FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------------------
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2228154
- ------------------------ --------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
76 S. MAIN ST., NAZARETH, PA 18064
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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: 1,853,271 SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON MARCH 31, 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 12
ITEM 3 - Quantitative and Qualitative Discussion About 25
Market Risk
PART II - OTHER INFORMATION
ITEM 5 - Other Information 29
ITEM 6 - Exhibits and Reports on Form 8-K 29
SIGNATURES 30
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
March 31 Dec. 31
2000 1999
-------- -------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 13,968 $ 14,272
Federal Funds Sold - 2,000
-------- --------
Total Cash and Cash Equivalents 13,968 16,272
Interest-Bearing Deposits With Banks 64 5,589
Investment Securities Held-to-Maturity
(Fair Value: March 31, 2000 $18,959
Dec. 31, 1999 - $19,123) 19,563 19,887
Securities Available-for-Sale at Fair Value 146,658 132,356
Mortgage Loans Held-for-Sale - -
Total Loans, Net of Unearned Discount 204,664 202,258
LESS: Allowance for Possible Loan Losses (2,371) (2,437)
-------- -------
Net Loans 202,293 199,821
Premises and Equipment, Net 7,223 7,116
Accrued Interest Income 2,851 3,045
Other Real Estate Owned 643 571
Other Assets 7,414 7,232
------- -------
TOTAL ASSETS $ 400,677 $ 391,889
--------- ---------
LIABILITIES
Deposits
Non-Interest Bearing Deposits 40,196 41,813
Interest-Bearing Deposits 279,450 282,667
--------- ---------
Total Deposits 319,646 324,480
Securities Sold Under Agreements to Repurchase 7,545 1,730
Short-Term Debt 7,730 -
Long-Term Debt 30,000 30,000
Accrued Interest Payable 3,763 4,208
Other Liabilities 3,267 3,228
--------- ---------
TOTAL LIABILITIES 371,951 363,646
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 - 1,853,271 shares at March 31, 2000
and 1,848,437 shares at Dec. 31, 1999 9,266 9,242
Additional Paid in Capital 15,727 15,674
Retained Earnings 9,423 8,968
Employee Stock Ownership Plan Debt (1,320) (1,320)
Accumulated Other Comprehensive Loss (4,370) (4,321)
--------- --------
Total Shareholders' Equity 28,726 28,243
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 400,677 $ 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
Mar. 31, Mar. 31,
2000 1999
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $4,182 $4,396
Interest on Investment Securities
Taxable 2,279 1,341
Tax-Exempt 363 388
Interest on Deposits with Banks and
Federal Funds Sold 32 99
------ ------
Total Interest Income 6,856 6,224
------ ------
INTEREST EXPENSE
Interest on Deposits 2,580 2,342
Interest on Short-Term Borrowings 116 46
Interest on Long-Term Debt 454 280
------ ------
Total Interest Expense 3,150 2,668
------ ------
NET INTEREST INCOME 3,706 3,556
Provision for Possible Loan Losses - 125
------ ------
Net Interest Income After Provision
for Possible Loan Losses 3,706 3,431
------ ------
OTHER INCOME
Trust Revenue 329 266
Service Charges on Deposit Accounts 451 372
Investment Securities Gains, Net 46 216
Gain on Sale of Mortgage Loans 1 78
Other Operating Income 208 182
------ ------
Total Other Income 1,035 1,114
------ ------
OTHER EXPENSES
Salaries and Employee Benefits 1,802 1,640
Net Occupancy and Equipment Expense 572 535
Other Operating Expenses 1,343 1,373
------ ------
Total Other Expenses 3,717 3,548
------ ------
Income Before Income Taxes 1,024 997
Applicable Income Taxes 228 212
------ ------
NET INCOME $ 796 $ 785
====== ======
PER SHARE DATA
Basic Net Income $ 0.44 $ 0.44
Diluted Net Income $ 0.44 $ 0.44
Cash Dividends $ 0.19 $ 0.18
</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
Mar. 31, Mar. 31,
2000 1999
------ -----
<S> <C> <C>
Net Income $ 796 $ 785
Other Comprehensive Loss, Net of Tax
Unrealized holding losses on securities
Unrealized holding losses arising in period (78) (753)
Less: Reclassification adjustment; gain
included in net income 30 143
----- -----
Other Comprehensive Loss (48) (610)
----- -----
Comprehensive Income $ 748 $ 175
===== =====
</TABLE>
Other comprehensive income is shown net of tax of $(25,000) and $(314,000) for
March 31, 2000 and March 31, 1999, respectively.
See accompanying notes to interim consolidated financial statements.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended
OPERATING ACTIVITIES March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Net Income $796 $785
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses - 125
Depreciation and Amortization 261 255
Amortization of Security Discounts (95) (36)
Amortization of Security Premiums 61 59
Amortization of Deferred Fees on Loans 117 1
Gainon Sale of Other Real Estate Owned (7) (13)
Mortgage Loans Originated for Sale (71) (10,266)
Mortgage Loan Sales 71 9,799
Gain on Sale of Mortgage Loans (1) (78)
Investment Securities Gains, Net (46) (801)
Changes in Assets and Liabilities:
Increase in Accrued Interest Income 194 82
Increase (Decrease) in Accrued Interest Payable (445) 27
Increase in Other Assets (174) (617)
Increase in Other Liabilities 39 440
------- --------
Net Cash (Used In) Operating Activities 700 (238)
------- --------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities Available-for-Sale 3,249 5,090
Proceeds from Maturities of Securities Held-to-Maturity 314 2,662
Proceeds from Sales of Securities Available-for-Sale 47 8,503
Purchase of Securities Available-for-Sale (17,582) (33,265)
Net Decrease (Increase) in Interest Bearing Deposits
with Banks 5,525 (3,452)
Net Increase) Decrease in Loans (2,675) 2,568
Purchase of Premises and Equipment, Net (350) (1)
Proceeds from Sale of Other Real Estate Owned 22 130
------- -------
Net Cash Used In Investing Activities (11,450) (17,765)
------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest
Bearing Demand Deposits and Savings Accounts (265) 2,654
Net Increase (Decrease) in Certificates of Deposits (4,569) 13,391
Net Increase in Short-Term Debt 7,730 -
Net Increase in Repurchase Agreements 5,815 981
Net Increase in ESOP Debt - (1,000)
Proceeds from Issuance of Stock 76 77
Cash Dividends Paid (341) (321)
------- ------
Net Cash Provided by Financing Activities 8,446 15,782
------- ------
(Decrease)Increase in Cash and Cash Equivalents (2,304) (2,221)
Cash and Cash Equivalents, January 1 16,272 14,259
------- ------
Cash and Cash Equivalents, March 31, $13,968 $12,038
======= =======
</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 months ended March 31, 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", statements or estimates
concerning the effect of the "Year 2000" issues on the Company's systems and
software and the Company's plans with regard to "Year 2000" issues and other
statements which are not historical facts or as to management's beliefs,
expectations or opinions. Such forward looking statements are subject to risks
and uncertainties and may be affected by various factors which may cause actual
results to differ materially from those in the forward looking statements,
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, results of litigation, and the
time, expense and unanticipated problems in addressing the Year 2000 issue.
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).
<PAGE>
NOTE E - CASH DIVIDENDS
On February 18, 2000 the Company paid its 2000 first quarter dividend on its
common stock of $.19 per share to shareholders of record on February 4, 2000.
NOTE F - STOCK DIVIDEND
On June 24, 1999 the Company paid a 5% stock dividend to shareholders of record
on June 4, 1999. Fractional shares were paid in cash based on the closing price
of $23.312 per share on the record date. Net income per share and average shares
outstanding have been restated to reflect the 5% stock dividend.
NOTE G - EARNINGS PER SHARE
The Company calculates earning per share in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS
128)". SFAS 128 eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share in conjunction
with the disclosures of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Prior periods
earnings per share calculations have been restated to reflect the adoption of
SFAS No. 128. Basic and diluted earnings per share are calculated as follows:
<PAGE>
For the Three Months Ended March 31,
<TABLE>
Average
Income Shares Per Share
(numerator) (denominator) Amount
2000
<S> <C> <C> <C>
Net Income $ 796
Basic Earnings Per Share
Income Available to Common Shareholders $ 796 1,794,838 $ 0.44
Effect of Dilutive Securities
Stock Options 2,616
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 796 1,797,454 $ 0.44
------ --------- -------
1999
Net Income $ 785
Basic Earnings Per Share
Income Available to Common Shareholders $ 785 1,790,857 $ 0.44
Effect of Dilutive Securities
Stock Options 5,689
------ --------- -------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 785 1,796,546 $ 0.44
------ --------- -------
</TABLE>
Average common shares outstanding in the three month period ending March 31,
2000 and 1999 do not include 55,677 and 43,416, respectively of average weighted
unallocated shares held by the ESOP. The exclusion of these unallocated shares
held by the ESOP is due to the Company's adoption of SOP 93-6. Share and per
share information have been restated to reflect the 5% stock dividend of June
1999.
<PAGE>
NOTE H - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
Three Month Period Ended March 31, 2000 1999
---------- ----------
<S> <C> <C>
Beginning Balance $2,437,000 $2,691,000
Additions
Provision for loan losses charged to
operating expenses - 125,000
Recoveries of loans 53,000 18,000
---------- ----------
Total Additions 53,000 143,000
Deductions
Loans charged off 119,000 165,000
---------- ----------
Ending Balance $2,371,000 $2,669,000
</TABLE>
NOTE I - IMPAIRED LOANS
The Company measures impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, impairment may be measured based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Company has identified a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
loan agreement. The accrual of interest is discontinued on such loans and no
income is recognized until all recorded amounts of interest and principal are
recovered in full.
Loan impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit loses related to loan impairment are as follows:
<PAGE>
<TABLE>
At March 31, 2000 1999
---------- ----------
<S> <C> <C>
Principal amount of impaired loans $371,000 $501,000
Deferred loan costs --- ---
---------- ----------
$371,000 501,000
Less valuation allowance 74,000 173,000
---------- ----------
$297,000 $328,000
</TABLE>
On January 1, 1995 a valuation for credit losses related to impaired loans was
established. The activity in this allowance account for the quarter ending March
31, 2000 is as follows:
<TABLE>
2000 1999
-------- --------
<S> <C> <C>
Valuation allowance at January 1, $ 74,000 $303,000
Provision for loan impairment --- ---
Transfer from Unallocated Allowance --- 112,000
Direct charge-offs --- 18,000
-------- --------
Valuation allowance at March 31, $ 74,000 $173,000
</TABLE>
Total cash collected on impaired loans during the three month period ended March
31, 2000 was $11,000, of which $4,000 was credited to the principal balance
outstanding on such loans and $7,000 was recognized as interest income. Interest
that would have been accrued on impaired loans during the first three months of
2000 was $10,000. The valuation allowance for impaired loans of $74,000 at March
31, 2000 is included in the "Allowance for Possible Loan Losses" which amounts
to $2,371,000 at March 31, 2000. There was no provision for loan impairment for
the period ended March 31, 2000.
NOTE J - REPORTING OF COMPREHENSIVE INCOME
On January 1, 1998, the Corporation adopted the Financial Accounting Standards
Board issued (SFAS) No. 130, "Reporting Comprehensive Income", which requires
presenting a complete set of financial statements to include details of
comprehensive income that arises in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income - income, expenses, gains and losses that bypass the income statement and
are reported directly in a separate component of equity. Other comprehensive
income includes, for example, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investment securities.
The Corporation has elected to report comprehensive income on a separate
schedule titled "Statement of Comprehensive Income".
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.
<PAGE>
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 Activities"' 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
operations.
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
trust funds which were allegedly directed by funeral directors to be invested in
a private placement annuity issued by EA International Trust. As of March 31,
2000, nine funeral directors whose funds were invested in this annuity have
commenced suit against the Bank; if all funeral directors whose funds were
invested in this annuity were to pursue claims, the Bank's maximum exposure for
unsettled claims would be approximately $4.1 million principal loss plus
punitive damages, interest, costs and attorney fees. The Bank has been advised
that it has significant defenses to these claims and intends to vigorously
defend against such claims. The Bank has discontinued its involvement in this
annuity and is pursuing indemnification for some or all of these possible losses
from its insurance carriers and from EA International Trust.
<PAGE>
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following financial review and analysis is of the financial condition and
earnings performance of the Company and its wholly owned subsidiaries for the
three month period ended March 31, 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, statements or estimates concerning the
effect of the "Year 2000" issues on the Company's systems and software and the
Company's plans with regard to "Year 2000" issues and other statements which are
not historical facts or as to management's beliefs, expectations or opinions.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements, including with
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, results of litigation and the time, expense
and unanticipated problems in addressing the "Year 2000" issue. 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 March
<PAGE>
31, 2000, cash, due from banks, Federal funds sold and interest bearing deposits
with banks totaled $14,032,000, and securities maturing within one year totaled
$3,479,000. At December 31, 1999, cash, due from banks, Federal funds sold and
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 $7,545,000 at March 31, 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 $3,000 at March 31, 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 March 31, 2000. At December 31, the Company had $2,000,000
in Federal funds sold.
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of
credit in the amount of $25,000,000 at March 31, 2000, subject to certain
collateral requirements. The Bank had $7,730,000 in short-term (overnight)
borrowings against this line at March 31, 2000. The Bank had no short-term
borrowings against the Federal Home Loan Bank line at December 31, 1999. The
Bank had additional borrowings from the Federal Home Loan Bank at March 31, 2000
and 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 and $7,000,000 is due in October 2003
and $10,000,000 is due in August 2004.
Cash flows for the three months ended March 31, 2000 consisted of cash
used in investing activities of $11,450,000 offset in part by cash provided by
operating activities of $700,000 and cash provided by financing activities of
$8,446,000 resulting in a decrease in cash and cash equivalents of $2,304,000.
Cash provided by operating activities consisted principally of net
operating income of $796,000, depreciation and amortization of $261,000, an
increase in accrued interest income of $194,000, and amortization of deferred
fees on loans and security premiums of $118,000 and $61,000, respectively,
partially offset by a decrease in accrued interest payable of $445,000, an
increase in other assets of $174,000 and amortization of security discounts of
$95,000. Cash was used in investing activities for the purchase of securities
available-for-sale of $17,582,000, a net increase in loans of $2,675,000 and the
net purchase of premises and equipment of $350,000, partially offset by proceeds
from maturities of securities available-for-sale and held-to-maturity of
$3,249,000 and $314,000, respectively, proceeds from the sale of securities
available-for-sale of $47,000 and proceeds from the sale of other real estated
owned of $22,000. Cash provided by financing activities consisted principally of
increases in short term borrowings and repurchase agreements of $7,730,000 and
$5,815,000, respectively, partially offset by a decrease in certificates of
deposit of $4,569,000, decreases in interest and non-interest bearing demand
deposits and savings accounts of $265,000 and the payment of cash dividends of
$341,000.
The Company recognizes the importance of maintaining adequate capital
levels to support sound, profitable growth and to encourage depositor and
investor confidence. Shareholders' equity at March 31, 2000 was $28,726,000 as
compared to $28,243,000 at December 31, 1999, for an increase of $483,000 or
1.7%. This increase was attributable to net income for the three months of 2000
of $796,000 and proceeds from the sale of common stock pursuant to the Dividend
Reinvestment Plan of $76,000 offset in part by a decrease of $48,000 in the
value of the securities available for sale (see discussion on "Investment
Securities"), and the payment of cash dividends of $341,000.
<PAGE>
The Company maintains a Dividend Reinvestment and Stock Purchase Plan.
During the first three months of 2000, 4,505 shares of common stock were
purchased from authorized and unissued shares at an average price of $16.63 per
share for proceeds of approximately $76,000.
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
of Tier I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 3% to 5% of average
assets (leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, that as of March 31, 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 March 31, 2000 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $34,793 16.71% $16,653 8.00% --- ---
Bank $31,173 15.01% $16,619 8.00% $20,774 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $32,422 15.57% $ 8,327 4.00% --- ---
Bank $28,602 13.77% $ 8,310 4.00% $12,465 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $32,422 8.25% $15,727 4.00% --- ---
Bank $28,602 7.27% $15,727 4.00% $19,659 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 March 31, 2000 were $400,677,000, representing an
increase of 2.24% over total assets of $391,889,000 at December 31, 1999.
Deposits decreased by $4,834,000 or 1.5% from $324,480,000 on December 31, 1999
to $319,646,000 on March 31, 2000. Contributing to this decrease were decreases
in certificates of deposit of $4,569,000, non-interest bearing checking deposits
of $1,617,000 and interest bearing checking deposits of $563,000, partially
offset by an increase in savings and money market deposits of $1,915,000. Loans
outstanding at March 31, 2000 were $204,664,000 as compared to $202,258,000 at
December 31, 1999. This was an increase of $2,406,000 or 1.2%. The increase in
loans was primarily the result of an increase of $1,986,000 or 3.4% in
residential real estate loans. During the first three months of 2000, one fixed
rate residential real estate mortgage was sold for $71,000 with a 30 year
maturity. Loans of this type are sold periodically to reduce the Company's
interest-rate risk and to provide liquidity for future lending opportunities.
The loan sold was originated in the first quarter of 1999. The Bank continues to
service this loan. There were no residential real estate loans identified as
held-for-sale at March 31, 2000 and none held-for-sale at December 31, 1999.
Additionally, the net increase in loans during the first three months of 2000
included a $68,000 or 0.12% increase in commercial loans and a $356,000 or 0.41%
increase in consumer loans. The loan to deposit ratio was 64.03% at March 31,
2000 and 62.3% at December 31, 1999.
Premises and equipment increased by $107,000 to $7,223,000 at March 31,
2000 from $7,116,000 at December 31, 1999.
The Company had long-term debt totaling $30,000,000 at March 31, 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 6.17% variable, 6.26%
variable (at LIBOR plus 3 basis points), 4.86% fixed to December 2003 at which
time the rate may be converted at the option of the lender to a variable rate of
LIBOR plus 15 basis points, and 6.06% fixed to August 2000 at which time the
rate may be 3 month LIBOR plus 15 basis points, respectively. The loans are
secured by the Bank's investment and residential real estate loans and
securities. These funds were borrowed to improve liquidity and to fund loans.
The Company's Employee Stock Ownership Plan (ESOP) has two loans
outstanding totaling $1,320,000 at March 31, 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 35,500 shares of the Company's common stock. In the second
quarter of 1998, the ESOP borrowed $500,000 from First C. G. Company. This loan
is due in 2005 with interest due quarterly and principal annually in October.
The interest rate on these loans is at the Bank's prime rate (9.0% at March 31,
2000 and 8.5% at December 31, 1999).
<PAGE>
At March 31, 2000, the Bank had short-term borrowings of $7,730,000 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 March 31, 2000 was $796,000, an
$11,000 or 1.4% increase compared to net income of $785,000 for the same period
in 1999. The earnings improvement is attributable to an increase in net interest
income of $150,000 or 4.2%, an increase in total other income of $168,000 or
20.5%, exclusive of investment security gains of $46,000 and gains on the sale
of mortgages of $1,000 and a decrease in the provision for possible loan losses
of $125,000 partially offset by an increase in other expenses of $169,000 or
4.8% and a $16,000 or 8% increase in Federal income taxes.
Basic earnings per share for the three months ended March 31, 2000 were
$0.44 as compared to $0.44 for the corresponding period in 1999. Average shares
outstanding during this three month period were 1,794,838 in 2000 and 1,790,857
in 1999. Diluted earnings per share for the three month period ended March 31,
2000 were $0.44 compared to $0.44 for the same period in 1999. Per share
earnings and average shares outstanding have been restated to reflect the 5%
stock dividend paid on June 24, 1999. (see Note F)
Net Interest Income
The "Rate/Volume Analysis" table segregates, in detail, the major factors
that contributed to the changes in net interest income, for the quarter ended
March 31, 2000 as compared to the quarter ended March 31, 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 $3,706,000 for the three months ended
March 31, 2000 as compared to $3,556,000 for the three months ended March 31,
1999, an increase of $150,000 or 4.2%. This increase is the result of deposit
growth and increases in investment securities as compared to the first quarter
of 1999.
Total taxable-equivalent interest income increased $558,000 or 8.7%
primarily the result of higher rates and volumes in the investment securities.
Taxable equivalent income from investment securities for the first quarter
increased $836,000 or 43.3% over the same period in 1999. This was comprised of
a $713,000 increase due to volume and a $123,000 increase as a result of an
increase in rate/volume. Average year-to-date earning assets increased to
$366,427,000 at March 31, 2000 from $337,108,000 at March 31, 1999, a
$29,319,000 or 8.7% increase.
<PAGE>
Total interest expense increased $482,000 during the first three months
of 2000, compared to the same period in 1999. This increase was principally the
result of increased volume of deposit accounts and borrowed money. Interest
expense attributed to time deposits increased $249,000 during the first three
months of 2000, compared to the first three months of 1999. The increase in time
deposit interest expense was due to a higher level of interest-bearing deposits.
Also affecting this growth in interest expense were higher interest rates paid
on all deposit accounts and borrowings as a result of repricing due to market
conditions (see Item 3. - Quantitative and Qualitative Discussion About Market
Risk).
<PAGE>
The following table sets forth a "Rate/Volume Analysis" which segregates
in detail the major factors that contributed to the changes in net interest
income for the three months ended March 31, 2000 compared to the same period in
1999. The interest income included in the table has been adjusted to a fully
taxable equivalent amount using the Federal statutory tax rate of 34%.
RATE/VOLUME ANALYSIS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended
March 31, 2000
Over / (Under)
March 31, 1999
CHANGE DUE TO:
TOTAL RATE VOLUME
<S> <C> <C> <C>
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks $ (61) $ 3 $ (64)
Federal Funds Sold (5) 3 (8)
Investment Securities 836 123 713
Loans (212) (75) (137)
------- ------- -------
Total Interest Income 558 54 504
------- ------- -------
INTEREST EXPENSE
Demand Deposits, Savings & Clubs $ - $ (10) $ 10
Time Deposits 238 (11) 249
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase (1) 10 (11)
Short-Term Borrowings 71 13 58
Long-Term Borrowings 174 34 140
------- ------- -------
Total Interest Expense $ 482 $ 36 $ 446
------- ------- -------
Net Increase in Interest Income $ 76 $ 18 $ 58
</TABLE>
<PAGE>
Other Income and Other Expenses
Other income for the three months ended March 31, 2000 including service
charges, trust fees, and other miscellaneous income, but exclusive of securities
gains or losses and gains on the sale of mortgage loans, was $988,000 as
compared to $820,000 for the same period in 1999. This was an increase of
$168,000 or 20.5%. The revenues from the Trust Department operations were
$329,000 for the three months ended March 31, 2000 compared to $266,000 for the
three months ended March 31, 1999, an increase of $63,000 or 23.7%. There were
$1,000 in gains on the sale of mortgage loans for the three month period ended
March 31, 2000 as compared to $78,000 for the same period in 1999, a decline of
$77,000 or 98.4%. This decline was the result of fewer mortgage loans being
originated as a result of an increase in interest rates for such loans.
Total other expenses for the three month period ended March 31, 2000
increased by $169,000 or 4.8% to $3,717,000 over total other expenses for the
same period in 1999 of $3,548,000. Included in this increase is a $162,000 or
9.8% increase in salary and benefit expenses which were $1,802,000 as compared
to $1,640,000 in 1999. These increases are primarily due to general salary
increases of approximately 4% and additional staff necessitated by the new
branches in Stroudsburg and Mount Pocono. Occupancy and equipment expenses were
$572,000 for the three months ended March 31, 2000 and $535,000 for the three
months ended March 31, 1999, an increase of $37,000 or 6.9%. The increase in
occupancy expense was primarily due to expenses related to the new branches.
Other operating expenses for the three month period ended March 31, 2000 were
$1,343,000, a decrease of $30,000 or 2.2% from the $1,373,000 in other operating
expenses for the same period in 1999.
Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". The Company had no trading securities at March 31,
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 $146,658,000 in
available-for-sale securities at March 31, 2000 with a net unrealized loss of
$4,370,000. At December 31, 1999 available-for-sale securities amounted to
$132,356,000 with a net unrealized loss of $4,321,000.
Held-to-maturity securities totaling $19,563,000 at March 31, 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 March 31, 2000, did not hold any
securities identified as derivatives.
Allowance and Provision for Possible Loan Losses
The provision is based on management's analysis of the adequacy of the
allowance for loan losses. In its evaluation, management considers past loan
experience, overall characteristics of the loan portfolio, current economic
conditions and other relevant factors. Management currently believes that the
allowance is adequate to absorb known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is largely dependent upon
economic conditions which are beyond the scope of management's control.
<PAGE>
For the first three months of 2000, the provision for loan losses was
zero compared to $125,000 for the same period in 1999. Net charge offs were
$66,000 for the three months ended March 31, 2000 compared with $147,000 for the
three months ended March 31, 1999. The ratio of the allowance for loan losses to
total loans at March 31, 2000 was 1.16% compared to 1.20% at December 31, 1999.
This was primarily the result of an increase in total loans to $204,664,000 at
March 31, 2000 from $202,258,000 at December 31, 1999 and the absence of
provisions for loan losses in the first three months of 2000. The allowance for
possible loan losses at March 31, 2000 totaled $2,371,000, a decrease of $66,000
or 2.71% from the December 31, 1999 amount of $2,437,000.
As provided by SFAS No. 114, as amended by SFAS No. 118, $74,000 of the
Allowance for Possible Loan Losses is allocated to impaired loans at March 31,
2000 (See Note I "Impaired Loans").
Transactions in the allowance for loan losses are as follows:
<TABLE>
Three Month Period Ended March 31, 2000 1999
------------- --------------
<S> <C> <C>
Beginning Balance $ 2,437,000 $ 2,691,000
Additions
Provision for loan losses charged to
operating expenses - 125,000
Recoveries of loans 53,000 18,000
----------- ------------
Total Additions 53,000 143,000
Deductions
Loans charged off 119,000 165,000
----------- ------------
Ending Balance $ 2,371,000 $ 2,669,000
</TABLE>
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
At March 31, 2000
- -----------------
<S> <C>
Commercial $ 751,000
Residential Real Estate 288,000
Consumer 809,000
Unallocated 523,000
---------
Total $2,371,000
</TABLE>
Non-Performing Loans
The following discussion relates to the Bank's non-performing loans which
consist of those on a non-accrual basis and accruing loans which are past due
ninety days or more.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection effort, that
the borrower's financial condition is such that the collection of interest is
doubtful. The Company views these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Interest on these loans is recognized
only when received. The following table shows the balance of non-performing
loans for each of the periods indicated.
<PAGE>
Non performing loans (non accruing loans and loans past due over 90 days)
were 1.59% of total loans at March 31, 2000 compared to 1.07% at March 31, 1999.
The increase in this ratio is the result of a $1,005,000 or a 44.59% increase in
non performing loans to $3,259,000 over the one year period ending March 31,
2000. The ratio of the allowance for loan losses to non performing loans was
72.75% at March 31, 2000 compared to 118.4% at March 31, 1999.
Non accruing loans at March 31, 2000 of $1,272,000 increased from March
31, 1999 level of $1,096,000. This $176,000 increase results primarily from the
addition of three residential real estate mortgages offset by the receipt of
payments. These loans are secured by residential real estate. At the present
time, management is of the opinion that these loans present a minimal amount of
loss exposure to the bank.
Loans past due 90 days or more and still accruing interest are loans that
are generally well secured and expected to be restored to a current status in
the near future. As of March 31, 2000, loans past due 90 days or more and still
accruing interest were $1,987,000 compared to $1,158,000 at March 31, 1999. The
$829,000 increase in loans past due 90 days from March 31, 1999 to March 31,
2000 was the result of increases in mortgage and commercial loans past due 90
days or more of $903,000 and $36,000, respectively. This was offset in part by a
decrease in consumer loans of $110,000.
<PAGE>
<TABLE>
NON-PERFORMING LOANS
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
Non-accrual loans on a cash basis $1,272,000 $1,311,000 $1,096,000
Non-accrual loans as a percentage
of total loans 0.62% 0.65% 0.52%
Accruing loans past due 90 days
or more $1,987,000 $1,491,000 $1,158000
Accruing loans past due 90 days
or more as a percentage of total
loans 0.97% 0.74% 0.55%
Other Real Estate Owned from
Foreclosed Property $ 643 $ 571,000 $ 601,000
Allowance for loan losses to
nonperforming loans 72.75% 86.97% 118.40%
Nonperforming assets to total loans 1.59% 1.39% 1.07%
Allowance for loan losses to total loans 1.16% 1.20% 1.27%
</TABLE>
There are no significant loans classified for regulatory purposes that
have not been included in the above table of non-performing loans. The Company
has no significant loans that qualify as "Troubled Debt Restructuring" as
defined by the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 15 "Accounting for Debtors and Creditors for Troubled
Debt Restructuring" at March 31, 2000.
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 developed and
implemented a five phase compliance plan divided into the following major
components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and
Testing; and (5) Implementation. The Company completed all phases of the plan
prior to year-end 1999.
The Company 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 increased 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 and
power sources were established.
<PAGE>
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 conducted 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.
The Company did not experience any material problems related to Year 2000
during the first three 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 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 ended March 31, 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 (36.3% of total loans) and commercial loans
supported by real estate (24.3% of total loans) in its loan portfolio. These
loans are subject to interest and economic risks. The Bank also originates
residential real estate loans for sale in the secondary market. Such loans are
identified as "Mortgage Loans Held-for-Sale" on the Company's Balance Sheet and
are subject to interest rate risk (see discussion on "Assets and Liabilities").
The Company does not own any trading assets and does not have any hedging
transactions in place such as interest rate swaps.
Interest Rate Sensitivity
The following table "Consolidated Comparative Statement Analysis" sets
forth a comparison of average daily balances, interest income and interest
expense on a fully taxable equivalent basis and interest rates calculated for
each major category of interest-earning assets and interest-bearing liabilities.
For the purposes of this analysis, the computations in the "Consolidated
Comparative Statement Analysis" were prepared using the Federal statutory rate
of 34%; there were no state or local taxes on income applicable to the Company.
<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Three Months Ended, March 31, 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 $ 1,763 $ 24 5.45% $ 7,278 $ 85 4.68%
Federal Funds Sold 549 9 6.56 1,267 14 4.40
Investment Securities
Taxable 33,893 2,279 6.81 87,181 1,341 6.16
Non-Taxable (1) 29,525 486 6.58 32,134 588 7.32
Net Loans Held for Sale 6 - -- 2,963 26 3.52
Loans (1) (2) 203,692 4,191 8.23 209,018 4,377 8.36
Reserve for Loan Losses (2,501) -- -- (2,733) -- --
--------- ----- -------- -----
Net Loans 201,191 4,191 8.33 206,285 4,377 8.48
--------- ----- -------- -----
Total Interest-Earning Assets 366,927 6,989 7.62 337,108 6,431 7.64
Non-Interest Earning Assets 30,879 -- -- 27,124 -- --
--------- ----- -------- -----
TOTAL ASSETS, INT INCOME $ 397,806 6,989 7.03 $364,232 6,431 7.08
--------- ----- -------- -----
LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
Demand Deposits $ 52,170 127 0.97 $ 49,448 132 1.08
Money Market Deposits 12,957 91 2.81 13,620 92 2.72
Savings & Club Deposits 62,165 342 2.20 61,998 336 2.16
CD's over $100,000 4,733 50 4.23 4,295 41 3.80
All Other Time Deposits 149,558 1,970 5.27 131,073 1,741 5.32
--------- ----- -------- -----
Total Int-Bearing Deposits 281,583 2,580 3.66 260,434 2,342 3.60
Federal Funds Purchased
and Securities Sold Under
Agreements to Repurchase 4,211 41 3.89 5,695 42 2.96
Short-Term Borrowings 4,992 75 6.01 321 4 5.00
Long-Term Borrowings 30,000 454 6.05 20,000 280 5.60
--------- ----- -------- -----
Total Int-Bearing Liabilities 320,786 3,150 3.93 286,450 2,668 3.72
NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits 41,151 -- -- 38,990 -- --
Other Liabilities 7,722 -- -- 7,660 -- --
--------- ----- -------- -----
TOTAL LIABILITIES 369,959 3,150 3.41 333,100 2,668 3.20
SHAREHOLDERS' EQUITY 27,847 -- -- 31,132 -- --
--------- ----- -------- -----
TOTAL LIABILITIES AND EQUITY $ 397,806 3,150 3.17 $364,232 2,668 2.92
NET INTEREST INCOME $ 3,839 $ 3,763
----- -----
Net Interest Spread 3.69 3.92
Effect of Interest-Free Sources
Used to Fund Earnings Assets 0.50 0.56
Net Interest Margin 4.19% 4.48%
---- ----
</TABLE>
<PAGE>
The net interest margin of 4.19% for the three month period ended March
31, 2000, decreased from the 4.48% net interest margin for the first three
months of 1999. The yield on interest earning assets was 7.62% during the first
three months of 2000 as compared to 7.64% in 1999. The average interest rate
paid on interest bearing deposits and other borrowings was 3.93% for the first
three 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 March 31, 2000,
assets of $154,816,000 (38.6% of total assets) were subject to interest rate
changes within one year. Liabilities subject to rate change within one year were
$165,864,000. A negative one-year gap position of $11,048,000 existed as of
March 31, 2000. The ratio of rate-sensitive assets to rate-sensitive liabilities
for the one-year time frame was 93.3%. The "Interest Sensitivity Analysis" in
the following table presents a sensitivity gap analysis of the Company's assets
and liabilities at March 31, 2000.
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------
INTEREST SENSITIVITY ANALYSIS
(Dollars in Thousands) as of March 31, 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 $ 64 $ --- $ --- $ --- $ --- $ 64
Inv Securities 32,333 12,232 15,322 66,566 39,768 166,221
Loans 47,677 10,745 22,475 62,751 58,645 202,293
Other Assets 13,968 --- --- --- 18,131 32,099
------- -------- -------- ------- -------- --------
TOTAL ASSETS $94,042 $22,977 $ 37,797 $129,317 $116,544 $400,677
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 40,196 $ 40,196
Int-Bearing
Deposits 73,989 19,265 44,335 65,014 76,847 279,450
Securities Sold
Under Agreements
to Repurchase 7,545 --- --- --- --- 7,545
Short-TermDebt 7,730 --- --- --- --- 7,730
Long-Term Debt 5,000 8,000 --- 17,000 --- 30,000
Other --- --- --- --- 7,030 7,030
Capital --- --- --- --- 28,726 28,726
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $ 94,264 $27,265 $ 44,335 $82,014 $152,799 $400,677
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $ (222) $(4,288) $ (6,538) $47,303 $(36,255) $ ---
Cumulative Int
Sensitivity Gap $ (222) $(4,510) $(11,048) $36,255 $ --- $ ---
Cumulative Gap
RSA/RSL 99.76% 96.29% 93.34% 114.63% 100.0%
</TABLE>
(1) Historically, non-interest-bearing deposits reflect insignificant changes in
deposit trends and, therefore, the Company classifies these deposits over five
years.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter during
which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST COLONIAL GROUP, INC.
DATE: May 15, 2000 BY: /S/ S. ERIC BEATTIE
--------------------- --------------------
S. ERIC BEATTIE
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE: May 15, 2000 BY: /S/ REID L. HEEREN
-------------------- -------------------
REID L. HEEREN
VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714719
<NAME> First Colonial Group
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-END> Mar-31-2000
<CASH> 13,968
<INT-BEARING-DEPOSITS> 64
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 146,658
<INVESTMENTS-CARRYING> 19,563
<INVESTMENTS-MARKET> 18,959
<LOANS> 204,664
<ALLOWANCE> 2,371
<TOTAL-ASSETS> 400,677
<DEPOSITS> 319,646
<SHORT-TERM> 15,275
<LIABILITIES-OTHER> 7,030
<LONG-TERM> 30,000
0
0
<COMMON> 9,266
<OTHER-SE> 19,460
<TOTAL-LIABILITIES-AND-EQUITY> 400,677
<INTEREST-LOAN> 4,182
<INTEREST-INVEST> 2,642
<INTEREST-OTHER> 32
<INTEREST-TOTAL> 6,856
<INTEREST-DEPOSIT> 2,580
<INTEREST-EXPENSE> 3,150
<INTEREST-INCOME-NET> 3,706
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 46
<EXPENSE-OTHER> 3,717
<INCOME-PRETAX> 1,024
<INCOME-PRE-EXTRAORDINARY> 796
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 796
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 4.19
<LOANS-NON> 1,272
<LOANS-PAST> 1,987
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,437
<CHARGE-OFFS> 119
<RECOVERIES> 53
<ALLOWANCE-CLOSE> 2,371
<ALLOWANCE-DOMESTIC> 1,848
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 523
</TABLE>
