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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for (fee required) for the fiscal year ended December 31, 1999.
OR
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ________.
Commission File Number 0-11526
FIRST COLONIAL GROUP, INC.
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(Name of Registrant as Specified in its charter)
Pennsylvania 23-2228154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
76 South Main Street, Nazareth, Pennsylvania 18064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-746-7300
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Securities registered pursuant to Section 12
(b) of the Exchange Act:
None
Securities registered pursuant to Section 12
(g) of the Exchange Act:
Common Stock, $5.00 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
during the preceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
registrant is $25,269,474. (1)
The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of March 24, 2000 was 1,853,270.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Company's Proxy Statement to be filed in connection
with its 2000 Annual Meeting of Shareholders are incorporated by reference in
Part III of this report.
Other documents incorporated by reference are listed in the Exhibit Index.
(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the registrant's Common Stock outstanding, reduced by the
amount of Common Stock held by executive officers, directors and shareholders
owning in excess of 10% of the registrant's Common Stock, multiplied by the last
sale price for the registrant's Common Stock on March 24, 2000. Includes an
aggregate of 211,521 shares, with an aggregate market value of $3,463,656, held
by the Trust Department of Nazareth National Bank & Trust Company in Trust for
persons other than executive officers, directors and 10% shareholders of the
registrant. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder may be deemed an
affiliate of the registrant or that such person is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission.
PART I
Item 1. Business
Forward Looking Information
The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements 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 as to
management's beliefs, expectations or opinions. Such forward looking statement
are subject to risks and uncertainties and may be affected by various factors
which may cause actual results to differ materially from those in the forward
looking statements including, without limitation, the effect of economic
conditions and related uncertainties, the effect of interest rates on the
Company and the Bank, Federal and state government regulation, competition,
results of litigation and the time, expense and unanticipated problems in
addressing the Year 2000 issue. These and other risks, uncertainties and other
factors are discussed elsewhere in this Annual Report on Form 10-K.
Investment Considerations
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:
Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control, may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earning assets, may adversely
affect loan demand and the cost of funds and, consequently, the profitability of
the Company. Any future decreases in interest rates may adversely affect the
Company's profitability because such decreases may reduce the amounts which the
Company may earn on its assets. Economic downturns could result in the
delinquency of outstanding loans. Management does not expect any one particular
factor to affect the Company's results of operations. However, a downtrend in
several areas, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to remain profitable.
Effect of Interest Rates on the Bank and the Company. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest which in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. At December 31, 1999 total interest earning assets
maturing or repricing within one year was less than total interest bearing
liabilities maturing or repricing during the same time period by $6,465,000,
representing a negative cumulative one year gap of .96%. If interest rates rise,
the Company could experience a decrease in net interest income. Like all
financial institutions, the Company's balance sheet is affected by fluctuations
in interest rates. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from financial institutions
into direct investments, such as U. S. Government and corporate securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than financial institutions. See "Item 7. Management's
Discussion of Financial Condition and Results of Operations".
Risks associated with Funeral Trust Litigation. A group of funeral
directors have asserted certain claims 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. The Company has
incurred legal expenses in regard to these claims during 1999 and 1998. In 1998,
the Company established a reserve of $1.5 million against these possible claims.
The reserve balance, as of December 31, 1999 equaled $994,000 with respect to
unsettled claims. The Bank has been advised that it has significant defenses to
these claims and intends to vigorously defend against such claims. However,
there is no assurance that the Bank will be successful. The Company will
continue to incur significant legal expenses in regard to these claims and any
settlement of this case could exceed the reserve amount and thus have a negative
impact on the Company's future earnings and financial condition (see "Item 3.
Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note N of the "Notes to Consolidated
Financial Statements" in "Item 8. Financial Statements and Supplementary Data").
Federal and State Government Regulations. The operations of the Company and
the Bank are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
Accounting Standards. The operations of the Company and the Bank are
affected by accounting standards issued by the Financial Accounting Standards
Board ("FASB") which the Company is required to adopt. The adoption of such
standards can have the effect of reducing the Company's earnings and capital.
Information on current FASB standards that affect the Company can be found in
the Notes to Consolidated Financial Statements contained under the caption,
"Item 8. Financial Statements and Supplementary Data".
Competition. The Company faces strong competition from many other banks,
savings institutions and other financial institutions which have branch offices
or otherwise operate in the Company's market area, as well as many other
companies now offering a range of financial services. Most of these competitors
have substantially greater financial resources than the Company including a
larger capital base which allows them to attract customers seeking larger loans
than the Bank is able to make. In addition, many of the Bank's competitors have
higher legal lending limits than does the Bank. Particularly intense competition
exists for sources of funds including savings and retail time deposits and for
loans, deposits and other services that the Bank offers.
Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset potential losses
on the Company's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan losses through a charge to earnings resulting in reduced profitability.
Dividends. While the Board of Directors presently intends to follow a
policy of paying cash dividends, the dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends will
be paid in the future. See the information contained under the caption in "Item
5. Market for Registrant's Common Equity and Related Stockholder Matters".
Market for Common Stock. While the Company's common stock is listed on the
Nasdaq Stock Market, there is no assurance that an active trading market for the
Company's common stock will exist at a particular time. See the information
contained under the caption in "Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters".
"Anti-Takeover" and "Anti-Greenmail" Provisions and Management
Implications. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to
discourage, make more costly or more difficult, or prevent a future takeover
offer, prevent shareholders from receiving a premium for their securities in a
takeover offer, and enhance the possibility that a future bidder for control of
the Company will be required to act through arms-length negotiation with the
Company's Board of Directors. Copies of the Company's Articles of the
Incorporation are on file with the SEC and Pennsylvania Department of State.
Year 2000 Compliance. The Company has adopted a "Year 2000 Policy" and
conducted a comprehensive review of its computer systems and operations to
identify the areas that could be affected by the Year 2000 issue. The issue with
respect to Year 2000 is whether systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause complete
system failures. The Company did not experience any material problems related to
Year 2000 during the first two months of 2000. The Bank had all of its branch
offices open for business on January 1, 2000 with all systems operating
normally. The Company's estimates the costs incurred to prepare for Year 2000
compliance were $1,066,000; however, there can be no assurance that the 2000
year problem will not have an adverse effect on the future financial condition
and results of operations of the Company. See "Management Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000" in "Item
7. Management's Discussion of Financial Condition and Results of Operations".
Stock Not an Insured Deposit. Investments in the shares of the Company's
common stock are not deposits insured against loss by the FDIC or any other
entity.
Bespeaks Caution Doctrine. Investor should be aware that the U. S. Court of
Appeals for the Third Circuit in In Re: Donald J. Trump Casino Securities
Litigation Taj Mahal, (No. 92-5350 filed October 14, 1993) adopted a legal
doctrine entitled the "Bespeaks Caution Doctrine" which may prevent them from
recovering from the Company based upon material misrepresentations or omissions
contained in the Company's disclosure documents to the extent that such
documents contained sufficient cautionary statements to apprise investors of the
risks of an investment in the Company's securities. The foregoing investment
considerations may have the effect of bringing this document, as well as other
Company disclosure documents, within the purview of the "Bespeaks Caution
Doctrine".
General
First Colonial Group, Inc. (the "Company) is a Pennsylvania business
corporation which is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"). The Company was
incorporated on December 30, 1982 for the purpose of acquiring Nazareth National
Bank and Trust Company (the "Bank") and thereby enabling the Bank to operate
within a bank holding company structure. The Company became an active bank
holding company on November 25, 1983 when it acquired the Bank. The Bank is a
wholly-owned subsidiary of the Company. In July, 1986, the Company established
another wholly-owned subsidiary, First C. G. Company, Inc. This subsidiary is a
Delaware business corporation formed for the purpose of investing in various
types of securities.
The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
business. The Company, through the Bank, derives substantially all of its income
from the furnishing of banking and banking-related services. The Bank has its
principal banking office as well as three branch offices in Nazareth,
Pennsylvania. It also presently has two branch offices in Bethlehem,
Pennsylvania, three branch offices in Easton, Pennsylvania, one branch in
Brodheadsville, Pennsylvania, two branches in Stroudsburg, Pennsylvania, one
branch in East Stroudsburg, Pennsylvania, one branch in Mount Pocono,
Pennsylvania and one branch in Allentown, Pennsylvania. The Bank has twenty-two
automated teller machines (ATMs), one at each branch office (except the Mount
Pocono branch which has two and the Main Street Nazareth branch which has none),
four free-standing drive-up machines at the Northampton Crossings Shopping
Center, Easton, Pennsylvania and free-standing machines at its operation center,
The First Colonial Building in the Bethlehem Business Park, Hanover Township,
Pennsylvania, at St. Luke's Hospital, Fountain Hill, Pennsylvania, at C. F.
Martin & Company in Nazareth, Pennsylvania and at a hardware store in Nazareth,
Pennsylvania.
The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in distributions of the assets or earnings of the
Bank, are necessarily subject to the prior claims of creditors of the Bank,
except to the extent that claims of the Company itself as a creditor may be
recognized. Such claims on the Bank by creditors other than the Company include
obligations relating to federal funds purchased and certain other borrowings, as
well as deposit liabilities.
The Company directs the policies and coordinates the financial resources of
the Bank. The Company provides and performs various technical, advisory and
auditing services for the Bank, coordinates the Bank's general policies and
activities, and participates in the Bank's major business decisions.
As of December 31, 1999 the Company, on a consolidated basis, had total
assets of $391,889,000, total deposits of $324,480,000, and total shareholders'
equity of $28,243,000.
Nazareth National Bank and Trust Company
History and Business
The Bank was incorporated under the laws of the United States of America as
a national bank in 1897 under its present name. Since that time, the Bank has
operated as a banking institution doing business at several locations in
Northampton County, Monroe County and Lehigh County, Pennsylvania. The Bank is a
member of the Federal Reserve System.
As of December 31, 1999, the Bank had total assets of $389,579,000, total
deposits of $324,919,000 and total shareholders' equity of $24,544,000. Its
deposits are insured by the Bank Insurance Fund ("BIF") maintained by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law.
The Bank engages in a full service commercial and consumer banking and
trust business. The Bank, with its main office at 76 South Main Street,
Nazareth, Pennsylvania, also provides services to its customers through its
branch network of fifteen full service banks, which includes drive-in facilities
at most locations, ATMs at each branch office (except the Main Street Nazareth
branch) and bank-by-mail services. Nine of the Bank's full service offices are
located in Northampton County, Pennsylvania. Five offices are located in Monroe
County, Pennsylvania. One office is located in Lehigh County, Pennsylvania. The
Bank also has free standing ATMs located in its Operations Center, the First
Colonial Building in the Bethlehem Business Park, Hanover Township,
Pennsylvania, in the lobby of St. Luke's Hospital in the Borough of Fountain
Hill, Pennsylvania, at the C. F. Martin & Company, Nazareth, Pennsylvania, in a
hardware store in Nazareth, Pennsylvania, and four free-standing drive-up ATM's
at Northampton Crossings Shopping Center, Lower Nazareth Township, Easton,
Pennsylvania.
The Bank's services include accepting time, demand and savings deposits,
including NOW accounts (Flex Checking), regular savings accounts, money market
accounts, fixed rate certificates of deposit and club accounts, including the
Vacation Club, the College Club(R) and the Christmas Club. The Bank offers
Mastercard(R) and VISA(R), as well as a Constant Cash account (a pre-approved
line of credit activated by writing checks against a checking account) and the
First Colonial Club(R) and Quality Checking(R) (deposit package programs which
provide checking accounts with other services including credit card protection,
discount travel, shopping services and other related financial services). Its
services also include making secured and unsecured commercial and consumer
loans, financing commercial transactions either directly or through regional
industrial development corporations, making construction and mortgage loans, and
renting safe deposit facilities. Additional services include making residential
mortgage loans (both fixed rate and variable rate), home equity lines of credit,
loans to purchase manufactured homes, revolving credit loans with overdraft
checking protection, small business loans, student loans, recreational vehicles
and new and used car and truck loans.
The Bank's business loans include seasonal credit and collateral loans and
term loans as well as accounts receivable and inventory financing. Most of the
Bank's commercial customers are small to medium size businesses operating in
Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in
the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas of
Pennsylvania.
Trust services provided by the Bank include services as executor and
trustee under wills and deeds, as guardian, custodian and as trustee and agent
for pension, profit sharing and other employee benefit trusts as well as various
investment, pension and estate planning services. Trust services also include
service as transfer agent and registrar of stock and bond issues and as escrow
agent. In addition, the Bank provides discount brokerage through an outside
supplier of this service, and various tax services.
The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
Competition
All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trade area of Northampton and Lehigh Counties (known as the
Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the
Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas. In order to
keep pace with its competition and the continuing growth of these areas, the
Bank may, in the future, consider establishing additional new branches, although
no assurance can be given that any new branches will be opened or if opened,
that they will be successful. The Bank competes with local commercial banks as
well as other commercial banks with branches in the Bank's market area. The Bank
considers its major competition to be Ambassador/Lafayette Bank, headquartered
in Easton, Pennsylvania, with branches in Nazareth, Bethlehem and Allentown,
Pennsylvania, Twin Rivers Bank, headquartered in Easton, Pennsylvania with
branches in Bethlehem Pennsylvania; First Union Bank, headquartered in
Charlotte, North Carolina, with branch offices in Easton, Bethlehem, Stroudsburg
and Allentown, Pennsylvania; Summit Bancorporation, headquartered in Princeton,
New Jersey, with branches in Bethlehem, Easton and Allentown, Pennsylvania; and
PNC Bank headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth,
Brodheadsville, Stroudsburg, Easton and Allentown, Pennsylvania.
The Bank, along with other commercial banks, competes with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies, regulated small loan
companies, credit unions and the issuers of commercial paper and other
securities, such as shares in money market funds. The Bank also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in the corporate trust and investment management
services. Many of the Bank's competitors have financial resources larger than
the Bank's.
As a result of the recent repeal of the Glass-Steagall Act which separated
the commercial and investment banking industries, all banking organizations are
likely to face an increase in competition. See "Supervision and Regulation" -
"Recent Regulation".
Management believes that the Bank is generally competitive with all
competing financial institutions in its service areas with respect to interest
rates paid on time and savings deposits, service charges on deposit accounts and
interest rates charged on loans.
First C. G. Company, Inc.
In July 1986, the Company established a wholly-owned subsidiary, First C.
G. Company, Inc., a Delaware corporation, for the purpose of investing in
various types of securities. As of December 31, 1999, First C. G. Company, Inc.
had total assets of $3,859,000, of which $2,185,000 was invested in common
stocks and $1,320,000 in a loan to the Bank's ESOP and most of the remaining
assets were in other tax-exempt and taxable securities and interest-bearing bank
deposits. The total shareholders' equity at December 31, 1999 was $3,680,000.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The regulatory framework is intended primarily for the
protection of depositors, other customers and the federal deposit insurance
funds and not for the protection of shareholders. To the extent that the
following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on the business and prospects of the Company and the Bank.
The Company
The Company is registered as a "bank holding company" under the Bank
Holding Act of 1956, as amended (the "Holding Company Act"), and is, therefore,
subject to supervision and regulation by the Board of Governors of the Federal
Reserve Board (the "Federal Reserve Board"). The Company is also regulated by
the Pennsylvania Department of Banking.
Under the Holding Company Act, the Company is required to secure the prior
approval of the Federal Reserve Board before it can merge or consolidate with
any other bank holding company or acquire all or substantially all of the assets
of any bank or acquire direct or indirect ownership or control of any voting
shares of any bank that is not already majority owned by it, if after such
acquisition, it would directly or indirectly own or control more than 5% of the
voting shares of such bank. See "Interstate Banking".
The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company engaged in non-banking activities unless
the Federal Reserve Board, by order or regulation, has found such activities to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making such determination, the Federal Reserve Board
considers whether the performance of these activities by a bank holding company
can reasonably be expected to produce benefits to the public which outweigh
possible adverse effects. The Federal Reserve Board has by regulation determined
that certain activities including, among others, operating a mortgage, finance,
credit card or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
non operating basis; and, certain stock brokerage and investment advisory
services, are closely related to banking within the meaning of the Holding
Company Act.
Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions. The
Bank currently is rated "satisfactory" under the Community Reinvestment Act.
Under the policy of the Federal Reserve Board with respect to bank holding
company operations, a bank holding company is deemed to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee
that any "undercapitalized" (as such term is defined in the statute) insured
depository institution subsidiary will comply with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards as of the time the institution failed to
comply with such capital restoration plan.
Under the Holding Company Act, the Company is required to file periodic
reports and other information concerning its operations with, and is subject to
examination by, the Federal Reserve Board. In addition, under the Banking Code
of 1965, the Pennsylvania Department of Banking has the authority to examine the
books, records and affairs of any Pennsylvania bank holding company or to
require any documentation deemed necessary to ensure compliance with the Banking
code.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities, and is subject to the Securities and
Exchange Commission's rules and regulations relating to periodic reporting,
reporting to shareholders, proxy solicitation and insider trading.
The Bank
The Bank, as a national bank, is subject to The National Bank Act. The Bank
is also subject to the supervision of, and is regularly examined by, the Office
of the Comptroller of the Currency of the United States (the "OCC") and is
required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions. Under current Pennsylvania
law, banking institutions located in Pennsylvania, such as the Bank, may
establish branches within any county in the Commonwealth, subject to the prior
regulatory approval.
As a national bank, the Bank is a member of the FDIC and a member of the
Federal Reserve System and, therefore, is subject to additional regulation by
these agencies. Some of the aspects of the lending and deposit business of the
Bank which are regulated by these agencies include personal lending, mortgage
lending and reserve requirements. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
The Bank is subject to certain limitations on the amount of cash dividends
it can pay. See "Note S - Regulatory Matters" in the Notes to Consolidated
Financial Statements which appears elsewhere herein.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Company and the Company's non-bank subsidiary.
Substantially all of the deposits of the Bank are insured up to applicable
limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit
insurance assessments to maintain the BIF. The insurance assessments are based
upon a matrix that takes into account a bank's capital level and supervisory
rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it
charged on bank deposits insured by the BIF to the statutory minimum of $2,000
annually for "well-capitalized" banks. On September 30, 1996, the Deposit
Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA
reduced the amount of FDIC insurance premiums for savings association deposits
acquired by banks to the same levels assessed for deposits insured by BIF. DIFA
further provides for assessments to be imposed on all insured depository
institutions with respect to deposits to pay for the cost of Financing
Corporation bonds; however, banks are assessed for this purpose at only
one-fifth the rate of the assessment on savings associations until December 31,
1999. As a result of these changes, the deposit insurance assessment for banks
and for thrifts has been nearly equalized and will be identical for comparably
rated institutions after January 1, 2000, at which time banks will share equally
in the FICO assessment and the BIF and SAIF funds will be merged.
Capital Regulation
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial condition and results of
operation. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital from 3% to 5% of average assets
(leverage ratio). The 3% leverage ratio is a minimum for the top-rated banking
organizations without any supervisory, financial or operational weaknesses or
deficiencies and other banking organizations are expected to maintain leveral
capital ratios 100 to 200 basis points above the minimum depending on their
financial condition. Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, as of December 31, 1999 that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
The following tables provide a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated.
CAPITAL RATIOS
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
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%
CAPITAL RATIOS
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,555 16.97% $15,819 8.00% --- ---
Bank $29,450 15.02% $15,684 8.00% $19,605 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $30,938 15.64% $ 7,906 4.00% --- ---
Bank $26,596 13.57% $ 7,842 4.00% $11,763 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $30,938 8.60% $14,114 4.00% --- ---
Bank $26,596 7.47% $13,951 4.00% $17,439 5.00%
Interstate Banking
On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state after September 29, 1995. Beginning June 1, 1997, a bank may
merge with a bank in another state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997. States may enact laws opting out of interstate branching before June
1, 1997, subject to certain conditions. States may also enact laws permitting
interstate merger transactions before June 1, 1997 and host states may impose
conditions on a branch resulting from an interstate merger transaction that
occurs before June 1, 1997, if the conditions do not discriminate against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance after May 31, 1997. Pennsylvania has enacted a law opting in
immediately to interstate merger and interstate branching transactions.
Interstate acquisitions and mergers would both be subject, in general, to
certain concentration limits and state entry rules relating to the age of the
bank.
Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de novo" branches. Pennsylvania has
enacted such a law.
Recent Legislation
On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") became law,
repealing the 1933 Glass-Steagall Act's separation of the commercial and
investment banking industries. The Act expands the range of nonbanking
activities a bank holding company may engage in, while preserving existing
authority for bank holding companies to engage in activities that are closely
related to banking. The new legislation creates a new category of holding
company called a "Financial Holding Company", a subset of bank holding companies
that satisfy the following criteria: (1) all of the depository institution
subsidiaries must be well capitalized and well managed; (2) the holding company
must file with the Federal Reserve Board a declaration that it elects to be a
financial holding company to engage in activities that would not have been
permissible before the Act; and (3) all of the depository institution
subsidiaries must have a CRA rating of "satisfactory" or better. Financial
holding companies may engage in any activity that (i) is financial in nature or
incidental to such financial activity or (ii) is complementary to a financial
activity and does not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally. The Act specifies
certain activities that are financial in nature. These activities include -
acting as principal, agent or broker for insurance; - underwriting, dealing in
or making a market in securities; and - providing financial and investment
advice. The Federal Reserve Board and the Secretary of the Treasury have
authority to decide whether other activities are also financial in nature or
incidental to financial activity, taking into account changes in technology,
changes in the banking marketplace, competition for banking services and so on.
These new financial activities authorized by the Act may also be engaged in
by a "financial subsidiary" of a national or state bank, except for insurance or
annuity underwriting, insurance company portfolio investments, real estate
investment and development, and merchant banking, which must be conducted in a
financial holding company. In order for the new financial activities to be
engaged in by a financial subsidiary of a national or state bank, the Act
requires each of the parent bank (and its sister-bank affiliate) to be well
capitalized and well managed; the aggregate consolidated assets of all of that
bank's financial subsidiaries may not exceed the lesser of 45% of its
consolidated total assets or $50 billion; the bank must have at least a
satisfactory CRA rating; and, if that bank is one of the 100 largest national
banks, it must meet certain financial rating or other comparable requirements.
The Act establishes a system of financial regulation, under which the
federal banking agencies will regulate the banking activities of financial
holding companies and bank's financial subsidiaries, the Securities and Exchange
Commission will regulate their securities activities and state insurance
regulators will regulate their insurance activities. The Act also provides new
protections against the transfer and use by financial institutions of consumers'
nonpublic, personal information.
The Act has only recently became law. Regulations of the banking agencies
implementing the legislative changes can be expected in the near future. Except
for the increase in competitive pressures faced by all banking organizations
that is a likely consequence of the Act, the legislation and implementing
regulations are likely to have a more immediate impact on large regional and
national institutions than on community-based institutions engaged principally
in traditional banking activities. Because the legislation permits bank holding
companies to engage in activities previously prohibited altogether or severely
restricted because of the risks they posed to the banking system, implementing
regulations can be expected to impose strict and detailed prudential safeguards
on affiliations among banking and nonbanking companies in a holding company
organization. Additionally, because the legislation allows various affiliates
within a single holding company organization to serve a broader array of
customers' financial goals, including their banking, insurance and investment
goals, implementing regulations can be expected to impose strict safeguards on
sharing of customer information among affiliated entities within an
organization.
The foregoing discussion is qualified in its entirety be reference to the
statutory provisions of the Act and the implementing regulations which are
adopted by various government agencies pursuant to the Act. The exact impact of
the Act on the Company and its subsidiaries, if any, cannot be predicted at this
time.
National Monetary Policy
In addition to being affected by general economic conditions, the earnings
and growth of the Bank and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
Federal Reserve Board and the FDIC. An important function of the Federal Reserve
Board is to regulate the money supply, credit conditions and interest rates.
Among the instruments used to implement these objectives are open market
operations in United States Government securities, setting the discount rate and
changes in reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall growth and distribution of
credit, bank loans, investments and deposits, and their use may also affect
interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had
a significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Company and the
Bank cannot be predicted.
Fair Value of Financial Instruments
The Financial Accounting Standards Board ("FASB") issued statement of
financial accounting standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires all entities to disclose the estimated
fair value of its assets and liabilities considered to be financial instruments.
Financial instruments consist primarily of securities, loans and deposits. The
Company has provided these disclosures as of December 31, 1999 and 1998 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 8. Financial Statements and Supplementary Data".
Accounting for Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Trading securities are measured at fair value with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1999 and 1998. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements. The classification of securities can be found in Note B of the Notes
to Consolidated Financial Statements contained under the caption, "Item 8.
Financial Statements and Supplementary Data".
Employees
As of December 31, 1999 the Company had approximately 213 employees, of
whom 39 were part-time. The Company considers its relationship with its
employees to be good.
Additional Information
The tables listed below, which are set forth on pages 18 through 23 herein,
contain unaudited information relevant to the business of the Company and the
Bank:
Investment Securities
Investment Securities Yield by Maturity
Loan Portfolio by Type
Loan Maturities and Interest Sensitivity
Allocation of the Allowance for Possible Loan Losses
Percentage of Total Loans in each Category to Total Loans
Average Deposit Balances by Major Classification
Maturities of Certificates of Deposit of $100,000 or more
INVESTMENT SECURITIES
Summary of Available-for-Sale and Held-to-Maturity Securities at December 31,
(Dollars in Thousands)
1999
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
U. S. Treasury $ 4,001 $ 3,992
U. S. Government Agency 53,112 49,747
State and Political Subdivisions 29,147 27,879
Mortgage-Backed Securities 47,332 46,030
Equity Securities 5,312 4,708
------- -------
Total $138,904 $132,356
1998
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
U. S. Treasury $ 7,026 $ 7,125
U. S. Government Agency 24,482 24,441
State and Political Subdivisions 27,860 28,466
Mortgage-Backed Securities 33,322 33,141
Equity Securities 4,900 5,216
------- -------
Total $97,590 $98,389
1997
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
U. S. Treasury $ 9,008 $ 9,066
U. S. Government Agency 14,512 14,556
State and Political Subdivisions 16,865 17,330
Mortgage-Backed Securities 26,791 26,812
Equity Securities 3,878 5,260
------- -------
Total $71,054 $73,024
1999
Held-to-Maturity Securities Carrying Amount Approximate
at Amortized Fair
Cost Value
U. S. Treasury $ --- $ ---
U. S. Government Agency 6,894 6,588
State and Political Subdivisions 7,974 7,583
Mortgage-Backed Securities 5,019 4,952
------- -------
Total $19,887 $19,123
1998
Held-to-Maturity Securities Carrying Amount Approximate
at Amortized Fair
Cost Value
U. S. Treasury $ --- $ ---
U. S. Government Agency 4,992 5,026
State and Political Subdivisions 6,770 6,943
Mortgage-Backed Securities 5,961 5,951
------- -------
Total $17,723 $17,920
1997
Held-to-Maturity Securities Carrying Amount Approximate
at Amortized Fair
Cost Value
U. S. Treasury $ --- $ ---
U. S. Government Agency 6,008 6,051
State and Political Subdivisions 3,169 3,233
Mortgage-Backed Securities 8,579 8,662
------- -------
Total $17,756 $17,946
INVESTMENT SECURITIES YIELD BY MATURITY
The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 1999 are presented in the following
table. Weighted average yields on tax-exempt obligations have been computed on a
fully taxable equivalent basis assuming a tax rate of 34%. All average yields
were calculated on the book value of the related securities. Equity and other
securities having no stated maturity have been included in the "After 10 Years"
category.
Available-for-Sale and Held-to-Maturity Investment Securities Yield
by Maturity, at December 31, 1999
AVAILABLE-FOR-SALE
AT FAIR VALUE After 1 But After 5 But
(Dollars in Thousands) Within One Year Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
U. S. Treasury $ 2,004 6.22 % $ 1,989 5.69 % $ -- -- %
U. S. Government Agency -- -- 5,086 5.90 26,085 6.50
Mortgage-backed Securities 196 5.50 315 5.99 3,911 6.24
State and Political
Subdivisions -- -- 1,295 7.23 8,234 7.03
Other Debt Securities -- -- -- -- 491 6.74
Equity Securities -- -- -- -- -- --
----- ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 2,200 6.15 % $ 8,685 6.05 % $38,721 6.59%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.53 3.36 9.16
==== ==== ====
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands) After 10 Years Total
Amount Yield Amount Yield
U. S. Treasury $ -- -- % $ 3,993 5.95 %
U. S. Government Agency 20,580 7.07 51,751 6.70
Mortgage-backed Securities 41,607 6.70 46,029 6.65
State and Political
Subdivisions 15,855 7.11 25,384 7.09
Other Debt Securities --- -- 491 6.74
Equity Securities 4,708 4.17 4,708 4.17
----- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $82,750 6.74 % $132,356 6.64 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 20.42 15.54
===== =====
HELD-TO-MATURITY
AT AMORTIZED COST After 1 But After 5 But
(Dollars in Thousands) Within One Year Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
U. S. Government Agency $ -- -- % $ 1,000 7.03 % $ 4,124 6.98 %
Mortgage-backed Securities -- -- 433 6.59 830 6.64
State and Political
Subdivisions 245 6.81 912 7.48 2,200 7.00
Equity Securities -- -- -- -- -- --
------ ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 245 6.81 % $ 2,345 7.12 % $ 7,154 6.95%
===== ==== ======= ==== ======= ====
Average Of Held-to-Maturity
Securities in years 0.53 4.24 8.64
==== ==== ====
HELD-TO-MATURITY
AT AMORTIZED COST
(Dollars in Thousands) After 10 Years Total
Amount Yield Amount Yield
U. S. Government Agency $ 1,770 7.34 % $ 6,894 7.08 %
Mortgage-backed Securities 3,756 5.93 5,019 6.11
State and Political
Subdivisions 4,617 8.56 7,974 7.95
Equity Securities -- -- -- --
----- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $10,143 7.37 % $ 19,887 7.18 %
======= ==== ======= ====
Average Of Held-to-Maturity
Securities in years 19.58 13.60
===== =====
LOAN PORTFOLIO BY TYPE
The loan portfolio by type is summarized in the following table for the
years ended December 31, 1999, 1998, 1997, 1996 and 1995.
(Dollars in Thousands) For the Year Ended December 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Real Estate - Residential $112,870 $119,914 $138,539 $134,013 $122,293
Real Estate - Construction 6,737 11,689 12,361 10,923 4,959
Real Estate - Commercial 26,809 29,587 34,579 39,421 35,316
Consumer/Installment 45,886 40,184 35,914 28,870 27,685
Commercial (non-Real Estate)
and Agricultural 9,538 10,900 9,086 8,715 5,403
State and Political Subdivisions 1,096 1,178 944 906 1,290
Other 13 10 20 28 13
-------------------------------------------------
TOTAL GROSS LOANS 202,949 213,462 231,443 222,876 196,959
Unearned Income (691) (1,025) (1,856) (2,759) (3,829)
-------------------------------------------------
Total Loans 202,258 212,437 229,587 220,117 193,130
Allowance for Possible
Loan Losses (2,437) (2,661) (2,664) (2,532) (2,443)
-------------------------------------------------
NET LOANS $199,821 $209,746 $226,923 $217,585 $190,687
=================================================
At December 31, 1999 there were no categories of loans exceeding 10% of
total loans which are not otherwise disclosed as the categories of loans listed
in the above table.
LOANS MATURITIES AND INTEREST SENSITIVITY
The maturity ranges of items in the loan portfolio (excluding residential
mortgages of 1 to 4 family residences and consumer loans) of the Bank and the
amount of loans with predetermined interest rates and floating interest rates
due after one year, as of December 31, 1999, are summarized in the table set
forth below. The determination of maturities included in the table are based
upon contract terms. Demand loans that do not have a defined repayment term are
reported as maturing within one year. In situations where a rollover is
appropriate, the Bank's policy in this regard is to evaluate the credit for
collectibility consistent with the normal loan evaluation process. This policy
is used primarily in evaluating ongoing customers' use of their lines of credit
with the Bank that are at floating interest rates. Management continues to
emphasize the granting of floating interest rate loans to better match the
interest sensitivity of deposits.
Due in Due in Due in
As of December 31, 1999 One Year One to Over
(Dollars in Thousands) or Less Five Years Five Years Total
- -------------------------------------------------------------------------------
Real Estate - Construction $ 3,108 $1,062 $ 2,567 $ 6,737
Real Estate - Commercial 15,899 8,735 2,175 26,809
Commercial (Non-Real Estate)
and Agricultural 6,148 2,155 1,235 9,538
------ ------ ------- -------
TOTAL $25,155 $11,952 $ 5,977 $43,084
====== ======= ======= =======
Loan Maturity After 1 Year With:
Predetermined Interest Rate $ 4,738 $ 4,674
Floating Interest Rate 7,214 1,303
------ ------
TOTAL $11,952 $ 5,977
======= =======
The following table details the Allocation of the Allowance for Possible
Loan Losses by the various loan categories. The allocation is not necessarily
indicative of the categories in which future loan losses will occur, and the
entire allowance is available to absorb losses in any category of loans.
As of December 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
Commercial $ 901 $1,350 $1,183 $ 663 $1,049
Real Estate- Construction -- 4 6 7 3
Real Estate - Residential 212 128 191 198 184
Consumer/Installment 764 738 785 811 534
Unallocated 560 471 499 853 673
------ ------ ------ ------ ------
TOTAL $2,437 $2,691 $2,664 $2,532 $2,443
====== ====== ====== ====== ======
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS
As of December 31,
1999 1998 1997 1996 1995
----------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
Commercial 18.46 % 19.52 % 19.28 % 22.02 % 21.33 %
Real Estate - Construction 3.32 5.48 5.34 4.90 2.52
Real Estate - Residential 55.61 56.18 59.86 60.13 62.09
Consumer/Installment 22.61 18.82 15.52 12.95 14.06
----- ----- ----- ----- -----
TOTAL 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
====== ====== ====== ====== ======
The average balances of deposits for each of the years ended December 31,
1999, 1998 and 1997 are presented in the following table.
AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION
For the Year Ended December 31,
1999 1998 1997
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
Demand Deposits
Non-Interest Bearing $ 41,337 --- % $ 35,254 --- % $ 31,074 --- %
Interest Bearing 52,395 1.18 48,988 1.15 45,338 1.17
Money Market Deposits 13,827 2.76 14,366 2.81 14,380 2.81
Savings & Club Accounts 63,199 2.06 61,177 2.21 62,746 2.44
Certificates of Deposit
under $100,000 139,076 5.26 124,823 5.59 118,846 5.58
Certificates of Deposit
of $100,000 or more 5,040 4.01 4,700 3.72 5,014 4.19
------ ---- ------ ---- ------ ----
Total Deposits $314,874 $289,308 $277,398
======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
At December 31,
(Dollars in Thousands) 1999 1998
-----------------------------------
Three Months or Less $ 252 $ 821
Over Three, Through Six Months 471 1,380
Over Six, Through Twelve Months 2,547 1,508
Over Twelve Months 1,835 1,017
-----------------------------------
TOTAL $5,105 $4,726
===================================
There were no brokered deposits at December 31, 1999 and 1998.
Item 2. Description of Property
The principal banking office of the Bank and the executive offices of the
Bank and the Company are located at 76 South Main Street in the Borough of
Nazareth, Northampton County, Pennsylvania, which building is owned by the Bank.
In addition, the Bank owns additional properties located at 29 South Broad
Street, Nazareth, Pennsylvania (Mortgage and Installment Loan Center); 553
Nazareth Drive, Nazareth, Pennsylvania (Branch Office); 33 S. Broad Street,
Nazareth (Branch Office), 2000 Sullivan Trail, Easton, Pennsylvania (Branch
Office), 3864 Adler Place, Bethlehem Business Park, Bethlehem, Pennsylvania
(First Colonial Building, Computer and Operations Center), Rt. 209
Brodheadsville, Pennsylvania (Branch Office), and 3856 Easton-Nazareth Highway
(Route 248), Lower Nazareth Township, Easton, Pennsylvania (free-standing,
drive-up ATM location).
The Bank also leases facilities for its branch office located at 44 East
Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath
Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at
101 South Third Street, Easton, Pennsylvania; its branch office located at 1125
N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located at 713
Main Street, Stroudsburg, Pennsylvania; its branch office located in the Hall
Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its
branch office located within Redner's Supermarket, Airport Road, Allentown,
Pennsylvania; and its branch office located within Redner's Supermarket,
Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania;
its branch office located within Wal-Mart's at 355 Lincoln Avenue, East
Stroudsburg, Pennsylvania; and its branch office located within Wal-Mart's at
500 Route 940, Mt. Pocono, Pennsylvania.
Item 3. Legal Proceedings
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 December 31,
1999, 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 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.
From time-to-time, the Company and the Bank are parties to routine
litigation incidental to their business.
Neither the Company, the Bank nor any of their properties is subject to any
other material legal proceedings, nor are any such proceedings known to be
contemplated by any governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.
Item 4.1: Executive Officers of the Registrant
The following table sets forth certain information, as of March 30, 2000,
concerning the executive officers of the Company and certain executive officers
of the Bank who are not also Directors.
Positions Positions
Name/Age with the Company with the Bank
Reid L. Heeren 58 (a) Treasurer since January, Executive Vice President
1987; Vice President since and Chief Financial
April, 1985 Officer since August, 1997
Senior Vice President and
Chief Financial Officer
since January, 1987;
Cashier since
November, 1984
Tomas J. Bamberger 58 (b) None Executive Vice President
and Senior Loan Officer
since September, 1997
Arthur Williams 54 (c) None Executive Vice President,
Administration since
August, 1997; Senior Vice
President, Administration
since November, 1988.
Robert M. McGovern 61 (d) None Executive Vice President,
Senior Trust Officer
since February, 1999
(a) Mr. Heeren was previously Senior Vice President, Chief Financial Officer and
Cashier of the Bank from January 1987 to August 1997 and Vice President, Finance
of the Bank from November, 1984 to January, 1987. Prior to November, 1984, Mr.
Heeren was employed by the American Bank and Trust Company, headquartered in
Reading, Pennsylvania, as Vice President for Financial Management (September,
1982 to November, 1984) and was Vice President, Community Banking, Chester
County, Pennsylvania (March, 1982 to September, 1982).
(b) Mr. Bamberger was previously Executive Vice President and Senior Loan
Officer of First Valley Bank/Summit Bank (PA) from February 1984 to September
1997. Prior to that, he was Senior Vice President and Senior Loan Officer of the
First National Bank of Allentown from March 1982 to February 1984. Mr. Bamberger
started his banking career in October 1967 at Girard Bank in Philadelphia. He
was a Vice President and Divisional Manager in commercial lending when he left
in February 1982.
(c) Mr. Williams was previously Senior Vice President, Administration of the
Bank from November, 1988 to August, 1997 and Vice President of the Bank, serving
as branch administrator with business development and commercial lending duties,
from April 1985 to November, 1988. Prior to April 1985, Mr. Williams was a Vice
President of United Penn Bank, serving as Regional Administrator of its Northern
Region (March 1980 to March 1985).
(d) Mr. McGovern was previously Vice President and Senior Trust Specialist of
First Union National Bank from April 1998 to February 1999. Prior to that, Mr.
McGovern was Vice President/Trust of CoreStates Bank from 1996 to 1998. From
1985 until 1996, Mr. McGovern was employed by Meridian Bank, most recently as
Vice President until it was acquired by CoreStates Bank in 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------ ---------------------------------------------------------------------
First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market
under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1999, there were 726 shareholders of record.
The declaration and payment of dividends is at the sole discretion of the
Board of Directors, and their amount depends upon the earnings, financial
condition, and capital needs of the Company and the Bank and certain other
factors including restrictions arising from Federal banking laws and regulations
(see "Note R - Regulatory Matters" in the "Notes to Consolidated Financial
Statements") and a certain loan agreement (see "Note G - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price was $17.375 in December 1999 and
$27.738 in December 1998. Stock prices and dividends per share have been
restated to reflect the 5% stock dividends of June 1999 and June 1998 (see "Note
S - Equity Transactions" in the "Notes to Consolidated Financial Statements"
contained in "Item 8. Financial Statements and Supplementary Data").
- -------------------------------------------------------------------------------
Cash Dividends
High Low Declared
- -------------------------------------------------------------------------------
1998
First Quarter $33.56 $31.07 $ 0.1724
Second Quarter 34.76 31.74 0.1724
Third Quarter 34.29 25.48 0.1810
Fourth Quarter 28.33 25.48 0.1810
-------
TOTAL $ 0.7068
- -------------------------------------------------------------------------------
1999
First Quarter $27.62 $21.91 $ 0.1810
Second Quarter 24.00 20.71 0.1810
Third Quarter 24.25 18.50 0.1900
Fourth Quarter 20.00 17.19 0.1900
-------
TOTAL $ 0.7420
- -------------------------------------------------------------------------------
The Company did not sell any of its equity securities during 1999 that were
not registered under the Securities Act.
Item 6. Selected Financial Data
Consolidated Financial Highlights
- --------------------------------------------------------------------------------
(Dollars in Thousands, Percentage Change
except per share data) 1999 1998 1997 1999/98 1998/97
- --------------------------------------------------------------------------------
At Year-End
Assets $ 391,889 $ 358,496 $ 346,738 9.3 % 3.4%
Deposits 324,480 294,549 282,255 10.2 4.4
Loans 202,258 212,437 229,587 (4.8) (7.5)
Shareholders' Equity 28,243 31,717 30,357 (11.0) 4.5
For the Year
Net Interest Income $ 14,904 $ 14,496 $ 14,613 2.8 % (0.8)%
Net Income 3,282 3,032 3,283 8.2 (7.6)
Per Share *
Basic Net Income $ 1.84 $ 1.68 $ 1.83 9.5 % (8.2)%
Diluted Net Income 1.83 1.67 1.83 9.6 (8.7)
Dividends Paid 0.74 0.70 0.64 5.7 9.4
Book Value 15.28 18.17 17.49 (15.9) 3.9
Financial Ratios
Return on average assets .86% .86% .97%
Return on average equity 10.90% 9.79% 11.67%
Average shareholders' equity
to average assets 8.11% 8.60% 8.33%
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following financial review and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of First Colonial Group, Inc. (the "Company") with a
primary focus on the analysis of operating results for the years ended December
31, 1999, 1998 and 1997. The Company's consolidated earnings are derived
primarily from the operations of Nazareth National Bank and Trust Company (the
"Bank") and First C. G. Company, Inc. ("First C. G."). The information below
should be read in conjunction with the Company's consolidated financial
statements and accompanying notes thereto, and other detailed information
appearing elsewhere in this report. Additional financial information can be
found in the Company's Form 10-K report, a copy of which may be obtained upon
request. During the two most recent fiscal years, there have been no changes in
or disagreements with the Company's accountants on accounting and financial
disclosure. The information concerning share and per share data included in this
discussion has been restated to reflect the 5% stock dividends of June 1999,
June 1998, and May 1997.
Forward Looking Statements
The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements 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 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,
results of itigation, and the time, expense and unanticipated problems in
unanticipated problems in addressing the Year 2000 issue. These and other risks,
uncertainties and other factors are discussed in this Annual Report or in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, a
copy of which may be obtained from the Company upon request and without charge
(except for the exhibits thereto).
Financial Performance Summary
In 1999, First Colonial Group recorded net income of $3,282,000. The 1999
net income is $250,000 or 8.2% higher than 1998 net income of $3,032,000. Net
income in 1998 included a provision expense of $1,000,000 to the special reserve
for possible losses resulting from specific pre-need funeral trusts which the
Bank had been directed to invest in a private placement annuity. The Company's
net income in 1998, exclusive of this special reserve, would have been
$3,692,000. Net income in 1997 was $3,283,000.
The basic earnings per share were $1.84, $1.68 and $1.83 in 1999, 1998 and
1997, respectively. The diluted earnings per share were $1.83 in 1999, $1.67 in
1998 and $1.83 in 1997. Diluted earnings per share include the effect of common
stock equivalents such as options (see Note A.13 of the "Notes to Consolidated
Financial Statements"). The basic and diluted earnings per share, exclusive of
the special reserve in 1998, would have been $2.04.
The Company's return on average assets was .86% in 1999 as compared to .86%
in 1998 and .97% in 1997. The return on average equity was 10.90%, 9.79% and
11.67% in 1999, 1998 and 1997, respectively.
The Company continued to achieve growth in total assets and deposits. Total
assets at December 31, 1999 were $391,889,000 as compared to $358,496,000 at
year end 1998. This is an increase of $33,393,000 or 9.3%. During 1998 total
deposits grew by 10.2% or $29,931,000 to a year-end total of $324,480,000. Total
deposits at December 31, 1998 were $294,549,000. Total loans amounted to
$202,258,000 and $212,437,000 at December 31, 1999 and 1998, respectively. The
loan decrease in 1999 was $10,179,000 or 4.8%. This decrease is attributed in
part to the sale of $38,068,000 of residential real estate loans and a
$4,140,000 or 10.2% decline in commercial loans during 1999.
The principal factors affecting earnings in 1999 were a $408,000 or 2.8%
increase in net interest income, higher other income of $175,000 or 5.1%
exclusive of net gains on the sales of securities and mortgages, a decrease in
the provision for possible loan losses of $75,000 and a reduction in Federal
income taxes of $102,000. These earnings improvement factors were partially
reduced by a decline in net gains on the sales of securities and mortgage loans
of $400,000 and higher operating expenses of $110,000.
The change in 1998 earnings was the result of a $757,000 increase in other
income, a decrease in the provision for possible loan losses of $155,000 and a
$265,000 reduction in Federal income taxes. Offsetting the earnings increases
were a decline in net interest income of $117,000 and higher operating expenses
of $1,311,000, including the provision for the special reserve of $1,000,000.
- -------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Dollars in Thousands,
except per share data)
For the Year Ended
December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
CONSOLIDATED SUMMARY OF INCOME:
Interest Income $ 26,353 $ 25,367 $ 25,444 $ 23,135 $ 21,896
Interest Expense 11,449 10,871 10,831 9,578 9,252
--------- --------- --------- --------- ---------
Net Interest Income 14,904 14,496 14,613 13,557 12,644
Provision for Possible
Loan Losses 375 450 605 670 1,798
Gains (Losses) on the
Sale of Mortgage Loans 157 398 178 (30) 22
Other Income, Excluding
Securities and Loan
Sale Gains 3,635 3,460 3,044 2,364 2,230
Securities Gains, Net 563 722 601 308 22
Other Expense 14,673 14,563 13,252 11,571 11,204
--------- --------- --------- --------- ---------
Income Before Income Taxes
and Cumulative Effect of
Accounting Method Change 4,211 4,063 4,579 3,958 1,916
Applicable Income Taxes 929 1,031 1,296 1,136 515
--------- --------- --------- --------- ---------
Net Income $ 3,282 $ 3,032 $ 3,283 $ 2,822 $1,401
--------- --------- --------- --------- ---------
Cash Dividends Paid $ 1,321 $ 1,275 $ 1,139 $ 1,011 $ 972
Cash Dividends Paid Per Share 0.74 0.70 0.64 0.58 0.56
Dividends Paid to Net Income 40.25% 42.05% 34.69% 35.82% 69.38%
PER SHARE DATA:
Basic Income $ 1.84 $ 1.68 $ 1.83 $ 1.60 $ 0.80
Diluted Net Income 1.83 1.67 1.83 1.60 0.80
Basic Average Common
Shares Outstanding 1,786,019 1,805,051 1,786,741 1,764,973 1,741,319
Dilutive Average Common
Shares Outstanding 1,789,311 1,812,898 1,792,064 1,767,958 1,741,732
CONSOLIDATED BALANCE SHEET DATA:
Total Assets $391,889 $358,496 $346,738 $322,352 $298,514
Loans (Net of
Unearned Discount) 202,258 212,437 229,587 220,117 193,130
Mortgage Loans
Held-for-Sale --- 603 759 721 1,006
Deposits 324,480 294,549 282,255 267,668 254,102
Securities Sold Under
Agreements to Repurchase 1,730 5,094 8,804 3,795 6,096
Debt (Short-Term
and Long-Term) 30,000 20,000 18,390 18,512 7,643
Shareholders' Equity 28,243 31,717 30,357 26,805 24,767
Book Value Per Share 15.28 18.17 17.49 16.37 16.04
SELECTED CONSOLIDATED RATIOS:
Net Income To:
Average Total Assets 0.86% 0.86% 0.97% 0.92% 0.48%
Average Shareholders' Equity 10.90% 9.79% 11.67% 11.16% 5.98%
Average Shareholders'
Equity to Average Assets 8.11% 8.60% 8.33% 8.35% 8.20%
- -------------------------------------------------------------------------------
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year
Ended December 31,
1999 1998 1997
Int Avg Int Avg Int Avg
Avg Inc/ Yield/ Avg Inc/ Yield/ Avg Inc/ Yield/
Bal Exp Rate Bal Exp Rate Bal Exp Rate
ASSETS
INT-EARNING
ASSETS
Int-Bearing
Balances
with Banks $ 3,928 $ 196 4.99% $3,060 $ 176 5.75% $ 1,252 $ 71 5.67%
Fed Funds
Sold 975 47 4.82 641 34 5.30 18 1 5.56
Inv Sec
Taxable 107,054 6,829 6.38 80,939 5,002 6.18 69,876 4,592 6.57
Non-Tax(1) 31,668 2,787 7.22 26,155 1,923 7.35 16,653 1,268 7.62
Loans(1(2) 212,993 17,817 8.36 219,357 18,910 8.62 229,205 19,972 8.71
Allow for
Loan Losses (2,669) --- --- (2,710) --- --- (2,614) --- ---
-------- ------ -------- ------ -------- ------
Net Loans 210,324 17,817 8.47 216,647 18,910 8.73 226,591 19,972 8.81
-------- ------ -------- ------ -------- ------
Total Int-
Earn
Assets 353,949 27,176 7.68 327,442 26,045 7.95 314,390 25,904 8.24
Non-Int
Earn Assets 29,153 --- --- 25,419 --- --- 24,391 --- ---
-------- ------ -------- ------ -------- ------
TOTAL ASSETS,
INTEREST
INCOME $383,102 27,176 7.09 $352,861 26,045 7.38 $338,781 25,904 7.65
-------- ------ -------- ------ -------- ------
LIABILITIES
INTEREST-BEARING
LIABILITIES
Int-Bearing
Deposits
Demand
Deposits $ 52,395 619 1.18 $ 48,988 562 1.15 $ 45,338 532 1.17
Money
Market
Deposits 13,827 382 2.76 14,366 404 2.81 14,380 404 2.81
Savings &
Club
Deposits 63,199 1,304 2.06 61,177 1,350 2.21 62,746 1,530 2.44
CD's over
$100,000 5,040 202 4.01 4,700 175 3.72 5,014 210 4.19
All Other
Time Dep 139,076 7,312 5.26 124,823 6,975 5.59 118,846 6,636 5.58
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Deposits 273,537 9,819 3.59 254,054 9,466 3.73 246,324 9,312 3.78
Securities
Sold Under
Agreements
to Repurchase 5,994 194 3.24 5,821 210 3.61 6,459 240 3.72
Other Short-
Term
Borrowings 1,721 89 5.17 974 55 5.65 2,325 132 5.68
Long-Term
Debt 23,534 1,347 5.72 18,631 1,140 6.12 18,422 1,147 6.23
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Liabilities 304,786 11,449 3.76 279,480 10,871 3.89 273,530 10,831 3.96
NON-INTEREST
BEARING
LIABILITIES
Non-Int-
Bearing
Deposits 41,337 --- --- 35,254 --- --- 31,074 --- ---
Other Liab 6,843 --- --- 7,157 --- --- 6,054 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB 352,966 11,449 3.24 321,891 10,871 3.38 310,658 10,831 3.49
SHAREHOLDERS'
EQUITY 30,136 --- --- 30,970 --- --- 28,123 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB &
SHAREHOLDERS'
EQUITY,
INTEREST
EXPENSE $383,102 11,449 2.99 $352,861 10,871 3.08 $338,781 10,831 3.20
NET INTEREST
INCOME $ 15,727 $15,174 $15,073
-------- ------- -------
Net Interest
Spread (3) 3.92 4.06 4.28
Effect of
Int-Free
Sources
Used to
Fund Earnings
Assets 0.52 0.57 0.51
NET INTEREST
MARGIN (4) 4.44% 4.63% 4.79%
---- ---- ----
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The taxable equivalent adjustments included above are
$678,000, $460,000 and $349,000 for the years 1998, 1997and 1996, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of $358,000, $377,000 and $303,000 for the years 1998, 1997 and
1996, respectively, are included in interest income. Average loan balances
include non-accruing loans and average loans held-for-sale of $3,726,000,
$1,781,000 and $2,212,000 for 1998, 1997 and 1996, respectively.
(3) Net interest spread is the arithmetic difference between yield on
interest-earning assets and the rate paid on interest-bearing liabilities.
(4) Net interest margin is computed by dividing net interest income by averaging
interest-earning assets.
Average Balances
The "Consolidated Comparative Statement Analysis" table sets forth a comparison
of average daily balances, interest income and interest expense on a fully
taxable equivalent basis and interest rates calculated for each major category
of interest-earning assets and interest-bearing liabilities. For purposes of
this analysis, the computations in the "Consolidated Comparative Statement
Analysis" were prepared using the Federal statutory rate of 34%; there are no
state or local taxes on income applicable to the Company. For further
information relating to the effective income tax rate of the Company, see Note I
of the "Notes to Consolidated Financial Statements". Interest income on loans
includes loan fees of $212,000, $358,000 and $377,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Net Interest Income
Net interest income is the difference between the interest income on loans,
investments and other interest-earning assets, and the interest paid on deposits
and other interest-bearing liabilities. Net interest income is the primary
source of earnings for the Company. Therefore, changes in this category can be
essential to the overall net income of the Company. The net interest income, on
a fully taxable equivalent basis, amounted to $15,727,000 for 1999, an increase
of $553,000 over $15,174,000 in 1998. As shown in the "Rate/Volume Analysis"
table, the increase in net interest income in 1999 was attributable to higher
net interest income from changes in volume of $355,000 and changes in rates of
$198,000. The volume-related change resulted primarily from increases in
investment securities partially offset by decreased average balances for loans
(see discussions on "Loan Portfolio" and "Mortgage Loans Held-for-Sale") and an
increase in time deposits. The rate-related change was primarily the result of
the decrease of interest paid on deposits and debt and an increase in the
interest rate earned on investments, offset in part by a decline in the interest
rates earned on loans.
Net interest income, on a fully taxable equivalent basis, in 1998 increased
$101,000 over the 1997 figure of $15,073,000. This increase was the result of
growth in investments, reduced in part by a decrease in loans and an increase in
time deposits. Also affecting 1998 was the decrease in interest rates earned on
loans and investments exceeding the decrease on the interest rates paid on
interest-bearing liabilities.
The net interest margin, a measure of net interest income performance, is
determined by dividing net interest income by total interest-earning assets. The
net interest margin was 4.44% for 1999, 4.63% for 1998 and 4.79% for 1997. The
decrease in 1999 was the result of the 0.27% decrease in the average rate earned
on interest-earning assets being greater than the 0.13% decrease in the average
interest rate paid on interest-bearing liabilities. The result was a decline in
the interest spread, the difference of interest earned on assets less the
interest paid on deposits and debt. The interest spread was 3.92%, 4.06% and
4.28% for 1999, 1998 and 1997, respectively. The impact on earnings by the
reduction in the interest spread was diminished in part by the $6,083,000
increase in 1999 of non-interest-bearing deposits.
The following table sets forth a "Rate/Volume Analysis", which segregates in
detail the major factors that contributed to the changes in net interest income
for the years ended December 31, 1999 and 1998, as compared to the respective
previous periods, into amounts attributable to both rate and volume variances.
In calculating the variances, the changes were first segregated into (1) changes
in volume (change in volume times the old rate), (2) changes in rates (change in
rate times the old volume) and (3) changes in rate/volume (changes in rate times
the change in volume). The changes in rate/volume have been allocated in their
entirety to the change in rates. The interest income included in the
"Rate/Volume Analysis" table has been adjusted to a fully taxable equivalent
amount using the Federal statutory tax rate of 34%. Non-accruing loans have been
used in the daily average balances to determine changes in interest income due
to volume. Loan fees included in the interest income calculation are not
material.
RATE/VOLUME ANALYSIS
(Dollars in Thousands) (Fully Taxable Equivalent)
Increase (Decrease) in Year Ended December 31,
1999 to 1998 1998 to 1997
Change Due to: Change Due To:
TOTAL RATE VOLUME TOTAL RATE VOLUME
----- --- ----- ----- ----- -----
Interest Income
Interest-Bearing Balances
With Banks $ 20 $ (30) $ 50 $ 105 $ 2 $ 103
Federal Funds Sold 13 (5) 18 33 (2) 35
Investment Securities 2,191 146 2,045 1,065 (328) 1,393
Loans (1,093) (580) (513) (1,062) (146) (916)
----- --- ----- ----- ----- -----
Total Interest Income 1,131 (469) 1,600 141 (474) 615
----- --- ----- ----- ----- -----
Interest Expense
Demand Deposits,
Savings & Clubs (11) (102) 91 (150) (192) 42
Time Deposits 364 (442) 806 304 (9) 313
Securities Sold Under
Agreements to Repurchase (16) (22) 6 (30) (6) (24)
Short-Term Borrowings 34 (8) 42 (77) - (77)
Long-Term Borrowings 207 (93) 300 (7) (20) 13
----- --- ----- ----- ----- -----
Total Interest Expense 578 (667) 1,245 40 (227) 267
----- --- ----- ----- ----- -----
Increase in Net
Interest Income $ 553 $ 198 $ 355 $ 101 $ (247) $ 348
Service Charges and Other Income
Service charge income on deposit accounts amounted to $1,682,000 in 1999
compared to $1,594,000 in 1998 and $1,349,000 in 1997. In 1999, the service
charges on deposit accounts increased by $88,000 or 5.5% over 1999 and the 1998
increase over 1997 was $245,000 or 18.2%. The increases in 1999 and 1998 were
primarily the result of increases in the number of deposit accounts and
increases in some deposit-related fees, including charges for the use by
non-depositors of the Bank's automated teller machines and the Bank's debit
card.
In 1999, the Company had a gain on the sale of mortgage loans of $157,000
as compared to a gain of $398,000 in 1998. In 1997, there was also a gain of
$178,000 (see discussion on "Mortgage Loans Held-for-Sale")
Other operating income was $707,000 in 1999, as compared to $641,000 in
1998. Other operating income for 1997 was $645,000. Investment Management and
Trust Division
Revenue from the Bank's Investment Management and Trust Division operations
was $1,246,000 in 1999, representing an increase of $21,000 or 1.7% over revenue
of $1,225,000 in 1998. The Investment Management and Trust Division revenue for
1998 increased by 16.7% or $175,000 over the 1997 revenue of $1,050,000. Trust
assets are held by the Bank for its customers in a fiduciary or agency capacity,
and thus, are not included in the financial statements of the Company. The
increase in 1999 and 1998 Trust revenue was the result of the addition of new
accounts and increased market values. Fees are assessed by the Trust Division to
some customers based on the market value of the assets held in the customers'
account. As a result, changing market values will impact the revenues earned
from Trust operations.
Other Expenses
Salaries and employee benefits represent a significant portion of
non-interest expense. These expenses, amounting to $6,780,000, increased by
$395,000 or 6.2% in 1999 compared to $6,385,000 in 1998. These expenses in 1998
amounted to an increase of $352,000 or 5.8% over the $6,033,000 reported in
1997. The increase in 1999 was primarily due to salary increases of
approximately 3.5%, the addition of staff related to the new branch opened in
Stroudsburg during the year and increases in the Trust Division staff. Salary
expense in 1998 increased due to normal salary increases of approximately 4% and
the addition of staff in the Lending Division.
Occupancy and equipment expenses were $2,171,000 in 1999 which was $53,000
greater than the 1998 amount of $2,118,000. The 1998 amount was $60,000 less
than the 1997 occupancy and equipment expense of $2,178,000. The increase in
1999 was primarily due to the establishment of the new branch in Stroudsburg and
new equipment related to the Y2K issue. The decrease in 1998 was the result of
cost control measures which offset the added expenses of a new teller system and
Trust system.
Other operating expenses (such as the provision for the special reserve,
advertising, publicity, litigation costs, deposit insurance premiums, data
processing fees, legal, accounting, supplies, postage and telephone) in 1999
were $5,722,000, compared to $6,060,000 in 1998 and $5,041,000 in 1997. The
decrease of $338,000 or 5.6% in other operating expense during 1999 was
primarily due to a $943,000 decrease in the provision to the special reserve for
Trust operations offset in part by increases of $251,000 in legal and litigation
expenses, $190,000 in data processing fees and $95,000 in consulting fees. The
increase in 1998 of $1,019,000 or 20.2% was the result of the provision to the
special reserve for Trust Operations of $1,000,000 and higher legal and loan
collection costs. The Company's advertising costs are expensed as incurred.
Advertising costs were $574,000, $597,000 and $524,000 for the years ended
December 31, 1999, 1998 and 1997, respectively (see Notes A.15 and H of the
"Notes to Consolidated Financial Statements").
Investment Securitie
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Trading securities are measured at fair value, with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1999 and 1998. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements (see Notes A.2 and B of the "Notes to Consolidated Financial
Statements").
Held-to-maturity securities totaled $19,887,000 at December 31, 1999 and
$17,723,000 at December 31, 1998. The Company has the intent and ability to hold
these securities until maturity. The fair value of these securities was
$19,123,000 and $17,920,000 at December 31, 1999 and 1998, respectively.
The Company, at December 31, 1999 and 1998, did not hold any securities
identified as derivatives in the form of Collateralized Mortgage Obligations
(CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment
Conducts (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps,
futures or options. The Company held adjustable rate mortgage-backed securities
issued by U. S. Government Agencies totaling $19,904,000 at December 31, 1999
($16,147,000 in available-for-sale and $3,757,000 in held-to-maturity) and
$19,844,000 at December 31, 1998 ($15,776,000 in available-for-sale and
$4,068,000 in held-to-maturity). The interest rates on most of these securities
are tied to various indexes, are subject to various caps, and adjust annually.
The Company also held fixed rate mortgage-backed securities issued by U. S.
Government Agencies totaling $31,145,000 at December 31, 1999 ($29,882,000 in
available-for-sale and $1,263,000 in held-to-maturity) and $19,258,000 at
December 31, 1998 ($17,365,000 in available-for-sale and $1,893,000 in
held-to-maturity).
Securities Available-for-Sale
The Company had $132,356,000 of securities available-for-sale at December
31, 1999, as compared to $98,389,000 at December 31, 1998. At December 31, 1999,
the net unrealized loss on these securities was $4,322,000, net of the tax
effect of $2,226,000. There was a net unrealized gain of $527,000, net of the
tax effect of $272,000 on the available-for-sale securities at December 31,
1998. The net unrealized gain or loss is included in shareholders' equity (see
Notes A.2 and B of the "Notes to Consolidated Financial Statements").
These securities are being held to meet the liquidity needs of the Company
and to provide flexibility to support earnings in changing interest rate
environments. The tax-free municipal securities in the available-for-sale
category will also be used to assist in managing the Company's Federal Tax
position. While management has the intent and the ability to hold
available-for-sale securities on a long-term basis or to maturity, they may sell
these securities under certain circumstances. Such occurrences could include,
but are not limited to, meeting current liquidity needs, adjusting maturities or
repricing periods to reduce interest rate risk, reducing Federal Income Tax
liability, improving current or future interest income, adjusting risk-based
capital position, changing portfolio concentrations, and providing funds for
increased loan demand or deposit withdrawals. Upon the sale of an
available-for-sale security, the actual gain or loss is included in income.
During 1999, $16,295,000 of securities available-for-sale were sold,
resulting in a total net gain of $563,000, which was recorded in income and
includes net gains on equity securities sold by First C. G. of $401,000. The
securities sold were primarily U. S. Treasury, U. S. Agency mortgage-backed
bonds and municipal bonds held by the Bank and equity securities held by First
C. G. The sales by the Bank were executed to provide liquidity and improve
future interest income. The sales of equity securities by First C. G. were made
to recognize certain gains, reposition the equity portfolio and provide funds
for a $1,000,000 loan to the Bank's Employee Stock Ownership Plan (see Note J of
the "Notes to Consolidated Financial Statements"). Securities purchased by the
Company in 1999 totaled $78,275,000. Included in these purchases were
$36,323,000 in U. S. Agency fixed rate bonds, $3,086,000 in U. S. Agency
adjustable rate bonds, $27,690,000 in U. S. Agency mortgage-backed bonds,
$8,016,000 in municipal securities, $215,000 in public housing bonds, $1,000,000
in U. S. Treasury bonds, $494,000 in corporate bonds and $1,451,000 in equity
securities. The securities sold in 1998 totaling $10,620,000 were primarily U.
S. Treasury, U. S. Agency and mortgage-backed bonds held by the Bank and equity
securities held by First C. G. The 1998 sales resulted in net gains of $722,000.
These gains include net gains of $694,000 on equity securities held by First C.
G. The sales were made to provide liquidity to fund a $500,000 loan to the
Bank's Employee Stock Ownership Plan, improve future income and invest in a
broader list of equity securities. Security purchases in 1998 amounted to
$76,280,000 which were primarily U. S. Agency mortgage-backed bonds, U. S.
Agency fixed rate bonds, municipal securities and U. S. Treasury bonds. In 1997,
a net gain on security transactions of $601,000 was recorded on sales of
$13,279,000.
Loan Portfolio
At December 31, 1999, total loans (net of unearned discounts of $691,000 in
1999 and $1,025,000 in 1998) of $202,258,000 were $10,179,000, or 4.8% less than
the 1998 amount of $212,437,000. The decline in loans in 1999 was primarily the
result of a decrease of $7,044,000 or 5.9% in residential real estate loans, a
decrease of $4,952,000 or 42.4% in real estate construction loans, a decrease of
$2,778,000 or 9.4% in commercial real estate loans and a decrease of $1,441,000
or 11.9% in commercial and municipal loans partially offset by a $5,702,000 or
14.2% increase in consumer loans.
Loans Outstanding at December 31 by Major Category are as follows:
- --------------------------------------------------------
Dollars in Thousands at Dec. 31, 1999 1998
- --------------------------------------------------------
Real Estate Residential $ 112,870 $ 119,914
Real Estate Construction 6,737 11,689
Real Estate Commercial 26,809 29,587
Consumer 45,886 40,184
Municipal 1,096 1,178
Commercial & Other 9,551 10,910
--------- ---------
Total 202,949 213,462
Unearned Discount (691) (1,025)
--------- ---------
Net $ 202,258 $ 212,437
- --------------------------------------------------------
The decline in residential real estate loans was the result of management's
decision to sell $20,977,000 of these loans originated in the prior year to
reduce the Bank's interest rate risk and concentration in these types of loans
(see discussion on "Mortgage Loans Held-for-Sale").
The Company's primary geographic area for its lending activities includes
Monroe, Northampton and Lehigh counties, Pennsylvania.
Making loans to businesses and individuals entails risks to the Company,
including ascertaining cash flows, evaluating the credit history, assets and
liabilities of a potential borrower, and determining the value of the various
types of collateral pledged as security. Lending involves determining risks,
managing those risks and charging an appropriate interest rate to compensate for
taking such risks, and to cover the cost of funds (see previous discussion on
"Market Risk").
The loan to deposit ratio was 62.3% at December 31, 1999 and 72.1% at
December 31, 1998. Additional information concerning loans is shown in Note C of
the "Notes to Consolidated Financial Statements".
Mortgage Loans Held-for-Sale
In 1999, management continued a program of selling most of its newly
originated residential real estate loans in the secondary market. The purpose of
this plan is to reduce the Company's interest rate risk and to provide funds to
support a higher level of loan originations.
The sales of residential real estate loans in the secondary market for 1999
amounted to $38,068,000. The amount of these loans originated in 1999 was
$17,091,000, with the remaining $20,977,000 being originated in prior years of
which $603,000 was identified as held-for-sale at December 31, 1998. The sale of
prior years loans in excess of those identified as held-for-sale was done to
restructure the loan portfolio, reducing interest rate risk and the level of
concentration in residential real estate loans. A net gain of $157,000 was
recorded on the total amount of loans sold. At December 31, 1999, there were no
residential real estate loans identified as held-for-sale.
In 1998, the Company originated $21,316,000 of residential real estate
loans which were sold in the secondary market. In addition, during 1998,
$21,564,000 of residential real estate loans originated in prior years were
sold. A net gain of $398,000 was recognized on the total loans sold in 1998. At
December 31, 1998, $603,000 of residential real estate loans were identified as
held-for-sale. Included in other operating expenses in 1998 is an unrealized
loss of $1,000 on these loans.
During 1997, the Company had a net gain of $178,000 on the sale of
$10,754,000 of residential real estate loans. The other operating expenses for
1997 include an unrealized loss of $13,000 on mortgage loans held-for-sale of
$759,000 at year-end 1997.
The Company intends to continue to originate residential real estate loans
in 2000 and to sell some of these loans in the secondary market. The Company
services all of the residential mortgage oans sold and plans to continue this
practice.
Non-Performing Loans
The following discussion relates to the Bank's non-performing loans, which
consist of loans on a non-accrual basis and accruing loans which are past due
ninety days or more.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is in
doubt. The Company recognizes these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Payments received on non-accrual loans
are applied to principal until such time as the principal is paid off. Any
additional payments are then recognized as interest income.
The table "Non-Accrual Loans" shows the balance and the effect non-accrual
loans have had on interest income for each of the periods indicated. Loans on
non-accrual status totaled $1,311,000 at December 31, 1999. This balance
represents a $66,000 increase in non-accrual loans during 1999 due to the
deterioration of certain commercial, residential real estate and consumer loans.
Management believes there is sufficient collateral to cover any possible losses
on these loans.
The Company did not have any significant loans that qualify as "Troubled
Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and
Creditors for Troubled Debt Restructuring", at December 31, 1999 and 1998.
Non-Accrual Loans
- -------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Non-accrual loans on
a cash basis $ 1,311 $ 1,245 $ 813 $ 1,440 $ 2,181
Non-accrual loans
as a percentage
of total loans .65% .59% .35% .65% 1.13%
Interest which would
have been recorded
at original rate $ 56 $ 144 $ 64 $ 210 $ 214
Interest that was
reflected in income 35 23 111 40 44
Net impact on
interest income $ 21 $ (121) $ 47 $ (170) $ (170)
- -------------------------------------------------------------------------------
Set forth below are the amounts of loans outstanding as of the end of each
of the periods indicated that are 90 days and over past due and are on an
accrual basis and are not included in the table above. Management continues to
accrue interest on these loans since they are secured and in the process of
collection and are expected to be eventually paid in full.
Accruing Loans Past Due 90 Days or More
- --------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Accruing loans past due
90 days or more $ 1,491 $1,021 $ 802 $ 986 $ 1,115
Accruing loans past due
90 days or more
as a percentage
of total loans .74% .48% .35% .45% .58%
- --------------------------------------------------------------------------------
The Company measures impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, impairment may be measured based on a
loan's observable market price, or the fair value of the collateral if the loan
is collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Company has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued in such loans and
no income is recognized until all recorded amounts of interest and principal are
recovered in full.
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit losses related to loan impairment at December 31, 1999 and 1998 are
as follows:
- ------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1999 1998
- ------------------------------------------------------------
Principal amount of impaired loans $370 $524
Accrued interest --- ---
Deferred loan costs --- ---
------- -------
370 524
Less valuation allowance
at December 31, (74) (303)
-------- --------
$296 $221
- ------------------------------------------------------------
The activity in the allowance account for credit losses related to impaired
loans is as follows:
- -----------------------------------------------------------------
(Dollars in Thousands)
for the year ended 1999 1998
- -----------------------------------------------------------------
Valuation allowance at January 1, $303 $138
Provision for loan impairment --- 294
Direct charge-offs (161) (129)
Recoveries --- ---
Transfers to Unallocated Reserve (68) ---
------- -------
Valuation allowance at December 31, $ 74 $303
- -----------------------------------------------------------------
Total cash collected on impaired loans during 1999 was $267,000, of which
$232,000 was credited to the principal balance outstanding on such loans, and
$35,000 was recognized as interest income.
Total cash collected on impaired loans during 1998 was $506,000, of which
$483,000 was credited to the principal balance outstanding on such loans and
$23,000 was recognized as interest income. Interest that would have been accrued
on impaired loans was $56,000 and $144,000 in 1999 and 1998, respectively. The
valuation allowance for impaired loans of $74,000 at December 31, 1999 and
$303,000 at December 31, 1998 is included in the "Allowance for Possible Loan
Losses" which amounts to $2,437,000 and $2,691,000 at December 31, 1999 and
1998, respectively.
Shown in the following table is the amount of "Other Real Estate Owned" as
of the end of each of the periods indicated recorded as an asset on the
Company's books as the result of the foreclosure of certain non-performing real
estate loans.
OTHER REAL ESTATE OWNED
- -----------------------------------------------------------------
(Dollars in
Thousands)
at December 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------
Other Real Estate $ 571 $ 636 $ 284 $ 595 $ 364
Owned
- -----------------------------------------------------------------
Allowance and Provision
for Possible Loan Losses
The allowance for possible loan losses constitutes the amount available to
absorb estimated losses within the loan portfolio. As of December 31, 1999, the
allowance for possible loan losses was $2,437,000 as compared to the December
31, 1998 amount of $2,691,000 and the December 31, 1997 amount of $2,664,000.
The allowance for possible loan losses as a percentage of total loans
outstanding as of December 31, 1999 was 1.20%. This compares to 1.27% at the end
of 1998 and 1.16% at the end of 1997. The decrease in the allowance for possible
loan losses of $254,000 was the result of management's review of loans
outstanding (see discussion on "Loan Portfolio") and non-performing loans (the
sum of non-accrual loans and accruing loans past due 90 days or more) of
$2,802,000 as of December 31, 1999 as compared to $2,266,000 as of December 31,
1998 (see tables on "Non-Accrual Loans" and "Accruing Loans Past Due 90 Days or
More"). Net charge-offs as detailed in the table "Allowance for Possible Loan
Losses" were $629,000 in 1999 or $206,000 greater than the 1998 amount of
$423,000. The 1999 charge-offs were the result of losses on commercial, consumer
and residential real estate loans. The net charge-offs in 1998 were primarily
the result of losses on commercial, consumer and residential loans. Net loans
charged-off in 1997 were $473,000. The ratio of net loan charge-offs to average
loans outstanding was .30%, .19% and .21% in 1999, 1998 and 1997, respectively.
The provision for loan losses for the year ended December 31, 1999 was
$375,000 as compared to $450,000 for the year ended December 31, 1998 and
$605,000 for the year ended December 31, 1997. The decrease in 1999 from 1998
was $75,000. In 1998, the decrease in the provision was $155,000 from 1997.
The allowance for possible loan losses is established through a provision
for possible loan losses charged to expenses. Loans are charged against the
allowance for possible loan losses when management believes that the
collectibility of the principal is unlikely. The risk characteristics of the
loan portfolio are managed through various control processes, including credit
evaluations of individual borrowers, periodic reviews, diversification by
industry, and the establishment of lending targets to various segments of the
portfolio. Risk is further mitigated through the application of lending
procedures such as the holding of adequate collateral and the establishment of
contractual guarantees. Management believes that these procedures provide
adequate assurances against the adverse impact from any event or set of
conditions, and that the level of the allowance for possible loan losses is
sufficient to meet the present and potential risk characteristics of the loan
portfolio, including the current level of non-performing and past-due loans.
The allowance for loan losses is evaluated based on an assessment of the
losses inherent in the loan portfolio. This assessment results in an allowance
consisting of two components, allocated and unallocated. The allocated component
of the allowance for loan losses reflects possible losses resulting from the
analysis of individual loans, pools of loans and commitments. The specific
allowance allocations for individual loans is based on an analysis of individual
loans where the internal credit rating is at or below a predetermined
classification. The general allocation for pools of loans and commitments is
based on historical loss experience adjusted for current trends in areas such as
lending policies, economic conditions, delinquencies and concentrations. The
historical loss factor is determined using actual loss experience and the
related internal risk rating of loans charged off. The unallocated portion of
the allowance is a function of the total allowance and the allocated portion of
the allowance. The analysis of the allowance is performed quarterly and
historical factors are updated periodically based on actual experience.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
- -------------------------------------------------------------------------------
(Dollars in Thousands)
For the Year Ended December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Allowance for Loan Losses
at Beginning of Year $ 2,691 $ 2,664 $ 2,532 $ 2,443 $ 2,187
Loans Charged-Off by Category:
Commercial 255 133 249 365 161
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 147 59 20 31 --
Consumer/Installment 330 348 301 271 319
Other -- -- -- -- 1,278
-------- -------- -------- -------- -------
Total Loans Charged-Off 732 540 570 667 1,758
-------- -------- -------- -------- -------
Loans Recovered by Category:
Commercial 30 42 19 39 105
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 29 1 1 -- --
Consumer/Installment 44 74 77 47 97
Other -- -- -- -- 14
-------- -------- -------- -------- --------
Total Loans Recovered 103 117 97 86 216
-------- -------- -------- -------- --------
Net Loans Charged-Off 629 423 473 581 1,542
-------- -------- -------- -------- --------
Provision Charged to Expense 375 450 605 670 1,798
-------- -------- -------- -------- --------
Allowance for Loan Losses
at End of Period $ 2,437 $ 2,691 $ 2,664 $ 2,532 $ 2,443
======== ======== ======== ======== ========
Total Loans
Average $212,993 $217,191 $228,245 $206,378 $190,874
Year-End $202,258 $212,437 $229,587 $220,117 $193,130
Net Loans Charged Off to:
Average Loans .30% .19% .21% .28% .81%
Loans at Year-End .31% .20% .21% .26% .80%
Allowance for Possible
Loan Losses at Year-End 25.81% 15.72% 17.76% 22.95% 63.12%
Provision for Possible
Loan Losses 167.73% 94.00% 78.18% 86.72% 85.76%
Allowance for Possible Loan Losses at Year-End to:
Average Loans 1.14% 1.24% 1.17% 1.23% 1.28%
Loans at Year-End 1.20% 1.27% 1.16% 1.15% 1.26%
- -------------------------------------------------------------------------------
Deposits
Deposits are the primary source of the Company's funds. During 1999,
deposits increased by $29,931,000 or 10.2% to a total of $324,480,000 at
December 31, 1999, from a total of $294,549,000 at December 31, 1998. Average
deposits for 1999 were $314,874,000, an increase of $25,566,000 or 8.8% over the
average total deposits for 1998 of $289,308,000. Contributing to the increase in
average deposits was the strong growth of checking deposits both interest and
non-interest bearing as consumers responded to a marketing campaign to attract
these types of deposits and continued growth in certificates of deposit and
savings accounts. The deposit growth in checking deposits, certificates of
deposit and savings accounts was partially offset by a small decline in money
market accounts. The continued growth of deposits held by the Company and the
banking industry in general could be adversely affected by the flow of funds
into credit unions, mutual funds and other investment options.
The Bank's time deposits, excluding certificates of deposit under $100,000,
increased in 1999 with average balances of $139,076,000, which was $14,253,000
or 11.4% higher than the 1998 average balance of $124,823,000. Non-interest
bearing deposits averaged $41,337,000 in 1999 as compared to $35,254,000 in
1998, an increase of $6,083,000 or 17.3%. In addition, there was an increase in
average interest-bearing demand deposits of $3,407,000 or 7.0% to $52,395,000 in
1999 from $48,988,000 in 1998, an increase in average savings and club deposits
of $2,022,000 or 3.3% from an average balance of $61,177,000 in 1998 to an
average balance of $63,199,000 in 1999 and an increase in average certificates
of deposit over $100,000 which averaged $5,040,000 in 1999 as compared to
$4,700,000 in 1998, an increase of $340,000 or 7.2%. Partially offsetting this
growth was a $539,000 or 3.8% decline in average money market deposits. Average
money market deposits were $13,827,000 and $14,366,000 in 1999 and 1998,
respectively.
Short-Term Borrowings
The Bank had securities sold under agreements to repurchase totaling
$1,730,000 at December 31, 1999 and $5,094,000 at December 31, 1998. At December
31, 1999 and 1998, there were no short-term borrowings in the form of Federal
funds purchased, Federal Reserve Bank discount borrowings or Federal Home Loan
Bank borrowings. Additional information relating to short-term borrowings can be
found in Note F of the "Notes to Consolidated Financial Statements".
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to raise funds to support
asset growth, meet deposit withdrawal and other borrowing needs, maintain
reserve requirements and otherwise operate the Company on an ongoing basis. The
Company manages its assets and liabilities to maintain liquidity and earnings
stability. Among the sources of asset liquidity are money market investments,
short-term investment securities, and funds received from the repayment of loans
and short-term borrowings. At year-end 1999, cash, due from banks, Federal funds
sold and interest-bearing deposits with banks totaled $21,861,000, and
securities maturing within one year totaled $2,249,000. At year-end 1998, cash,
due from banks, Federal funds sold and interest-bearing deposits with banks
totaled $17,560,000, and securities maturing within one year were $4,493,000.
The Bank is a member of the Federal Home Loan Bank of Pittsburgh,
Pennsylvania. The Bank had interest-bearing deposits at the Federal Home Loan
Bank of Pittsburgh in the amount of $5,548,000 at December 31, 1999, and
$3,193,000 at December 31, 1998. These deposits are included in interest-bearing
deposits with banks on the Company's financial statements. As a result of this
relationship, the Bank places most of its short-term funds at the Federal Home
Loan Bank of Pittsburgh in place of other banks. The Federal Home Loan Bank of
Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000,
all of which was available at December 31, 1999.
The Bank had four long-term loans from the Federal Home Loan Bank of
Pittsburgh totaling $30,000,000 at December 31, 1999 and three long-term loans
totaling $20,000,000 at December 31, 1998. The loans outstanding at December 31,
1999 were originated in 1999, 1998 and 1996 with the proceeds used to fund the
growth in residential real estate loans and the investment portfolio. The loans
are for $8,000,000 originated in August, 1996, and due August, 2000, at a fixed
rate of 5.89%, $5,000,000 originated in December, 1996 and due December, 2001,
at a variable rate at LIBOR plus 3 basis points (6.26% at December 31, 1999),
$7,000,000 originated in October, 1998 and due October, 2008, at a fixed rate of
4.86% until December, 2003, at which time the rate may be converted at the
option of the lender to a variable rate of LIBOR plus 15 basis points and
$10,000,000 originated in August, 1999, and due in August, 2004, at a fixed rate
of 6.06% until August 21, 2001, at which time the rate may be converted at the
option of the lender to a variable rate of LIBOR plus 15 basis points, if the
LIBOR rate is 7.5% or higher. If the lender elects to convert a fixed rate loan
to a variable rate, the Bank may prepay the loan converted in full at the time
of conversion without a penalty. The Bank had an additional loan from the
Federal Home Loan Bank at December 31, 1997 in the amount of $5,000,000 that was
paid in full in November, 1998. This loan was originated in 1996 and had a fixed
interest rate of 5.96% (see Note G of the "Notes to Consolidated Financial
Statements").
Cash flows for the year ended December 31, 1999, consisted of cash provided
by financing activities of $34,659,000 and cash provided by operating activities
of $3,889,000 offset in part by cash used in investing activities of $36,535,000
resulting in a net increase in cash and cash equivalents of $2,013,000. The cash
provided by financing activities was comprised of a net increase in certificates
of deposit of $27,873,000, a net increase in long-term debt of $10,000,000, a
net increase in interest and non-interest bearing demand and savings deposits of
$2,058,000, and proceeds from the sale of common stock to the Dividend
Reinvestment Plan of $302,000. Partially offsetting these increases were a net
decrease in repurchase agreements of $3,364,000, the payment of cash dividends
of $1,321,000 and a net increase to the ESOP debt of $885,000. The cash provided
by operating activities was comprised principally of the proceeds from mortgage
loan sales of $38,068,000, net income of $3,282,000, depreciation and
amortization of $1,027,000, an increase in accrued interest payable of $672,000
and the provision for possible loan losses of $375,000, reduced in part by
mortgage loans originated for sale of $37,460,000, net investment securities
gains of $563,000, a net increase in other assets of $970,000, an increase in
accrued interest income of $503,000 and net gains on the sale of mortgage loans
of $157,000. The cash used in investing activities was primarily for the
purchase of securities available-for-sale in the amount of $72,150,000, the
purchase of securities held-to-maturity in the amount of $6,559,000, a net
increase in interest-bearing deposits with banks of $2,288,000 and the purchase
of premises and equipment in the amount of $1,143,000. These cash uses were
partially offset by the proceeds from the sales of securities available-for-sale
of $16,858,000, proceeds from the maturities of securities available-for-sale of
$15,331,000, proceeds from the maturities of securities held-to-maturity of
$3,622,000 and a net decrease in loans of $9,412,000.
The Company recognizes the importance of maintaining adequate capital
levels to support sound, profitable growth and to encourage depositor and
investor confidence. Shareholders' equity at December 31, 1999 was $28,243,000
as compared to $31,717,000 at December 31, 1998, a decrease of $3,474,000 or
11.0%. This decrease was attributable to a decline of $4,848,000 in accumulated
other comprehensive income (see Note A.7 of the "Notes to Consolidated Financial
Statements"), and a net increase of $885,000 in ESOP debt. These decreases were
partially offset by retained earnings and the sale of common shares pursuant to
the Dividend Reinvestment Plan. Total shareholders' equity, exclusive of
accumulated other comprehensive income was $32,564,000 and $31,190,000 at
December 31, 1999 and 1998, respectively. This is an increase of $1,374,000 or
4.4%. The accumulated other comprehensive income is comprised of the unrealized
gains or losses on securities available-for-sale. The unrealized losses on
securities available-for-sale at December 31, 1999 amounted to $4,322,000 (net
of tax effect of $2,226,000). Included in shareholders' equity at December 31,
1998 was $527,000 (net of tax effect of $272,000) of unrealized losses on
securities available-for-sale (see discussion on "Securities
Available-for-Sale").
The Company paid a 5% stock dividend on its common stock from authorized
but unissued shares on June 24, 1999 to all shareholders of record at the close
of business on June 4, 1999. On June 25, 1998, the Company paid a 5% stock
dividend on its common stock from authorized but unissued shares to all
shareholders of record at the close of business on June 5, 1998. The Company
also paid a 5% stock dividend on June 19, 1997 to shareholders of record on May
30, 1997. Fractional shares on the stock dividends were paid in cash. The number
of average shares and per share information in this report has been restated to
reflect these 5% stock dividends.
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. In
1999, 15,061 new common shares were purchased pursuant to this Plan at an
average price of $20.99 for total proceeds of $316,000. In 1998, 10,910 common
shares were purchased pursuant to the Plan at an average price of $29.98 per
share. The total proceeds were $327,000. New common shares purchased in 1998
totaled 7,992 at an average price of $29.15 for proceeds of $233,000. The
remaining purchase of 2,918 shares were from Treasury shares at an average price
of $33.21 for proceeds of $94,000.
A Non-Employee Directors Stock Option Plan was adopted by the Company in
1994. This plan provides for the awarding of stock options to the Company's
non-employee directors. In 1999, options to purchase 7,654 shares of the
Company's common stock at an average price of $21.81 were granted. During 1999,
options for 1,276 shares of the Company's common stock issued pursuant to the
plan were exercised at an average price of $13.32 per share. No options were
issued or exercised under this Plan in 1998. During 1997, options for 957 shares
of the Company's common stock were exercised by a non-employee director at a
price of $13.32 per share.
The Company also has a "Stock Option Plan" that was originally adopted in
1986 and the "1996 Stock Option Plan" that was adopted in 1996 which provide for
the granting of options to acquire the Company's common stock for officers and
key employees. In 1999, no options were issued under this plan. In 1998, options
to purchase 32,524 shares of the Company's common stock at a price of $33.56 per
share were granted to certain officers. No options were exercised under this
plan in 1999 and 1998. During 1997, options to purchase 20,948 shares of the
Company's common stock at a price of $21.31 were issued under this plan. In
1997, options to purchase 6,330 shares of the Company's common stock issued
pursuant to the 1986 Plan were exercised at an average price of $14.93 per
share.
The Company Stock Option Plans are accounted for under Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees"
and its related interpretations. This accounting method is permitted under
Financial Accounting Standards Board standard SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows an entity to use a fair-value based
method for valuing stock-based compensation which measures compensation cost at
the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the Standard permits entities to continue accounting for employee
stock options and similar instruments under Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair-value based method of accounting defined in
SFAS No. 123 had been applied. The Company's stock option plans are accounted
for under APB Opinion No. 25. Additional information relating to the Company's
Stock Option Plans can be found in Notes A.10 and M of the "Notes to
Consolidated Financial Statements".
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Additional
information relating to the Company's and Bank's capital requirements and
capital ratios can be found in Note R of the "Notes to Consolidated Financial
Statements".
A group of funeral directors have asserted certain claims 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. The Company
has incurred legal expenses in regard to these claims during 1999 and 1998. In
1998, the Company established a reserve of $1.5 million against these possible
claims. The reserve balance, as of December 31, 1999 equaled $994,000 with
respect to unsettled claims. The Bank has been advised that it has significant
defenses to these claims and intends to vigorously defend against such claims.
However, there is no assurance that the Bank will be successful. The Company
will continue to incur significant legal expenses in regard to these claims and
any settlement of this case could exceed the reserve amount and thus have a
negative impact on the Company's future earnings and financial condition (see
Note N of the "Notes to Consolidated Financial Statements").
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate
equity-to-assets ratio. Another significant effect of inflation is on other
expenses, which tend to rise during periods of general inflation.
Management believes the most significant impact on financial results is the
Company's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain an essentially balanced
position between interest-sensitive assets and liabilities in order to protect
against wide interest-rate fluctuations.
Year 2000
The Company has adopted a Year 2000 policy to address the "Year 2000" Issue
concerning the inability of certain information systems and automated equipment
to properly recognize and process dates containing the Year 2000 and beyond. If
not corrected, these systems and equipment could produce inaccurate or
unpredictable results commencing on January 1, 2000. The Company, similar to
most financial services providers, is particularly vulnerable to the potential
impact of the Year 2000 Issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware, and
other equipment both within the Company's direct control and outside of the
Company's ownership, yet with which the Company electronically or operationally
interfaces.
In order to address the Year 2000 Issue, the Company 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 had identified its mission-critical systems as those that
affect the Company's ability to process banking transactions and its general
accounting systems. Such systems include deposit, loan and trust accounting,
check and deposit processing and branch teller equipment.
The Company purchases most of its computer software from major outside
providers of bank software. A significant component of the Year 2000 plan was to
install the Year 2000 compliant software provided by these vendors and also to
test these supplied systems. The Company's major software providers have
informed the Company that, based on tests they have conducted and continue to
conduct, they believe their respective systems to be Year 2000 compliant. In
addition, the Company conducted its own tests on these systems provided by
vendors. The Company also has some internally generated programmed software.
This software was corrected for Year 2000.
The Company has reviewed the impact of Year 2000 on other equipment and
systems such as heating, air conditioning, telecommunications, electric service,
vaults, photocopiers, personal computers, printers and other equipment where
necessary. Some of this equipment, such as personal computers, were replaced.
Other items such as vaults, heating, air conditioning, photocopiers and printers
were tested and found "not date sensitive". The Company's providers of
telecommunications and electric service were contacted. These providers
indicated they do not expect any interruption of service in the Year 2000.
Other important segments of the Year 2000 plan were to identify those
suppliers and customers whose possible lack of Year 2000 preparedness might
expose the Company to financial loss. Included in this process was
communications to all the Company's customers and identification of loan and
deposit customers whose failure to address the Year 2000 Issue might impact
their banking relationship. As a result of this communication, the Company
identified those customers who may be affected by the Year 2000. Risk factors
were assigned to these customers. The Company has not experienced any
significant loss as a result of these risks. The Company initiated
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company developed contingency plans to address any or all systems that,
despite all testing, still did 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
were established and alternative power source was installed at the Company's
Operations Center.
The Company spent $215,000 and $496,000 on Year 2000 compliance matters in
1999 and 1998, respectively. As of December 31, 1999, $1,066,000 has been spent
on this project. These expenses are comprised of the replacement of branch
teller and new account systems for $645,000, replacement of personal computers
for $231,000, the installation of an alternative electrical power source at the
Company's Operations Center for $90,000, the replacement of automatic teller
machines for $28,000, replacement of mortgage lending software for $19,000 and
enhancements to banking systems of $21,000 and trust systems of $12,000. In
addition, the Company spent $20,000 on communications to its customers regarding
Year 2000 issues. The expenses related to Year 2000 were financed by the general
revenues of the Company and are included in the Company's other operating
expenses in the Company's financial statement.
The Company 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.
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 month of January, 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's revenues and financial
condition could be adversely impacted.
Earnings Per Common Share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" in 1997. SFAS No. 128 eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. Prior periods' earnings per share
calculations have been restated to reflect the adoption of SFAS No. 128 (see
Note A.13 of the "Notes to Consolidated Financial Statements). Accounting for
the Impairment of Long-Lived Assets
The Company has adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain intangibles and how to value long-lived assets to
be disposed of. The adoption of SFAS No. 121 had no material effect on the
Company's consolidated financial position or results of operations. Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
The Company has adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", as amended by
SFAS No. 127, which provides accounting guidance on transfers of financial
assets, servicing of financial assets and extinguishment of liabilities. This
statement is effective for transfers of financial assets, servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
Adoption of this statement had no material impact on the Company's consolidated
financial position or results of operations.
Reporting Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires entities presenting a complete set of financial statements to include
details of comprehensive income. Comprehensive income consists of net income or
loss for the current period and income, expenses, gains and losses that bypass
the income statement and are reported directly in a separate component of
equity. The Company's financial statements have been reclassified to reflect the
provision of SFAS No. 130 (see Note A.7 of the "Notes to Consolidated Financial
Statements").
Disclosures About Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 established standards for the
method that public business enterprises report selected information regarding
operating segments in financial reports issued to shareholders. The disclosure
information required consists of a measure of segment profit and loss, certain
revenue and expense items and segment assets based upon specified quantitative
thresholds, as it is reported internally to the chief operating decision maker
on both an interim and annual basis. The statement is effective for fiscal years
beginning after December 15, 1997. Management has determined that the
Corporation consists of one segment: community banking.
Accounting for Derivative Instruments and Hedging Activities
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 stockholder' 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.
Quarterly Financial Data (Unaudited)
The following represents summarized quarterly financial data of the
Company, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation.
Net income per share of common stock has been restated to reflect retroactively
the 5% stock dividends of June, 1999, June, 1998 and May, 1997.
QUARTERLY FINANCIAL DATA (Unaudited)
Dollars in Thousands,
except per share data
1999 Dec. 31 Sept. 30 June 30 March 31
Interest income $6,705 $6,934 $6,490 $6,224
Net interest income 3,683 3,980 3,685 3,556
Provision for possible
loan losses 125 -- 125 125
Net gain (loss) on sale
of securities and mortgages 9 59 358 294
Income before income taxes 845 1,161 1,208 997
Net income $ 687 $ 885 $ 925 $ 785
Basic net income per share $ 0.39 $ 0.48 $ 0.52 $ 0.44
Diluted net income per share $ 0.39 $ 0.49 $ 0.51 $ 0.44
Three Months Ended
1998 Dec. 31 Sept. 30 June 30 March 31
Interest income $6,234 $6,393 $6,355 $6,385
Net interest income 3,504 3,643 3,650 3,699
Provision for possible
loan losses 112 113 113 112
Net gain (loss) on sale
of securities and mortgages 350 135 495 140
Income before income taxes 630 1,175 1,219 1,039
Net income $ 498 $ 871 $ 895 $ 768
Basic net income per share $ 0.27 $ 0.48 $ 0.50 $ 0.43
Diluted net income per share $ 0.27 $ 0.48 $ 0.49 $ 0.43
Item 7.A Quantitative and Qualitative Disclosure About Market Risks
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 (55.6% of total loans) and commercial loans
supported by real estate (13.2% of total loans) in its loan portfolio. In
addition, 56.2% of the Bank's consumer, installment loans are for recreational
vehicles. These loans represent 12.7% of total loans (see Note P of the "Notes
to Consolidated Financial Statements"). These loans are subject to interest and
economic risks. The Bank also originates residential real estate loans for sale
in the secondary market. Such loans are identified as "Mortgage Loans
Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate
risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does not
own any trading assets and does not have any hedging transactions in place such
as interest rate swaps (see discussions on "Investment Securities" and
"Securities Available-for-Sale").
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the extent to which net interest
income would change due to changes in the level of interest rates. The objective
of interest rate sensitivity management is to reduce a company's vulnerability
to future interest rate fluctuations and to enhance consistent growth of net
interest income. The Bank's Asset/Liability Management Committee meets
semi-monthly to examine, among other subjects, interest rates for various
products and interest sensitivity.
Rate sensitivity arises from the difference between the volumes of assets
which are rate-sensitive as compared to the volumes of liabilities which are
rate-sensitive. A comparison of interest-rate-sensitive assets to interest-rate-
sensitive liabilities is monitored by the Bank on a regular basis using several
time periods. The mismatch of assets and liabilities in a specific time frame is
referred to as interest sensitivity gap. Generally, in an environment of rising
interest rates, a negative gap (interest sensitive liabilities being greater
than interest sensitive assets in a given period of time) will decrease net
interest income, and in an environment of falling interest rates, a negative gap
will increase net interest income.
Assets and liabilities are allocated to a specific time period based on
their scheduled repricing date or on an historical basis. At December 31, 1999,
assets of $157,197,000 (40% of total assets) were subject to interest rate
changes within one year. This compares to assets subject to interest rate
changes within one year of $143,809,000 (40% of total assets) at the end of 1998
and $151,613,000 (44% of total assets) at the end of 1997. Liabilities subject
to rate change within one year were $163,662,000, $175,047,000 and $166,220,000
in 1999, 1998 and 1997, respectively. A negative one-year gap position of
$6,465,000 existed as of December 31, 1999. The gap positions at December 31,
1998 and 1997 were negative $31,238,000 and negative $14,607,000, respectively.
The ratio of rate-sensitive assets to rate-sensitive liabilities for the
one-year time frame was .96 at the end of 1999, compared to .82 at the end of
1998 and .91 at the end of 1997. The "Interest Sensitivity Analysis" in the
following table presents a sensitivity gap analysis of the Company's assets and
liabilities at December 31, 1999 for five time-intervals. The Company's negative
gap position for the one year time frame decreased in 1999 as a result of a
decrease in interest-bearing demand deposits with a maturity of one year or less
and a reduction of loan maturities. The change in the deposit mix was due to the
sale of longer term certificates of deposit to customers. The change in loan
maturities was due in part to the sale of residential mortgage loans. Management
intends to continue to purchase adjustable rate securities, make adjustable rate
loans, market longer-term certificates of deposit and sell fixed-rate mortgage
loans to maintain an acceptable gap position.
Interest Sensitivity Analysis
0-90 91-180 181-365 1-5 Over
Days Days Days Years 5 years Total
Interest-Bearing
Deposits with Banks $ 5,589 $ --- $ --- $ --- $ --- $ 5,589
Federal Funds Sold 2,000 --- --- --- --- 2,000
Inv Securities 17,925 11,245 26,255 72,126 24,692 152,243
Loans Held-for-Sale --- --- --- --- --- ---
Loans 48,573 9,122 22,216 61,981 57,929 199,821
Other Assets 14,272 --- --- --- 17,964 32,236
------- -------- -------- ------- -------- --------
TOTAL ASSETS $88,359 $20,367 $ 48,471 $134,107 $100,585 $391,889
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 41,813 $ 41,813
Int-Bearing
Deposits 99,506 18,747 30,679 72,286 61,449 282,667
Securities Sold
Under Agreements
to Repurchase 1,730 --- --- --- --- 1,730
Long-Term Debt 5,000 --- 8,000 17,000 --- 30,000
Other --- --- --- --- 7,436 7,436
Capital --- --- --- --- 28,243 28,243
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $106,236 $18,747 $ 38,679 $89,286 $138,941 $391,889
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $(17,877)$ 1,620 $ 9,792 $44,821 $(38,356) $ ---
Cumulative Int
Sensitivity Gap $(17,877)$(16,257)$ (6,465) $38,356 $ --- $ ---
Cumulative Gap
RSA/RSL 83.2% 87.0% 96.1% 115.2% 100.0%
(1) Historically, non-interest-bearing deposits reflect insignificant change in
deposit trends and, therefore, the Company classifies these deposits over
five years.
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest-rate changes that are characteristic of various interest-rate-sensitive
assets and liabilities. Consequently, even though the Company currently has a
negative gap position because of the unequal sensitivity of these assets and
liabilities, management believes that this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
Bank's net income. This model produces an interest rate exposure report that
forecasts changes in the market value of portfolio equity under alternative
interest rate environments. The market value of portfolio equity is defined as
the present value of the Company's existing assets, liabilities and off-balance
sheet instruments. The calculated estimates of changes in the market value of
portfolio value at December 31, 1999 are as follows:
- -------------------------------------------------------------------------------
Dollars in Thousands at December 31, 1999
- -------------------------------------------------------------------------------
Market Value of Percent of
Changes in Rate Portfolio Equity Change
- --------------------------- ---------------------- ------------------
+ 400 basis points 10,122 (58.6)%
+ 300 basis points 13,469 (44.9)
+ 200 basis points 16,962 (30.6)
+ 100 basis points 20,611 (15.6)
Flat Rate 24,425 ---
- 100 basis points 28,466 16.5
- 200 basis points 32,503 33.1
- 300 basis points 36,202 48.2
- 400 basis points 39,538 61.9
- -------------------------------------------------------------------------------
The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest rate sensitivity of the Company's assets and
liabilities as well as the estimated effect of changes in interest rates on the
market value of portfolio equity could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Colonial Group, Inc.
We have audited the accompanying consolidated balance sheets of First
Colonial Group, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statement of earnings, changes in stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Colonial Group, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 14, 2000
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(Dollars in Thousands) At December 31, 1999 1998
- -------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 14,272 $ 12,259
Federal Funds Sold 2,000 2,000
-------- --------
Total Cash and Cash Equivalents 16,272 14,259
Interest-Bearing Deposits With Banks 5,589 3,301
Investments Securities
(Fair Value: 1999 - $19,123; 1998 - $17,920) 19,887 17,723
Securities Available-for-Sale at Fair Value 132,356 98,389
Mortgage Loans Held-for-Sale - 603
Total Loans, Net of Unearned Discount 202,258 212,437
Less: Allowance for Possible Loan Losses (2,437) (2,691)
-------- --------
Net Loans 199,821 209,746
Premises and Equipment, Net 7,116 6,885
Accrued Interest Income 3,045 2,542
Other Real Estate Owned 571 636
Other Assets 7,232 4,412
-------- --------
TOTAL ASSETS $ 391,889 $ 358,496
========= =========
LIABILITIES
Deposits
Non-Interest-Bearing Deposits $ 41,813 $ 38,885
Interest-Bearing Deposits
(Includes Certificates of Deposit in Excess
of $100: 1999 - $5,105; 1998 - $4,726) 282,667 255,664
-------- --------
Total Deposits 324,480 294,549
Securities Sold Under Agreements to Repurchase 1,730 5,094
Long-Term Debt 30,000 20,000
Accrued Interest Payable 4,208 3,536
Other Liabilities 3,228 3,600
-------- --------
TOTAL LIABILITIES 363,646 326,779
-------- --------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $5.00 a share
Authorized: 500,000 shares, none issued --- ---
Common Stock, Par Value $5.00 a share
Authorized: 10,000,000 shares
Issued: 1,848,437 shares in 1999 and
1,745,725 shares in 1998 9,242 8,729
Additional Paid-In Capital 15,674 13,873
Retained Earnings 8,968 9,023
Employee Stock Ownership Plan Debt (1,320) (435)
Accumulated Other Comprehensive Income (Loss) (4,321) 527
-------- -------
TOTAL SHAREHOLDERS' EQUITY 28,243 31,717
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 391,889 $ 358,496
========= =========
See accompanying notes to consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(Dollars in Thousands, except per share data)
For the Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $17,772 $ 18,885 $19,943
Interest on Investment Securities
Taxable 6,829 5,002 4,592
Tax-Exempt 1,509 1,269 837
Interest on Deposits with Banks and
Federal Funds Sold 243 211 72
------- ------- -------
Total Interest Income 26,353 25,367 25,444
------- ------- -------
INTEREST EXPENSE
Interest on Deposits 9,819 9,466 9,312
Interest on Short-Term Borrowings 283 265 372
Interest on Long-Term Debt 1,347 1,140 1,147
------- ------- -------
Total Interest Expense 11,449 10,871 10,831
------- ------- -------
NET INTEREST INCOME 14,904 14,496 14,613
Provision for Possible Loan Losses 375 450 605
------- ------- -------
Net Interest Income After Provision
for Possible Loan Losses 14,529 14,046 14,008
------- ------- -------
OTHER INCOME
Trust Revenue 1,246 1,225 1,050
Service Charges on Deposit Accounts 1,682 1,594 1,349
Investment Securities Gains, Net 563 722 601
Gains on Sale of Mortgage Loans 157 398 178
Other Operating Income 707 641 645
------- ------- -------
Total Other Income 4,355 4,580 3,823
------- ------- -------
OTHER EXPENSES
Salaries and Employee Benefits 6,780 6,385 6,033
Net Occupancy and Equipment Expense 2,171 2,118 2,178
Other Operating Expenses 5,722 6,060 5,041
------- ------- -------
Total Other Expenses 14,673 14,563 13,252
------- ------- -------
Income Before Income Taxes 4,211 4,063 4,579
Applicable Income Taxes 929 1,031 1,296
------- ------- -------
NET INCOME $ 3,282 $ 3,032 $ 3,283
======= ======= =======
PER SHARE DATA
Basic Net Income $ 1.84 $ 1.68 $ 1.83
Diluted Net Income $ 1.83 $ 1.67 $ 1.83
Cash Dividends $ 0.74 $ 0.70 $ 0.64
See accompanying notes to consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(Dollars in Thousands) Accumulated
Add. Other
Common Paid-In Retained Treas. ESOP Comprehensive
Stock Capital Earnings Stock Debt Income Total
- -------------------------------------------------------------------------------
Balance at
Jan 1, 1997 $7,803 $ 9,212 $9,975 $(20) $ (512) $ 347 $26,805
1997
Comprehensive
Income
Net Income 3,283 3,283
Change in
Unrealized
Sec Gains,
Net 953 953
------
Total
Comprehen-
sive Income 4,236
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(10,036
shares) 50 204 254
Sale of
Common Stock
under Stock
Option Plan
(6,610 shs) 33 74 107
Purchase of
Treasury Stock
(3,279 shs) (107) (107)
Sale of
Treasury Stock
under Div
Reinv Plan
(1,361) 33 33
Cash Div Paid (1,139) (1,139)
Stock Div
Paid of 5%
(78,132 shs) 391 1,474 (1,865) ---
Cash in Lieu
of Fractional
Shares (4) (4)
ESOP Loan
Pymt 122 122
Unall ESOP
Shares
Committed
to
Employees
(4,415 shs) 50 50
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1997 8,277 11,014 10,250 (94) (390) 1,300 30,357
1998
Comprehensive
Income
Net Income 3,032 3,032
Change in
Unrealized
Sec Gains
(Losses), Net (773) (773)
--------
Total Comprehen-
sive Income 2,259
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(7,611
shares) 38 195 233
Sale of
Treas Stock
under
Dividend
Reinv Plan
(2,779
shares) 94 94
Cash
Dividends
Paid (1,275) (1,275)
Stock
Dividend
of 5%
(82,701
shares) 414 2,564 (2,978) ---
Cash in
Lieu of
Fractional
Shares (6) (6)
ESOP Loan
Pymt 455 455
Loan to ESOP (500) (500)
Unall ESOP
Shares
Committed
to
Employees
(5,353
shares) 100 100
------- ------- ------- ----- ------ ------ -------
Balance at
Dec 31, 1998 8,729 13,873 9,023 --- (435) 527 31,717
1999
Comprehensive
Income
Net Income 3,282 3,282
Change in
Unrealized
Gains
(Losses), Net (4,848) (4,848)
------
Total
Comprehen-
sive Income
(Loss) (1,566)
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(14,732
shares) 74 242 316
Sale of
Common
Stock
under
Directors
Stk Option
Plan
(496
shares) 2 2 4
Cash
Dividends
Paid (1,321) (1,321)
Stock
Dividend
of 5%
(87,484
shares) 437 1,575 (2,012) ---
Cash in
Lieu of
Fractional
Shares (4) (4)
ESOP Loan
Payment 115 115
Loan to ESOP (1,000) (1,000)
Unallocated
ESOP Shares
Committed
to Employees
(3,691 shares) (18) (18)
------ ------- ------ --- ----- ---- -------
Balance
at Dec
31, 1999 $9,242 $15,674 $8,968 $-- $(1,320) $(4,321) $28,243
See accompanying notes to consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(Dollars in Thousands)
For the Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 3,282 $ 3,032 $ 3,283
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Provision for Possible Loan Losses 375 450 605
Depreciation and Amortization 1,027 1,004 884
Accretion of Security Discounts (267) (78) (70)
Amortization of Security Premiums 251 242 124
Deferred Taxes 90 (395) (277)
Amortization of Deferred Fees on Loans 12 (136) (170)
(Gain) Loss on Sale of
Other Real Estate Owned (39) 4 (54)
Investment Securities Gains, Net (563) (722) (601)
Gain on Sale of Mortgage Loans (157) (397) (178)
Mortgage Loans Originated for Sale (37,460) (42,723) (27,183)
Mortgage Loan Sales 38,068 42,879 27,145
Changes in Assets and Liabilities
Increase in Accrued Interest Income (503) (310) (212)
Increase in Accrued Interest Payable 672 70 261
Increase in Other Assets (970) (740) (545)
Increase in Other Liabilities 71 396 625
-------- -------- -------
Net Cash Provided by Operating Activities 3,889 2,576 3,637
-------- -------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of
Securities Available-for-Sale 15,331 29,744 13,986
Proceeds from Maturities of Securities
Held-to-Maturity 3,622 9,403 8,047
Proceeds from Sales of Securities
Available-for-Sale 16,858 11,094 13,279
Proceeds from Sales of Securities
Held-to Maturity -- 248 --
Purchase of Securities Available-for-Sale (72,150) (66,712) (40,485)
Purchase of Securities Held-to-Maturity (6,559) (9,722) (5,838)
Net Increase in Interest-Bearing
Deposits With Banks (2,288) (2,906) (110)
Net (Increase) Decrease in Loans 9,412 16,614 (10,130)
Purchase of Premises and Equipment (1,143) (494) (1,126)
Proceeds from Sale of Other Real Estate Owned 382 290 900
-------- -------- -------
Net Cash Used in Investing Activities (36,535) (12,441) (21,477)
-------- ------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest Bearing
Demand Deposits and Savings Accounts 2,058 10,669 3,804
Net Increase in Certificates of Deposit 27,873 1,625 10,783
Net Increase in Long-Term Debt 10,000 1,610 --
Net Increase in ESOP Debt (885) (45) --
Net Increase (Decrease) in
Repurchase Agreements (3,364) (3,710) 5,009
Proceeds from Issuance of Common Stock 302 333 361
Purchase of Treasury Stock -- -- (107)
Proceeds from Sale of Treasury Stock -- 94 33
Cash Dividends Paid (1,321) (1,275) (1,139)
Cash in Lieu of Fractional Shares (4) (6) (4)
-------- ------- -------
Net Cash Provided by Financing Activities 34,659 9,295 18,740
-------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents 2,013 (570) 900
Cash and Cash Equivalents, January 1, 14,259 14,829 13,929
-------- -------- -------
Cash and Cash Equivalents, December 31, $ 16,272 $ 14,259 $ 14,829
See accompanying notes to consolidated financial statements.
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in
thousands, except per share data.)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
First Colonial Group, Inc. (the "Company") is a one bank holding company of
Nazareth National Bank and Trust Company (the "Bank"). The Bank is an
independent community bank providing retail and commercial banking services
through its thirteen offices in Northampton, Lehigh, and Monroe counties in
northeastern Pennsylvania.
The Bank competes with other banking and financial institutions in its primary
market communities, including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings and
loan associations, credit unions and money market funds actively compete for
savings and time deposits and for various types of loans. Such institutions, as
well as consumer finance and insurance companies, may be considered competitors
of the Bank with respect to one or more of the services it renders.
The Company and the Bank are subject to regulations of certain state and Federal
agencies and, accordingly, they are periodically examined by those regulatory
agencies. As a consequence of the extensive regulation of commercial banking
activities, the Bank's business is particularly susceptible to being affected by
state and Federal legislation and regulation which may have the effect of
increasing the cost of doing business.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Bank and First C. G. Company, Inc. All
significant inter-company balances and transactions have been eliminated. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenditures
for the periods. Therefore, actual results could differ significantly from those
estimates.
2. Investment Securities
As required by Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the Company
classifies debt and marketable equity securities in three categories: trading,
available-for-sale and held-to-maturity. Trading securities are measured at fair
value, with unrealized holding gains and losses included in income. The Company
does not have any securities classified as trading securities.
Available-for-sale securities are measured at fair value, with unrealized gains
and losses, net of tax effect, reported in equity. Held-to-maturity securities
are carried at amortized cost, and the Company has the positive intent and
ability to hold such securities until maturity. The Company's classification of
its investment securities into these categories is detailed in "Note B -
Investment Securities".
Investment securities held-to-maturity are principally debt securities and
are carried at cost, net of unamortized premiums and discounts, which are
recognized in interest income using the interest method over the period to
maturity.
Gains or losses on disposition are based on the net proceeds and the
adjusted carrying amount of the securities sold, using the specific
identification method.
3. Mortgage Loans Held-for-Sale
Mortgage loans held-for-sale are carried at the lower of aggregate cost or
fair value. Unrealized losses are included in other operating expenses. Realized
gains and losses from mortgage loan sales are included in total other income.
Interest and fee income earned during the holding period are included in
interest and fees on loans.
4. Loans and Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for possible loan losses. Interest income on loans is
accrued using various methods which approximate a constant yield.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. Upon such discontinuance, all unpaid accrued interest is reversed.
The allowance for possible loan losses is established through a provision
for loan losses charged to expenses. Loans are charged against the allowance for
possible loan losses when management believes that the collectibility of
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb possible loan losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay.
As required by SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures", the Company measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that, as a practical expedient,
impairment may be measured based on the observable market price of a loan, or
the fair value of the collateral if the loan is collateral dependent. The
Company measures impairment based on the fair value of the collateral when it
determines that foreclosure is probable (see Note D).
5. Loan Fees and Related Costs
Certain origination and commitment fees, and certain direct loan
origination costs are deferred and amortized over the contractual life of the
related loans. This results in an adjustment of the yield on the related loan.
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of buildings and land improvements is computed
principally on the straight-line method, and for equipment, principally on an
accelerated method, over the estimated useful lives of the assets.
7. Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This standard requires entities presenting a complete set
of financial statements to include details of comprehensive income.
Comprehensive income consists of net income or loss for the current period and
income, expenses, gains, and losses that bypass the income statement and are
reported directly in a separate component of equity. These financial statements
have been reclassified to reflect the provisions of SFAS No. 130.
The income tax effects allocated to comprehensive income are as follows:
- -------------------------------------------------------------------------------
For the Year Ended December 31, Before Tax Tax Net of Tax
Amount Expense Amount
-------------------------------------------
(Credit)
1999
- -----------------------------------
Unrealized Losses on Securities
Unrealized Holding Losses
Arising During Period $ (7,910) $ (2,690) $ (5,220)
Less: Reclassification
Adjustment for Gains
Realized in Net Income 563 191 372
-------------------------------------------
Other Comprehensive Loss, Net $ (7,347) $ (2,499) $ (4,848)
-------------------------------------------
1998
- -----------------------------------
Unrealized Losses on Securities
Unrealized Holding Losses
Arising During Period $ (1,894) $ (644) $ (1,250)
Less: Reclassification
Adjustment for Gains
Realized in Net Income 722 245 477
-------------------------------------------
Other Comprehensive Loss, Net $ (1,172) $ (399) $ (773)
-------------------------------------------
1997
- -----------------------------------
Unrealized Gains on Securities
Unrealized Holding Gains
Arising During Period $ 2,045 $ 695 $ 1,350
Less: Reclassification
Adjustment for Gains
Realized in Net Income 601 204 397
-------------------------------------------
Other Comprehensive Income, Net $ 1,444 $ 491 $ 953
-------------------------------------------
8. Accounting for Derivative Instruments and
Hedging Activities
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.
9. Income Taxes
The Company, in accordance with SFAS No. 109, "Accounting for Income
Taxes", computes the tax expense using the liability method whereby deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation,
loan origination fees, provision for possible loan losses, unrealized gains and
deferred expenses.
10. Stock Option Plans
Under Stock Option Plans, options to acquire shares of common stock are
granted to certain officers, key employees and directors.
The Company Stock Option Plans are accounted for under Accounting
Principles Board (APB) Opinion 25 "Accounting for Stock Issued to Employees" and
its related interpretations. This accounting method is permitted under SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows an entity to
use a fair value-based method for valuing stock-based compensation which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the Standard permits entities to continue
accounting for employee stock options and similar instruments under APB Opinion
No. 25. Entities that continue to account for stock options using APB Opinion
No. 25 are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied (see Note M).
11. Employee Benefit Plans
The Company has established an Employee Stock Ownership Plan (ESOP)
covering eligible employees with one year of service as defined by the ESOP. The
Company accounts for its ESOP in accordance with Statement of Position (SOP)
93-6, "Employer's Accounting for Employee Stock Ownership Plans", issued by the
Accounting Standards Division of the American Institute of Certified Public
Accountants (AICPA). SOP 93-6 is applied to shares acquired by the ESOP after
December 31, 1992. For issuances of stock to the ESOP after December 15, 1989,
but prior to December 31, 1992, the shares allocated method is used to recognize
expense in the Company's financial statements. For issuances of stock prior to
December 15, 1989, the Company will continue the cash contribution method of
recognizing expense to the extent that it exceeds the cumulative expense that
would be recognized under the shares allocated method (see Note J).
Employees who qualify may elect to participate in a deferred salary savings
401(k) plan. The Company contributes $.50 for each $1.00 up to the first 5% that
each employee contributes. The Company also has an executive compensation plan
which provides additional death, medical and retirement benefits to certain
officers (see Note K).
The Company has a deferred compensation plan involving the Directors of the
Company. This plan provides defined annual payments for 15 years beginning at
age 65 or death in exchange for the Directors deferring the payment of a portion
of their fees (see Note K).
The Company records the cost of post-retirement medical benefits on the
accrual basis as employees render service to earn the benefits and records a
liability for the unfunded accumulated post-retirement benefit obligation. The
transition obligation, representing the unfunded and unrecognized accumulated
past-service benefit obligation for all plan participants, will be amortized on
a straight-line basis over a 20-year period (see Note L).
12. Trust Assets and Revenue
Assets held by the Trust Department of the Bank in fiduciary or agency
capacities for its customers are not included in the accompanying consolidated
balance sheets since such assets are not assets of the Company. Operating
revenue and expenses of the Trust Department are included under their respective
captions in the accompanying consolidated statements of income and are recorded
on the accrual basis.
13. Per Share Information
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" in 1997. SFAS No. 128 eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. Prior periods earnings per share
calculations have been restated to reflect the adoption of SFAS No. 128. Basic
and diluted earnings per share are calculated as follows. There is no difference
between basic and diluted earnings per share for the year ended December 31,
1997.
- -------------------------------------------------------------------------------
Income Average Shares Per Share
For the Year Ended December 31, (numerator) (denominator) Amount
-------------------------------------
1999
- ------------------------------------------
Net Income $ 3,282
Basic Earnings Per Share
Income Available to Common Shareholders $ 3,282 1,786,019 $ 1.84
Effect of Dilutive Securities
Stock Options 3,292
-------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 3,282 1,789,311 $ 1.83
-------------------------------------
1998
- ------------------------------------------
Net Income $ 3,032
Basic Earnings Per Share
Income Available to Common Shareholders $ 3,032 1,805,051 $ 1.68
Effect of Dilutive Securities
Stock Options 7,847
-------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 3,032 1,812,898 $ 1.67
-------------------------------------
1997
- ------------------------------------------
Net Income $ 3,283
Basic Earnings Per Share
Income Available to Common Shareholders $ 3,283 1,786,741 $ 1.83
Effect of Dilutive Securities
Stock Options 5,323
-------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 3,283 1,792,064 $ 1.83
-------------------------------------
Average common shares outstanding in 1999, 1998 and 1997 do not include 56,598,
26,102 and 29,346, respectively, of average weighted unallocated shares held by
the ESOP. The exclusion of these unallocated shares held by the ESOP is due to
the Company's adoption of SOP 93-6 (see Note A.11). Share and per share
information have been restated to reflect the 5% stock dividends of June, 1999,
June, 1998 and May, 1997.
14. Statement of Cash Flows
The Company considers cash, due from banks and Federal funds sold as cash
equivalents for the purposes of the Consolidated Statements of Cash Flows.
Cash paid for interest was $10,777,000, $10,801,000 and $10,570,000, for
the years ended December 31, 1999, 1998 and 1997, respectively. Cash paid for
taxes was $1,060,000 in 1999, $1,458,000 in 1998 and $1,465,000 in 1997.
15. Advertising Costs
The Company expenses advertising costs as incurred.
16. Transfer and Servicing of Assets and
Extinguishments of Liabilities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishments of liabilities. This
statement is effective for transfers of financial assets, servicing of financial
assets, and extinguishments of liabilities occurring after December 31, 1996.
There is no material impact on the Company's consolidated financial position or
results of operations as a result of the adoption of this statement.
17. 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.
18. Stock Dividends
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. Stock dividends of 5% each were
also paid in 1997 and 1998. Net income per share and average shares outstanding
have been restated to reflect these stock dividends.
19. Reclassifications
Certain reclassifications of prior years amounts have been made to conform
to the 1999 presentation.
NOTE B - INVESTMENT SECURITIES
The Company classifies debt and marketable equity securities in three
categories: trading, available-for-sale and held-to-maturity as required by
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Trading securities are
measured at fair value, with unrealized holding gains and losses included in
income. The Company had no trading securities in 1999, 1998 and 1997.
Available-for-sale securities are measured at fair value, with unrealized gains
and losses reported, net of tax, as a component in equity. Held-to-maturity
securities are carried at amortized cost.
Available-for-sale securities had unrealized holding losses of $4,322,000
(net of the tax credit of $2,226,000) in 1999 and unrealized holding gains of
$527,000 (net of the tax effect of $272,000) in 1998. At December 31, the equity
securities in the available-for-sale category include Federal Reserve Bank stock
in the amount of $259,000 in 1999 and $256,000 in 1998, and Federal Home Loan
Bank stock in the amount of $2,265,000 in 1999 and $1,835,000 in 1998 which are
carried at cost.
The amortized cost, unrealized gains and losses, and fair value of the
Company's available-for-sale and held-to-maturity securities at December 31,
1999 and 1998 are summarized as follows.
1999
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Treasury $ 4,001 $ 4 $ 13 $ 3,992
U. S. Government Agency 53,112 -- 3,365 49,747
State and Political Subdivisions 29,147 16 1,284 27,879
Mortgage-Backed Securities 47,332 36 1,338 46,030
Equity Securities 5,312 68 672 4,708
------- ------- ------- -------
Total $138,904 $ 2,124 $ 6,672 $132,356
1998
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Treasury $ 7,026 $ 99 $ -- $ 7,125
U. S. Government Agency 24,482 94 135 24,441
State and Political Subdivisions 27,860 721 115 28,466
Mortgage-Backed Securities 33,322 85 266 33,141
Equity Securities 4,900 519 203 5,216
------- ------- ------- -------
Total $97,590 $ 1,518 $ 719 $98,389
1999
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government Agency $ 6,894 $ -- $ 306 $ 6,588
State and Political Subdivisions 7,974 10 401 7,583
Mortgage-Backed Securities 5,019 13 80 4,952
------- ------- ------- -------
Total $19,887 $ 23 $ 787 $19,123
1998
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government Agency $ 4,992 $ 35 $ 1 $ 5,026
State and Political Subdivisions 6,770 179 6 6,943
Mortgage-Backed Securities 5,961 39 49 5,951
------- ------- ------- -------
Total $17,723 $ 253 $ 56 $17,920
The following table lists the maturities of debt securities at December 31,
1999 and 1998, classified as available-for-sale and held-to-maturity. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
MATURITIES OF DEBT SECURITIES
At December 31, 1999 Available-For-Sale Held-To-Maturity
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- --------- --------
Due in one year or less $ 2,001 $ 2,004 $ 245 $ 245
Due after one year
through five years 8,509 8,370 1,912 1,902
Due after five years
through ten years 36,703 34,809 6,324 6,104
Due after ten years 39,047 36,435 6,387 5,920
------- ------- ------- -------
86,260 81,618 14,868 14,171
Mortgage-Backed Securities 47,332 46,030 5,019 4,952
Equity Securities 5,312 4,708 -- --
------- ------- ------- -------
Total Investments $138,904 $132,356 $19,887 $19,123
At December 31, 1998 Available-For-Sale Held-To-Maturity
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- --------- --------
Due in one year or less $ 4,019 $ 4,043 $ 250 $ 251
Due after one year
through five years 4,973 5,092 760 777
Due after five years
through ten years 19,865 20,094 7,131 7,207
Due after ten years 30,511 30,803 3,621 3,734
------- ------- ------- -------
59,368 60,032 11,762 11,969
Mortgage-Backed Securities 33,322 33,141 5,961 5,951
Equity Securities 4,900 5,216 -- --
------- ------- ------- -------
Total Investments $97,590 $98,389 $17,723 $17,920
======= ======= ======= ======
Investment securities with a carrying amount of $13,950,000 and $12,262,000
at December 31, 1999 and 1998, respectively, were pledged to secure public
deposits, to qualify for fiduciary powers and for other purposes required or
permitted by law. There were no securities held other than U. S. Treasury or U.
S. Agencies from a single issuer which represented more than 10% of
shareholders' equity. Proceeds from sales of investments in debt and equity
securities during 1999, 1998 and 1997 were $16,858,000, $11,342,000 and
$13,279,000, respectively. Gross gains of $716,000 and gross losses of $153,000
were realized on those sales in 1999. Gross gains of $740,000 and gross losses
of $18,000 were realized on the sales in 1998. In 1997, gross realized gains
were $615,000 and gross realized losses were $14,000.
NOTE C - LOANS
Major classifications of loans at December 31, 1999 and 1998 are as
follows.
1999 1998
- -------------------------------------------------------------------------------
Real Estate/Residential $112,870 $ 119,914
Real Estate/Construction 6,737 11,689
Real Estate/Commercial 26,809 29,587
Consumer/Installment 45,886 40,184
Commercial (Non-Real Estate)
and Agricultural 9,538 10,900
State and Political Subdivisions 1,096 1,178
Other 13 10
-------- ---------
Total Gross Loans 202,949 213,462
Less: Unearned Discount (691) (1,025)
-------- ---------
Total Loans $202,258 $ 212,437
Included in total gross loans are unamortized loan fees totaling $1,230,416
at December 31, 1999 and $293,000 at December 31, 1998. There were loans
totaling $1,311,000 on which the accrual of interest has been discontinued or
reduced at December 31, 1999. During 1999, an average of $1,091,000 of loans was
on non-accrual status. Non-accrual loans at December 31, 1998 amounted to
$1,245,000 and averaged $1,560,000 during 1998. Loans 90 days and over past due
and still accruing totaled $1,491,000 at December 31, 1999 and $1,021,000 at
December 31, 1998.
NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows.
- -------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Beginning Balance $ 2,691 $ 2,664 $ 2,532
Additions
Provisions for loan losses
charged to operating expenses 375 450 605
Recoveries 103 117 97
------- ------- -------
Total Additions 478 567 702
Deductions
Loans charged-off (732) (540) (570)
------- -------- --------
Ending Balance $ 2,437 $ 2,691 $ 2,664
The recorded investment in impaired loans as defined by SFAS No. 114 was
$370,000, $524,000 and $523,000 at December 31, 1999, 1998 and 1997,
respectively. The valuation allowance for credit losses related to impaired
loans is a part of the allowance for possible loan losses. The total valuation
allowance was $74,000, $303,000 and $138,000 at December 31, 1999, 1998 and
1997, respectively. The average recorded investment in impaired loans during the
year ended December 31, 1999, 1998 and 1997 was approximately $469,000, $897,000
and $612,000, respectively. All impaired loans were on a non-accrual status.
Income on impaired loans is recognized by the Company on a cash basis. The
Company recognized interest income of approximately $35,000, $23,000 and
$111,000 on impaired loans in 1999, 1998 and 1997, respectively.
NOTE E - PREMISES AND EQUIPMENT
Major classifications of these assets at December 31, 1999 and 1998 are
summarized as follows.
- -------------------------------------------------------------------------------
Estimated
Useful Lives 1999 1998
- -------------------------------------------------------------------------------
Land --- $ 939 $ 939
Premises 10-20 years 7,370 6,963
Equipment 3-10 years 6,408 5,768
------ -----
14,717 13,670
Accumulated depreciation
and amortization (7,601) (6,785)
------ -------
Total Premises and Equipment $ 7,116 $ 6,885
Depreciation and amortization expense amounted to $912,000, $908,000 and
$857,000 in 1999, 1998 and 1997, respectively.
NOTE F - SHORT-TERM BORROWINGS
- -------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK BORROWINGS
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Balance outstanding at December 31, $ -- $ -- $ --
Maximum amount outstanding at
any month-end during the year $12,425 $ 1,422 $ 6,890
Average amount outstanding $ 1,721 $ 974 $ 1,217
Average interest rate during the year 5.19% 5.65% 5.85%
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of
credit in the amount of $25,000,000, all of which was available at December 31,
1999.
There were no short-term borrowings in the form of Federal Reserve Discount
borrowings and Federal Funds purchased at December 31, 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Balance outstanding at December 31, $ 1,730 $ 5,094 $ 8,804
Maximum amount outstanding at
any month-end during the year $ 8,682 $ 8,166 $14,290
Average amount outstanding $ 5,994 $ 5,821 $ 6,459
Average interest rate during the year 3.24% 3.61% 3.72%
NOTE G - LONG-TERM DEBT
The Company had long-term borrowings from the Federal Home Loan Bank of
Pittsburgh totaling $30,000,000 at December 31, 1999 and $20,000,000 at December
31, 1998. These loans will mature in eight months to eight years. The weighted
average interest rate on these loans was 5.78% and 5.41% at December 31, 1999
and 1998, respectively. The Company also has an obligation as a party to the
Employee Stock Ownership Plan debt, which is discussed in Note J. The principal
payments due on the Company's debt at December 31, 1999 are as follows.
- --------------------------------------------------------------------------------
ESOP Debt FHLB Debt Total Debt
- --------------------------------------------------------------------------------
2000 $ 115 $ 8,000 $ 8,115
2001 115 5,000 5,115
2002 115 - 115
2003 115 - 115
2004 115 10,000 10,115
2005 and beyond 745 7,000 7,745
----- -------- --------
Total $1,320 $ 30,000 $ 31,320
- --------------------------------------------------------------------------------
NOTE H- OTHER OPERATING EXPENSES
The following items which are greater than 1% of the aggregate of "Total
Interest Income" and "Total Other Income" are included in "Other Operating
Expenses" for the respective years indicated.
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Advertising $ 574 $ 597 $ 524
Consulting Fees $ 511 $ 416 $ 430
Data Processing Services $ 773 $ 583 $ 607
Litigation Costs and Legal Fees $ 669 $ 418 $ 237
Loan Collection $ 298 $ 346 $ 240
Printing, Stationery and Supplies $ 318 $ 328 $ 363
Provisions for Trust Reserve $ 57 $ 1,000 $ 500
- -------------------------------------------------------------------------------
NOTE I- INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Applicable income tax expense (benefit) in the consolidated statements of
income is as follows.
- -------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Federal
Current $ 840 $ 1,426 $ 1,573
Deferred (benefit) 89 (395) (277)
----- ------- -------
Total $ 929 $ 1,031 $ 1,296
- -------------------------------------------------------------------------------
The income tax provision reconciled to the tax computed statutory Federal
rate is as follows.
- -------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Federal tax expense
at statutory rate $ 1,432 $ 1,385 $ 1,557
Increase (decrease)
in taxes resulting from:
Tax-exempt investment
securities income (569) (363) (261)
Tax-exempt interest
on loans (29) (23) (16)
Other, net 95 32 16
------- ------- -------
Applicable Income Taxes $ 929 $ 1,031 $ 1,296
Deferred tax assets and liabilities consist of the following.
- ------------------------------------------------------------------------
At December 31, 1999 1998
- ------------------------------------------------------------------------
Deferred Tax Assets:
Unrealized Securities Losses $ 2,226 $ --
Loan Loss Reserve 523 648
Deferred Compensation 429 432
Post-Retirement Benefits 71 64
Deferred Loan Fees 34 50
Depreciation 64 47
Miscellaneous Reserves 531 537
Other 86 49
------- -------
------- -------
Total $ 3,964 $ 1,827
------- -------
Deferred Tax Liability:
Unrealized Securities Gains $ -- $ 272
Other -- --
------- -------
------- -------
Total $ -- $ 272
------- -------
Net $ 3,964 $ 1,555
- ------------------------------------------------------------------------
Based on management's evaluation of the likelihood of realization, no
valuation allowance has been provided.
NOTE J - EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains an Employee
Stock Ownership Plan (ESOP) for the benefit of eligible employees.
In 1999, the ESOP borrowed $1,000,000 from the Company's subsidiary, First
C. G., payable over twenty years. The interest on this loan is at the Bank's
prime rate (an interest rate of 8.50% at December 31, 1999). The balance on this
loan was $950,000 at December 31, 1999. The proceeds from this loan were used to
purchase shares from the market.
In 1998, the ESOP borrowed $500,000 from the Company's subsidiary, First C.
G., payable over six years. The interest rate on this loan is at the Bank's
prime rate (an interest rate of 8.50% at December 31, 1999 and 7.75% at December
31, 1998). The balance outstanding on this loan was $370,000 at December 31,
1999 and $435,000 at December 31, 1998. The proceeds from this loan were used to
purchase shares from retiring employees and to pay off the balance on the 1993
loan of $358,000.
In 1993, the ESOP borrowed $650,000 from a bank payable over ten years. The
interest rate on this loan was that bank's prime rate plus 1.25% (an interest
rate of 9.75% at December 31, 1997). The balance outstanding on this loan was
$390,000 at December 31, 1997. During 1997, the ESOP made the final principal
payments on two additional loans.
These obligations have been recorded as a liability on the books of the
Company and are collateralized by stock of the Bank. Interest expense represents
the actual interest paid by the ESOP. The interest incurred on ESOP debt was
$85,000, $40,000 and $41,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Compensation expense related to the ESOP amounted to $210,000, $310,000 and
$275,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As
provided by SOP 93-6 (see Note A.10), the ESOP compensation expense includes a
$20,000 credit in 1999 and an expense of $100,000 in 1998 and $50,000 in 1997,
which is the fair market value of the shares related to the loans that were
allocated to the employees during these years. The number of shares released was
3,783 in 1999, 5,621 in 1998 and 4,867 in 1997.
Dividends on unallocated shares used for debt service were $45,000, $19,000
and $23,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The total shares held by the ESOP were 277,778 and 236,135 at December 31,
1999 and 1998, respectively. ESOP shares have been restated to reflect the 5%
stock dividends of June, 1999, June, 1998 and May, 1997.
NOTE K - OTHER BENEFIT PLANS Employees who qualify may elect to participate
in a deferred salary savings 401(k) plan. A participating employee may
contribute a maximum of 12% of his or her compensation. The Company will
contribute $.50 for each $1.00 up to the first 5% that each employee
contributes. Company payments are charged to current operating expenses. These
contributions were $86,000, $75,000 and $84,000 in 1999, 1998 and 1997,
respectively.
The Company also has an executive compensation plan (the "Officers'
Supplemental Retirement Plan") which provides additional death, medical and
retirement benefits to certain officers.
The Company has a deferred compensation plan (the "Deferred Directors'
Plan") involving Directors of the Company. The plan requires defined annual
payments for 15 years beginning at age 65 or death. The annual benefit is based
upon the amount deferred plus interest. The Company has recorded the deferred
compensation liabilities using the present value method.
The following table sets forth the funded status of the Officers'
Supplemental Retirement Plan and the Deferred Directors' Plan and the amounts
recognized in the Company's balance sheets at December 31, 1999 and 1998.
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
At December 31, 1999 1998 1999 1998
Accumulated benefit obligation, all of
which is vested $ 170 $ 146 $ 468 $ 491
Projected benefit obligation
for service rendered to date $(227) $(200) $(468) $(491)
Plan assets at fair value -- -- -- --
----- ----- ----- -----
Projected benefit obligation
in excess of plan assets (227) (200) (468) (491)
Unrecognized net (gain) loss from past
experience different from that
assumed and effects of changes
in assumptions (260) (247) 37 38
Prior service cost not yet recognized
in net periodic pension cost -- -- -- --
Unrecognized net assets at December 31,
being recognized over 15 years (4) (4) -- --
Adjustment to recognize
additional minimum liability -- -- (37) (38)
----- ----- ----- -----
Accrued Pension Cost $(491) $(451) $(468) $(491)
The weighted average assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were 6.75% in 1999
and 6.50% in 1998 and 7.0% in 1997 for the Officers' Supplemental Retirement
Plan. The weighted average assumed discount rate used in determining the
actuarial present value of the projected benefit obligation for the Deferred
Directors' Plan was 7.0% in 1999, 7.0% in 1998 and 7.5% in 1997. The weighted
average expected long-term rate of return on assets was 8.0% for 1999, 1998 and
1997 for the Officers' Supplemental Retirement Plan and 9.0% in each of those
years for the Deferred Directors' Plan. The weighted average rate of increase in
future compensation levels used in determining the actuarial present value for
the Officers' Supplemental Retirement Plan was 6.0% in 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
OFFICERS' SUPPLEMENTAL RETIREMENT PLAN
at December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost - benefits
earned during the period $ 43 $ 37 $ 10
Interest cost on projected
benefit obligation 18 15 11
Net amortization and
deferral (21) (15) (19)
---- ---- ---
Net Periodic Pension Cost $ 40 $ 37 $ 2
DEFERRED DIRECTORS' PLAN
at December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost - benefits
earned during the period $ - $ - $ --
Interest cost on projected
benefit obligation 32 34 36
Net amortization and
deferral -- -- --
---- ---- ---
Net Periodic Pension Cost $ 32 $ 34 $ 36
- --------------------------------------------------------------------------------
NOTE L - POST-RETIREMENT BENEFIT
The Company sponsors a post-retirement plan that covers a certain number of
retired employees and a limited group of current employees. This plan provides
medical insurance benefits to a group of previously qualified retirees and
spouses and to current full-time employees who were 60 years of age or older on
January 1, 1992 and who have retired from the Company after attaining age 65 and
are fully vested in the ESOP at the time of retirement. This plan is currently
unfunded.
As permitted by SFAS No. 106, the Company elected to delay the recognition
of the transition obligation by aggregating $308,000, which arose from adopting
SFAS No. 106, and amortize this amount on a straight-line basis over 20 years.
This election is recorded in the financial statements as a component of net
periodic post-retirement benefit cost.
The Company has determined the actuarially computed expense associated with
this benefit for 1999, 1998 and 1997. The components of the net periodic
post-retirement benefit cost for the years ended December 31 were as follows.
- -------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Service cost - benefits
earned during the period $ - $ - $ -
Interest cost on accumulated
benefit obligation 11 11 14
Amortization of transition
obligation 7 6 8
----- ----- -----
Net periodic post-
retirement benefit cost $ 18 $ 17 $ 22
- -------------------------------------------------------------------------------
The assumptions used to develop the net periodic post-retirement benefit
cost and the accrued post-retirement benefit cost were as follows.
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Discount Rate 6.75% 6.50% 7.00%
Medical care cost
trend rate 8.50% 8.50% 10.00%
- -------------------------------------------------------------------------------
The medical care cost trend rate used in the actuarial computation
ultimately is reduced to 8.0% in the year 2001 and 6.0% in 2005 and subsequent
years. This was accomplished using 0.5% decrements through the year 2005 and
later. The table of actuarially computed plan assets and benefit obligations for
the Company is presented below.
- ----------------------------------------------------------------
at December 31, 1999 1998
- ----------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees $ 173 $ 164
Active, eligible employees - -
Active, not-yet-eligible
employees - -
------ ------
Accumulated post-retirement
benefit obligation 173 164
Plan assets at fair value - -
Accumulated benefit obligation
in excess of plan assets 173 164
Unrecognized transition
obligation (201) (216)
Unrecognized net gain 94 117
------ ------
Accrued post-retirement
benefit cost $ 66 $ 65
- ----------------------------------------------------------------
At December 31, 1999, $207,000 of the accrued post-retirement benefit cost
is included in "Total Other Liabilities". The effect of a one percentage point
increase in each future year's assumed medical care cost trend rate, holding all
other assumptions constant, would have been to increase the net periodic
post-retirement benefit cost by $12,000 and the accrued post-retirement benefit
cost by $1,000.
Health care benefits are provided to certain retired employees. The cost of
providing these benefits was approximately $16,000, $20,000 and $22,000 in 1999,
1998 and 1997, respectively. The cost is accrued over the service periods of
employees expected to receive benefits. Past-service costs are being amortized
principally over 30 years.
NOTE M - STOCK OPTIONS
The Company adopted a Stock Option Plan in 1996 that was similar to the
Stock Option Plan established in 1986. Under the Stock Option Plans, options to
acquire shares of common stock may be granted to the officers and key employees.
The Stock Option Plans provide for the granting of options at the fair market
value of the Company's common stock at the time the options are granted. Each
option granted under the Stock Option Plans may be exercised within a period of
ten years from the date of grant. However, no option may be exercised within one
year from date of grant. In 1999, no options were awarded under this plan. In
1998, options to purchase 32,524 shares of the Company's common stock at a price
of $33.56 per share were awarded. The aggregate number of shares which may be
issued under these plans are 317,196 shares of common stock.
In 1994, a Non-Employee Directors Stock Option Plan was adopted. This Plan
provides for the awarding of stock options to the Company's Directors. Pursuant
to this Plan, on May 1, 1994, each non-employee director of the Company was
automatically granted an option to purchase 1,275 shares of the Company's common
stock at the fair market value of the Company's common stock of $13.32 per
share. In addition, on May 1, 1999, the fifth anniversary of the initial option
grant, persons who continue to be non-officer directors were each granted
additional options to purchase 1,275 shares of the Company's common stock at a
price of $21.81. The Plan additionally provides that any non-employee director
who is first elected or appointed as a director of the Company or any subsidiary
after May 1, 1994, shall, as of that date of such election or appointment,
automatically be granted an option to purchase 1,275 shares of the Company's
common stock. Such persons who continue to be non-officer directors shall also
be granted additional options to purchase 1,275 shares of the Company's common
stock on the fifth anniversary of the date they were first elected or appointed
to the Board of Directors. The aggregate number of shares which may be issued
under the Non-Employee Directors Stock Option Plan is 25,524 shares of common
stock.
Had compensation cost for the Plans been determined based on the fair value
of the options at the grant dates consistent with the method required by SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
- -------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Net Income As reported $ 3,282 $ 3,032 $ 3,283
Pro forma $ 3,194 $ 3,015 $ 3,265
Basic earnings per share As reported $ 1.84 $ 1.68 $ 1.83
Pro forma $ 1.79 $ 1.67 $ 1.82
Diluted earnings per share As reported $ 1.83 $ 1.67 $ 1.83
Pro forma $ 1.78 $ 1.66 $ 1.82
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options- pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of 2.8%, 2.8% and 2.1%; expected volatility of 39.0%, 39.0% and 39.0%; risk-free
interest rates of 6.3%, 5.7% and 6.7%; and expected lives of 10 years.
A summary of the status of the Company's Employee Stock Option Plans as of
December 31, 1999, 1998 and 1997, and changes during the years ending on those
dates is presented below. The number of shares and price per share have been
restated to reflect the 5% stock dividends of June, 1999, June, 1998 and May,
1997.
- -------------------------------------------------------------------------------
EMPLOYEE STOCK OPTION PLAN
Year Ended December 31, 1999
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 59,908 $ 26.97
Granted --- ---
Exercised --- ---
Expired 1,102 33.56
------ --------
Outstanding at end of year 58,806 $ 26.85
Options exercisable at year-end 32,898
Weighted average fair value of
options granted during the year N/A
Year Ended December 31, 1998
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 27,935 $ 19.43
Granted 32,524 33.56
Exercised --- ---
Expired 551 33.56
------ --------
Outstanding at end of year 59,908 $ 26.97
Options exercisable at year-end 12,223
Weighted average fair value of
options granted during the year $ 33.56
Year Ended December 31, 1997
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 13,317 $ 14.30
Granted 20,948 21.31
Exercised 6,330 14.93
Expired --- ---
------ --------
Outstanding at end of year 27,935 $ 19.43
Options exercisable at year-end 5,240
Weighted average fair value of
options granted during the year $ 21.31
The following information applies to options outstanding at December 31,
1999.
- -------------------------------------------------------------------------------
EMPLOYEE STOCK OPTION PLAN
- -------------------------------------------------------------------------------
Number outstanding 58,806
Range of exercise prices $13.78 to $33.56
Weighted-average exercise price $26.85
Weighted-average remaining contractual life 7.46 years
- -------------------------------------------------------------------------------
A summary of the status of the Company's Non-Employee Directors Stock Option
Plan as of December 31, 1999 and 1998, and changes during the years ending on
those dates are presented below. The number of shares and price per share have
been restated to reflect the 5% stock dividends of June, 1999, June, 1998 and
May, 1997.
NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN
Year Ended December 31, 1999
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 10,206 $ 13.56
Granted 7,654 21.81
Exercised 1,276 13.32
Expired --- ---
----- --------
Outstanding at end of year 16,584 $ 17.39
Options exercisable at year-end 8,611
Weighted average fair value of
options granted during the year $ 21.81
Year Ended December 31, 1998
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 10,206 $ 13.56
Granted --- ---
Exercised --- ---
Expired --- ---
----- --------
Outstanding at end of year 10,206 $ 13.56
Options exercisable at year-end 8,929
Weighted average fair value of
options granted during the year N/A
Year Ended December 31, 1997
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 11,481 $ 13.53
Granted --- ---
Exercised 957 13.32
Expired 318 13.32
----- --------
Outstanding at end of year 10,206 $ 13.56
Options exercisable at year-end 6,378
Weighted average fair value of
options granted during the year N/A
The following information applies to options outstanding at December 31, 1999.
- -------------------------------------------------------------------------------
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
- -------------------------------------------------------------------------------
Number outstanding 16,584
Range of exercise prices $12.96 to $23.25
Weighted-average exercise price $17.39
Weighted-average remaining contractual life 6.98 years
- -------------------------------------------------------------------------------
NOTE N - COMMITMENTS AND CONTINGENCIES
The Company has non-cancellable operating lease agreements in excess of one
year with respect to various buildings and equipment. The minimum annual rental
commitments at December 31, 1999 are payable as follows.
- --------------------------------------------
Operating Leases
- --------------------------------------------
2000 $ 428
2001 441
2002 526
2003 412
2004 422
2005 and beyond 1,258
-------
Total $ 3,487
- --------------------------------------------
The total rental expense was $397,000, $378,000 and $421,000 in 1999, 1998
and 1997, respectively.
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 December 31,
1999, 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.
NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
The contract or notional amounts as of December 31, 1999 are as follows.
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 36,119
Standby letters of credit $ 2,164
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support contracts entered into by customers. Most guarantees
extend for one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
When deemed necessary, collateral held by the Bank for financial
instruments varies, but may include personal or commercial real estate, accounts
receivable, inventory, equipment, certificates of deposit or marketable
securities. The extent of collateral held for any one financial instrument
ranges up to 100%. The average collateral held on financial instruments was
79.9% as of December 31, 1999.
NOTE P - CONCENTRATIONS OF CREDIT RISK
The Bank grants commercial, real estate and installment loans to customers
primarily in Northampton, Monroe and Lehigh Counties, Pennsylvania. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the economy of Northampton,
Monroe and Lehigh Counties.
At December 31, 1999, the Bank had residential real estate loans
outstanding totaling $112,870,000, which is 55.6% of total loans. The Bank also
had real estate related commercial loans outstanding at December 31, 1999
totaling $26,809,000, which is 13.2% of total loans. Loans to various borrowers
for land development totaling $7,053,000 are included in the Bank's total real
estate commercial loans. These loans represent 26.3% of the total real estate
related commercial loans. Loans to individuals for recreational vehicles totaled
$25,817,000 at December 31, 1999. This is 12.7% of total loans and 56.2% of the
Bank's consumer and installment loans which totaled $45,886,000 at December 31,
1999
NOTE Q - RELATED PARTY TRANSACTIONS
The amount of loans by the Company to its directors and executive officers
was approximately $1,040,000 and $1,298,000 at December 31, 1999 and 1998,
respectively. These loans were made in the ordinary course of business at
substantially the same terms and conditions as those with other borrowers.
An analysis of the 1999 activity of these loans follows.
- -------------------------------------------------------
Balance, January 1, 1999 $ 1,298
New loans 131
Repayments 389
--------------
Balance, December 31, 1999 $ 1,040
- -------------------------------------------------------
NOTE R - REGULATORY MATTERS
The Bank, as a National Bank, i s subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings (as defined) plus
the retained earnings (as defined) from the prior two years. The dividends, as
of December 31, 1999, that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $3,494,000.
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying subordinated debt instruments, and the allowance for possible
loan losses. Management believes that, as of December 31, 1999, the Company and
the Bank met all capital adequacy requirements to which they were subject.
The following table provides a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated
CAPITAL RATIOS
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
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%
CAPITAL RATIOS
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,555 16.97% $15,819 8.00% --- ---
Bank $29,450 15.02% $15,684 8.00% $19,605 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $30,938 15.64% $ 7,906 4.00% --- ---
Bank $26,596 13.57% $ 7,842 4.00% $11,763 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $30,938 8.60% $14,114 4.00% --- ---
Bank $26,596 7.47% $13,951 4.00% $17,439 5.00%
The Company is not aware of any known trends, events or uncertainties that
will have a material effect on the Company's liquidity, capital resources or
operations. The Company is not under any agreement with the regulatory
authorities nor is it aware of any current recommendation by regulatory
authorities which, if they were implemented, would have a material effect on
liquidity, capital, resources, or the operations of the Company.
Restrictions on cash and due from bank accounts are placed upon the banking
subsidiary by the Federal Reserve Bank. Certain amounts of reserve balances are
required to be on hand or on deposit at the Federal Reserve Bank based upon
deposit levels and other factors. The average and year-end amount of the reserve
balance for 1999 was approximately $6,150,000 and $6,558,000, respectively. For
1998, the average reserve balance was $5,152,000 and the year-end amount was
$5,675,000.
NOTE S - EQUITY TRANSACTIONS
The Company paid a 5% stock dividend on its common stock from authorized
but unissued shares on June 24, 1999 to all shareholders of record at the close
of business on June 4, 1999. On June 25, 1998, the Company paid a 5% stock
dividend on its common stock from authorized but unissued shares to all
shareholders of record at the close of business on June 5, 1998. The Company
also paid a 5% stock dividend on June 19, 1997 to shareholders of record on May
30, 1997. Fractional shares on these stock dividends were paid in cash. The
number of shares and earnings per share as stated in the following discussion of
the shares issued under the Dividend Reinvestment and Stock Purchase Plan have
been restated to reflect these 5% stock dividends.
A Dividend Reinvestment and Stock Purchase Plan was established in 1988.
The Plan provides the holders of common stock with a method to invest their cash
dividends and voluntary cash payments of not less than $100 or more than $1,000
per quarter in additional shares of the Company's common stock. Under this plan,
shares are sold, in general, at a discounted price of 5% below the average of
the high bid and asked price for the Company's common stock on the trading day
immediately preceding the investment date. In 1999, 15,061 common new shares
were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at
an average cost of $20.99 per share for total proceeds of $316,000. In 1998,
10,910 common shares were purchased pursuant to the Dividend Reinvestment and
Stock Purchase Plan at an average cost of $29.98 for proceeds of $327,000.
NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. For the Company, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many such
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. Also, it is the
Company's general practice and intent to hold its financial instruments (other
than available-for-sale) to maturity and to not engage in trading or sales
activities. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available, as generally provided in the Company's FRY-9C Regulatory
Reports, and estimation methodologies deemed suitable for the pertinent category
of financial instrument. The estimation methodologies and resulting fair values,
and recorded carrying amounts at December 31, 1999 and 1998 were as follows.
Fair value of loans and deposits with floating interest rates is generally
presumed to approximate the recorded carrying amounts. Fair value of financial
instruments actively traded in a secondary market has been estimated using
quoted market prices.
1999 1998
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
Cash and cash equivalents $ 16,272 $ 16,272 $ 14,259 $ 14,259
Investment securities 19,123 19,887 17,920 17,723
Securities available-for-sale 132,356 132,356 98,389 98,389
Mortgage loans held-for-sale --- --- 603 603
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities.
1999 1998
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
Assets:
Interest-bearing deposits
with banks $ 5,589 $ 5,589 $ 3,301 $ 3,301
Liabilities:
Deposits with stated
maturities 154,771 156,584 136,024 128,711
Securities sold under
agreements to repurchase 1,730 1,730 5,094 5,094
Long-term debt 29,519 30,000 20,419 20,000
Fair value of financial instrument liabilities with no stated maturities
has been estimated to equal the carrying amount (the amount payable on demand).
1999 1998
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
Deposits with no
stated maturities $ 167,691 $ 167,896 $ 173,301 $165,838
The fair value of the net loan portfolio has been estimated using present
value cash flow, discounted at the approximate current market rates adjusted for
non-interest operating costs and giving consideration to estimated prepayment
risk and credit loss factors.
1999 1998
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
Total loans $199,738 $202,258 $238,031 $212,437
There is no material difference between the carrying amount and the
estimated fair value of off-balance-sheet items totaling $38,283,000 at December
31, 1999 and $22,502,000 at December 31, 1998 which are primarily comprised of
unfunded loan commitments which are generally priced at market at the time of
funding.
The Company's remaining assets and liabilities are not considered financial
instruments. No disclosure of the relationship value of the Company's deposits
is required by SFAS No. 107
NOTE U - FIRST COLONIAL GROUP, INC.
(PARENT COMPANY ONLY)
- -----------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31, 1999 1998
- -----------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 14 $ 20
Interest-Bearing Deposits
with Banks 369 130
Loan to Banking Subsidiary 1,000 1,000
Investment in Banking
Subsidiary 24,544 27,158
Investment in Other
Subsidiary 3,680 3,909
Other Assets 35 13
--------- ---------
TOTAL ASSETS $ 29,642 $ 32,230
LIABILITIES
Long-Term Debt $ 1,320 $ 435
Other Liabilities 79 78
-------- ---------
TOTAL LIABILITIES 1,399 513
SHAREHOLDERS' EQUITY 28,243 31,717
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 29,642 $ 32,230
- -------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
INCOME
Dividends from Subsidiaries $ 1,321 $ 688 $ 1,139
Interest on Loan
to Subsidiary 85 89 89
Interest on Deposits
with Banks 6 5 21
------- ------ ------
TOTAL INCOME 1,412 782 1,249
------- ------ ------
EXPENSES
Interest on Long-Term Debt 105 39 41
Other Expenses 81 94 99
------- ----- ------
TOTAL EXPENSES 186 133 140
------- ----- ------
Income Before Taxes and
Equity in Undistributed Net
Earnings of Subsidiaries 1,226 649 1,109
Federal Income Tax (Credit) (32) (12) (10)
------- ----- ------
Income Before Equity in
Undistributed Net Earnings
of Subsidiaries 1,258 661 1,119
Equity in Undistributed Net
Earnings of Subsidiaries 2,024 2,371 2,164
------- ------- -------
NET INCOME $ 3,282 $ 3,032 $ 3,283
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 3,282 $ 3,032 $ 3,283
Adjustments to Reconcile
Net Income to Net Cash
Provided by Operating
Activities:
Distribution in Excess
of Undistributed Net
Earnings of Subsidiaries (2,006) (2,467) (2,164)
Changes in Assets and
Liabilities:
(Increase) Decrease in
Interest-Bearing Deposits
with Banks (239) 774 (248)
(Increase) Decrease in
Other Assets (22) (1) -
Increase (Decrease) in
Other Liabilities 1 28 (23)
------- ------- ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,016 1,366 848
------- ------- ------
INVESTING ACTIVITIES
Capital Contribution to
Bank Subsidiary - (500) -
-------- ------- ------
NET CASH PROVIDED BY
INVESTING ACTIVITIES - (500) -
-------- ------- ------
FINANCING ACTIVITIES
Increase in Long-Term Debt 885 45 -
Increase in ESOP Debt (885) (45) -
Purchase of Treasury Stock - - (107)
Proceeds from the Sale of
Treasury Stock - 94 33
Proceeds from Issuance
of Common Stock 303 333 361
Cash Dividends Paid (1,321) (1,275) (1,139)
Cash in Lieu of
Fractional Shares (4) (6) (4)
-------- ------ -------
NET CASH USED IN
FINANCING ACTIVITIES (1,022) (854) (856)
-------- ------ -------
Increase (Decrease) in Cash
and Cash Equivalent (6) 12 (8)
Cash and Cash Equivalent,
January 1, 20 8 16
-------- ------ -------
Cash and Cash Equivalent,
December 31, $ 14 $ 20 $ 8
- -------------------------------------------------------------------------------
INVESTOR INFORMATION
First Colonial Group, Inc.
76 South Main Street
Nazareth, PA 18064
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders' meeting will be held on Thursday, May 11, 1999 at
9 a.m. at the Bethlehem Holiday Inn, Routes 22 and 512, Bethlehem, Pennsylvania
18017.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent is Nazareth National Bank and Trust
Company. Shareholders seeking assistance with stock registration, lost stock
certificates or dividend information should contact Maria A. Keller at the
following address or by telephone at (610) 746-7317.
Nazareth National Bank
Trust Department
76 South Main Street
Nazareth, PA 18064
STOCK INFORMATION
First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market
under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1999, there were 726 shareholders of record.
The declaration and payment of dividends is at the sole discretion of the
Board of Directors, and their amount depends upon the earnings, financial
condition, and capital needs of the Company and the Bank and certain other
factors including restrictions arising from Federal banking laws and regulations
(see "Note R - Regulatory Matters" in the "Notes to Consolidated Financial
Statements") and a certain loan agreement (see "Note G - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price in December, 1999 was $17.375 and
in December, 1998 was $27.738. Stock prices and dividends per share have been
restated to reflect the 5% stock dividends of June, 1999 and June, 1998 (see
"Note S - Equity Transactions" in the "Notes to Consolidated Financial
Statements").
1998
First Quarter $33.56 $31.07 $ 0.1724
Second Quarter 34.76 31.74 0.1724
Third Quarter 34.29 25.48 0.1810
Fourth Quarter 28.33 25.48 0.1810
--------
TOTAL $ 0.7068
1999
First Quarter $27.62 $21.91 $ 0.1810
Second Quarter 24.00 20.71 0.1810
Third Quarter 24.25 18.50 0.1900
Fourth Quarter 20.00 17.19 0.1900
--------
TOTAL $ 0.7420
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Shareholders may participate in the Dividend Reinvestment and Stock
Purchase Plan. The plan provides that additional shares of common stock may be
purchased with reinvested cash dividends and with voluntary cash payments at a
5% discount from market. A description of the plan and additional information
may be obtained by writing to:
Nazareth National Bank
Trust Department
76 South Main Street
Nazareth, PA 18064
INVESTMENT CONSIDERATIONS
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the information contained in
this Annual Report and certain investment considerations and other information
described in the Company's Form 10-K for the year ended December 31, 1999.
FORM 10-K
Shareholders, analysts and others seeking a copy of Form 10-K without
charge (except for exhibits) or additional financial information about First
Colonial Group, Inc. should send a written request to:
Reid L. Heeren, Vice President
First Colonial Group, Inc.
76 South Main Street
Nazareth, PA 18064
MARKET MAKERS
The following investment brokerage houses currently make a market in First
Colonial Group, Inc. common stock: F. J. Morrissey & Co., Inc.; Instinet
Corporation; Ryan, Beck & Co.; Spear Leeds & Kellogg Capital Markets; and Tucker
Anthony, Inc.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the captions "Election Of Directors"
and "Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in
the Company's 2000 Proxy Statement and "Executive Officers of the Registrant" in
Item 4.1 of this Form 10-K is incorporated herein by reference therefrom.
Item 11. Executive Compensation
The information contained under the caption "Executive Compensation" in
the Company's 2000 Proxy Statement is incorporated herein by reference
therefrom.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "Voting Securities and
Principal Holders Thereof" in the Company's 2000 Proxy Statement is incorporated
herein by reference therefrom.
Item 13. Certain Relationships and Related Transactions
The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's 2000 Proxy Statement is incorporated
herein by reference therefrom.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements: The Consolidated Financial Statements of the Company
and the Report of Independent Certified Public Accountants thereon, as
listed below, have been filed under "Item 8, Financial Statements and
Supplementary Data".
Report of Independent Certified Public Accountants
Consolidated Balance Sheets for the Years Ended
12/31/99 and 12/31/98
Consolidated Statements of Income and Comprehensive Income
for the Years Ended 12/31/99, 12/31/98 and 12/31/97
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended 12/31/99, 12/31/98 and 12/31/97
Consolidated Statements of Cash Flows for the Years Ended
12/31/99, 12/31/98 and 12/31/97
Notes to Consolidated Financial Statements
2. Exhibits:
Number Title Page No.
3.1 (7) Restated Articles of Incorporation of the Company,
as amended.
3.2 (7) Bylaws of the Company, as amended.
4.1 (1) Specimen Common Stock Certificate of the Company.
* 10.1 (1) Deferred Compensation Plan for Directors.
10.2 Intentionally omitted.
* 10.3 (1) Form of Executive Benefit Program Agreement.
* 10.4 (6) Employee Stock Ownership Plan.
10.5 (1) Loan Agreement (including Exhibits thereto), dated
October 5, 1994, by and between the Company and
Commonwealth Bank and Trust Company, N.A.
* 10.6 (3) First Colonial Group, Inc. Stock Option Plan.
10.7 Intentionally Omitted
* 10.8 (8) Restated Optional Deferred Salary Plan (401(k)).
* 10.9 (10) 1994 Stock Option Plan for Non-Employee Directors,
as amended
*10.10 (9) Severance Agreement dated July 19, 1994 by and between
the Bank and S. Eric Beattie
*10.10.1 (12) Amendment No. 1 to Severance Agreement by and between
the Board and S. Eric Beattie
*10.11 (9) Severance Agreement dated July 19, 1994 by and between
the Bank and Reid L. Heeren
Number Title Page No.
------ ----- --------
*10.11.1 (12) Amendment No. 1 to Severance Agreement by and
between the Board and Reid L. Heeren
*10.12 (9) Severance agreement dated July 19, 1994 by and
between the Bank and Arthur Williams
*10.12.1 (12) Amendment No. 1 to Severance Agreement by and
between the Board and Arthur Williams
*10.13 (9) Severance dated July 19, 1994 by and between
the Bank and Gerald E. Kemmerer
*10.14 (10) Amendment No. 1 dated September 27, 1994 to
the Bank's Employee Stock Ownership Plan
*10.15 (10) Amendment No. 1 dated September 22, 1994 to
the Optional Deferred Salary Plan (401K)
*10.16 (11) Amendment Number 1 to the 1994 Stock Option Plan
for Non-Employee Directors
*10.17 (11) 1996 Employee Stock Option Plan
*10.18 (13) Severance Agreement dated September 22, 1997 by
and between the Board and Tomas J. Bamberger
10.19 (14) Loan Agreement dated April 22, 1998 by and
between First C. G. Company and the
Employee Stock Ownership Plan
*10.20 (15) Severance Agreement dated March 1, 1999 by and
between the Board and Robert McGovern
10.21 Loan Agreement dated February 8, 1999 by and
between First C. G. Company and the
Employee Stock Ownership Plan
21.1 (3) Subsidiaries of the Company.
23.1 Consent of Accountants.
27.1 Financial Data Schedule
- -----------------------
* Represents a Management Contract or Compensatory Plan,
Contract or Arrangement.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 33-4908), as filed on April 16, 1986.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 33-20319), as filed on February 25, 1988.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1986.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1988.
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated June 20, 1989 (File No. 0-11526).
(6) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 1991.
(7) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 33-64816), as filed on June 22, 1993.
(8) Incorporated by reference from the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1993.
(9) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB (File No. 0-11526) for the quarter ended June 30, 1994.
(10) Incorporated by reference from the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1994.
(11) Incorporated by reference from the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1995.
(12) Incorporated by reference by the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1996.
(13) Incorporated by reference by the Company's Annual Report on Form 10-KSB
(File No. 0-11526) for the fiscal year ended December 31, 1997.
(14) Incorporated by reference by the Company's Annual Report on Form 10-K (File
No. 0-11526) for the fiscal year ended December 31, 1998.
(15) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
(File No. 0-11526) for the quarter ended June 30, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of the year ended
December 31, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST COLONIAL GROUP, INC.
Dated: March 31, 2000 By: /s/ S. Eric Beattie
--------------------
S. ERIC BEATTIE, President
and Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Richard Stevens, III
----------------------------
RICHARD STEVENS, III
Chairman of the Board
and Director
March 31, 2000
By: /s/ S. Eric Beattie
----------------------------
S. ERIC BEATTIE
President, Chief Executive Officer
and Director (Principal Executive Officer)
March 31, 2000
By: /s/ Reid L. Heeren
----------------------------
REID L. HEEREN
Executive Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer) March 31, 2000
By: /s/ Robert J. Bergren
----------------------------
ROBERT J. BERGREN
Director
March 31, 2000
By: /s/ Christian F. Martin, IV
----------------------------
CHRISTIAN F. MARTIN, IV
Director
March 31, 2000
By: /s/ Gordon B. Mowrer
----------------------------
GORDON B. MOWRER
Director
March 31, 2000
By: /s/ Daniel B. Mulholland
----------------------------
DANIEL B. MULHOLLAND
Director
March 31, 2000
By: /s/ Charles J. Peischl
-----------------------------
CHARLES J. PEISCHL, ESQUIRE
Director
March 31, 2000
By: /s/ John H. Ruhle, Jr.
-----------------------------
JOHN H. RUHLE, JR.
Director
March 31, 2000
By: /s/ Maria Zumas Thulin
-----------------------------
MARIA Z. THULIN
Director
March 31, 2000