)
Capital Contribution to Bank Subsidiary (500) -- (600)
------- ------- -------
Net Cash PROVIDED BY Investing Activities (500) -- --
------- ------- -------
FINANCING ACTIVITIES
Increase in Long-Term Debt 45 -- --
Increase in ESOP Debt (45) -- --
Purchase of Treasury Stock -- (107) (102)
Proceeds from the Sale of Treasury Stock 94 33 64
Proceeds from Issuance of Common Stock 333 361 290
Cash Dividends Paid (1,275) (1,139) (1,011)
Cash in Lieu of Fractional Shares (6) (4) (3)
------- ------- -------
Net Cash Used in Financing Activities (854) (856) (762)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents 12 (8) (40)
Cash and Cash Equivalents, January 1, 8 16 56
------- ------- -------
Cash and Cash Equivalents, December 31, $ 20 $ 8 $ 16
------- ------- -------
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR INFORMATION
First Colonial Group, Inc.
76 South Main Street
Nazareth, PA 18064
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders' meeting will be held on Thursday, May 13, 1999 at
9 a.m. at the Bethlehem Holiday Inn, Routes 22 and 512, Bethlehem, Pennsylvania
18017.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent is Nazareth National Bank and Trust
Company. Shareholders seeking assistance with stock registration, lost stock
certificates or dividend information should contact Maria A. Keller at the
following address or by telephone at (610) 746-7317.
Nazareth National Bank
Trust Department
76 South Main Street
Nazareth, PA 18064
STOCK INFORMATION
First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market
under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1998, there were 738 shareholders of record.
The declaration and payment of dividends is at the sole discretion of the
Board of Directors, and their amount depends upon the earnings, financial
condition, and capital needs of the Company and the Bank and certain other
factors including restrictions arising from Federal banking laws and regulations
(see "Note S- Regulatory Matters" in the "Notes to Consolidated Financial
Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price in December, 1998 was $29.125 and
in December, 1997 was $33.80. Stock prices and dividends per share have been
restated to reflect the 5% stock dividends of June, 1998 and May, 1997 (see
"Note T - Equity Transactions" in the "Notes to Consolidated Financial
Statements").
<PAGE>
<TABLE>
1997
<S> <C> <C> <C>
First Quarter $22.45 $20.18 $ 0.1633
Second Quarter 23.33 21.31 0.1633
Third Quarter 32.62 22.38 0.1714
Fourth Quarter 33.81 33.04 0.1714
--------
TOTAL $ 0.6694
</TABLE>
<TABLE>
1998
<S> <C> <C> <C>
First Quarter $35.24 $32.62 $ 0.1810
Second Quarter 36.50 33.33 0.1810
Third Quarter 36.00 26.75 0.1900
Fourth Quarter 29.75 26.75 0.1900
--------
TOTAL $ 0.7419
</TABLE>
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Shareholders may participate in the Dividend Reinvestment and Stock
Purchase Plan. The plan provides that additional shares of common stock may be
purchased with reinvested cash dividends and with voluntary cash payments at a
5% discount from market. A description of the plan and additional information
may be obtained by writing to:
Nazareth National Bank
Trust Department
76 South Main Street
Nazareth, PA 18064
INVESTMENT CONSIDERATIONS
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the information contained in
this Annual Report and certain investment considerations and other information
described in the Company's Form 10-K for the year ended December 31, 1998.
FORM 10-K
Shareholders, analysts and others seeking a copy of Form 10-K without
charge (except for exhibits) or additional financial information about First
Colonial Group, Inc. should send a written request to:
Reid L. Heeren, Vice President
First Colonial Group, Inc.
76 South Main Street
Nazareth, PA 18064
MARKET MAKERS
The following investment brokerage houses currently make a market in First
Colonial Group, Inc. common stock: F. J. Morrissey & Co., Inc.; Hopper, Soliday
& Co., Inc.; Ryan, Beck & Co.; and Wheat First Securities, Inc.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the captions "Election Of Directors" and
"Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in the
Company's 1999 Proxy Statement and "Executive Officers of the Registrant" in
Appendix A to Part I of this Form 10-K is incorporated herein by reference
therefrom.
Item 11. Executive Compensation
The information contained under the caption "Executive Compensation" in the
Company's 1999 Proxy Statement is incorporated herein by reference therefrom.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "Voting Securities and
Principal Holders Thereof" in the Company's 1999 Proxy Statement is incorporated
herein by reference therefrom.
Item 13. Certain Relationships and Related Transactions
The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's 1999 Proxy Statement is incorporated
herein by reference therefrom.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements: The Consolidated Financial Statements of the Company
and the Report of Independent Certified Public Accountants thereon, as
listed below, have been filed under "Item 8, Financial Statements and
Supplementary Data".
Report of Independent Certified Public Accountants
Consolidated Balance Sheets for the Years Ended
12/31/98 and 12/31/97
Consolidated Statements of Income and Comprehensive Income
for the Years Ended 12/31/98, 12/31/97 and 12/31/96
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended 12/31/98, 12/31/97 and 12/31/96
Consolidated Statements of Cash Flows for the Years Ended
12/31/98, 12/31/97 and 12/31/96
Notes to Consolidated Financial Statements
<PAGE>
2. Exhibits:
Number Title Page No.
3.1 (7) Restated Articles of Incorporation of the Company, as amended.
3.2 (7) Bylaws of the Company, as amended.
4.1 (1) Specimen Common Stock Certificate of the Company.
* 10.1 (1) Deferred Compensation Plan for Directors.
10.2 Intentionally omitted.
* 10.3 (1) Form of Executive Benefit Program Agreement.
* 10.4 (6) Employee Stock Ownership Plan.
10.5 (1) Loan Agreement (including Exhibits thereto),
dated October 5, 1984, by and between the
Company and Commonwealth Bank and Trust Company N.A.
* 10.6 (3) First Colonial Group, Inc. Stock Option Plan.
10.7 (2) Loan Agreement, dated July 17, 1987, by and between
the Company and Commonwealth Bank and Trust Company, N.A.
* 10.8 (8) Restated Optional Deferred Salary Plan (401(k)).
* 10.9 (10) 1994 Stock Option Plan for Non-Employee Directors, as amended
*10.10 (9) Severance Agreement dated July 19, 1994 by and between the Bank
and S. Eric Beattie
*10.10.1(12) Amendment No. 1 to Severance Agreement by and between the Board
and S. Eric Beattie
*10.11 (9) Severance Agreement dated July 19, 1994 by and between the Bank
and Reid L. Heeren
<PAGE>
Number Title Page No.
*10.11.1(12) Amendment No. 1 to Severance Agreement by and between the Board
and Reid L. Heeren
*10.12 (9) Severance agreement dated July 19, 1994 by and between the Bank
and Arthur Williams
*10.12.1(12) Amendment No. 1 to Severance Agreement by and between the Board
and Arthur Williams
*10.13 (9) Severance dated July 19, 1994 by and between the Bank and Gerald
E. Kemmerer
*10.14 (10) Amendment No. 1 dated September 27, 1994 to the Bank's Employee
Stock Ownership Plan
*10.15 (10) Amendment No. 1 dated September 22, 1994 to the Optional Deferred
Salary Plan (401K)
*10.16 (11) Amendment Number 1 to the 1994 Stock Option Plan for Non-Employee
Directors
*10.17 (11) 1996 Employee Stock Option Plan
*10.18 (13) Severance Agreement dated September 22, 1997 by and between the
Board and Tomas J. Bamberger
10.19 Loan Agreement dated April 22, 1998 by and between
First C. G. Company and the Employee Stock Ownership Plan
21.1 (3) Subsidiaries of the Company.
23.1 Consent of Accountants.
27.1 Financial Data Schedule
- -----------------------
* Represents a Management Contract or Compensatory Plan, Contract or
Arrangement.
<PAGE>
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 33-4908), as filed on April 16, 1986.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 33-20319), as filed on February 25, 1988.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1986.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1988.
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated June 20, 1989 (File No. 0-11526).
(6) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1991.
(7) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 33-64816), as filed on June 22, 1993.
(8) Incorporated by reference from the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1993.
(9) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB (File No. 0-11526) for the quarter ended June 30, 1994.
(10) Incorporated by reference from the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1994.
(11) Incorporated by reference from the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1995.
(12) Incorporated by reference by the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1996.
(13) Incorporated by reference by the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of the year ended
December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST COLONIAL GROUP, INC.
Dated: March 30, 1999 By: /s/ S. Eric Beattie
S. ERIC BEATTIE, President
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Richard Stevens, III
RICHARD STEVENS, III
Chairman of the Board
and Director
March 30, 1999
By: /s/ S. Eric Beattie
S. ERIC BEATTIE
President, Chief Executive Officer
and Director (Principal Executive Officer)
March 30, 1999
By: /s/ Reid L. Heeren
REID L. HEEREN
Executive Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
March 30, 1999
By: /s/ Robert J. Bergren
ROBERT J. BERGREN
Director
March 30, 1999
<PAGE>
By: /s/ Gordon Mowrer
GORDON MOWRER
Director
March 30, 1999
By: /s/ Daniel B. Mulholland
DANIEL B. MULHOLLAND
Director
March 30, 1999
By: /s/ Robert C. Nagel
ROBERT C. NAGEL
Director
March 30, 1999
By: /s/ Charles J. Peischl
CHARLES J. PEISCHL, ESQUIRE
Director
March 30, 1999
By: /s/ Maria Zumas Thulin
MARIA ZUMAS THULIN
Director
March 30, 1999
ESOP LOAN AGREEMENT
THIS LOAN AGREEMENT, dated April 22, 1998 by and between Nazareth National
Bank and Trust Company Employee Stock Ownership Plan Trust, a trust formed under
the laws of the Commonwealth of Pennsylvania pursuant to a Trust Agreement dated
June 28, 1994 (the "Borrower"), Nazareth National Bank and Trust Company in its
capacity as trustee for Borrower ("Trustee") and First C. G. Company, Inc., a
Delaware Corporation (the "Lender").
BACKGROUND
The Borrower has requested the Lender to lend to it moneys in an amount not
to exceed Five Hundred Thousand and 00/100 Dollars ($500,000) (the "Loan"). The
purpose of the loan is to refinance the purchase of certain shares of the common
stock of First Colonial Group, Inc. (the "Common Stock") made in 1993 and to
purchase an additional 4,071 shares of Common Stock from certain Trustee
employees. The Lender is willing to make the Loan to the Borrower pursuant to
the terms of a note of even date herewith (the "ESOT Term Note").
NOW, THEREFORE, in consideration of the promises herein contained, and each
intending to be legally bound hereby, the parties agree as follows:
Section I. The Loan
1.01 General Terms. Subject to the terms hereof, the Lender will lend Five
Hundred Thousand and 00/100 Dollars ($500,000) to the Borrower at Closing which
will be repayable in seven (7) equal annual installments of $65,000 each due
each October 1, commencing October 1, 1998, with a final installment of the
entire unpaid principal balance due October 1, 2005 and semi-annual interest
payments of all outstanding accrued and unpaid interest due on each October 1
and April 1, commencing October 1, 1998, and a final interest payment of all
outstanding accrued and unpaid interest due on October 1, 2005.
1.02 Disbursement of the Loans. The Lender will wire transfer the proceeds
of the Loan to Borrower.
1.03 Interest Rate and Payments of Interest.
(A) Interest on the principal balance of the Loan, from time to time
outstanding, will be payable at the rate of the Nazareth National Bank and Trust
Company's (or its successor, the "Bank") Prime Rate and shall be paid as
provided herein.
(B) Changes in the Prime Rate shall be effective at the beginning of
business on the same day on which the Bank effects a change in its Prime Rate.
Interest shall be calculated by the Lender on the basis of a 365 day year and
the actual number of days elapsed.
(C) For purposes of this Agreement, "Prime Rate" and "Bank's Prime Rate"
shall mean the commercial lending rate of interest per annum as fixed from time
to time by the management of the Bank at its main office and designated as
"Prime Rate". The determination and publication of "Prime Rate" by the Bank
shall not in any way preclude or limit the Bank from lending to certain
borrowers from time to time at a rate of interest less than "Prime Rate."
<PAGE>
(D) If, at any time, the interest rate shall be deemed by any competent
court of law, governmental agency or tribunal to exceed the maximum rate of
interest permitted by any applicable laws, then, for such time as the interest
rate would be deemed excessive, its application shall be suspended and there
shall be charged instead the maximum rate of interest permissible under such
laws.
(E) If an event of default, as set forth in Section VI of this Agreement,
should occur, the interest rate hereunder shall increase thereafter to the rate
of three percent (3%) per annum over the Bank's Prime Rate and shall be paid as
provided herein.
1.04 Payment to the Lender. All sums payable to the Lender hereunder shall
be paid directly to the Lender in immediately available funds. The Lender shall
send the Borrower statements of all amounts due hereunder, which statements
shall be considered correct and conclusively binding on the Borrower unless the
Borrower notifies the Lender to the contrary within sixty (60) days of its
receipt of any statement which it deems to be incorrect.
Section II. Conditions Precedent
2.01 The obligation of the Lender to make the Loan hereunder is
subject to the following conditions precedent:
(A) Delivery of the ESOT Term Note executed by the Trustee of the Borrower;
(B) Delivery of a certified (as of the date of Closing) copy of resolutions
of the Borrower's Trustee authorizing the execution, delivery and performance of
this Agreement and the ESOT Term Note;
(C) A copy (certified by the Trustee) of the trust agreement for the ESOT;
and
(D) A certificate (dated the date of the request for the advance under the
Loan) of the secretary of the Trustee as to the incumbency and signatures of the
officers of the Trustee signing the ESOT Term Note.
Section III. Collateral
3.01 First Colonial Group, Inc. has executed a Pledge Agreement this date
and delivered 134,946 shares of the common stock of Nazareth Nation Bank and
Trust Company (the "Stock") to the Lender together with stock powers executed in
blank, as security for the performance of the obligations of the Trustee of the
ESOT under a certain note from the Trustee to the Lender. The Pledge Agreement
and the Stock held pursuant thereto shall be collateral for Trustee's
obligations hereunder.
<PAGE>
Section IV. Subordination and Set Off
4.01 Lender hereby waives its right to set off obligations due from the
Lender to the Borrower and agrees that, in the event of an event of default
hereunder or otherwise, it will not set off any amounts due from it to the
Borrower.
Section V. Warranties and Covenants
5.01 Within ninety (90) days after the close of each fiscal year, Borrower
shall provide annual financial statements all in reasonable detail, including
all supporting schedules and comments; the statements to be audited by an
independent certified public accountant selected by the Borrower and acceptable
to the Lender, and certified by such accountants to have been prepared in
accordance with generally accepted accounting principles consistently applied by
the Borrower, except for any inconsistencies explained in such certificate. The
Lender shall have the right, from time to time, to discuss the Borrower's
affairs directly with the Borrower's independent certified public accountants
after notice to the Borrower and opportunity of the Borrower to be present at an
such discussions.
5.02 Within forty-five (45) days after the end of the first three financial
quarters of any fiscal year in which the Loan is outstanding, the Borrower shall
provide financial statements for the preceding quarter prepared by the Trustee
or Trustee's designee, all in reasonable detail and certified by the Trustee as
having been prepared in accordance with generally accepted accounting principals
consistently applied.
5.03 The Borrower represents that it is not in default with respect to any
of its existing indebtedness, and the making and performance of this Agreement,
and the Note executed in connection herewith, will not, immediately or with the
passage of time, the giving of notice, or both, constitute default under any
notes or agreements with third parties.
5.04 The Borrower will notify the Lender immediately of the occurrence of
any event of default or of any fact, condition or event that only with the
giving of notice or the passage of time or both, could become an event of
default, or of the failure of the Borrower to observe any of its undertakings
hereunder.
5.05 The Borrower will not furnish to the Lender any certificate or other
document that will contain any untrue statement of material fact or that will
omit to state a material fact necessary to make it not misleading in light of
the circumstances under which it was furnished.
Section VI. Acts of Default
6.01 The occurrence of any one or more of the following events shall
constitute an event of default:
(A) The Borrower shall fail to pay any amounts to be paid hereunder, or
under the ESOT Term Note when and as due, and such failure shall continue
uncured for ten (10) days after notice from the Lender to the Borrower;
<PAGE>
(B) The Borrower shall fail to observe or perform any other obligation to
be observed or performed by it herein or in any of the notes or agreements
secured hereby and such failure shall continue for thirty (30) days after notice
of such failure to the Borrower by the Lender;
(C) Any financial statement, representation, warranty or certificate made
or furnished by the Borrower to the Lender or the Lender's agent or
representatives in connection with this Agreement, or as inducement to the
Lender to enter into this Agreement, or in any separate statement or document to
be delivered hereunder to the Lender, shall be materially false, incorrect, or
incomplete when made;
(D) The Borrower shall admit its inability to pay its debts as they mature,
or shall make an assignment for the benefit of its or any of its creditors;
(E) Proceedings in bankruptcy, or for reorganization of the Borrower, or
for the readjustment of any of its debts, under the Bankruptcy Act of 1978, as
amended, or any part thereof, or under any other laws, whether State or Federal,
for the relief of borrowers, now or hereafter existing, shall be commenced by
the Borrower, or shall be commenced against the Borrower and shall not be
discharged within thirty (30) days of commencement, or stayed pending legal
action to have such proceeding dismissed; or
(F) A receiver shall be appointed for the Borrower or for any substantial
part of its assets, or any proceedings shall be instituted for the dissolution
or the full or partial liquidation of the Borrower, and such receiver shall not
be discharged within ninety (90) days of his appointment, or such proceedings
shall not be discharged within ninety (90) days of their commencement.
6.02 Acceleration. Upon the occurrence of an event of default, at the
option of the Lender, but only upon notice to the Borrower, all amounts due
hereunder shall immediately become due and payable without further action of any
kind.
Section VII. Miscellaneous
7.01 Construction. The provisions of this Agreement shall be in addition to
those of any pledge, note, assignment or other evidence of liability held by the
Lender, all of which shall be construed as complementary to each other. Nothing
herein contained shall prevent the Lender from enforcing any or all of any other
notes, pledges or security agreements it may have in accordance with their
respective terms.
7.02 Further Assurance. From time to time, the Borrower will execute and
deliver to the Lender such additional documents and will provide such additional
information as the Lender may reasonably require to carry out the terms of this
Agreement and to be informed of the Borrower's status and affairs.
7.03 Expenses of the Lender. The Borrower will, on demand, reimburse the
Lender for all expenses, including the reasonable fees and expenses of legal
counsel for the Lender, incurred by the Lender in connection with the
preparation, administration, amendment, modification or enforcement of this
Agreement and the collection or attempted collection of the notes.
<PAGE>
7.04 Applicable Law. Except to the extent preempted by applicable Federal
law, the substantive laws of the Commonwealth of Pennsylvania relating to
contracts executed and to be performed therein shall govern the construction of
this Agreement and the rights and remedies of the parties hereto.
7.05 Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if delivered in
person or if sent by certified mail, postage prepaid, return receipt requested,
or telegraph, as follows, unless such address is changed by written notice
hereunder:
(A) If to the Borrower:
Nazareth National Bank and Trust Company as Trustee
76 South Main Street
Nazareth, PA 18064
Attn: S. Eric Beattie, President
With copy to:
Frederick D. Lipman, Esquire
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
(B) If to the Lender:
First C. G. Company, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, DE 19810
Attn: Reid L. Heeren, President
7.06 Binding Effect, Assignment and Entire Agreement. This Agreement shall
inure to the benefit of, and shall be binding upon, the respective successors
and permitted assigns of the parties hereto. The Borrower has no right to assign
any of its rights or obligations hereunder without the prior written consent of
the Lender. This Agreement, and the documents executed and delivered pursuant
hereto, constitute the entire agreement between the parties, and may be amended
only by a writing signed on behalf of each party.
7.07 Severability. If any provision of this Agreement shall be held invalid
under any applicable laws, such invalidity shall not affect any other provision
of this Agreement that can be given effect with the invalid provision, and, to
this end, the provisions hereof are severable.
<PAGE>
7.08 Waivers. The Lender may at any time, and from time to time, waive any
one or more of the conditions or provisions contained herein; however, no waiver
shall be effective unless in writing.
Section VIII. Miscellaneous
8.01 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.
Section IX. Seal
9.01 This document is intended to take effect as an instrument under seal.
FIRST C. G. COMPANY, INC.
By: /S/ REID L. HEEREN (Seal)
President
NAZARETH NATIONAL BANK AND TRUST
COMPANY EMPLOYEE STOCK OWNERSHIP
PLAN TRUST
By: /S/ BARBARA A. SEIFERT (Seal)
Vice President of Trustee
NAZARETH NATIONAL BANK AND
TRUST COMPANY
By: /S/ S. ERIC BEATTIE (Seal)
President
<PAGE>
Copy
ESOT TERM NOTE
DATE: April 22, 1998 $500,000
Nazareth National Bank and Trust Company, Employee Stock Ownership Plan
Trust, a trust formed under the laws of the Commonwealth of Pennsylvania (the
"ESOT") pursuant to a trust agreement dated June 28, 1994 (the "Agreement"), by
the trustee(s) under the Agreement (individually and collectively the "Trustee")
for value received, hereby promises to pay to the order of First C. G. Company.
Inc., a Delaware corporation (the "Lender"), the principal sum of Five Hundred
Thousand and 00/100 Dollars ($500,000) in seven (7) equal annual installments of
principal in the amount of $65,000 each due each October 1, commencing October
1, 1998, with a final installment of the entire unpaid principal balance due
October 1, 2005, and semi-annual interest payments of all outstanding accrued
and unpaid interest thereon due each October 1 and April 1, commencing October
1, 1998.
The ESOT shall pay interest at the Nazareth National Bank and Trust
Company's (or its successor, the "Bank") prime rate plus on the unpaid principal
balance due hereunder, in such coin or currency of the United States of America
as at the time of payment shall be legal tender for the payment of public and
private debts. The interest shall be calculated on the basis of a 365 day year
and the actual number of days elapsed. The Bank's prime rate shall be that rate
of interest which the management of the Bank establishes as its "prime rate"
from time to time. The determination and publication of "prime rate" by the Bank
shall not in any way preclude or limit the Bank from lending to certain
borrowers from time to time at a rate of interest less than the Bank's announced
"prime rate." Changes, from time to time, in the Bank's prime rate shall be
effective at the beginning of business on the same day on which the Bank effects
a change in its prime rate. If an event of default, as set forth in this Note,
should occur, the interest rate hereunder shall increase to rate of three
percent (3%) per annum over prime rate. Interest, at the rate provided for
herein, shall continue to accrue at such rate and continue to be paid even after
default, maturity, acceleration, recovery of judgment, bankruptcy, insolvency
proceedings of any kind or the happening of any event or occurrence similar or
dissimilar.
The Trustee may prepay the balance due hereunder in whole at any time, or
in part from time to time, without penalty or premium.
The ESOT, and any and all endorsers hereby:
1. Waive presentment, demand, protest and notice of protest or dishonor;
2. Consent to any extension, renewal, compromise, forbearance, acceleration
or release of any party;
3. Agree that any provisions may be modified between the holder hereof and
any party;
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4. Consent to the exchange, release or surrender of any collateral to any
party or to any guarantor, for the waiver, release or subordination of any
security interest, in whole or in part; and
5. Waive all other notices in connection with the delivery, acceptance.
performance, default or enforcement of payment of this Note.
The occurrence of any of the following events or conditions shall
constitute an event of default hereunder:
1. The ESOT shall fail to pay when due any amounts due hereunder of
principal or interest and such failure shall continue for a period often (10)
days:
2. The ESOT shall fail to observe or perform any other obligation to be
observed or performed by it hereunder or under any other agreements pledges, or
instruments relating hereto, and such failure shall continue uncured for thirty
(30) days after notice of such failure from the Lender to the Trustee;
3. Any financial statement, representation, warranty or certificate made or
furnished by the Trustee to the Lender or to the Lender's agent or
representative in connection with this Note or any agreements or instruments
entered into in connection herewith, or as an inducement to the Lender to make
any loans shall be materially false, incorrect or incomplete when made;
4. The institution of any proceedings by or against the ESOT under any
bankruptcy or insolvency statute or an assignment for the benefit of creditors
or the appointment of a receiver, conservator, liquidator or other judicial
representative by or for the ESOT, whether similar or dissimilar, for the ESOT's
assets, which if commenced by the ESOT shall not be discharged within ninety
(90) days of their commencement; or
5. The Trustee shall admit its inability to pay the ESOT's debts as they
become due.
Upon the occurrence of an Event of Default, at the option of the Lender,
but only upon notice to the Trustee, all amounts due hereunder shall become
immediately due and payable, and the Lender shall thereupon have all rights and
remedies provided hereunder and under any other agreements between the Lender
and the ESOT or otherwise available at law or in equity.
A waiver by the Lender of any event of default hereunder shall not
constitute a waiver of any subsequent event of default.
The Lender waives its right to set off obligations due from it to the ESOT
and agrees that, in event of default or otherwise, it will not set off any
amounts due from it to the ESOT
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The Trustee shall be liable hereunder only in its capacity as Trustee under
the agreement of trust for the ESOT and recourse for the obligations due
hereunder shall be limited to the assets of the ESOT.
Except to the extent preempted by applicable Federal law, this Note shall
be governed and construed in accordance with the laws of the Commonwealth of
Pennsylvania applicable to contracts made and to be performed in Pennsylvania,
but all rights of the Lender hereunder shall inure to the benefit of its
successors and assigns and all obligations of the ESOT shall bind its successors
and assigns.
Any provision hereof found to be illegal, invalid or unenforceable for any
reason whatsoever shall not effect the validity, legality or enforceability of
the remainder of the provisions hereof.
NAZARETH NATIONAL BANK AND TRUST
COMPANY EMPLOYEE STOCK OWNERSHIP
PLAN TRUST
By: /S/ Barbara A. Seifert (SEAL)
Vice President of Trustee
<PAGE>
PLEDGE AGREEMENT
TO: First C. G. Company, Inc. (the "Pledgee") April 22, 1998
103 Springer Building
3411 Silverside Road
Wilmington, DE 19810
Attn: Reid L. Heeren, President
In order to induce the Pledgee to make loans or otherwise to give, grant or
extend credit at any time(s) to the Nazareth National Bank and Trust Company
Employee Stock Ownership Plan Trust (the "ESOT") or the trustee or trustees for
the ESOT (individually and collectively "Trustee") for the benefit of the ESOT,
First Colonial Group, Inc. (the "Pledgor") hereby agrees and consents:
BACKGROUND
The Pledgee is lending the ESOT Five Hundred Thousand and 00/100 Dollars
($500,000) pursuant to the ESOT Loan Agreement of even herewith between the ESOT
and the Pledgee (the "ESOT Loan Agreement") and pursuant to an ESOT Term Note
(as defined in the ESOT Loan Agreement).
NOW, THEREFORE, in consideration of the promises herein contained, and each
intending to be legally bound hereby, and incorporating the foregoing Background
herein, the parties agree as follows:
1. That, as security for any and all indebtedness and/or other liabilities
of the ESOT to the Pledgee, now existing or to arise pursuant to the ESOT Loan
Agreement and the ESOT Term Note between the ESOT and the Pledgee (hereinafter
referred to as the "Obligations"), the Pledgee shall have and is hereby given a
lien upon and security interest in the following property, which is owned by the
Pledgor and is in due form for transfer and all of which has been or is herewith
deposited with the Pledgee:
134,946 shares of common stock of the Nazareth National Bank and Trust
Company hereby warranted by the Pledgor to be duly authorized, validly
issued, fully paid and non-assessable, free and clear of any liens,
encumbrances, security interests, claims and demands of any person
whatsoever and which the Pledgor has power to pledge and the Pledgee shall
be under no duty with respect to all or any of the aforesaid property
except to account therefor in due course pursuant to the terms and
conditions hereof.
2. The Pledgor grants to the Pledgee the unlimited and unconditional right
to vote all stock pledged hereunder only after default has occurred.
3. The Pledgee assumes no Responsibility for the custody and preservation
of stock in its possession other than the use of reasonable care which the
parties by agreement determine as follows: the Pledgor will give the Pledgee at
least ten (10) days prior written notice of any act or acts to be done or notice
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or notices to be served which are necessary to preserve rights under the stock,
necessary to collect money thereunder, or any act which is necessary, advisable
or desirable to preserve any interest against third parties, exercise rights or
options which the Pledgor may have in stock or to preserve its value or to take
any other act or action, similar or dissimilar; and, unless so notified, the
Pledgee or any holder will not be responsible for any loss or impairment of such
interest, rights, options or benefits in connection therewith. Neither the
Pledgee nor any holder will be required to see to the collection of any sums
which may become due with respect to said stock nor to give notice to the
Pledgor or any one else in respect thereto. The Pledgee shall have no obligation
to give notice to the Pledgor or any other person or to consult with it, him or
them regarding any rights or options which the Pledgor may at any time have to
vote, tender, sell, convert or otherwise deal with such securities or to
purchase, obtain or receive any securities or other property by virtue of
ownership of said stock. The Pledgee is also granted a security interest in all
additional securities issued by the issuer of the securities pledged hereunder,
if any, including but not limited to, all stock dividends, stock splits, stock
received in exchange for the stock pledged herein, whether by merger,
consolidation, liquidation, reorganization or otherwise and all other securities
of every kind and character whatsoever, whether similar or dissimilar to that
pledged hereunder, now or hereafter issued by the issuer thereof to the Pledgor.
4. That, in event of the happening of any one or more of the following, to
wit: (a) the non-payment to the Pledgee when due of all or any part of the
Obligations which shall continue uncured for ten (10) days after notice from the
Pledgee to the Pledgor and the ESOT; (b) failure in business dissolution or
termination of existence of the Pledgor or the ESOT; (c) any petition in
bankruptcy being filed by or against the Pledgor, or any proceedings in
bankruptcy, or under any Acts of Congress relating to the relief of debtors,
being commenced for the relief or readjustment of any indebtedness of the
Pledgor or the ESOT, either through reorganization, composition, extension or
otherwise and such petition or commencement shall not be discharged within
ninety (90) days of filing or commencement, or stayed pending proceedings for
dismissal; (d) a receiver of any property of the Pledgor or the ESOT which may
be in or come into your possession or control, or that of any third party as
agent or pledgeholder for Pledgor or the ESOT, being attached or distrained, or
becoming subject to any mandatory order of court or other legal process, which
writ of attachment, distraint, order or process shall not be discharged within
ninety (90) days of its issuance or entry, then, or at any time after the
happening of any such event and expiration of the periods for cure. The Pledgee
is authorized and empowered, acting in its discretion and either before or after
the maturity of all or any part, of the property upon which you then have a lien
hereunder, at public or private sale, upon ten (10) days prior written notice to
the Pledgor which is agreed to be reasonable notice.
5. That no delay on the part of the Pledgee in exercising any power of
sale, lien, option or other right hereunder, and no notice or demand which may
be given to or made upon the Pledgor by the Pledgee with respect to any power of
sale, lien, option or other right hereunder, shall constitute a waiver thereof,
or limit or impair the right of the Pledgee to take any other right hereunder,
without notice or demand, or prejudice the rights of the Pledgee as against the
Pledgor in any respect.
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6. That the Pledgee may, at its option and without any obligation to do so,
transfer to or register all or any part of said stock into its name or its
nominee's all or any part of property upon which you may have a lien hereunder
at any time, only after default on all or an part of the Obligations, with
written notice to the Pledgor.
7. That the Pledgee may release or surrender at any time(s) all or any of
the property upon which it has a lien at any time, together with any
substitution(s) therefor and/or any addition(s) thereto and/or any proceeds
thereof without in any way affecting the liability of the Pledgor or the ESOT
hereunder or otherwise.
8. That it will not vote its stock of the Nazareth National Bank and Trust
Company in favor of, or consent to, or otherwise approve the issuance of any
additional shares of the common stock of Nazareth National Bank and Trust
Company, unless such shares are pledged to the Pledgee.
9. That this is a continuing agreement and shall remain in full force and
effect and be binding upon the Pledgor and the legal representatives successors
or assigns of the Pledgor until payment in full of all sums due to become due to
the Pledgee.
10. That all remedies of the Pledgee shall be cumulative not alternative.
11. Except to the extent preempted by applicable Federal law, this
agreement shall be deemed to be made under and shall be governed by the laws of
the Commonwealth of Pennsylvania in all respects, including matters of
construction, validity and performance and none of its terms or provisions may
be waived, altered, modified or amended, except as the Pledgee may consent
thereto in writing duly signed by the Pledgee.
12. This is the entire agreement between the Pledgor and the Pledgee.
FIRST C. G. COMPANY, INC.
By: /S/ Reid L. Heeren
President
FIRST COLONIAL GROUP, INC.
By: /S/ S. Eric Beattie
President
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 15, 1999, accompanying the
consolidated financial statements included in the 1998 Annual Report of First
Colonial Group, Inc. and Subsidiaries on Form 10-K for the year ended December
31,1998. We hereby consent to the incorporation by reference of said reports in
the Registration Statement of First Colonial Group, Inc. and Subsidiaries on
Form S-3 (File No. 33-21126, effective July 6, 1989) and on Form S-8 (File No.
33-84400, effective September 27, 1994).
/S/ GRANT THORNTON
Philadelphia, Pennsylvania
March 30, 1999
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<NAME> FIRST COLONIAL GROUP
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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0
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