FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-11526
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FIRST COLONIAL GROUP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2228154
-------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
76 S. MAIN ST., NAZARETH, PA 18064
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO _____
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 1,950,912 SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON JUNE 30, 2000.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1 - Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Income 3
Consolidated Statement of Comprehensive Income 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3 - Quantitative and Qualitative Discussion About 28
Market Risk
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders 32
ITEM 5 - Other Information 32
ITEM 6 - Exhibits and Reports on Form 8-K 32
SIGNATURES 33
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
June 30 Dec. 31
2000 1999
-------- -------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 16,328 $ 14,272
Federal Funds Sold - 2,000
-------- --------
Total Cash and Cash Equivalents 16,328 16,272
Interest-Bearing Deposits With Banks 351 5,589
Investment Securities Held-to-Maturity
(Fair Value: June 30, 2000 $18,707
Dec. 31, 1999 - $19,123) 19,291 19,887
Securities Available-for-Sale at Fair Value 144,983 132,356
Mortgage Loans Held-for-Sale 634 -
Total Loans, Net of Unearned Discount 214,622 202,258
LESS: Allowance for Possible Loan Losses (2,426) (2,437)
-------- -------
Net Loans 212,196 199,821
Premises and Equipment, Net 7,054 7,116
Accrued Interest Income 3,980 3,045
Other Real Estate Owned 489 571
Other Assets 7,184 7,232
------- -------
TOTAL ASSETS $ 412,490 $ 391,889
--------- ---------
LIABILITIES
Deposits
Non-Interest Bearing Deposits 45,908 41,813
Interest-Bearing Deposits 290,126 282,667
--------- ---------
Total Deposits 336,034 324,480
Securities Sold Under Agreements to Repurchase 7,050 1,730
Short-Term Borrowings 3,445 -
Long-Term Debt 30,000 30,000
Accrued Interest Payable 3,720 4,208
Other Liabilities 3,001 3,228
--------- ---------
TOTAL LIABILITIES 383,250 363,646
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 - 1,950,912 shares at June 30, 2000
and 1,848,437 shares at Dec. 31, 1999 9,755 9,242
Additional Paid in Capital 16,858 15,674
Retained Earnings 8,155 8,968
Employee Stock Ownership Plan Debt (1,320) (1,320)
Accumulated Other Comprehensive Loss (4,208) (4,321)
--------- --------
Total Shareholders' Equity 29,240 28,243
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 412,490 $ 391,889
--------- ---------
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 4,454 $ 4,432 $ 8,636 $ 8,828
Investment Securities Income
Taxable 2,346 1,647 4,625 2,988
Tax-Exempt 367 392 730 780
Interest on Deposits with Banks and
Federal Funds Sold 2 19 34 118
------- ------- ------- -------
Total Interest Income 7,169 6,490 14,025 12,714
------- ------- ------- -------
INTEREST EXPENSE:
Interest on Deposits 2,675 2,450 5,255 4,792
Interest on Short-Term Borrowing 198 76 314 122
Interest on Long-Term Debt 459 279 913 559
------- ------- ------- -------
Total Interest Expense 3,332 2,805 6,482 5,473
------- ------- ------- -------
NET INTEREST INCOME: 3,837 3,685 7,543 7,241
Provision for Possible Loan Losses 125 125 125 250
------- ------- ------- -------
Net Interest Income After Provision
For Possible Loan Losses 3,712 3,560 7,418 6,991
------- ------- ------- -------
OTHER INCOME:
Trust Revenue 303 337 632 603
Service Charges on Deposit Accounts 491 425 942 797
Investment Securities Gains, Net 112 345 158 561
(Loss)Gain on the Sale of Mortgage Loans (2) 13 (1) 91
Other Operating Income 179 155 387 337
------- ------- ------- -------
Total Other Income 1,083 1,275 2,118 2,389
------- ------- ------- -------
OTHER EXPENSES:
Salaries and Employee Benefits 1,811 1,653 3,613 3,293
Net Occupancy and Equipment Expense 602 515 1,174 1,050
Other Operating Expenses 1,638 1,459 2,981 2,832
------- ------- ------- -------
Total Other Expenses 4,051 3,627 7,768 7,175
------- ------- ------- -------
Income Before Income Taxes 744 1,208 1,768 2,205
Provision for Income Taxes 125 283 353 495
------- ------- ------- -------
NET INCOME $ 619 $ 925 $ 1,415 $ 1,710
======= ======= ======= =======
Per Share Data
Basic Net Income $ 0.32 $ 0.50 $ 0.74 $ 0.91
======= ======= ======= =======
Diluted Net Income $ 0.32 $ 0.49 $ 0.74 $ 0.90
======= ======= ======= =======
Cash Dividends $ 0.18 $ 0.17 $ 0.37 $ 0.34
======= ======= ======= =======
</TABLE>
See accompanying notes to interim financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 619 $ 925 $ 1,415 $1,710
Other Comprehensive Income (Loss),
Net of Tax
Unrealized gains (losses)
on securities
Unrealized gains (losses)
arising in period 134 (2,570) 55 (3,322)
Reclassification adjustment;
gain included in net income 27 228 58 370
------ ------ ------ ------
Other Comprehensive Income (Loss) 161 (2,342) 113 (2,952)
------ ------ ------ ------
Comprehensive Income (Loss) $ 780 $(1,417) $ 1,528 $(1,242)
====== ====== ====== ======
</TABLE>
Other comprehensive income is shown net of tax (benefit) for the six
months ended June 30, 2000 and June 30, 1999 of $58,000 and $(1,521,000),
respectively and the three months ended June 30, 2000 and June 30, 1999 of
$83,000 and $(1,206,000) respectively.
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Six Months Ended
June 30, 2000 June 30, 1999
OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net Income $1,415 $1,710
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses 125 250
Depreciation and Amortization 541 510
Amortization of Security Discounts (191) (96)
Amortization of Security Premiums 121 131
Amortization of Deferred Fees on Loans 249 65
Gain on Sale of Other Real Estate Owned (7) -
Loss from write-down of Other Real Estate Owned 184 -
Mortgage Loans Originated for Sale (1,600) (14,412)
Mortgage Loan Sales 966 13,534
Loss (Gain)on Sale of Mortgage Loans 1 (91)
Investment Securities Gains, Net (152) (561)
Changes in Assets and Liabilities:
Increase in Accrued Interest Income (411) (319)
Decrease in Accrued Interest Payable (488) (299)
Net Increase in Other Assets (588) (354)
Net Decrease in Other Liabilities (227) (788)
------- -------
Net Cash Used In Operating Activities (64) (720)
------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities
Available-for-Sale 5,771 8,572
Proceeds from Maturities of Securities
Held-to-Maturity 577 3,460
Proceeds from Sales of Securities
Available-for-Sale 3,561 13,858
Purchase of Securities Available-for-Sale (21,546) (43,367)
Purchase of Securities Held-to-Maturity - (2,415)
Net Decrease (Increase) in Interest Bearing
Deposits With Banks 5,238 (1,753)
Net Increase in Loans (12,866) (5,940)
Purchase of Premises and Equipment, Net (425) (211)
Proceeds from Sale of Other Real Estate Owned 22 176
------- -------
Net Cash Used In Investing Activities (19,668) (27,620)
------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest
Bearing Demand Deposits and Savings Accounts 7,596 7,119
Net Increase in Certificates of Deposits 3,957 19,804
Net Increase in Short-Term Borrowings 3,445 -
Net Increase in ESOP Debt - (1,000)
Net Increase in Repurchase Agreements 5,320 4,057
Proceeds from Issuance of Stock 154 160
Cash Dividends Paid (683) (643)
Cash in Lieu of Fractional Shares (2) (4)
------- -------
Net Cash Provided by Financing Activities 19,788 29,493
------- -------
Increase in Cash and Cash Equivalents 56 1,153
Cash and Cash Equivalents, January 1 16,272 14,259
------- -------
Cash and Cash Equivalents, June 30, $16,328 $15,412
======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - GENERAL
The accompanying financial statements, footnotes and discussion should be read
in conjunction with the audited financial statements, footnotes, and discussion
contained in the Company's Annual Report for the year ended December 31, 1999.
The financial information presented herein is unaudited; however, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the unaudited financial information have been made.
The results for the three and six months ended June 30, 2000 are not necessarily
indicative of results to be expected for the full year or any other interim
period.
NOTE B - SUBSIDIARIES
First Colonial Group, Inc. (the "Company") is a Pennsylvania business
corporation which is registered as a bank holding company under the Bank Holding
Company Act of 1956. The Company has two wholly-owned subsidiaries, Nazareth
National Bank and Trust Company (the "Bank") founded in 1897 and First C. G.
Company, Inc. founded in 1986.
NOTE C - INVESTMENT CONSIDERATIONS
In analyzing whether to make, or to continue, an investment in the Company,
investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, a copy of which can be obtained
from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main
Street, Nazareth, PA 18064.
NOTE D - FORWARD LOOKING STATEMENTS
The information contained in this Quarterly Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements as to
litigation and the amount of reserves, the discussion in "Item 3 - Quantitative
and Qualitative Discussion About Market Risk", issues and other statements which
are not historical facts or as to management's beliefs, expectations or
<PAGE>
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 regulations, competition, and results of litigation. Certain of these
risks, uncertainties and other factors are discussed in this Quarterly Report or
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999, a copy of which may be obtained from the Company upon request and without
charge (except for the exhibits thereto).
NOTE E - CASH DIVIDENDS
On May 19, 2000 the Company paid its 2000 second quarter dividend on its common
stock of $.19 per share to shareholders of record on May 5, 2000.
NOTE F - STOCK DIVIDEND
On June 22, 2000 the Company paid a 5% stock dividend to shareholders of record
on June 2, 2000. Fractional shares were paid in cash based on the closing price
of $14.50 per share on the record date. Net income per share and average shares
outstanding have been restated to reflect the 5% stock dividend.
NOTE G - EARNINGS PER SHARE
The Company calculates earnings per share as provided by the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS
128)". SFAS 128 eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share in conjunction
with the disclosures of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Basic and diluted
earnings per share were calculated as follows.
<PAGE>
For the Three Months Ended June 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
2000
<S> <C> <C> <C>
Net Income $ 619
Basic Earnings Per Share
Income Available to Common Shareholders $ 619 1,916,026 $ 0.32
Effect of Dilutive Securities
Stock Options 1,121
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 619 1,917,147 $ 0.32
------ --------- -------
1999
Net Income $ 925
Basic Earnings Per Share
Income Available to Common Shareholders $ 925 1,868,696 $ 0.50
Effect of Dilutive Securities
Stock Options 7,084
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 925 1,875,780 $ 0.49
------ --------- -------
</TABLE>
Average common shares outstanding in the three month period ended June 30, 2000
and 1999 did not include 51,386 and 58,636, respectively of average weighted
unallocated shares held by the ESOP. The exclusion of these unallocated shares
held by the ESOP is due to the Company's adoption of SOP 93-6. Share and per
share information have been restated to reflect the 5% stock dividend of June
2000.
<PAGE>
For the Six Months Ended June 30,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
2000
<S> <C> <C> <C>
Net Income $1,415
Basic Earnings Per Share
Income Available to Common Shareholders $1,415 1,912,381 $ 0.74
Effect of Dilutive Securities
Stock Options 1,121
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $1,415 1,913,503 $ 0.74
------ --------- -------
1999
Net Income $1,710
Basic Earnings Per Share
Income Available to Common Shareholders $1,710 1,874,551 $ 0.91
Effect of Dilutive Securities
Stock Options 7,220
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $1,710 1,881,771 $ 0.91
------ --------- -------
</TABLE>
Average common shares outstanding in the six month period ended June 30, 2000
and 1999 did not include 52,071 and 50,990, respectively of average weighted
unallocated shares held by the ESOP. The exclusion of these unallocated shares
held by the ESOP is due to the Company's adoption of SOP 93-6. Share and per
share information have been restated to reflect the 5% stock dividend of June
2000.
<PAGE>
NOTE H - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
Six Month Period Ended June 30, 2000 1999
<S> <C> <C>
Beginning Balance $2,437,000 $2,691,000
Additions
Provision for loan losses charged to
operating expenses 125,000 250,000
Recoveries of loans 106,000 39,000
---------- ----------
Total Additions 231,000 289,000
Deductions
Loans charged off 242,000 322,000
---------- ----------
Ending Balance $2,426,000 $2,658,000
</TABLE>
NOTE I - IMPAIRED LOANS
The Company measures impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, impairment may be measured based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Company has identified a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
loan agreement. The accrual of interest is discontinued on such loans and no
income is recognized until all recorded amounts of interest and principal are
recovered in full.
Loan impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit loses related to loan impairment are as follows:
<PAGE>
<TABLE>
At June 30, 2000 1999
<S> <C> <C>
Principal amount of impaired loans $ 269,000 $ 419,000
Deferred loan costs 1,000 ---
-------- --------
270,000 419,000
Less valuation allowance 54,000 151,000
-------- --------
$ 216,000 $ 268,000
</TABLE>
On January 1, 1995 a valuation for credit losses related to impaired loans was
established. The activity in this allowance account for the six months ending
June 30, 2000 was as follows:
<TABLE>
2000 1999
<S> <C> <C>
Valuation allowance at January 1, $ 74,000 $303,000
Provision for loan impairment 1,000 28,000
Transfer from Unallocated Allowance for
Possible Loan Losses (21,000) (112,000)
Direct charge-offs --- (68,000)
-------- --------
Valuation allowance at June 30, $ 54,000 $151,000
</TABLE>
Total cash collected on impaired loans during the six month period ended June
30, 2000 was $136,000 of which $106,000 was credited to the principal balance
outstanding on such loans and $30,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the first six
months of 2000 was $18,000. Interest income recognized for the first half of
1999 was $50,000. The valuation allowance for impaired loans of $54,000 at June
30, 2000 is included in the "Allowance for Possible Loan Losses" which amounts
to $2,426,000 at June 30, 2000. The provision for loan impairment of $1,000 for
the six month period ended June 30, 2000 is included in the "Provision for
Possible Loan Losses" as reflected on the "Consolidated Statement of Income" for
the same period.
NOTE J - REPORTING OF COMPREHENSIVE INCOME
On January 1, 1998, the Corporation adopted the Financial Accounting Standards
Board issued (SFAS) No. 130, "Reporting Comprehensive Income", which requires
presenting a complete set of financial statements to include details of
comprehensive income that arises in the reporting period. Comprehensive income
consist of net income or loss for the current period and other comprehensive
income - income, expenses, gains and losses that bypass the income statement and
are reported directly in a separate component of equity. Other comprehensive
income includes, for example, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investment securities.
The Corporation has elected to report comprehensive income on a separate
schedule titled "Statement of Comprehensive Income".
<PAGE>
NOTE K - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 established standards for the
method that public business enterprises report selected information regarding
operating segments in financial reports issued to shareholders. The disclosure
information required consists of a measure of segment profit and loss, certain
revenue and expense items and segment assets based upon specified quantitative
thresholds, as it is reported internally to the chief operating decision maker
on both an interim and annual basis. The statement is effective for fiscal years
beginning after December 15, 1997. Management has determined that the
Corporation consists of one segment: community banking.
NOTE L - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITY
In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activity" which was effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 must be adopted prospectively and retroactive
application is not permitted. SFAS No. 133 will require the Company to record
all derivatives on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in the
value of related hedged assets, liabilities and firm commitments or for
forecasted transactions, deferred and recorded as a component of accumulated
other comprehensive income (loss) in stockholders' equity until the hedged
transactions occur and are recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value will be immediately recognized in
earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". SFAS No. 133 is now effective for fiscal years beginning
after June 15, 2000. The Company expects to adopt SFAS No. 133 on January 1,
2001 and does not believe the effect of adopting SFAS No. 133 will have any
material effect on its consolidated financial position or results of operation.
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company has reserved $994,000 against unsettled claims which have been or
may be asserted against the Bank in connection with certain pre-need funeral
trusts which were allegedly directed by funeral directors to be invested in a
private placement annuity issued by EA International Trust. As of June 30, 2000,
nine funeral directors whose funds were invested in this annuity commenced suit
against the Bank; if all funeral directors whose funds were invested in this
annuity were to pursue claims, the Bank's maximum exposure would be
approximately $4.1 million principal loss plus punitive damages, interest, costs
and attorneys fees. The Bank has been advised that it has significant defenses
to these claims and intends to vigorously defend against such claims. The Bank
has discontinued its involvement in this annuity and is pursuing indemnification
for some or all of these possible losses from its insurance carriers and from EA
International Trust.
<PAGE>
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following financial review and analysis is of the financial condition and
earnings performance of the Company and its wholly owned subsidiaries for the
three and six month period ended June 30, 2000.
The information contained in this Quarterly Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, the discussion in "Item 3
- Quantitative and Qualitative Discussion About Market Risk", statements as to
litigation and the amount of reserves, and other statements which are not
historical facts or as to management's beliefs, expectations or opinions. Such
forward looking statements are subject to risks and uncertainties and may be
affected by various factors which may cause actual results to differ materially
from those in the forward looking statements, 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 results of litigation. Certain of these risks, uncertainties
and other factors are discussed in this Quarterly Report or in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, a copy of which
may be obtained from the Company upon request and without charge (except for the
exhibits thereto).
In analyzing whether to make, or to continue, an investment in the Company,
investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, a copy of which can be obtained
from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main
Street, Nazareth, PA 18064.
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to raise funds to support asset
growth, meet deposit withdrawal and other borrowing needs, maintain reserve
requirements and otherwise operate the Company on an ongoing basis. The Company
manages its assets and liabilities to maintain liquidity and earnings stability.
Among the sources of liquidity are money market investments, securities
available-for-sale, funds received from the repayment of loans, short-term
borrowings and borrowings from the Federal Home Loan Bank. At June 30, 2000,
cash, due from banks, Federal funds sold and interest bearing deposits with
banks totaled $16,679,000, and securities maturing within one year totaled
$3,337,000. At December 31, 1999, cash, due from banks, Federal funds sold and
<PAGE>
interest bearing deposits with banks, totaled $21,861,000, and securities
maturing within one year were $2,249,000. Securities sold under an agreement to
repurchase totaled $7,050,000 at June 30, 2000 and $1,730,000 at December 31,
1999. The Bank is a member of the Federal Home Loan Bank of Pittsburgh. The Bank
had interest bearing demand deposits at the Federal Home Loan Bank of Pittsburgh
in the amount of $6,000 at June 30, 2000 and $5,548,000 at December 31, 1999.
These deposits are included in due from banks on the Company's financial
statements. As a result of this relationship, the Company places most of its
short-term funds at the Federal Home Loan Bank of Pittsburgh. There were no
Federal funds sold at June 30, 2000. At December 31, 1999 there were Federal
funds sold totaling $2,000,000.
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit
in the amount of $25,000,000 at June 30, 2000, subject to certain collateral
requirements. The Bank had $3,445,000 in short-term (overnight) borrowings
against this line at June 30, 2000. The Bank had no short-term (overnight)
borrowings at December 31, 1999. The Bank had additional borrowings from the
Federal Home Loan Bank at June 30, 2000 and at December 31, 1999 totaling
$30,000,000 of which $8,000,000 is due in August 2000, $5,000,000 is due in
December 2001, $7,000,000 is due in October 2008 and $10,000,000 is due in
August 2004.
Cash flows for the six months ended June 30, 2000 consisted of cash provided by
financing activities of $19,788,000 offset in part by cash used in investing
activities of $19,668,000 and cash used in operating activities of $64,000
resulting in an increase in cash and cash equivalents of $56,000.
Cash used in operating activities was the result of mortgage loans originated
for sale of $1,600,000, an increase in other assets of $588,000, a decrease in
accrued interest expense of $488,000, an increase in accrued interest income of
$411,000, a decrease in other liabilities of $227,000 and gains on investment
securities of $152,000 partially reduced by net operating income of $1,415,000,
mortgage loan sales of $966,000, depreciation and amortization of $541,000,
amortization of deferred fees on loans of $249,000, the loss from the write-down
of other real estate owned of $184,000 and a provision for possible loan losses
of $125,000. Cash was used in investing activities for the purchase of
securities available-for-sale of $21,546,000 plus net increase in loans of
$12,866,000 reduced in part by proceeds from maturities of securities
available-for-sale and held-to-maturity of $5,771,000 and $577,000,
respectively, proceeds from sales of securities available-for-sale of
$3,561,000, and a decrease in interest bearing deposits with other banks of
$5,238,000. Cash provided by financing activities consisted principally of
increases in interest and non-interest bearing demand deposits and savings
accounts of $7,596,000, an increase in certificates of deposit of $3,957,000, an
increase of $5,320,000 in repurchase agreements, an increase in short-term
(overnight) borrowings of $3,445,000 and the proceeds from the issuance of stock
of $154,000 offset in part by the payment of cash dividends of $683,000 and cash
paid in lieu of fractional shares on the 5% stock dividend of June 2000 in the
amount of $2,000.
<PAGE>
The Company recognizes the importance of maintaining adequate capital levels to
support sound, profitable growth and to encourage depositor and investor
confidence. Shareholders' equity at June 30, 2000 was $29,240,000 as compared to
$28,243,000 at December 31, 1999, for an increase of $997,000. This increase was
attributable to net income for the first six months of $1,415,000, the proceeds
from the sale of common stock pursuant to the Dividend Reinvestment Plan of
$153,000, proceeds from the sale of common stock pursuant to the exercise of
options under the Company's Non-Employee Director Stock Option Plan of $1,000,
and an increase of $113,000 in accumulated other comprehensive income (see
statement of Comprehensive Income), offset in part by the payment of cash
dividends of $683,000 and the payment of $2,000 in cash in lieu of fractional
shares from the 5% stock dividend of June 2, 2000.
On June 22, 2000, the Company paid a 5% stock dividend to shareholders of record
on June 2, 2000. Fractional shares were paid in cash based on the closing price
of $14.50 per share on the record date.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. During
the first six months of 2000, 9,860 shares of common stock were purchased from
authorized and un-issued shares at an average price of $15.48 per share for
proceeds of approximately $153,000.
The Company has a Non-Employee Director Stock Option Plan that provides for the
awarding of stock options to the Company's non-employee directors. During the
first six months of 2000, options to purchase 2,550 shares of the Company's
common stock at an average price of $16.43 per share were granted to certain
non-employee directors. Options for 1,340 shares of the Company's common stock
were exercised at a price of $12.69 per share by a non-employee director during
the first half of 2000.
The Company also has a Stock Option Plan which provide for the granting of
options to acquire the Company's common stock for officers and key employees. No
options were issued or exercised under this plan during the first six months of
2000.
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.
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, that as of June 30, 2000, the Company and the Bank met all
capital adequacy requirements to which they were subject.
<PAGE>
Capital Ratios
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At June 30, 2000 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $35,172 16.21% $17,359 8.00% --- ---
Bank $31,208 14.45% $17,278 8.00% $21,598 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $32,746 15.09% $ 8,680 4.00% --- ---
Bank $28,782 13.33% $ 8,639 4.00% $12,959 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $32,746 7.99% $16,395 4.00% --- ---
Bank $28,782 7.10% $16,221 4.00% $20,276 5.00%
</TABLE>
<TABLE>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Action
(Dollars in Thousands)
At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $34,329 16.67% $16,477 8.00% --- ---
Bank $30,831 15.00% $16,446 8.00% $20,557 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,892 15.48% $ 8,239 4.00% --- ---
Bank $28,194 13.71% $ 8,223 4.00% $12,334 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $31,892 8.11% $15,726 4.00% --- ---
Bank $28,194 7.20% $15,655 4.00% $19,568 5.00%
</TABLE>
<PAGE>
The Company is not aware of any trends, events or uncertainties that will have a
material effect on the Company's liquidity, capital resources or operations,
except for higher interest rates which could cause deposit disintermediation and
an increase in interest expense and the possibility of inflationary trends, the
results of which cannot be determined at this time. The Company is not under any
agreement with the regulatory authorities nor is it aware of any current
recommendation by regulatory authorities which, if they were implemented, would
have a material adverse effect on liquidity, capital resources, or the
operations of the Company.
Assets and Liabilities
Total assets at June 30, 2000 were $412,490,000, representing an increase of
5.3% over total assets of $391,889,000 at December 31, 1999. Deposits increased
by $11,553,000 or 3.6% from $324,480,000 on December 31, 1999 to $336,033,000 on
June 30, 2000. Contributing to this increase were increases in non-interest
bearing checking deposits of $4,095,000, certificates of deposit of $3,957,000,
interest-bearing checking deposits of $2,421,000 and savings and money market
deposits of $1,080,000. Loans outstanding at June 30, 2000 were $214,622,000 as
compared to $202,258,000 at December 31, 1999. This is an increase of
$12,364,000 or 6.1%. The increase in loans was primarily the result of a
increases of $6,041,000 or 6.9% in consumer loans, $5,776,000 or 10% in
residential real estate and $547,000 or 1% in commercial loans. During the first
half of 2000, $966,000 of residential real estate loans were sold. Most of the
loans sold were fixed rate with 30 or 15 year maturities. These loans were sold
to reduce the Company's interest-rate risk and to provide liquidity for future
lending opportunities. Most of the loans sold were originated in 2000. The Bank
continues to service all of these loans. There were $634,000 of residential real
estate loans identified as held-for-sale at June 30, 2000. The loan to deposit
ratio was 63.9% at June 30, 2000 and 62.3% at December 31, 1999.
Premises and equipment decreased by $62,000 to $7,054,000 at June 30, 2000 from
$7,116,000 at December 31, 1999.
The Company had long-term debt totaling $30,000,000 at June 30, 2000 and
December 31, 1999 from the Federal Home Loan Bank of Pittsburgh. Of this amount
$8,000,000 matures in August 2000, $5,000,000 matures in December 2001,
$7,000,000 matures on 2008 and the remaining $10,000,000 matures in August 2004.
The interest rates associated with these loans are 6.89% variable, 6.36%
variable (at LIBOR plus 3 basis points), 4.86% fixed to October 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, and 6.06% fixed to August 2001 at which time the
rate may be 3 month LIBOR plus 15 basis points, if LIBOR is 7.5% or higher,
respectively. The loans are secured by the Bank's investment and residential
real estate loans and securities. These funds were borrowed to improve liquidity
and to fund loans.
<PAGE>
The Company's Employee Stock Ownership Plan (ESOP) has two loans outstanding
totaling $1,320,000 at June 30, 2000 and December 31, 1999. During the first
quarter of 1999, the ESOP borrowed $1,000,000 from the Company's subsidiary,
First C. G. Company, payable over twenty years with interest due quarterly and
principal annually in October. The proceeds from this loan were used to purchase
37,275 shares of the Company's common stock. In the second quarter of 1998, the
ESOP borrowed $500,000 from First C. G. Company. This loan is due in 2005 with
interest due quarterly and principal annually in October. The interest rate on
these loans is at the Bank's prime rate (9.5% at June 30, 2000 and 8.5% at
December 31, 1999).
At June 30, 2000 the Bank had short-term borrowings of $3,445,000 from the
Federal Home Loan Bank of Pittsburgh against a line of credit of $25,000,000.
The Bank had no such short-term borrowings at December 31 1999.
Results of Operations
The net income for the three months ended June 30, 2000 was $619,000, a $306,000
or 33% decrease compared to net income of $925,000 for the same period in 1999.
The earnings decline was attributable to an increase in total other expenses of
$424,000 primarily the result of a one-time write-down in the amount of $184,000
of a commercial property held in Other Real Estate Owned and increases in salary
and benefits of $158,000 and occupancy expense of $87,000, and a decrease of
$233,000 in net securities gains offset in part by increases in net interest
income of $152,000 and other income exclusive of net securities gains of $41,000
and a $158,000 decrease in Federal income taxes.
Net income for the six months ended June 30, 2000 was $1,415,000 compared to
$1,710,000 for the same period in 1999. The earnings decrease of $295,000 or
17.3% was primarily attributable to increases in total other expenses of
$593,000 and a decreases in net securities gains of $403,000 and gains on the
sale of mortgage loans of $92,000. These were offset in part by an increase of
$302,000 in net interest income, an increase of $224,000 in other income
exclusive of net securities gains and gains on the sale of mortgage loans, and
decreases of $125,000 in the provision for loan losses and Federal income taxes
of $142,000.
Basic earnings per share for the three months ended June 30, 2000 were $0.32 as
compared to $0.50 for the corresponding period in 1999. Average shares
outstanding during this three month period were 1,916,026 in 2000 and 1,868,696
in 1999. Basic earnings per share for the six months ended June 30, 2000 and
1999 were $0.74 and $0.91, respectively. Average shares outstanding during this
six month period were 1,912,381 in 2000 and 1,874,551 in 1999. Diluted earnings
per share for the three month period ended June 30, 2000 were $0.32 compared to
$0.49 for the same period in 1999. Diluted earnings per share for the six month
period ended June 30 were $0.74 and $0.90 in 2000 and 1999, respectively. Per
share earnings and average shares outstanding have been restated to reflect the
5% stock dividend paid on June 22, 2000. (see Note F)
<PAGE>
Net Interest Income
The "Rate/Volume Analysis" table segregates, in detail, the major factors that
contributed to the changes in net interest income, for the quarter and six
months ended June 30, 2000 as compared to the same period in 1999, into amounts
attributable to both rate and volume variances. In calculating the variances,
the changes were first segregated into (1) changes in volume (change in volume
times the old rate), (2) changes in rate (changes in rate times the old volume)
and (3) changes in rate/volume (changes in rate times the change in volume). The
changes in rate/volume have been allocated in their entirety to the change in
rates. The interest income included in the "Rate/Volume Analysis" table has been
adjusted to a fully taxable equivalent amount using the Federal statutory tax
rate of 34%. Non accruing loans have been used in the daily average balances to
determine changes in interest income due to volume. Loan fees included in the
interest income calculation are not material.
Net interest income amounted to $3,837,000 for the three months ended June 30,
2000 as compared to $3,685,000 for the three months ended March 31, 1999, an
increase of $152,000 or 4.1%. This increase is the result of the increase in the
volume of interest-earning assets reduced in part by increases in
interest-bearing liabilities and a lower interest spread.
For the six months period ended June 30, 2000, net interest income was
$7,543,000 compared to $7,241,000 for the same period in 1999, a decrease of
$302,000 or 4.2%.
The fully taxable-equivalent net interest income was $7,946,000 for the first
six months of 2000, compared to $7,661,000 for the same period in 1999, a 3.7%
or $284,000 increase. As shown in the following "Rate/Volume Analysis" table,
this increase in taxable-equivalent net interest income was primarily due to a
$282,000 increase related to interest rates and a $2,000 increase related to
volume.
Total taxable-equivalent interest income grew $1,295,000 primarily the result of
the higher volumes in the investment security earning asset category.
Taxable-equivalent income from investment securities for the six month period
increased $1,560,000 over the first half of 1999. This was comprised of a
$1,174,000 increase due to volume and a $386,000 increase due to rates as a
result of rising interest rates. The increase in interest earned on investment
securities was partially reduced by a $181,000 reduction in taxable equivalent
interest earned on loans in the first half of 2000 as compared to 1999. This
decrease was attributed to a $280,000 reduction due to a lower volume of loans
partially offset by an increase of $99,000 due to rising interest rates on
loans. Average year-to-date earning assets increased to $371,095,000 at June 30,
2000 from $345,119,000 at June 30, 1999, a $25,976,000 or 7.5% increase.
Total interest expense grew $1,009,000 during the first six months of 2000,
compared to the same period in 1999. This growth was principally the result of
higher volumes, primarily due to an increase in time deposits, short-term
borrowing and long-term debt. Interest expense attributed to time deposits
increased $483,000 during the first six months of 2000, compared to the first
six months of 1999. This increase is primarily attributable to an increase in
volume. The increase in time deposits was used to finance the earning asset
growth. Interest expense for short-term borrowings and long-term debt increased
$176,000 and $354,000, respectively. These increases are primarily due to higher
level of borrowings. These borrowings were used to fund the increase in
interest-earning assets. Also contributing to the increase in interest expense
were higher rates on time deposits and short and long term borrowings. Partially
offset by lower interest rates paid on demand deposits, savings and club
accounts as a result of repricing. (see Item 3. - Quantitative and Qualitative
Discussion About Market Risk).
<PAGE>
The following table sets forth a "Rate/Volume Analysis" which
segregates in detail the major factors that contributed to the changes in net
interest income for the six months ended June 30, 2000. The interest income
included in the table has been adjusted to a fully taxable equivalent amount
using the Federal statutory tax rate of 34%.
RATE/VOLUME ANALYSIS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Six Months Ended
June 30, 2000
Over / (Under)
June 30, 1999
CHANGE DUE TO:
TOTAL RATE VOLUME
<S> <C> <C> <C>
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ (75) $ 2 $ (77)
Federal Funds Sold (9) 3 (12)
Investment Securities 1,560 386 1,174
Loans (181) 99 (280)
------- ------- -------
Total Interest Income 1,295 490 805
------- ------- -------
INTEREST EXPENSE
Demand Deposits, Savings & Clubs $ (20) $ (25) $ 5
Time Deposits 483 78 405
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 16 31 (15)
Short-Term Borrowings 176 48 128
Long-Term Debt 354 74 280
------- ------- -------
Total Interest Expense $ 1,009 $ 205 $ 803
------- ------- -------
Net Increase in Interest Income $ 284 $ 282 $ 2
</TABLE>
<PAGE>
Other Income and Other Expenses
Other income for the three months ended June 30, 2000 including service charges,
trust fees, gains or losses on the sale of mortgage loans and other operating
income, but exclusive of securities gains or losses, was $971,000 as compared to
$930,000 for the same period in 1999. This increase of $41,000 was due to a
$66,000 increase in service charges, offset in part by decreases in gains on the
sale of mortgage loans and Trust Division revenues. There was $2,000 in losses
on the sale of mortgage loans for the three months ended June 30, 2000 compared
to a gain of $13,000 same period in 1999. In the three month period ended June
30, 2000, service charges were $491,000, a $66,000 increase over the 1999 amount
of $425,000. The revenues from the Trust Division operations were $303,000 for
the three months ended June 30, 2000 as compared to $337,000 for the three
months ended June 30, 1999, a decline of $34,000. Other operating income for the
three months ended June 30, 2000 was $179,000, as compared to $155,000 for the
same period in 1999.
Other income for the six months ended June 30, 2000 including service charges,
trust revenues, gains or losses on the sale of mortgage loans and other
operating income, but exclusive of securities gains or losses, was $1,960,000 as
compared to $1,828,000 for the same period in 1999. This was an increase of
$132,000 or 7.2%. In the six month period ended June 30, 2000 service charges
were $942,000, a $145,000 or 18.2% increase over the 1999 amount of $797,000.
The increase in service charge income is the result of an increase in deposit
accounts. The revenues from the Trust Division operations were $632,000 for the
six months ended June 30, 2000 as compared to $603,000 for the six months ended
June 30, 1999, an increase of $29,000 or 4.8%. During the six months ended June
30, 2000, sales of mortgage loans resulted in a loss of $1,000 as compared to a
gain of $91,000 for the same period in 1999, a decrease of $92,000. The loss in
2000 was the result of the sale of $966,000 of residential real estate loans in
the first half of the year (see discussion on Assets and Liabilities). Other
operating income for the six months ended June 30, 2000 was $387,000 as compared
to $337,000 for the same period in 1999, an increase of $50,000 or 14.8%.
Total other expenses for the three month period ended June 30, 2000 increased by
$424,000 or 11.7% to $4,051,000 over total other expenses for the same period in
1999 of $3,627,000. Included in the total other expenses for the three month
period ended June 30, 2000 is a $158,000 or 9.6% increase in salary and benefit
expenses to a total of $1,811,000 as compared to $1,653,000 in 1999. These
increases were primarily due to general salary increases of approximately 4% and
the additional staff necessitated by the new branches in Stroudsburg and Mount
Pocono. Occupancy and equipment expenses were $602,000 for the three months
ended June 30, 2000 and $515,000 for the three months ended June 30, 1999, an
increase of $87,000 or 16.9%. The increases in occupancy and equipment expense
is related to the costs of the new branches and other equipment expenses. Other
operating expenses for the three month period ended June 30, 2000 were
$1,638,000, an increase of $179,000 or 12.3% from the $1,459,000 in other
expenses for the same period in 1999. The increase in other expenses was the
result of a one-time write-down in the amount of $184,000 of a commercial
property held in Other Real Estate Owned (see discussion on "Other Real Estate
Owned").
<PAGE>
Total other expenses for the six months ended June 30, 2000 increased by
$593,000 or 8.3%, to $7,768,000 from $7,175,000 for the same period in 1999.
Salaries and employee benefits were $3,612,000 for the six months ended June 30,
2000 as compared to $3,293,000 for the six months ended June 30, 1999
representing an increase of $319,000 or 9.7%. These increases were primarily due
to general salary increases of approximately 4% and the new branches. Occupancy
and equipment expenses were $1,174,000 for the six months ended June 30, 2000
and $1,050,000 for the six months ended June 30, 1999, an increase of $124,000
or 11.8%. The increases in occupancy and equipment expense is related to the new
branches and other equipment expense. Other operating expenses for the six
months ended June 30, 2000 were $2,981,000 in relation to $2,832,000 for the six
months ended June 30, 1999, an increase of $149,000 or 5.3%. This increase is
the result of the $184,000 write-down of the Other Real Estate Owned property.
Investment Securities
The Company classifies its debt and marketable securities into three categories:
trading, available-for-sale, and held-to-maturity as provided by the Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The Company had no trading securities at June 30, 2000 and
December 31, 1999.
Available-for-sale securities are carried at fair value with the net unrealized
gains or losses reported in equity. The Company had $144,983,000 in
available-for-sale securities at June 30, 2000 with a net unrealized loss of
$4,208,000. At December 31, 1999 available-for-sale securities amounted to
$132,356,000 with a net unrealized loss of $4,321,000.
During the six month period ended June 30, 2000, $3,561,000 of securities
available-for-sale were sold for a net gain of $112,000 as compared to
$13,297,000 of securities available-for-sale were sold for a net gain of
$561,000 for the same time period in 1999.
Held-to-maturity securities totaling $19,291,000 at June 30, 2000 are carried at
cost. At December 31, 1999, the held-to-maturity securities totaled $19,887,000.
The Company has the intent and ability to hold the held-to-maturity securities
until maturity. The Company, at June 30, 2000, did not hold any securities
identified as derivatives.
<PAGE>
Allowance and Provision for Possible Loan Losses
The provision is based on management's analysis of the adequacy of the allowance
for loan losses. In its evaluation, management considers past loan experience,
overall characteristics of the loan portfolio, current economic conditions and
other relevant facators. At present, management currently believes that the
allowance is adequate to absorb known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is largely dependent upon
economic conditions which are beyond the scope of management's control.
For the first six months of 2000, the provision for loan losses was $125,000
compared to $250,000 for the same period in 1999. Net charge offs were $136,000
for the six months ended June 30, 2000 compared with $283,000 for the six months
ended June 30, 1999. The ratio of the allowance for loan losses to total loans
at June 30, 2000 was 1.13% compared to 1.20% at December 31, 1999 and 1.22% at
June 30, 1999. This was primarily the result of an increase in total loans to
$214,622,000 at June 30, 2000 over $202,258,000 at December 31, 1999. The
allowance for possible loan losses at June 30, 2000 totaled $2,426,000, a
decrease of $11,000 or 0.5% from the December 31, 1999 amount of $2,437,000 and
$232,000 or 8.73% over the June 30, 1999 balance of $2,658,000.
As provided by SFAS No. 114, as amended by SFAS No. 118, $54,000 of the
Allowance for Possible Loan Losses is allocated to impaired loans at June 30,
2000 (See Note I "Impaired Loans").
Transactions in the allowance for loan losses are as follows:
ALLOWANCE FOR LOAN LOSSES
<TABLE>
2000 1999
<S> <C> <C>
Balance, January 1, $ 2,437,000 $ 2,691,000
Provision charged to Operating Expenses 125,000 250,000
Loans Charged Off 242,000 322,000
Recoveries 106,000 39,000
------- ------
Balance, June 30 $ 2,426,000 $ 2,658,000
</TABLE>
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
At June 30, 2000
<S> <C>
Commercial $ 739,000
Residential Real Estate 243,000
Consumer 765,000
Unallocated 679,000
-------
Total $2,426,000
</TABLE>
<PAGE>
Non-Performing Loans
The following discussion relates to the Bank's non-performing loans which
consist of those on a non-accrual basis and accruing loans which are past due
ninety days or more.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection effort, that the
borrower's financial condition is such that the collection of interest is
doubtful. The Company views these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Interest on these loans is recognized
only when received. The following table shows the balance of non-performing
loans for each of the periods indicated.
Non-performing loans (non accruing loans and loans past due over 90 days) were
1.27% of total loans at June 30, 2000 compared to 1.16% at June 30, 1999. The
increase in this ratio is the result of a $201,000 or 7.94% increase in
non-performing loans to $2,733,000 as compared to non-performing loans at June
30, 1999. The ratio of the allowance for loan losses to non-performing loans was
88.77% at June 30, 2000 compared to 86.97% at December 31, 1999 and 104.97% at
June 30, 1999.
Non-accruing loans at June 30, 2000 of $1,095,000 increased from the June 30,
1999 level of $941,000. This $154,000 increase was primarily the result of two
additional residential mortgage loans recognized as non-accrual. At the present
time, management is of the opinion that these loans present a minimal amount of
exposure to the Bank.
Loans past due 90 days or more and still accruing interest are loans that are
generally well secured and expected to be restored to a current status in the
near future. As of June 30, 2000, loans past due 90 days or more and still
accruing interest were $1,638,000 compared to $1,591,000 at June 30, 1999. The
$47,000 increase in loans past due 90 days from June 30, 1999 to June 30, 2000
was the result of an increase in commercial loans past due 90 days or more.
<PAGE>
NON-PERFORMING LOANS
<TABLE>
June 30, December 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
Non-accrual loans on a cash basis $1,095,000 $1,311,000 $ 941,000
Non-accrual loans as a percentage
of total loans 0.51% 0.65% 0.43%
Accruing loans past due 90 days
or more $1,638,000 $1,491,000 $1,591,000
Accruing loans past due 90 days
or more as a percentage of total
loans 0.76% 0.74% 0.73%
Allowance for loan losses to
nonperforming loans 88.77% 86.97% 104.97%
Nonperforming assets to total loans 1.27% 1.39% 1.16%
Allowance for loan losses to total loans 1.13% 1.20% 1.22%
</TABLE>
There are no significant loans classified for regulatory purposes that have not
been included in the above table of non-performing loans. The Company has no
significant loans that qualify as "Troubled Debt Restructuring" as defined by
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 15 "Accounting for Debtors and Creditors for Troubled Debt
Restructuring" at June 30, 2000.
OTHER REAL ESTATE OWNED
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. Other Real Estate Owned at June 30, 2000 of $489,000 decreased from the
June 30, 1999 level of $593,000. This $104,000 decrease was primarily the result
of a $184,000 write-down of a commercial property, offset in part by the
addition of other foreclosed properties.
Year 2000
The Company did not experience any material problems related to Year 2000 during
the first six months of 2000. The Bank had all of its branch offices open for
business on January 1, 2000 with all systems operating normally. The potential
full effect, if any, of the Year 2000 issue on the Company, its customers and
its business partners, including other banks, the Federal Reserve Bank and other
Federal agencies, will not be fully determined until later. If problems related
<PAGE>
to the Year 2000 arise within the Company or entities with which the Company
conducts business, the Company revenues and financial condition could be
adversely impacted.
The Company did not incur any Year 2000 related expenses during the quarter and
six month period ended June 30, 2000 and does not anticipate any additional Year
2000 related expenses. No significant projects have been delayed as a result of
the Company's Year 2000 effort.
<PAGE>
ITEM 3. Quantitative and Qualitative Discussion About Market Risk
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Fluctuations in interest will ultimately impact both
the level of income and expense recorded on a large portion of the Company's
assets and liabilities, and the market value of all interest-earning assets,
other than those which possess a short term to maturity. Since most of the
Company's interest-bearing assets and liabilities are located at the Bank, the
majority of the Company's interest rate risk is at the Bank level. As a result,
most interest rate risk management procedures are performed at the Bank level
(see discussion on "Interest Rate Sensitivity").
The Company and the Bank operate as a community banking institution primarily in
the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a result of its
location and nature of operations, the Company is not subject to foreign
currency exchange or commodity price risk. The Bank makes real estate loans
primarily in the counties adjacent to its operations and thus is subject to
risks associated with those local economies. The Bank holds a concentration of
residential real estate loans (56.01% of total loans) and commercial loans
supported by real estate (20.7% of total loans) in its loan portfolio. These
loans are subject to interest and economic risks. The Bank also originates
residential real estate loans for sale in the secondary market. Such loans are
identified as "Mortgage Loans Held-for-Sale" on the Company's Balance Sheet and
are subject to interest rate risk (see discussion on "Assets and Liabilities").
The Company does not own any trading assets and does not have any hedging
transactions in place such as interest rate swaps.
Interest Rate Sensitivity
The following table "Consolidated Comparative Statement Analysis" sets forth a
comparison of average daily balances, interest income and interest expense on a
fully taxable equivalent basis and interest rates calculated for each major
category of interest-earning assets and interest-bearing liabilities. For the
purposes of this analysis, the computations in the "Consolidated Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
were no state or local taxes on income applicable to the Company.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Six Months Ended, June 30, 2000 1999
Int Avg Int Avg
Avg Inc/ Yield/ Avg Inc/ Yield/
Bal Exp Rate Bal Exp Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS
Int-Bearing Deposits with Banks $ 944 $ 25 5.30% $ 4,185 $ 100 4.78%
Federal Funds Sold 275 9 6.55 785 18 4.59
Investment Securities
Taxable 135,348 4,625 6.83 95,769 2,988 6.24
Non-Taxable (1) 29,732 1,105 7.43 33,049 1,182 7.15
Loans (1) (2) 207,266 8,664 8.36 214,054 8,845 8.26
Reserve for Loan Losses 2,470 -- -- 2,723 -- --
--------- ----- -------- -----
Net Loans 204,796 8,664 8.46 211,331 8,845 8.37
--------- ----- -------- -----
Total Interest-Earning Assets 371,095 14,428 7.78 345,119 13,133 7.61
Non-Interest Earning Assets 31,406 -- -- 27,366 -- --
--------- ----- -------- -----
TOTAL ASSETS, INT INCOME $ 402,501 14,428 7.17 $372,485 13,133 7.05
--------- ----- -------- -----
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 52,125 260 1.00 $ 50,576 271 1.07
Money Market Deposits 12,774 176 2.76 13,785 188 2.73
Savings & Club Deposits 63,194 693 2.19 63,160 690 2.19
CD's over $100,000 4,398 108 4.91 4,631 91 3.93
All Other Time Deposits 150,493 4,018 5.34 134,744 3,552 5.27
--------- ----- -------- -----
Total Int-Bearing Deposits 282,984 5,255 3.71 266,896 4,792 3.59
Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase 4,928 104 4.22 5,903 88 2.98
Short-Term Borrowings 6,671 210 6.30 1,398 34 4.86
Long-Term Borrowings 30,000 913 6.09 20,000 559 5.59
--------- ----- -------- -----
Total Int-Bearing Liabilities 324,583 6,482 3.99 294,197 5,473 3.72
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 42,267 -- -- 40,213 -- --
Other Liabilities 7,531 -- -- 7,196 -- --
--------- ----- -------- -----
TOTAL LIABILITIES 374,381 6,482 3.46 341,606 5,473 3.20
SHAREHOLDERS' EQUITY 28,120 -- -- 30,879 -- --
--------- ----- -------- -----
TOTAL LIABILITIES AND EQUITY $ 402,501 6,482 3.22 $372,485 5,473 2.94
NET INTEREST INCOME $ 7,946 $ 7,662
----- -----
Net Interest Spread (3) 3.79 3.89
Effect of Interest-Free Sources
Used to Fund Earnings Assets 0.49 0.55
Net Interest Margin (4) 4.28% 4.44%
---- ----
</TABLE>
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The tax equivalent adjustments included above are
$404,000 and $419,000 for the six months ended June 30, 2000 and June
30, 1999, respectively. The effective tax rate used for the taxable
equivalent adjustment was 34%.
(2) Loan fees of $(144,000) and $57,000 for the six months ended June 30, 2000
and June 30, 1999, respectively, are included in interest income. Average
loan balances include non-accruing loans and average loans held-for-sale
of $1,199,000 $3,395,000 for the six months ended June 30, 2000 and June 30,
1999, 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>
The net interest margin of 4.28% for the six month period ended June 30, 2000,
decreased from the 4.44% net interest margin for the first six months of 1999.
The yield on interest earning assets was 7.78% during the first six months of
2000 as compared to 7.61% in 1999. The average interest rate paid on interest
bearing deposits and other borrowings was 3.99% for the first six months of 2000
as compared to 3.72% in 1999.
Interest rate sensitivity is a measure of the extent to which net interest
income would change due to changes in the level of interest rates. The objective
of interest rate sensitivity management is to reduce a company's vulnerability
to future interest rate fluctuations and to enhance consistent growth of net
interest income
Rate sensitivity arises from the difference between the volumes of assets which
are rate-sensitive as compared to the volumes of liabilities which are
rate-sensitive. The mismatch of assets and liabilities in a specific time frame
is referred to as interest sensitivity gap. Generally, in an environment of
rising interest rates, a negative gap will decrease net interest income, and in
an environment of falling interest rates, a negative gap will increase net
interest income.
Assets and liabilities are allocated to a specific time period based on their
scheduled repricing date or on an historical basis. At June 30, 2000, assets of
$145,282,000 (35.22% of total assets) were subject to interest rate changes
within one year. Liabilities subject to rate change within one year were
$190,738,000. A negative one-year gap position of $45,456,000 existed as of June
30, 2000. The ratio of rate-sensitive assets to rate-sensitive liabilities for
the one-year time frame was 76.17%. The "Interest Sensitivity Analysis" in the
following table presents a sensitivity gap analysis of the Company's assets and
liabilities at June 30, 2000.
<PAGE>
<TABLE>
-------------------------------------------------------------------------------
INTEREST SENSITIVITY ANALYSIS
(Dollars in Thousands) as of June 30, 2000
-------------------------------------------------------------------------------
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 $ 351 $ --- $ --- $ --- $ --- $ 351
Inv Securities 35,687 9,196 17,671 72,484 29,236 164,274
Loans Held-for-Sale 634 --- --- --- --- 634
Loans 33,832 11,096 20,487 81,113 65,668 212,196
Other Assets 16,328 --- --- --- 18,707 35,035
------- -------- -------- ------- -------- --------
TOTAL ASSETS $86,832 $ 20,292 $ 38,158 $ 153,597 $113,611 $412,490
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 45,908 $ 45,908
Int-Bearing
Deposits 82,744 17,402 72,097 54,433 63,449 290,125
Securities Sold
Under Agreements
to Repurchase 7,050 --- --- --- --- 7,050
Short-Term Debt 3,445 --- --- --- --- 3,445
Long-Term Debt 8,000 --- --- 15,000 7,000 30,000
Other --- --- --- --- 6,721 6,721
Capital --- --- --- --- 29,241 29,241
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $101,239 $ 17,402 $ 72,097 $ 69,433 $152,319 $412,490
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(14,407) $ 2,890 $(33,939) $ 84,164 $ 38,708 $ ---
Cuumulative Int
Sensitivity Gap $(14,407) $(11,517) $(45,456) $(38,708) $ --- $ ---
Cumulative Gap
RSA/RSL 85.77% 90.29% 76.17% 114.88% 100.0%
</TABLE>
(1) Historically, non-interest-bearing deposits reflect insignificant changes in
deposit trends and, therefore, the Company classifies these deposits over five
years.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 11, 2000, the Company held its annual meeting of shareholders. At the
annual meeting, the shareholders elected S. Eric Beattie, Christian F. Martin,
IV and John J. Ruhle, Jr. as Class 2 Directors of the Company to serve for a
term of four years and until their successors are duly elected and qualified.
The following is a tabulation of the vote for these directors.
<TABLE>
Votes
Withheld
For Authority
---------------- --------------
<S> <C> <C>
S. Eric Beattie 1,586,233 35,726
Christian F. Martin, IV 1,588,597 33,362
John H. Ruhle, Jr. 1,588,597 33,362
</TABLE>
The other directors whose terms of office as a director continued after the
meeting are Robert J. Bergren, Gordon B. Mowrer, Daniel B. Mulholland, Charles
J. Peischl, Richard Stevens, III and Maria Z. Thulin.
ITEM 5. Other Information
On April 24, 2000, the Bank entered into an agreement to acquire two supermarket
branches from Commonwealth Bank of Valley Forge, Pennsylvania. These branches
are located in Giant Supermarkets in Whitehall and Trexlertown, Lehigh County,
Pennsylvania. This acquisition has been approved by the regulatory authorities
and is expected to be completed during the third quarter.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8K
No reports on Form 8K were filed for the
quarter during which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST COLONIAL GROUP, INC.
DATE: August 15, 2000 BY: /S/ S. ERIC BEATTIE
-------------------------- --------------------
S. ERIC BEATTIE
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: August 15, 2000 BY: /S/ REID L. HEEREN
------------------------- -------------------
REID L. HEEREN
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
